More of the Same…Lufthansa Group moderates its financial outlook for 2015

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Citing a series of unrelated events and factors including the Ukraine conflict, Ebola, pilot strikes and weak revenue conditions, Lufthansa Group remained cautious about the prospects for 2015. The Passenger Airline division, which produced more than 75 percent of Lufthansa Group’s revenue in first 9 months of 2014, posted a 1% decline in revenue and a 41 million euro fall in its operating performance to September 2014.

This blog has analysed in detail both the fundamental challenges facing Lufthansa and its strategic response. Indeed, Lufthansa’s fate and response is shared by other European network carriers:

  • Rapid commoditisation of passenger air travel;
  • Far-reaching de-regulation of the sector leading to new entrants undercutting traditional players across main segments (short-haul, long-haul, point-to-point);
  • Business model innovation in passenger aviation leading to an unbundling of service proposition and new types of carriers such as low-cost airlines;
  • Ongoing challenges with tackling the structural rigidities in the airline’s human resource allocation e.g. pilots pay and legacy costs such as pensions;
  • A lack of innovative response with airline executives pursuing similar strategies of weakening and diluting the value proposition to get costs down.

Within the Lufthansa Group, Swiss International is doing well by raising its third quarter operating profit by 5 percent to 125 million euro. Swiss International is the only one of the group’s airlines on a clearly improving route to profitability in the , first three quarters of 2014 – in part to a new depreciation policy at Lufthansa Group. According to CAPA, Lufthansa reformed its depreciation approach in 2014 such that it now depreciates its aircraft over 20 years to a residual value of 5%, compared with a policy of 12 years to 15% in the past. This net result is lower annual depreciation charges.

The poor performer in the passenger aviation group without question is Austrian Airlines. Its operating profit fell by 32 percent to 37 million euro and its operating result for Q1,2 and 3 dropped by 26 million euro recording a loss of 7 million euro. While recent restructuring efforts at the airline saw a temporary improvement (the airline has made a profit only once since 2005), its fragility was exposed by two events: the Ukraine conflict and its dependence on Eastern European/Russian routes and the EU Court of Justice ruling forcing the company to re-negotiate with its staff on the basis of a labour agreement between Austrian Airlines AG and the unions rather than the less generous one through Tyrolean. The CCO, Dr. Karsten Benz, recently left to take up a new position within the Lufthansa Group and the so the revolving door at Austrian that has seen four CEOs at the helm in a decade and numerous senior managers come and go appears to be continuing.

Lufthansa Group noted that two of its core markets (Europe-N. America and Europe-Asia Pacific) faced weak revenue conditions. Both regions saw increases in Lufthansa’s capacity but RASK fell in North America by 7.6 percent and in Asia-Pacific by 3.1 percent in the first three quarters of the year. In the case of Asia-Pacific, Lufthansa cited competition from Middle East Carriers.

CEO Carsten Spohr is betting on growth in Lufthansa’s “Wings” concept – point-to-point carriers such as Germanwings. Again, the strategy faces challenges from both a supply-side (pilots and the threat of strikes) and a demand-side (coherence with Lufthansa’s stated ‘premium’ positioning). History is littered with generally unsuccessful attempts by network carriers who try to create new carriers within the group structure (United’s TED, Delta’s SONG, British Airline’s GO, Singapore Airlines’ Tigerair, Air France/KLM’s Transavia). Lufthansa’s ambition must draw on the lessons of previous failures.

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