Lufthansa Group : margins first !

While there was talk of Lufthansa’s renewed interest in Alitalia and IAG’s takeover of Air Europa, there were other significant announcements last week that speak volumes about how they see the future and their capabilities to meet it.

Air France unveiled its strategy for the next few years to investors, but before talking about it in a future post, let’s start with four announcements from Lufthansa Group.

Lufthansa cuts service, staff and loyalty program

I said a while ago that Air France was cutting back on everything, but Lufthansa is not to be outdone. Logic: same market, same competitive environment, same consequences even if the means are not the same.

First news: a cut in the long-haul service.

Lufthansa will reduce service in economy and premium economy class starting November 28, 2019.

On long-haul flights, Lufthansa will only offer a small cold vegetarian snack as a meal before landing, without choice.
Today, on flights lasting more than 10 hours, the airline offers a small hot meal with two choices of dishes.
Currently, on flights lasting less than 10 hours, it offers snacks with hot food.

So you’ll tell me that it’s just a small change but it’s still a sign of a degradation of the service.

Second news: a cut in the workforce at Brussels Airlines and Austrian.

The two member airlines of the Lufthansa Group are going to be put on a slimming diet!

First of all, Brussels Airlines has been forced to make a 160 million cut each year from 2022. Without being able to quantify the impact in terms of number of jobs, we can imagine at least a voluntary departure plan or even dry layoffs. In addition, the Board of Directors of the Belgian airline will be “fully digitized and streamlined”, its fleet will be “standardized” and all processes reviewed and improved.

At Austrian, a plan to save 90 million euros each year will be implemented, resulting in the closure of all its bases outside Vienna. It is estimated that 700 to 800 jobs will be affected.

The third piece of news, which we won’t go into here, is an overhaul of the Miles&More frequent flyer program, in line with what we’ve seen done elsewhere in the past, at Air France for example, and more recently at United, Lufthansa’s preferred partner in a joint venture.

Fourth news: a clarification of the context in which Lufthansa would be interested in Alitalia. According to Carsten Spohr, CEO of the German group: “As far as Alitalia is concerned, our position has not changed. As we have said many times, we are not interested in investing in the current Alitalia, but we are interested in considering a new, restructured Alitalia, if it makes sense for us and our shareholders, our staff and our customers because of the importance of the Italian market. So there is nothing new about this, as I just said“.

In other words, he calls the government and the current shareholders to account: “clean up first and then we will come if we like the bride“.

Reasons for belt tightening

One wonders why the German group is tightening the screws so much when it has just published good half-yearly results. Well, it couldn’t be simpler: while the sector is expected to go through a new cyclical crisis and enter a consolidation phase, at least in Europe, what we said about Air France is just as true for Lufthansa. It will be necessary first to pass the winter and then to have the means to participate in the consolidation of the sector (or to participate in the consolidation before…if one has the means but without putting oneself in danger).

For this there are neither a thousand, nor a hundred, nor ten, nor two ways to achieve it but only one: restore the margin. Without margins, winter will be harsh, without margins one can find oneself in difficulty, without margins one will watch others feed on the spoils of companies that have not resisted or even become prey oneself.

We will see in a few days that this is exactly the logic behind Air France’s new strategic plan, and in this case it is the sole concern of the Lufthansa Group.

Lufthansa is doing well, even very well? It is necessary to anticipate! Brussels Airlines and Austrian are not doing badly? Well, that’s not enough. The two laggards are aiming for a minimum of 8% EBIT (earnings before interest and taxes) and the parent company is not going to rest on its laurels.

Let’s remember the lucid words of Ben Smith, the CEO of Air France-KLM this summer:

“Air France’s margin in 2018 was only 2 percent, compared to 9 percent for KLM, 10 percent for Lufthansa, 12 percent for British Airways and 18 percent for Ryanair. A 2% margin at Air France is not satisfactory. Five points can be explained by the costs in France. But two points are due to the complexity and inefficiency of the airline. It’s up to us to tackle it. “

That’s all there is to it.

Is austerity the right choice?

If the efforts imposed on Austrian and Brussels Airlines seem to be pure common sense, one can wonder if the cut in long-haul economy and premium economy service is in the right direction when we know that at the same time British Airways improves its premium eco offer and, above all, Delta Airlines finally launches its new long-haul eco product which marks a real step forward in this class of travel and surely a reference that the competition will not fail to benchmark.

The passenger will certainly prefer Delta’s approach but only time will tell who was right, maybe both. We are simply faced with two opposing philosophies or dogmas: Delta thinks that a better product will help to sell more and to make better results while Lufthansa thinks with a very Germanic rigor that everything is in the control of the costs and the budgetary rigor.

European airlines in battle order

In any case, one thing is certain: the European “majors” are preparing their weapons for a medium-term future that they do not see as rosy and in which some of them will certainly leave their mark.

However, in this game, not all companies are on equal footing: while IAG and Lufthansa Group are doing well and are “content” to prepare themselves, Air France-KLM has to catch up and give itself the means to play a role tomorrow. We will discuss it again soon…

Photo : lufthansa aircraft By Tupungato via Shutterstock