Air Cargo Germany’s future uncertain

Posted on June 3, 2013 by Adina Solomon

Air Cargo Germany’s descent into insolvency was both cruel and heartless.

The suspension of its AOC by the Luftfahrt Bundesamt, Germany’s civil aviation authority, came after a snap audit which revealed the airline did not have the financial resources to maintain competent operations over the next 12-month period, a breach of European Union regulations.

Despite assurances by airline CEO Michael Schaecher that operations would quickly resume, the enforced grounding immediately exposed ACG’s cash flow weakness. It was only a matter of days before Schaecher was forced to declare insolvency in order to avoid further retribution in the German courts. Under strict company law, it is illegal in Germany not to admit insolvency.

Despite everything, Schaecher remains upbeat about the turn of events.

"Through insolvency proceedings, both management and shareholders envision to create an opportunity to restructure the company and restore operational activities," he insists.

It seems a forlorn hope. All the more so given that any autopsy of Air Cargo Germany would reveal that it was the positives, which should have ensured the carrier’s success, which in the end turned to negatives.

The German carrier’s future seemed assured when Russia’s Volga-Dnepr Group acquired a 49 percent stake in April 2012. But even prior to this, there had been a strong Russian influence from its earliest inception in 2008.

The airline was started by Michael Bock and Thomas Homering, two former executives of German airline LTU. Bock was reported as holding the majority stock, but much of the early financial support is said to have come from Russian entrepreneur Rashid Mursekaev, one time co-owner of Russia’s VIM Airlines. The airline’s core management at the time reflected a similar Russian flavor, being made up almost entirely of former Aeroflot Cargo executives.

With the more recent arrival of Volga-Dnepr on the scene, all kinds of synergies were immediately envisioned with VD’s line haul operation AirBridgeCargo. There was also talk of the ACG fleet of four B747-400s being replaced, in part at least, by newer ABC B747-8F capacity.

ACG’s new benefactor has had to contend with cash flow problems of its own.

"Volga-Dnepr’s base AN-124 business has seen a dramatic decline, and ABC is struggling in a weak scheduled cargo market," Stan Wraight, aviation consultant and executive director of Strategic Aviation Solutions, says. "This comes at a time when VD has been investing heavily in new maintenance facilities at Leipzig airport in Germany and at Sharjah in the United Arab Emirates."

ACG has been denied the promised new B747-8F capacity, which instead has been parked-up by cash-strapped ABC.

The only real synergy between the two airlines has been the move by ACG to stop flying out of its Hahn airport base and operate instead out of nearby Frankfurt, to allow greater connectivity with ABC’s services from Germany’s premier hub.

Volga-Dnepr, Wraight adds, has been thwarted from throwing ACG a more meaningful lifeline by the fact that further funding from the Russians would tip it over the European Union’s 49 percent foreign ownership rules.

Bizarrely, ACG’s home state of Rhineland-Palatinate, where Hahn airport is located, came forward with the offer of a liable bank guarantee for the ailing airline, but this has been seen has coming dangerously close to a government subsidy.

"The problem for ACG is that any source of further borrowing is only going to increase the airline’s debt burden," Wraight says. "What is really required is an injection of equity funding, preferably form a European entity."

Wraight stops short of reading the last rites for the German cargo carrier, but says the prospects are not bright, given that one of the airline’s B747-400BCF has already been returned to KLM-Martinair, with the contract on a second Dutch aircraft due to expire this month, which will leave the airline with just two freighters in its downsized fleet.

"It is difficult to be non-partisan in these things, but right now it would be illogical for Air Cargo Germany to restart operations, particularly with just two freighters, which require the same support infrastructure as an operator with six aircraft," Wraight says. "Even if further borrowing can be found, it will take four to five months to regain market confidence, during which time its debt burden would only increase further."

There was some talk in the German airfreight market that it was only a matter of time before ACG was forced out of business. The German civil aviation authority was said to have been watching the airline like a hawk and had already come close to revoking its operating licence on more than one occasion.

Lufthansa Cargo’s role in ACG’s ignominious end may be that of a non-participant, but its loathing of ACG’s business model is clearly understood, given that at the very outset the new German carrier was established with the single goal of challenging LH Cargo’s dominance in the German market.

"Air Cargo Germany didn’t just happen when it first launched in 2008," Wraight says.

"It was with the complicity of major elements of the German forwarding community, fed-up with the way they were being treated by the country’s primary flag carrier."

In particular, Schaecher, then executive vice president airfreight at DHL Global Forwarding, threw his full support behind the new venture. Other senior forwarding executives, such as Wolfgang Meier, who was in charge of Panalpina’s own controlled airfreight network, also endorsed the new second tier cargo carrier.

It was later rumored that DHL Global Forwarding was taking up as much as 70 percent of ACG’s capacity.

Little surprise then when earlier this year Schaecher was appointed as ACG’s new CEO. And Meier also remains in the mix, having in 2009 been appointed vice president for sales at AirBridgeCargo.

"That might have been part of the problem, having a forwarding executive running an airline," Wraight suggests as being another contributory factor to ACG’s demise. "But in the final analysis, the loss of ACG will be seen as being about petty jealousies in the German market, outside of which nobody else was really bothered."