Cargolux, the good news

My Orchids. Cattleya "Looking Good" Photo ET

Cargolux, the good news

Cargolux followed its wing wave with a release of interesting numbers: records breaking tonnage, revenue and block hours. The good news is, business is there.

A probable help for the new records is the increase in the number of aircraft. The report doesn’t say though if the results show a profit, which in light of the Zhengzhou flights started by mid-year, expected to be unprofitable for a while, would be interesting to know.

The airline made a net profit of $8.4 million in 2013 on revenue of $1.99 billion, which is a very thin margin indeed.

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.

Cargolux: the lost management effect?

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Cargolux: the lost management effect?

Are we already witnessing the effects of the loss of top talent at Cargolux earlier in 2014? There are some signals that are discomforting, though not conclusive yet. But they all show in the same direction.

Let’s take as a starting point Cargolux’ business in 2013. CV carried 754,000 tons, an increase in cargo traffic of 16.7% compared to the year 2012 (the Qatar Airways year). Whereas 2012 ended with a loss, 2013 produced a relatively small profit, but a profit.

Then comes 2014. Top managers leave. The first half of 2014 generates a loss of $31 million. Is it the market, or CV and the loss of talent, or the new CV brand allied to HNCA? The second half will show. The new management might get more insight, the market may improve. One element however will add to the earnings crisis: the pre-programmed losses of mandatory flights to Zhengzhou.

According to Radio 100,7 today, Dirk Reich, the new CEO of Cargolux gave the Board the (dire) outlook, as results are below expectations so far, and where he projects the need for another capital injection by the end of 2015. Of course, as the CEO who just took over the reins, he better tells all the truth and the bad news upfront. He can only be a hero if he beats those bad expectations.

Now change of viewpoint. Let’s have a look at Airbridge Cargo, ABC. That’s where Robert van de Weg took his talents, after undeniably having made out of CV a fighting force. Compared to CV, ABC is young, 40 years for CV, 10 years for ABC. In the first half of 2014, ABC forwarded 188,354 tons, according to “The Loadster”. That’s an increase of 16%. Freight ton-kilometers in the 1 January-30 June, 2014 period, rose by 19% (industry 4.4%). And here is ABC’s outlook for 2014, as quoted by The Loadster:

“Denis Ilin, Executive President of Air Bridge Cargo Airlines, said: “The challenges which the global air cargo market continues to face have not held back ABC’s development. We have achieved our goals for the first half of the year and lay down ambitious plans for the second half of 2014, which will include launching of more new routes and increasing our frequencies on a number of existing routes, as well as growing our fleet. We will surely keep focus on our home market, not only by developing additional import business to Russia but also by launching domestic routes using the Boeing 737 freighter fleet of Atran Airlines, another part of Volga-Dnepr Group. We are on track for good 2014 and projecting our total tonnage for the year to exceed 400,000 tons of cargo”.

Should I just highlight once more: Robert van de Weg left Cargolux to join ABC in March 2014, and no one held him back. So did too many others.

Cargolux Inaugural Flight to Ghengzhou Delayed Again

My Orchids. Oncidium "Ghengzhou Square Dance". Photo ET

Cargolux Inaugural Flight to Ghengzhou Delayed Again

Following HNCA's acquisition of 35% of the Luxembourg airline, an inaugural flight was scheduled for April 24th. As everyone knows the flight of the "City of Ghengzhou", ready to go, was aborted 4 hours before takeoff. Cargolux was not in possession of the required rights. Minister Bausch who had traveled to China to witness and celebrate the arrival  of the first flight had to take the frustration, the criticisms and also the entertaining comments at his expense.

Another date for the inaugural flight was set on May 29, so to allow for ample time for the bureaucratic hurdles to be cleared. So far they are not.

The breaking news sound like a broken record: the inaugural flight had again to be delayed, this time to June 14th. For an intransparent reason.

There is in my opinion good news in this new delay. These are that there will be a positive effect on the 2014 results, as these flights will be money losing flights in the foreseeable future.  

Cargolux explained by Cargoforwarder

My Orchids. Cypripedium. Photo ET

Cargolux explained by Cargoforwarder

And here is a confirmation. The ABC of knowing it all:

BREAKING NEWS - ABCRestructures its Management

Cargolux: One moves in, two move out

My Orchids. Phalaneopsis. Photo ET

Cargolux: One moves in, two move out

While it has been reported that Dirk Reich will be Cargolux' next CEO, Board willing,  Robert van de Weg and Peter van de Pas will join ABC Cargo as of the 01st of May.. If my sources and my aunt Leontine are right.

The bottom line is a strong deficit on the talent side. And the restructuring at the top missed a chance to consolidate the existing team that because of the two who are leaving, was a winning team as documented during the crisis.

Cargolux: Blogging over blogging in a Blog by Wort.lu

My Orchids in a Blog. Photo ET

Cargolux: Blogging over blogging in a Blog by Wort.lu

This is a story that is a bit dated.  But it is interesting to note that the argument in favor of standalone and of potential financial partners gets some place in the light. Though the piece assumes an essentially anti-Chinese bias, I wouldn't assume that it places the writer in an unconditional pro-Chinese bias either. This is about a sustainable strategic orientation, and partnerships have ALL had their difficulties: Lufthansa, Swissair, Qatar Airways.

With HNCA, the good news is, it IS the standalone option, though only for several years, until internal competition builds up through the famous JV. Unfortunately the standalone in this case is conceived in a way that it carries obligations that are forecast to generate significant losses.

If and when the deal is finalized. Which is not yet the case.

Cargolux: les anti-Chinois font tourner leur opposition (Wort.lu)

Cargolux: How to play a bad hand?

My Orchids. Phalaneopsis "Shut Up". Photo ET

Cargolux: How to play a bad hand?

As promised to some, translated from feierwon.blogspot.com,

http://feierwon.blogspot.com/2014/02/cargolux-comment-jouer-une-mauvaise-main.html

In the debate over the sale of a 35 % stake in Cargolux, owned by the Luxembourg government, to a Chinese entity in Henan Province, there seem to appear a number of incongruities. Maybe those can be explained? This was not done until now. However, it is arrogant to deny the debate and to hide issues from the Luxembourg taxpayer, the employees of Cargolux and even the governing bodies of the company, if not such experts as outside counsel. And to selectively ignore advice that is not in favor, while retaining only those favoring the deal.

The public’s right to know is well established: Cargolux is a matter of concern to all taxpayers, so to everyone. Cargolux indeed is not like any other companies. It is almost 100% owned by the state, when considering the parastatals. It matters to us. What Cactus or any other private company however decides, is none of our business.

The facts, the leaks and the rumors

Explaining the partnership between Cargolux and HNCA is not easy. In any case explanations were not communicated spontaneously, exhaustively, nor frankly. Or the partnership agreement has serious shortcomings, and there is no other explanation than to admit that either we were not up to the task, or at least that the agreement lacks consistency and balance. Without direct and open responses, there will be more leaks, which then obviously are not rumors. They are facts, hidden from the public for a purpose, obtained by stealth, and most cannot be trivialized. But unanswered questions about the dark corners of the partnership with HNCA, that leaks do not expose, that vacuum will be filled by rumors.

Mr. Helminger tried to address this lack of communication within the company in a letter to employees. It lists the reasons to be optimistic about the HNCA parnership, including the business plan over five years. But it ends with the warning that "rumors" must stop to avoid ruining the chances of finding new management professionals, and therefore ruining the chances of success for Cargolux . This is a pre-emptive strike of the same kind as the one used by Mr. Schaus towards the Executive Committee, which he called “dysfunctional ", thus potentially endangering the great Chinese project. This is summed up in the simple slogan: if the deal is successful, it will be thanks to us, if it fails, it will be because of you. Unfortunately, such statements cannot reassure the world, as unintentionally it is a subconscious statement exposing one’s own uncertainty about the success of the project one defends.

But the preemptive strikes had their effects, as trade unions have deliberately fallen silent since. Just as did the two members of the Executive Committee, who chivalrously refused to elaborate on the reasons for their resignations. It is true that those speak for themselves. And so do leaks. Some media outlets have contributions that are aligned with the thought that the debate must end.  They mention an “offensive" by Mr. Helminger to defend the project. Which more adequately would be called a “defensive” that became necessary to try to calm the game. Still, it is a good starting point to improve internal and public communication.

Rumors and propaganda are equally harmful

Other initiatives to calm the game are less fortunate. I do not know who inspired an article in “Wort” ( 1) , which for some unknown reason attacks the "myth" of  a Cargolux "stand alone". So this vision of a standalone Cargolux, according to the government, would be a fancyful and impossible vision. And that’s why this idea of a ​​partnership with HNCA is such a great idea! It is interesting to see a newspaper, known to be an outlet for an opposition party, come along and lend its support to the Chinese " good solution ", using a product pitch that seems to have grown in the garden of a biased Ministry. The mystery deepens as to the motivation of Wort, although some continuity with the past is undeniable. The argument against the standalone though is simplistic and defeats itself through its restricted vision, and is awash in sophistry. This isn’t very clever, because people will be wondering what lies behind these bold and wrong assertions, which provides new grounds for rumors. Here are those assertions:

The standalone is not possible, because the 2012 results are bad. 615,286 tons of freight is less than the peak year of 2008, a record 788,286 tons. Unfortunately, this argument is a demonstration against the partnership and in favor of the standalone. The bad year of 2012 was one of a partnership with Qatar Airways, a demonstration that the worst year was when CV was not a standalone. We hasten to ignore also the year 2013. CV is standalone again, after the departure of Qatar Airways. After the miserable year of 2012, 2013 will be a profitable year, as I am told. This provides evidence that the argument that the standalone is not sustainable is misleading. The opposite is rather true.

The second argument is that the company lost 253 million euros since 2007, and that a capital increase of 175 USD is necessary. Forgive me to remind you of a painful detail: the total fines paid by Cargolux these past years totals over USD 250 million. Don’t you see a relationship between the fines and those losses, and capital requirements? CV has operated very well this year. Without those old fines, the numbers would add up nicely. We would be talking about future financing needs only, if any, of 300-400 million. There are investors ready to move in for this, including in Luxembourg, right now.

Based on these two false arguments, one would make us believe the wrong conclusion that there is no alternative to the Joint Venture with the Chinese group. That’s an extreme lack of logic. The conclusion would be correct, but the result of a fallacy? Well, let’s elaborate a bit on that fallacy: it is suggested that  if the Joint Venture were not pursued, the Luxembourg state would have to pay in case of the standalone’s failure. But let’s calm down. In reality the state would also have to pay in the event the JV crashes. Which of the two options is riskier, the partnership or the standalone? In the case of Qatar Airways, it was the partnership with Qatar Airways, not the stand alone. See how the year 2012 worked out, with its poor results!

The final argument is that the various consultants Clifford Chance, UBS and even Arendt & Medernach (!?) could not provide better visions for Cv’s future. Add even Robert Schaus. I would oppose to those two leading experts , Robert Van de Weg and Peter Van De Pas, and Shearman and Sterling, and even Akbar Al Bakr , CEO of Qatar Airways, whom I quote as saying in 2011 : " ... Cargolux, a sound , healthy and profitable company and a leading all- cargo carrier ..... " . He spoke of the standalone.

The most tremendous contradiction in this demonstration is that it explodes under its own arguments: standalone, no, JV with Chinese group, yes! But in fact, in this case stand alone and JV are virtually the same. Cargolux will operate for at least three years as a virtual standalone, which only benefited from a Chinese cash investment. The only differences from another capital investment are multiple obligations that CV has to honor, as a result of an after all very small Chinese investment. Those obligations are bound to trigger losses and lost opportunities to which we have acquiesced in advance. In a nutshell, that amounts to a very costly new shareholder. Even considering the remedy to these planned (!) losses through a USD 15 million relief fund. What a pessimistic prospect! The most worrying aspect is that politicians, who never have even run a lemonade stand, and who consider advice selectively, are making these decisions on behalf of the taxpayer, and affect the future of a multi-billion company and its nearly 1,500 employees.

Omission that would make the difference

Why is there so much mystery around simple and legitimate questions of price, veto and other conditions generally very in favor of the Chinese side? Maybe we as taxpayers should demand that a debate in those circumstances should be held before the Chamber of Deputies. I refer to Article 99 of the Constitution that says ... any significant financial commitment of the State must be authorized by a special law." Although this article refers to real estate transactions, the only transactions conceivable when this was written a century and a half ago , when nobody thought to acquire or sell other securities, such as shares of an airline, it nevertheless indicates that it would have been wise to seek the debate in Parliament and to back the transaction by a special law. The Budgetary Act of 8 June 1999, in Article 80 confirms the merits of such a cautious approach: " Must be permitted by law: sub. d) - any other financial commitment, including state guarantees, the amount of which exceeds the sum of Euros 7,500,000 (seven million five hundred thousand)" This was done for the granting of a guarantee of 3,000. 000,000 of FLux (€75,000,000 million) for the SES before the launch of Luxembourg’s first satellite Astra (1A) in 1988. In case there would be a secret part to a contract with a Chinese official entity (they are all official entities in a planned economy), the Constitution would say . . "Secret treaties are abolished" Tell us all there is. Such a special law would have shed the light on the project, allowed for necessary amendments, and by a clean vote would have ended all discussions. Memo: This is a note to the dossier "Revision of the Constitution."

I would conclude for the rest, that there will be no new divorce of the kind with Qatar Airways. Technically, the Chinese government as the ultimate authority could still refuse approval for the signed project. But HNCA’s contract is too good to give it up. The Luxembourg Government on the other hand has lost its freedom of action by signing up with a Province under Beijing rule. CV is left to assume, and to prepare the first money losing flights to Zhengzhou. An idea for the ​​internal PR effort: on every flight, take a dozen Cargolux employees along to visit Zhengzhou. This would round the corners, and make them happy like Ulysses, who made a nice voyage.... And those who still complain, will not be part of the journey, if I understand the new line correctly.

Aviation Week - Can New Chinese Investor Boost Cargolux?

My Orchids. Phalaneopsis. "Three Gorgeous". Photo ET

Aviation Week - Can New Chinese Investor Boost Cargolux?

The short answer is no.

The longer answer is in this interview: by "Le Quotidien" 

Cargolux, a Postmortem

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Cargolux, a Postmortem

We know what happened with the Qatar Airways - Cargolux deal. It just was a mindboggling adventure that in no way was a "good deal", and was miserably negotiated. It would barely have helped Cargolux, but rather to the contrary would have and indeed has hurt Cargolux.

In the aftermath of such an ordeal, any serious company on earth would have licked its wounds, maybe would have apologized even for failing to responsibly lead the company, and would of course have committed itself to take every step possible, so that the same mistake will never be made again. Alas! The same mistake was  made again and in a hurry. Almost no one would have expected this to happen twice. I give up on quoting Einstein on insanity.

I would have expected a thorough evaluation of the company after the QR debacle, very probably the replacement of the CFO brought in by Qatar Airways, not as a sanction, but as cautious good governance. He came from the other side. I would have examined the reasons why and if indeed the Luxembourg government had to get rid of its Cargolux shares, and establish the list of mistakes made in that flawed QR deal: the valuation of the deal, the question of the minority shareholder's veto right, the attractiveness of the various other possible partners.

It appears that none of these has been seriously undertaken. The HNCA deal is justified by general talking points by those who made it happen. There might be good prospects in the particular HNCA deal. But then it would certainly be easy to articulate and demonstrate these. That China is a big country and will offer many possibilities is very general. That other candidates didn't line up, is nonsense. When Mr. Bausch announced he would negotiate for further last minute landing rights in China before traveling to Beijing, he got the Chinese equivalent of Luxembourg's "dann misst een emol kucken". They have to think about it. He travelled to sign the minimal agreement, which he could have done in an environmentally friendly manner by scanning and Emailing, which as we know has a lower carbon footprint.

More generally, the deal has been pushed, though a very respectable law firm, Shearman & Sterling was hired to give their best professional advice: they concluded that the agreement needed a lot of work. Very often governments and companies hire an outside consultant to say loudly, what the client didn't want to say himself. Well, this wasn't the case with Shearman & Sterling. According to an ever growing number of excerpts of leaked correspondence, the opposition to the deal was vast at the management level.

Logically, in such a case you hire another consultant. The very basic strategy is revealed by the emerging details of a damning correspondence reported by Radio 100,7 and also reported by tageblatt. The role of the "informateur" Mr. Schaus is questioned there, for seeming to be of the second type of consultant: the clients megaphone and green light barrier guard. Insiders talk about conflicts of interest, as Mr. Schaus had been suggested as a CEO candidate early on, as he started his role as consultant.

I had high hopes that such an outside consultant would conclude to, and indicate a wider spectrum of options for Cargolux, in the true Bain Capital approach, for which Mr. Schaus worked previously. Options that could have been debated and weighed by management. I have seen a number of brilliant analyses and advice brought together by Bain. This would also have satisfied the neutral observers, which is of course not the case if the only outcome is to confirm the for whatever reasons wishful agenda of the contracting party. In particular this one statement is available on Radio 100,7. It is both a superficial endorsement of the Chinese partnership, with a built-in preemptive excuse for future failure, that is already squarely put on uncooperative management. We succeed: it is the merit of the innovative thinkers. We fail: that's because of the uncooperative Management.

Radio 100,7: " …) There is a broad and remarkable consensus among the vast majority of players (management, board, even trade unions and third parties) that the management team in its current configuration and mode of operation is dysfunctional. This is a serious issue that needs to be addressed as soon as possible and preferably before any entering in relationship with a third party. Similarly, the equity split between the different (Luxembourgish) actors and the composition and mode of operation of the Supervisory Board need to be revisited and reengineered.

If the issues are not addresses successfully, the outlook for the venture will be doubtful in any case. On the other hand, if these issues are tackled, the partnership with HNCA sounds promising. Risks are limited, but much more importantly, this may be the opportunity to give Cargolux a new lease of life and to support it in securing a stable base in Luxembourg based on sustainable global growth."

But wait: what exactly is this to say: ".... the management team in its current configuration and mode of operation is dysfunctional." Did managers want to leave? Did someone want them to leave, as this language may suggest? In any case, responsibility for future failure after their departure lies with those who stay.

A clearer image emerges thanks to the personal details coming out of the trenches. Exposing those tactics on the ground, it is going to reveal the strategic Cargolux agenda in a starker way.

For now one can conclude that by signing the deal, the Luxembourg government has lost its freedom of action, though it might hope that by getting rid of its shares means that the ordeal is over. It is trapped, and there is no way out either of the deal, or future problems.

The Chinese party still has a backdoor open. Beijing has to approve the deal later this year. It should, because HNCA got tremendous advantages, with only some shabby USD of exposure. The Luxembourg side convinces itself that there is hope, that everything they always wanted to ask for from HNCA, but never dared, will eventually come together. But hope is not a strategy.

http://www.100komma7.lu/emissions/2014/01/29/cargolux-zitater-aus-de-breiwer-vun-ex-direktiounsmemberen-an-aus-dem-robert-schaus-rapport/

Cargoforwarder: Robert Quits Cargolux

My Orchids. Vanda. "Bonjour Tristesse". Photo ET

Cargoforwarder: Robert Quits Cargolux

Cargoforwarders' report sounds like the medical report of what I called the "Chinese Syndrom".

This is the alarming quote in that report: " Robert is the first to quit, others might follow. His step clearly shows that there is widespread discontent with the Luxembourg government's decision to sell 35 percent state-held shares in Cargolux to the Chinese investor."

Losing the key architect of CV's sales is a serious problem. Without growing sales, no value is added. It is almost ironical that at the same time CV advertises that it is hiring a new CEO. Finally, but what about timing !? Any serious candidate knows now what is going on. So one can only find a kamikaze. You know those pilots who crash their aircraft on the target.

Now even that is not funny. It is perplexing how the new government just took over a lame duck solution from the former government, which did not earn the prize of the best negotiator of all times. Political expediency has won over talent and expertise.

An old friend of mine, Rene Anselmo, founder of PanamSat crafted his company's slogan on that subject: "Truth and technology will prevail over BS and bureaucracy". Well said. But in this case it is the contrary.

Cargolux in Xinhua

My Orchids. Henan Beauty. Photo ET

Cargolux in Xinhua

The quintessential of the story. But what is done is done.

Wednesday, January 15, 2014, 20:36

China firm, Europe's largest cargo airline tie up

By Xinhua

ZHENGZHOU - A company in central China's Henan Province has invested in Luxembourg's Cargolux Airlines International to introduce a new freight service between China and Europe, local authorities announced on Wednesday.

Henan Civil Aviation Development & Investment Co. Ltd purchased 35 percent of the stocks in Cargolux.

Francois Bausch, head of Luxembourg's department of sustainable development and primary industries, signed an equity acquisition agreement with a representative of the company, after his meeting with Xie Fuzhan, governor of Henan, on Tuesday.

According to the agreement, Cargolux will open a new freight service route between Zhengzhou City in Henan and Luxembourg, and build an air cargo network that links Asia and Europe.

Cargolux Airlines International is the largest cargo airline in Europe, and the ninth largest in the world.

Cargo Forwarder: CSL Gives a Thumbs Down on Cargolux-HNCA Deal

My Orchids. Phalaneopsis "You name it". Photo ET

Cargo Forwarder: CSL Gives a Thumbs Down on Cargolux-HNCA Deal

But of course. This is an excellent summary of CSL's comments about the deal. The Chamber is required to advise on ongoing legal issues. 


Cargoforwarder points out the obvious inefficiencies in the agreement, that is unbelievably lopsided. Unless there is more than the documents show and the eye can meet, this will be the second disastrous negotiation that the Luxembourg government leads all on its own, disregarding the rules of good governance of a corporation.

This blog reflected on the same in late December:  http://egidethein.blogspot.com/2013/12/cargolux-shearman-and-chambre-des.html

Cargolux, Shearman&Sterling, and Chambre des Salariés CSL

My Orchids. Phalaneopsis Target. Photo ET

Cargolux, Shearman & Sterling, and Chambre des Salariés CSL

I'm aware of the two opinions about the pending CV/HNCA deal. The first, dated 7 November by Shearman &Sterling, the second dated 20 December by Chambre des Salariés. Both have similar reservations, concluding that the "agreement" is very lopsided. Both unfortunately confirm my own analysis of what is visible. Both are wondering if they have seen ALL the information.

Looking at the big picture, the agreement will achieve the following: HNCA will gain a share of CV, gain 200,000 tons of traffic, gain a new airline, and other logistical know how. CV can only hope to have no losses of capital and employment, and gives away know how and effort. That is lopsided and very cheap access for HNCA, unless there is a "yes" to the following unanswered question: is there a secret part to the "agreement" serving other purposes than CV? In which case, where are we with the trumpeted commitment to an ever more transparent government? Yes, as taxpayers, we have a right to know. Not only mysterious suggestions about the hidden benefits. List them, until we strike a balance in the "agreement".

1. Let 1,000 questions be asked

 It is very disappointing to see the "agreement" in such a sorry state. Even at the elementary level of language. Even after the botched alliance with Qatar Airways, nothing seems to have been learned. There are dozens if not hundreds of questions to be answered, and some of the visions sound like a pie in the sky.  The target for CV three years from now to move 200,000 tons annually in and out of CGO lets me wonder about who did the underlying projections, including the weekly need for aircraft in those rotations? Not to forget the loss of opportunity for those aircraft, that obviously would be pulled back from now commercially more viable routes.

2. State corporatism at its finest

I'm perplexed to discover that "negotiations" were done by the government alone, without CV's management or other shareholders being present. How can the government, that's not a majority shareholder, commit the other shareholders into other binding agreements, when its proclaimed purpose was to sell its shares? For sure, most of the shareholders won't protest too much, as they are represented by people who owe their positions by the grace of the same government, but not all: Luxair has private investors. And employees have to contemplate this perceived unlawfulness in awe.

3. What about levels of engagement?

In doing its solo "negotiation" beyond the immediate wish to sell its shares, shouldn't the government have negotiated with the Chinese Central government too? There is a logic to the level of representation around the table, there could have been shortcuts, as HNCA's economic development plan is in the context of China's 12th five year plan. CV's interest would have been to have broad rights in China with a priority to serve other existing and commercially viable hubs. Positive cash flow will be of the essence for the indebted CV, not the mere compensation of losses through a limited, ill-defined Fund.

4. Never use an argument that you knew not to be true

Not to miss: the CSL report's Annex about what constitutes illicit governmental aid. It addresses the Luxembourg government's claim that it has to sell its CV stake, given European law. Which obligation, it appears to me, is not present in CV's case, though the government has long argued to the contrary. Not many will believe this. In addition, I would make the case that European obligations under European treaties are not always respected, and many violations by our neighbors have been met with willful blindness in the past. After the Qatar Airways mishap, there was room for leniency towards Luxembourg at the least.  

5. Conclusion

Now the deal is done. Let's negotiate the deal. Fire, aim, ready!

There is a very small statistical chance that we have hit the target. Now we have to try harder and move the target, so we can see it.

Cargolux: The Deal with HNCA

My Orchids. Cattleya, a closer look. Photo ET

Cargolux: The Deal with HNCA

Earlier in 2013, no one in Luxembourg would have known the name HNCA. The Acronym stands for Henan Civil Aviation Development & Investment Co., Ltd, created in June of 2012. HNCA has three shareholders: Henan Coal Chemical Industry Group, Henan Transport Investment Group and Zhengzhou City Real Estate Group. Citing from a speech translated into neo-Chinese English: "Zhang Mingchao, Chairman of HNCA, spoke that the HNCA had the glorious mission of developing the civil aviation of Henan province. The Company will keep learning, innovating, optimizing operation, and make more contribution to the construction of Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan Province."

I had a look at the "Commercial Cooperation Agreement" between HNCA and Cargolux in the form of the "Updated draft of 30 September 2013, changes as per meeting HNCA Cargolux 10 December 2013". It has 13 pages, cover page included, and 5 pages of attachments !

The fact that such a short, poor document saw little improvement over the last 10 weeks, is reason enough that I would be embarrassed to bring such a document to a meeting.

Apart from the very little remediation to the text, my analysis fills me with doubt about the negotiation skills of those who did this, the poverty of the language which allows for many questions and opens the door for conflicts in the future, and to open legal questions, which I would ask my lawyer. I have to believe and hope that CV's lawyers saw those considerable questions, which they didn't want to detail publicly?

1. Negotiation 101

HNCA exists since mid 2012. Its mission is to focus on the " Zhengzhou Airport Economic Comprehensive Experimental Zone and Henan Province." Did you read "Experimental"? It says further that "The Company will keep learning, innovating...". 

No one at this stage can say that the parties don't negotiate in good faith. There is an exciting project: creating an airport, now encroached by several towns, expand it from 1 to 4 runways, create a JV with CV for another all cargo airline in Zhengzhou, together with all the infrastructure on the ground, including maintenance and pilot training. Nothing of these exists today. As a young adventurer, not risking my own money, I would go for it in a minute. And as a broker, I would sell it as a nice story for a nice fee to anyone who would listen.

But does this accomplish the "glorious mission" to guarantee CV's future? No one knows from this Agreement exactly what was agreed to. But essentially, not much has changed when it comes to CV's extremely low valuation. It was essentially pre-determined by the undervalued and unfortunate Qatar Airways deal. Now, for the neutral outside observer, there is maybe a very stupid seller, and a sophisticated buyer. But it doesn't impede the next steps, if both sides are happy with the price. The very impatient seller, the Luxembourg government, seems very happy. The only problem there is, it isn't the seller's money, it is the tax payer's money.

As for the rest, CV will be a strategic asset for HNCA in the grandiose adventure of creating a market, an airport with 4 runways, with infrastructure, a new airline with its own maintenance and pilot school, and other unnamed JVs. If that is the exciting project where we want to see CV's future, and where HNCA sees CV as a strategic asset, the overwhelming question is, why didn't CV become a shareholder of HNCA? There was enough valuation in CV (the real value of CV) to get a reciprocal share for CV in HNCA, for no money down. But the opportunity to get reciprocity and a fair valuation for CV was missed. Who negotiated this? A pertinent question, as there was and is no real urgency.

2. The "Commercial Cooperation Agreement" is barely an Executive Summary.

If you buy or sell a one family home in an Anglo-Saxon jurisdiction, the contract can easily have 180 pages. Selling 35% of CV, I understand, can be done in 18 pages, cover page included. It is indeed much easier to read. As I'm not a lawyer, I appreciate that fact, but I would ask my lawyer, if I hadn't fired him yet for such a disappointing performance, the following questions:

Page 2: Define in more detail voting rights and mandatorily convertible bonds

Page 4: Is import + export cargo 30,000 tons or 60,000 tons?

Page 5: If cargo volume through CGO doesn't reach 200,000 tons after 36 months, what happens?

Page 5: With so many JVs considered, why isn't there cross ownership CV-HNCA?

Page 5: There is much uncertainty as the Luxembourg government deals with a non-sovereign Provincial government. What if rules change, CAAC doesn't cooperate or the Chinese government comes out as bad cop undoing what the good cop Henan Province seemed allowed to do?

Page 6: Are 4 flights binding? Who covers the losses? CV is a commercial venture, not a government agency. Page six actually overflows with dictates of a planned economy for a venture that has to care for the bottom-line in a market economy: increase flights, additional "traffic rights", scaling up flights, subsidies and their guarantee over time, etc. But: CV has no veto right, as again, reciprocity would have demanded.

Page 7: 3.7. The Dual Hub Strategy Fund needs "Unanimous decisions". Good luck.

Page 7: 3.8. "Reasonable cooperation" means "best efforts" only?

Page 7. 4.1. "Reputable international consulting firm". What can that be? At what cost?

Page 8. 5. CV could have had cross ownership in HNCA, at no other cost than the value of 35% of CV. Or at least get a better price.

Page 9: 9 is boiler plate language. Just mentioning that there was no excruciating effort in that paragraph.

Page 10: This agreement is under the laws of England and Wales. Future JV's under Chinese laws. Dispute resolution will be through arbitration in Hong Kong (HKIAC), a place not known for its strong pro-Luxembourg bias. It is not impartial territory.

Page 11: 11. Waiver of Sovereign Immunity. But of course: the good cop - bad cop plays out. Luxembourg and the Province of Henan waive their rights. Beijing does not. It is not involved for now. Later it will.

Page 12: 12. Just standard clerical discipline: Fill in the following missing address for HNCA:

HNCA: No.8 Shangwuwaihuan Road, 
Zhengzhou City, Henan Province, China
Zip Code：450000
Phone: 0371-87519086
Fax:0371-87519086

Page 12: 13.1. We are talking millions in fees, legal etc. Does any third party get commissions? How much? Are those commensurate with service levels provided? Not to a politically exposed person?  Beware of international and Chinese anti bribery laws. CV doesn’t need new fines, jailed managers, if not executed ones.

3. Conclusion. Manage risk. Start over again.

All in all, the Agreement is a poorly written document, barely a draft Executive Summary maybe, and an ill-conceived, -negotiated, and poorly defined undertaking. I guess Shearman & Sterling, which is a sterling law firm, was only minimally involved in the production of this document, and even worse, was not involved in advising what the deal could be and should be. They would certainly love to answer my  questions from a lay man and they have many more of their own.

There is also some more intangible political risk, as was the case with Qatar. We are not partnering with a Swiss or German entity. In this case we partner with one of a newly assertive super power, which leaves the political risk at the level of politics, preferences, and pragmatic choices for Luxembourg. Locally in Zhengzhou, CV will be associated with a project that will cover probably about 30km2 or more, going from the present one runway small airport to a multiple of four. It will have an important impact on zoning, and encroaching populations will have to be displaced, villages razed. This displacement may not become a major political issue though, as the local culture provides for a more docile acceptance for general interest projects, than it would in Luxembourg.

Maybe it is not too late to make corrections and fill in the blanks in the hollow Agreement, blanks about which I hope there is at least a consensus between both sides over answers, that there are common assumptions and at least verbal commitments at this stage. HNCA has shown a positive attitude, and will be glad to learn and understand. In particular, that there is no mention, no declaration, no formal guarantee to alleviate the rightful concerns of the Luxembourg employees, tax payers and other stakeholders when it comes to their future.