No Room for Entrepreneurship? Last week, all cargo carrier ACG Air Cargo Germany temporarily suspended services and grounded all of it‘s all-cargo Boeing 747Fs which are sidelined at Frankfurt airport.

The carrier founded in 2008 began operations in mid-2009 after obtaining its AOC in July of that year. Since then Air Cargo Germany (ACG) has increased its fleet from formerly two to four full freighters flying between its home base at Frankfurt-Hahn and destinations throughout Asia. As we all remember well, the beginning of ACG coincided with the global crisis, which in return provided a shrinking demand and caused an erosion of freight yields. So the economic environment for the start of this carrier was poor and rumors started from the beginning about their financial capabilities.

Nevertheless, ACG was able to grow its business and to become the largest freight carrier at Hahn airport. This business development obviously encouraged the Rhineland-Palatinate Government to a continued cash injection into the ailing airport operation.

Roughly one year ago, ACG sold 49 per cent of its shares to Russia’s Volga Dnepr Group – a well established name through its heavyweight and charter operator “Volga Dnepr” and its line-haul arm “AirBridge Cargo” (ABC). At this time it was questionable whether there have ever been synergies between ABC and ACG as both carriers basically served the same (Asian) markets and have been previously in stiff competition. On the other hand Russian ABC by now had an entrance card into Europe through its minority share in ACG and announced plans to trim the combined network, enabling a seamless service from Asia to Europe and onward to the Americas. Meanwhile, we have notedthat the combined operation has obviously made progress as ACG’s aircraft have been shifted from Hahn to Frankfurt Rhine-Main to better interconnect with ABC’s flights and to streamline ground operations of both carriers, even though both have sold their capacities under different MAWBs.

What are the consequences if ACG fails?

First of all we’d like to repeat our warning, released five years ago that it is a very ambitious and extremely fragile business model to setup an all-cargo airline in Europe to compete against giants such as Lufthansa or Air France-KLM-Martinair Cargo or rivals from the Middle East and East Asia. Even long established Cargolux has been facing severe difficulties despite its unusually loyal client basis. We have seen too many smaller or niche carriers ceasing service, although general market conditions had been decent at the time. But as soon as unexpected hurdles hamper the business such as increased fuel expenses, additional expenditures for security or environmental matters, and slack capacity demand by the market, their financial capabilities are often too little to weather these unfavorable circumstances, while investors refrain from making any further cash injections.
However, the ACG case is certainly different and here is why:

It is certainly no secret that Russian Volga Dnepr expects operational advantages if they will be treated like a European (Union) carrier, in particular on routes across the Atlantic. Therefore, their 2012 investment into the already financially ailing ACG made a lot of sense. However, European laws prohibit – in a similar manner to U.S. laws – non-European ownership of an EU air carrier. The maximum allowance of 49 per cent of the equity has already been achieved. The appointment of Michael Schaecher as ACG’s new CEO, the previous head of global air freight at DHL Global Forwarding, was a clever choice by the Russian carrier. He and ABC’s sales boss Wolfgang Meier are well known names in the industry and both have a sound and solid understanding what’s being needed at large, multinational forwarding organizations. While Wolfgang is on board of ABC since 2009, Michael has joined ACG just eight weeks ago and we don’t expect that this situation was planned as well as we don’t expect that this is the end of his career.

And there is the government of Rhineland-Palatinate state and its pressing Hahn issue, the loss making airport nearby Frankfurt. The state government has frequently provided loans and facilities to the conversion airport. ACG’s CEO Schaecher has just recently been quoted by a local newspaper that “Hahn is like a Ferrari but you’d better be able to drive a Ferrari,” because ACG has shifted flights to its big neighbor Frankfurt. The future of Hahn, however, depends on its ability to attract further carriers and to significantly increase freight volumes. Hence, the shift of existing capacity is a bad sign, in particular at a time when the full privatization of Hahn airport is currently under review by an external advisory. Both, Schaecher and Meier are famous for their know-how in forwarder controlled capacity, especially from their joint ex-employer Panalpina. Therefore, we expect that these two experts will play a vital role in the future plans of ACG.

Finally, we have always known Volga Dnepr’s energetic head Alexej Isaikin as a visionary person who can calculate well and is anything but a money burner. So we expect the continued support of ACG by Volga Dnepr, although the Russians cannot become the direct owner of a reshaped Air Cargo Germany.

While the current market conditions for air freight have slightly improved in Europe, the future of both ACG and ABC will most likely lead to operating under a single umbrella, reinforcing the strengths of each carrier: a mutually utilized hub at Frankfurt (Rhine-Main) for connecting flights to and from the Americas and two hubs within Russia for intra-Russia distribution and for linking operations on routes between Asia/Pacific and Europe. Under the current circumstances, over flight charges in Russia are extremely expensive for foreign carriers – this could turn into an advantage for the combined carrier while at the same time the reshaped and closely tied ABC-ACG will be able to offer a global network with standardized aircraft at a decent combined fleet size with optional dedicated services for the prime forwarders operating globally.

Author: Dirk Steiger