Cargolux in an Italian Triangulation.

My Orchids. Phalaenopsis "Triangle". Photo ET

Cargolux in an Italian Triangulation.

A decision by Cargolux to transfer one additional aircraft and 25 jobs to Cargolux Italia SpA rightfully has all the Unions’ radars going off. In the background, reference can be made to an interview by Dirk Reich, the new CEO, that Italian pilots work 25% more than their Luxembourg counterparts, and cost 20% less. Work more for less pay seems to be the desirable goal for Cargolux management. But that is not exactly Union speak. Is it necessary, or just desirable, or should it be even a topic to work more for less? Is the Italy strategy a triangulation strategy to force pay cuts elsewhere in the company down to Italian levels, at Cargolux Luxembourg in particular or even generally in the future Luxembourg “Tripartite” discussions? The idea of triangulation being that disequilibrium in the triangle will eventually be leveled out in bringing down high costs in one corner by shifting them to the more “cost-effective” corner. This way internal competition is created with the owners in the top corner of the triangle providing the arbitrage.

Cargolux Italia runs losses ever since its creation in 2008. The additional aircraft is supposed to reduce losses at the Italian operation. Interestingly the decision to create Cargolux Italia was already a triangulation of another kind. Its purpose was to circumvent restrictions on direct flights to/from Asia and North America using a third country. Crews were Luxembourg crews, until Italian regulations, or so it was argued, imposed Italian crews on the Italian company. This is a surprising requirement in the Common Market where exactly no restrictions on free movement are supposed to be the norm. This rule was maybe not true, but cheaper, and could not be verified yet. In the meantime the reason to operate Cargolux Italia has become obsolete, following new agreements on third country traffic. The Pilots Association ALPL has commissioned an expertise from Janezic & Schmidt Lawyers OG, on the particular aspects that led Cargolux to create Cargolux Italia SpA. It analyzes the need in view of new developments in air services agreements to keep the Italian operation alive at all. The interim report so far seems to confirm that for the main reason, servicing the third countries mentioned at the time, the arrangement in Italy is obsolete.

Why would Cargolux Management then pursue a strategy to consolidate and keep alive a losing and possibly useless operation? Obviously to improve its results, and cut 7 years of losses there. However, if despite the low payroll costs and more work hours, profitability could not be achieved, why persevere in a business that does not help the bottom line? As the pressure tool in the triangulation? The alternative would be to shut it down.

The hope and responsibility of Management is of course to make sure the company operates in a profitable way. It has probably determined that by providing critical mass to the Italian operation, earnings should increase and incremental costs decrease. For the CEO of a “private” company, it would be a normal bet on the future to strive for an effort to reduce costs and increase revenue. If he fails, he bears the blame. However maintaining that Cargolux is a private company is a practical lie to hide political responsibility. Cargolux still is a quintessential Luxembourg company, and its destiny has important national implications on employment at a moment where we hit new records in unemployment, on Luxair, on the airport in general and on the government’s plan to develop logistics as another leg of our economic setup.

So is this maneuver a bootstrapping in view of a capital raise next year, or is it an elaborate triangulation beyond Cargolux to declare war on the tripartite, or is it just kabuki in the context of upcoming negotiations with the unions?

It might be wise to consider an alternative way to make sure present decisions do not make matters worse. Isn’t there a smoother way to go along? Cargolux proudly always could refer to the “Cargolux Spirit”. That spirit is borne by employees. It is worrisome if in a recent companywide survey only about 30% of the employees responded. For those the three most important issues to address at Cargolux are:  Leadership 66.8%, Teamwork 62.5%, and Respect 61.9%. That is a shock to the Cargolux spirit, the shrill warning of a morale problem.

At this moment we hear about losses that are said to be $11 million “below target” (Forson speak to hide the real total loss that I would estimate then at $25.4 million, given that the target was already a loss of only $14.4 million) in the first half of the year. The company also is said to target a total fleet of 30 aircraft, among those 5 aircraft for charter flights, 5 for the China routes including Italian flights, and 5 for wet leases. This is a good but bold move to achieve profitability. The financing of new aircraft is of course a major question, as existing shareholders might not all be fit enough financially to carry their share. And if new shares have to be issued for raising capital, it will of course affect ownership, and the most willing one and capable to jump in could be the Chinese partner HNCA for the financing of 5 new B747-8 aircraft.

Which brings up the future situation that should be better addressed now, the creation of yet another company as a Chinese joint venture down the road. Will this company, let’s call it Cargozhou, be another triangulation, and duplicate the Italian issues at hand? With the Italian operation still in place, it will add yet another corner to the triangle, achieving thus the wonderful squaring of the triangle. It will be another matter of concern to think through now, instead of in two years from now. At the table, the discussions will be around profitability, political will, solutions, and Leadership 66.8%, Teamwork 62.5%, and Respect 61.9%. The sum of it will define the Cargolux Spirit, and its capacity to achieve all expectations.