Record cargo results in 2022

Inflated cargo yields were the one bright spot for airlines during the pandemic, as the shortage of wide-body belly capacity led to a massive supply crunch.

As wide-body capacity began to return in earnest during 2022, yields began to fall but still remained at historically high levels during the year. Whilst all the major long-haul airlines saw the benefit of this in their results for 2022, the size of the impact varied in accordance with the significance of cargo to their business. That varies quite a bit across the three big European network airline groups, partly due to route mix. Flights to Asia are much more lucrative from a cargo perspective than flights to North America or the Caribbean. The location of their hubs also matters a lot. There is a lot more industry in Germany and the Netherlands than there is in London. Transhipping cargo across Europe is also much easier if you don’t have to cross the English Channel to do it. I found this interesting heat-map of the most desirable logistics locations in Europe from a study by Prologis, which I think illustrates the point well.

The locational advantages enjoyed by KLM in Amsterdam and Lufthansa in Germany mean that the economics of flying dedicated freighter aircraft are vastly superior for them than is the case for BA at Heathrow. Lufthansa operate 18 freighters, KLM have four, Air France have two, whilst BA have none. Based on my estimates, about 38% of Lufthansa’s cargo was carried on dedicated freighters in 2022, compared to 24% at Air France - KLM and only 7% at IAG. Whilst IAG does not operate freighters themselves, they do contract in freighter capacity, mainly these days from shareholder and partner Qatar Airways.

The freighter capacity contributes to a big difference in the volume of cargo carried. The following chart shows that, measured in Cargo Tonne Kilometres (CTK), Lufthansa Group is 2.2 times the size of IAG, despite having a wide-body passenger network that is of a similar size.

In revenue terms, the differences are even more stark. Lufthansa Group is 3.2 times the size of IAG on that measure. The reason the revenue gap is even bigger is of course due to higher yields, a topic I will return to later.

I should note that I am not including Luxembourg-based Cargo specialist CargoLux in this comparison. As a private company, they don’t report much information. But with 30 747 freighters and a revenue of $4.4 billion in 2021, they would probably feature as the number two European player and certainly rival Lufthansa Group in terms of size in the cargo market.

Before I move onto talking about yields, I first want to show you the breakdown of cargo volumes by individual airline. Lufthansa Group don’t split their volumes down, with almost all of their cargo activity reported as part of the Logistics division. But SWISS and Eurowings are not included in Logistics and their cargo figures are reported as part of the airline. So with a bit of arithmetic, it is possible to work out their aggregated figures, which is essentially all SWISS. The only wide-bodies flown under the Eurowings name are part of Eurowings Discover, which is included in the Lufthansa airline segment. I’ve had to make some estimates to split Lufthansa out from Austrian and Brussels Airlines, but as the latter two are small, my estimate for Lufthansa at least should be pretty accurate. It shows how much bigger Lufthansa’s cargo operations are than any of the other passenger airlines.

Disentangling Lufthansa Group’s accounting

Despite being by far the largest cargo airline here, the results for “Lufthansa the airline” don’t include the full cargo revenues from flights bearing their name. That’s true even for the belly cargo business. The overall cargo revenue mostly ends up in the Logistics division. As I said before, the exceptions are SWISS and Eurowings, where all the revenues do get booked within the airline results. Whilst cargo isn’t material for Eurowings, this is a big deal for SWISS. In current market conditions, it probably goes a long way to explaining why SWISS has been the best performing airline in the Lufthansa group recently, based on reported results.

But what exactly does get included in the reported results for Lufthansa the airline for cargo? It makes sense that neither the revenues nor the costs of the freighter operation are included. But it can’t be the case that the airline receives nothing for its belly space, surely? I’ve long wondered what the answer to this question is, so I put a cold towel round my head, made an extra strong cup of tea and started trying to figure out exactly what Lufthansa were doing with their internal transfer pricing.

The place to start the investigation is the cost line called “charter expenses”. The management commentary that accompanies the results makes it clear that this is the cost line in which the Logistics division includes the payments made to the airlines for their belly space. Within the Logistics division, that cost totalled €1,287m in 2022. But I don’t think that internal belly space payments are the only thing in the Logistics division’s charter costs. The group had total charter costs in 2022 of €855m, of which only €385m were incurred within the passenger airlines, presumably for wet lease capacity. I can’t see that the MRO or catering divisions would have spent any money on chartering aircraft, so I think that means that the difference between the total €855m and the €385m spent by the airlines was external charter costs for the Logistics division, i.e. €470m. So that means that the payment for belly space was only €817m (€1,287m less €470m).

The next port of call in our investigations is the “internal revenue” line within the passenger airlines. At the total “Passenger Airlines” segment reporting level, that added up to €887m. I think this is virtually all cargo belly payments. The fact that SWISS has only €4m in this line gives support to that theory. As does the fact that the figure is very close to the number we just calculated, looking at the Logistics division’s costs.

What proportion of the total revenues that Lufthansa Group received for its belly space ended up in the airlines? To get at the answer to that question, we need to try and estimate the split of CTKs between belly and freighter capacity. The company doesn’t provide any information to help, so I’ve had to do my own estimates. We know from schedule data the number of flights and the distance flown by dedicated cargo flights in 2022, split by aircraft type. We also know the cargo payload for those aircraft types. That gives us an estimate for freighter ATKs of about 4.6 billion in 2022. Deducting this from the cargo ATKs for the Logistics division, we get an estimate of 7.2 billion cargo ATKs for the belly space of Lufthansa, Austrian and Brussels combined. I did a cross check estimating that number directly and got a very similar figure, so hopefully it isn’t too far out. To get a figure for CTKs, we need to assume a load factor. I went with 55%, slightly below the figure for SWISS. The balancing figure is the load factor for the freighters, which works out at 70%. Load factors should be higher on the freighters, since they only operate on cargo relevant markets. As a reference point, the load factor for Cargolux in 2021 was 73%.

All of this estimating work is to enable us to calculate what the €817m of belly-hold payments represents per CTK, at least approximately. It produces a figure of 21 euro cents per CTK. That can be compared to the average yield reported by the logistics division of 61 euro cents. So the airlines are getting only about 34% of the revenue. Cargo yields have doubled compared to pre pandemic levels, so that would have been closer to 70% when the transfer pricing arrangements were put together, assuming the transfer pricing deal works on fixed amounts per CTK or tonne, rather than a percentage commission. Given that the Logistics division also presumably picks up a chunk of handling and selling costs, that might have seemed a reasonable deal back then.

Another thing we can do with these estimates is to see how different the Lufthansa airline results would be if they accounted for cargo in the same way that Air France - KLM or IAG does. Lufthansa’s 2022 revenue was €13.2 billion. If it received the whole revenue from its belly capacity, it would book another €1.3 billion of revenue. Include the freighter revenue and there would be another €2.1 billion on top. Most of the €1.6 billion of profits from the Logistics division would end up at Lufthansa too. That would make quite a difference to the €432m “adjusted EBIT” loss reported for the year.

Yield comparisons

I said I would come back to talk about yields. Here is a chart of the cargo yield per CTK, split by airline. I’ve shown the Lufthansa figures on both the “full revenue” basis (61 cents) and my estimate for the reported basis (21 cents). Air France - KLM don’t actually split out their cargo revenue between the two airlines. KLM does provide the data when they publish their own annual report, so I have the split of the figures for 2021. You can see that there was virtually no difference between Air France and KLM’s cargo yields in 2021. So for the purposes of this analysis, I’ve assumed the same held true in 2022. We’ll know for sure once KLM publishes its 2022 annual report.

Cargo yields should be adjusted for stage length before making comparisons in the same way we do for passenger yields. Where we have data for both CTK and tonnes, you can calculate an effective average stage length for the traffic carried. We have that data in some cases but I’ve had to estimate it for others, but I’m confident it shouldn’t be too far out.

You can see that there does seem to be something of a stage length effect visible in the data. Whilst I won’t claim that this is a statistically valid sample, interestingly the line of best fit does follow the same “square root” relationship that we see in the passenger yield data. This view confirms that Lufthansa leads the pack on yields, especially given the stage length. British Airways and Iberia stand out as looking quite poor. That will partly be due to the locational advantages of the others. But it could also be something to do with them being the only airlines amongst this group with significant wide-body competitors operating from the same city, in the shape of Virgin Atlantic and Air Europa.

Volume trends

It is hard to detect much of an overall pattern looking at the quarterly volume trends. I’ve put them on the chart below, expressed as a percentage of 2019, in order to adjust for seasonality. For airlines dependent on belly cargo capacity, volume is of course quite correlated with the pace at which wide-body flights have been restored. Aer Lingus is a good example, showing the strongest recovery in volume as they’ve rebuilt their passenger network from a low base in 2021. The opposite is true for carriers like KLM, with a lot of freighter capacity relative to their passenger network. They have gone from the airline with the strongest volume compared to pre-pandemic levels to the worst performer amongst this group. Operational challenges at their main hub Schiphol will also have played a part as shippers move their business elsewhere.

British Airways versus Virgin, revisited

About a year ago, I wrote a piece comparing the performance of British Airways and Virgin. One of the areas where I said that Virgin was “kicking sand in the face of BA” was Cargo. I thought it would be interesting to see whether that had changed at all as BA has restored its network and Virgin has refocused its capacity back on passenger markets rather than chasing cargo. You can see on the following chart that the market share gains made by Virgin do seem to have been reversed now. I’ve rather cheekily fitted a polynomial trendline to the data, which implies that Virgin is heading rapidly for oblivion. I’m sure that isn’t really the case and the situation has probably stabilised back at pre-pandemic levels, but it makes for an exciting looking chart.

What next?

2023 should see wide-body capacity in most markets largely restored. The main exception is Asia, where the recovery has been lagging and flights from Europe continue to suffer the impact of Russian overflight restrictions. Carriers were already seeing the impact of a normalisation of yield at the end of 2022 and I would expect those trends to continue into 2023. I’m a bit surprised that cargo yields are holding up as well as they are, to be honest.

The other big uncertainties relate to the economic outlook. Cargo is notoriously sensitive to changes in economic activity. Maybe capacity will finally come back just as economic demand turns down, triggering a big downturn in yields. Or perhaps Cargo management teams will enjoy another year of record profits in 2023, with volume recovering as capacity is restored, offsetting any impact from softening yields.

Overall, I think it is wise to be cautious. Air Cargo has been a pretty ugly business from the perspective of profitability for most of its history. We’ve seen three years of record profits and 2023 is likely to be another better than average year. But eventually the supply/demand balance will shift back again and when it does, yields have a long way to fall.

Comparing European airline cargo results for 2022