MENAFN - Khaleej Times
Lufthansa breathes new life into product
(MENAFN - Khaleej Times) World's leading aviation group undergoes restructure to keep on par with growing air travel market in the Middle East
Low-cost airport fees in the Middle East - especially in Dubai - make Gulf carriers one of the most-aggressively priced products within the aviation industry today, and German-owned Lufthansa - the world's largest aviation group - is playing catch-up with one of the world's fastest growing air travel markets. But at what cost?
In order to gain level pegging with its competitors, Lufthansa's 117,000-strong workforce is set to receive a blow within the next few years, with up to 3,500 employees being let go in a bid to increase profitability and decrease costs.
But despite the risky long shot, Lufthansa's corporate strategy is one that is bound to see it pick up momentum within the next decade, strengthening an already-strong position within the industry.
During a Lufthansa Aviation Academy meeting in Frankfurt, Germany recently, Lufthansa's director of group communications Aage Dunhaupt said that in order to increase cash flow to further invest in the product, "there will be a reduction in the workforce".
But will these employees be let go as natural wastage or lay-offs?
Dunhaupt said the idea is to have a "natural fluctuation" either through employees being offered benefit packages or early retirement, and he added that "lay-offs would be the last resort".
"This is an investment to enable us be more efficient in the long run," he added.
In an industry that has transformed over the last decade, and with regions such as the Middle East slowly creeping through offering passengers flight travel at slashed rates due to lower landing fees at airports, European network carriers are facing a structural crisis.
New competitors, yield decline and an increase in the cost of fuel - which has quadrupled over the past 10 years and sees Lufthansa spend 9 billion on annually - have all contributed to this growing crisis and large network carriers are being forced to adapt their business in order to keep their heads above water.
The addition of 10 brand-new air carriers since 1999 signifies an industry dominated by new entrants, but with Lufthansa noted as the world's leading aviation group, with a history spanning nearly 100 years and expertise including Lufthansa Technik - an aircraft maintenance repair overhaul facility, and LSG SkyChefs - the world's largest provider of in-flight catering, they are in a leading position to overcome the current challenges being faced.
Opportunities in the Middle East
According to IHS Global Insight, the Middle East's annual GDP between 2013-32 is expected to grow by 3.8 per cent and while commodities, exports and infrastructure development are among the leading growth drivers behind the Middle East's emerging economy, air travel is expected to dominate this success in the future.
Lufthansa Group chairman and chief executive officer Christoph Franz, who recently announced his departure from the company early next year, told Khaleej Times that Germany - and Lufthansa especially - has always backed the idea of visa-free entry for Emiratis into the Schengen region.
"We have always advocated for all entry bans into Europe be wiped... for tourism purposes and business purposes, we would favour this free flow of passengers," he said. And as a result, this could create possibilities for Gulf and German carriers to work together in the future, allowing Lufthansa to cement a stronger presence within the Middle East.
But Nils Ecke, Lufthansa Group's senior vice-president of Airline Group, Alliances and Cooperations, has indicated that it has no immediate plans to work directly with Middle Eastern airlines.
"Both [Lufthansa and Emirates] respect each other, but we haven't found a good solution to work together. Lufthansa has a great feeding venture into Europe, but Emirates very much focuses on a hub service," he said.
According to Boeing statistics, air travel growth in the Middle East and Asia-Pacific will increase 7.3 per cent in the next 20 years, with the total scheduled passenger traffic - or revenue per kilometre - expected to hit more than 800 billion within this period.
Speaking at the Academy, Lufthansa Group's senior vice-president and chief strategy officer Sadiq Gillani said restructuring, consolidation and capacity discipline are all key factors that European carriers need to implement in order to improve profit margins and maintain global success - in line with the Middle East's growing domination within the air travel market.
With airlines achieving the lowest average return on capital when it comes to the value chain of the air transport industry, Lufthansa airlines, with a revenue share of 58 per cent on the group's overall product/service line, sees little profit, with a margin of just four per cent.
"This is an industry known to be turbulent, with no margins. No jobs, no hope, no cash, but this is what we have to fight for," Franz added.
So where do profits come from?
According to Gillani, "Lufthansa's additional expertise such as Technik helps with profits. Technik is big in China and the Phillipines and we're now looking at the Asian market for expansion."
Dunhaupt added that the group currently has about 200 programmes set in place to improve their business structure and catch up with its competitors, and it is actively looking to double this margin, to eight per cent, year on year, from now.
"From here on in we are working towards achieving profits of ‚1.5 billion each year to achieve this growth in margin," he said.
And the plan to increase profitability is by "financing investment". The future outlook is to develop its portfolio by investing in the product, improving relations with airports and delighting customers and in 2011, Lufthansa set aside ‚36 billion to be pumped into aircraft purchasing. This strategy will take them forward to 2020, but so far they have only spent 25 per cent of this sum, although "the rest of the money has been committed", Gillani said.
So what's on order?
In total, 59 aircrafts have been purchased, 34 of which are Boeing 777-9X models and 25 are Airbus A350-900 planes.
And customers are going to benefit from premium services too. Business class is going fully-flat on its Boeing 747-800 fleet, making it the first airline in the world to introduce such a feature. In 2011, Lufthansa Group invested another ‚3 billion into its business, with ‚1 billion dedicated to the new Business Class seating - the single biggest expense in this investment. Since the end of last year, eight aircrafts - including a passenger jet travelling from Munich to Dubai daily - have been retrofitted with the seats, with a total of 104 aircrafts to benefit from the new luxury product by 2015.
And it is also introducing a brand-new premium economy seating option for passengers as well, which will commence from 2014.
With the Middle East - Dubai in particular - noted as a region of rapid growth and expansion, there's no doubt that where there is buying power there is room for a product, so despite growing competition, Lufthansa Group is committed to staying on top of the game by regularly evaluating its already-strong business model.
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