Cargolux squaring the circle at a tripartite and a Round Table

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Cargolux Squaring the Circle at a Tripartite and Round Table

Usually Board meetings don't get as much attention as last week's Cargolux meeting. Expectations were high to see the selection of a new CEO, and important decisions about the company's next steps ahead. The really big news is that there were no news at all, or almost. This is important, as for the first time the Board, under pressure not to be seen as submissive to QA desires, decided to decide nothing. Gutsy move, and great strategy to calm down the game, except for the impatient and frustrated QA representatives, I must conclude. They threatened that QA might back out of Cargolux, if certain conditions are not met.

First of all, to the credit of the Board  is that they recognized probably the elementary flaw behind the decision making problem, at least for the public's eye. How could the Board have decided anything, if of the two main issues, only 50% of the needed information was available? I'm talking about the CEO selection and the Wymans report. Have decisions already been made, before even getting the underlying information?

Indeed 4 candidates for the CEO job have been selected, but only 2 had been interviewed before the Board meeting? Was a decision already taken in favor of one candidate who exhibited such overwhelming capacities among the 2 interviewed? Did the two other candidates hold only minor mock roles of spaceholders in a kabuki?

Maintenance outsourcing should also have been discussed according to the completed part one of the Wymans report. How can you do that if part two, the one recommending a future mix of aircraft is not yet ready and you don't know which aircraft are to be maintained? The ropes would have been too big to hide.

Actually even more surprising is the idea or also foregone decision spun at that meeting of a leaner Cargolux, with only 4 aircraft (747) on its balance sheet, all the others owned by QA, under QA flag, and available to be wet leased to Cargolux. So is that another foregone decision, before even Wymans concludes its report? Or is it so far only wishful thinking at the Board level, and who at that level is thinking that way? It obviously seems to be QA's thinking, saying my way or the highway, meaning they would quit? Let's look at the two options on the table then, which are that either QA stays and Cargolux has 4 aircraft, or QA quits.

1. QA stays with a leaner, but not meaner Cargolux.

The key is that QA, which has a virtually unlimited budget to achieve its strategy, has a vision which is to make QA a dominant airline and Doha a major hub with its airport a major source of revenue. The airport construction has been impressive. Down the road, it will handle 50 million passengers, cargo and services, such as maintenance. No one knows where the point of profitability lies, but given the enormous investment, that has to be sooner than later, or, according to Mr. Al Bakr, "His Highness will kick ass." May I point out that probably Mr. al Bakr himself has a bulls eye painted on his behind, which explains the urgencies: get planes, get passengers, get clients, get cargo, fill the hangars with maintenance, even sell Whisky in tax free shops.

So the idea about slimming down Cargolux to 4 aircraft makes sense to QA:

·         I guess about 8 -12 aircraft could be taken off Cargolux'  balance sheet and acquired, I bet you at a discount, by QA to alleviate pressure from CV.

·         Those aircraft will be under QA colors, and maintained and stationed in Doha. Luxembourg will immediately lose more than half of its maintenance.  QA's promotion of the 777 mirrors another hypothetical reason to opt for this strategy.

·         The "wet lease" can be a complicated agreement. I would think that we are talking about the classical variety where QA as a lessor would provide the plane, the crew, the insurance and fuel, possibly at market price. Unless Cargolux pilots apply for a job at Doha, they will not fly the leased aircraft. There goes more than half of Cargolux' pilot pool.

·         In order to get started, QA can show real savings for CV, and still make a good profit on the wet leases in 2 ways: save on QA's tax free salaries and on discounted fuel. QA pays Captains a tax free monthly salary of approximately US$ 11,300 (assuming 70 block hours), First Officers a monthly tax free salary of approximately US$ 8,100 (assuming 70 block hours), whereas CV in Luxembourg has to pay a gross salary. As about half the operating costs are fuel costs, QA gets its at half price, which would become a huge potential for profits on the back of CV. (Actually a privilege that CV used to have in Kazhakstan, but seems to have abandoned it for more civilized higher pricing at Luxfuel).

·         QA has full authority over the leased aircraft. They specifically didn't mention other lease options such as dry lease, a less precarious solution, if leaving Cargolux with 4 aircraft is a solution at all. A corollary is that maintenance in Luxembourg could hardly survive. Gone would be dozens of pilots, other staff functions, and loss of all maintenance, huge volumes of cargo, revenue for Luxair and the airport as well as considerable economic activity up- and down- stream. There goes Luxembourg for Logistics.

2. Cargolux without QA

This is a QA threat , if not a secret wish, and a challenge, or maybe not for CV. QA doesn't seem to have done anything valuable for CV so far, but got a lot instead. Nothing positive as far as I know for CV. One of the first gut reactions of the Luxembourg public was surprise at the rapprochement with Qatar. As a veteran of economic development, I would argue that business is business, to a certain point. In this case we have a culture clash, that had to be bridged right from the beginning, answering the question: "How can one reconcile two business cultures, that differ so much?"

Here is an illustration of  that culture clash: A majority of workers in the GCC countries tend to be immigrant male workers from Bangladesh, Pakistan, India or the Philippines. Qatar's overwhelmingly male population  (about 5 males to 1 female), is explained by this migratory phenomenon. The migrant worker is happy with the prospect to make a salary that looks like the cavern of Ali Baba compared to salaries in his home country. He is probably employed by a construction company, that houses him in temporary shelters at a "labor camp" on the building site, maybe charges rent, maybe withholds passports. On payday, our brave man, who probably has no bank account, brings his pay to a Western Union remittance office, which charges up to 11% in fees, maybe also a deposit fee, and at the other end, where the family staying at home lives from remittances, Western Union probably converts into local currency for another 5-6% fee. This is amply documented by United Nations surveys about "remittances" by migrant workers.  Some published statistics in 2011 put the monthly wage of an average uneducated migrant worker in Qatar at $330 a month, and he is officially "happy" to work 6 days a week and 9 hours a day. Reconcile that!

But QA would leave CV under which conditions? I would argue, it sells its 35% back to Cargolux (or another bold thought, to its employees so they have skin in the game) for € 1 and zero cents. Unless there is a secret clause in that secret agreement that again handcuffed Cargolux onto other commitments and precludes that outcome?

Basically 2 years of efforts would have been lost. And much insider knowledge would have been lost to QA, which would be the net winner. However QA has probably made up its mind that a lean CV with 4 aircraft cannot or should not make money in the future, and its threat to leave is therefore real and not without self-interest. For CV there comes a time when you have to cut your losses, and protect your trademark when time is of the essence.

There is no doubt CV needs capital and I trust those quotes of about € 750 million that would be needed over the next three to four years. For once that sounds true, and is a probable number. Where to get that financing? It is very difficult. Three possibilities come to mind.

·         The aircraft and engine manufacturer should be able to provide financing solutions. Actually I believe that one, financing through EximBank, has already been used by CV.

·         Replace QA by another partner who is willing and able to boost CV's finances, and may provide other advantages, as was expected from QA. Yangtze River Express might still be around, flying into Hahn several times a week. Hahn?

·         Explore other possibilities for aircraft financing. The US has several specialized firms. I trust an average CFO knows how solutions can be engineered, that could give CV its freedom and independence back. Examples are dry lease or sale with lease-back etc. QA so far has brought no relief to CV, no capital, no other advantage. And that "no result" took 16 months so far !?

The whole discussion reveals some chronic weaknesses in the Luxembourg system: how can you know that you are told the truth, the whole truth? We need Mr. Bodry's Freedom of information  bill to get passed. And a "Whistleblower Act". We all acknowledge that according to the Luxembourg Prime Minister, we'll have an ethics code for government and civil servants before year end. Definitely! Transparency and liability would help.

Strangely, the Luxembourg government has been very quiet recently. Most telling is its silence in the episode, or rather the unprecedented decision by Mr. Forson to unilaterally cancel the CWA agreements. Walking around as if it were not a 65% owner is no longer an option, as Mr Forson is their employee and controlled by a Board stuffed with government preferred civil servants who have oversight. I guess they are leading from behind, the QA way.

With such a critical pillar of the Luxembourg economy and its vision of a logistics center, shouldn't the government step up and be ready to give its guarantees to CV to develop its own solutions? It did so to salvage BIL (oh, what a coincidence) by signing up to € 3 billion  in guarantees for DEXIA. But it let Cargolux sell its soul for $117.5 million.