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A Luxembourg employees’ association has come out in support of staff at Cargolux battling proposed investment by China’s HNCA, following last month’s government announcement that the deal may not be signed before March – although insiders say it could be signed as early as next week.

The potential breathing space gives opponents some hope of changing the deal, which, according to Luxembourg’s infrastructure minster, “is no guarantee for safeguarding Cargolux”.

A Chambre des Salariées (CSL) report, seen by The Loadstar, asks why the proposal’s “dual hub strategy” fails to mention Luxembourg. It also questions whether the governments involved – Luxembourg wants to promote a Chinese financial centre in Europe and China wants to promote Henan – have any complementary strategies.

The association also claims no one has properly examined the relevant markets and believes both Cargolux and Luxembourg will be taking significant risks if the deal goes through.

Meanwhile the carrier is engaged in a search for a new CEO, with interim chief Richard Forson, previously CFO of Qatar Airways, expected to return to the CFO position at Cargolux. In the face of the Chinese investment deal and its forecast of losses, who will take up the top job is an interesting question.

According to documents seen by The Loadstar – including the recently updated proposed commercial agreement with HNCA – the business model for the key Luxembourg-Baku-Zhengzhou-Baku-Luxembourg route anticipates significant losses.

Based on volumes of 40 tonnes to Baku and another 40 tonnes to Zhengzhou, with 110 tonnes outbound, it projects revenue of $371,000 per rotation  – after costs, a loss of $25,617. Over a year, with four rotations each week, losses would amount to $5.3m.

However, the contract states that if the new routes result in “displacement of other routes”, the network contribution of the new routes must be at least equal to previous ones.

The agreement also specifies that the target for Cargolux – which can be reviewed if there is “material deviation” – is to reach no less than annualised import and export volumes through Zhengzhou of 200,000 tonnes between 24 months and 36 months into the agreement – the equivalent of  six aircraft or one-third of the carrier’s current fleet capacity.

With all costs and revenues being equal in this timeframe, this could mean losses of some $25m a year – more than the amount  in Henan’s “special fund”, which provides subsidies to airlines flying through Zhenghzou.

The agreement also outlines Henan’s subsidy policy, under which Cargolux would get “no less” than any other airline.

This would involve a one-off reward of $33,000 for setting up in Henan for one year, plus allowances of a further $33,000 for any new routes from Zhengzhou – to be used on advertising and promotion of the route only. There are further subsidies for all-cargo carriers and road feeder services.

In addition, HNCA would commit to $15m “for the promotion of the dual hub strategy” – although this is not detailed further.

In fact, according to lawyers consulted by Cargolux and the CSL report, much of the contract, which includes Cargolux setting up handling and maintenance operations, is open to interpretation – in particular, setting up a joint-venture airline.

The agreement specifies getting a feasibility study on the viability of a new JV airline from a consultant. Subject to this and “mutual agreement on key parameters of the joint-venture airlines (such as funding, commercial and corporate governance), the joint-venture airlines shall finalise the registration for its incorporation within the following 24 months”.

The airline would have a Chinese AOC, but Cargolux would “assign management”.

Despite some changes to the original document, under English law the clauses are “vague” and “may not create an enforceable obligation”, according to law firm Shearman & Sterling, consulted by Cargolux.

While only the lion-hearted would consider setting up a cargo airline in the current economic environment, the agreement now states that the new airline’s network would be “an integral part of the Cargolux network, and that … if so requested by Cargolux, be integrated into the commercial operation of Cargolux”.

It also states that HNCA would undertake to provide support to Cargolux, or the new airline, for fleet financing. However, Shearman & Sterling points out that any detail on how the new airline is to be controlled or funded is “missing”.

The law firm also noted that there has been no due diligence on HNCA and that, with negotiations conducted between HNCA and the Luxembourg government, Cargolux has had no real visibility into the terms of the deal.

While some of the lawyers’ objections have since been ironed out, the CSL remains unsatisfied, accusing Luxembourg’s government of being short-termist.

The government has made no secret of its intention to establish the country as the centre of international renminbi business in Europe. According to lobbying website RMB Luxembourg, the country has the largest pool of of the Chinese currency in the Eurozone, with Rmb56bn in deposits, Rmb67.2bn in loans, Rmb24.5bn in bond listings and more than Rmb228bn-worth of assets in mutual funds.

“It is the only country in Europe with Rmb-denominated mutual funds.”

One well-placed source told The Loadstar: “There is economics at play, and the future of the nation – which wants to be aligned with China– is to make Luxembourg the financial centre in Europe for the Chinese currency.”

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