Consolidation in Turbulent Times

Consolidation in turbulent times

Lufthansa carried a total of 70.5 million passengers last year and was ranked number one by IATA (International Air Transport Association) for having carried the most number of passengers on international scheduled routes, leaving number two Air France lagging some 20 per cent behind.

The airline also made headlines when it made a the team’s achievement ‘on the playing field' and I’m number of strategic moves last year, such as confident they will rise to the challenge when the establishing Lufthansa Italia, a market-specific chips are down. network in Italy; buying a stake in American carrier JetBlue Airways; and exercising an option on bmi, In addition to our people are our robust financial giving it the second most number of slots after base and our expertise and experience in dealing British Airways at London Heathrow, Europe’s with difficult situations. busiest airport. A major contribution to the stabilisation of the It also took a leading role in consolidating in Europe group’s profitability as a whole in this environment by taking over Swiss International Air Lines and is made by our portfolio of business segments. Austrian Airlines (subject to regulatory approval by Thanks to the different cycles in the individual the European Commission), and acquiring a 45 per segments, they decisively support the sustainable cent stake in Brussels Airlines with an option to development of the group. Equally decisive, acquire the remaining 55 per cent of the company in however, is the fact that all business segments in 2011 (again, subject to regulatory approval by the themselves have a significantly lower volatility European Commission). today than they had a few years ago. Through the combination of these two factors – which is a direct Wolfgang Mayrhuber, executive board chairman result of our strategic orientation and our and CEO of Lufthansa spoke to INSEAD Knowledge profitability claim in all parts of the company – even on the sidelines of the 65th IATA Annual General in stormy times, Lufthansa can keep on track better Meeting on how the airline competes in the market than the competition. and why consolidation is necessary during these turbulent times. What are the main aviation trends currently?

Knowledge: How does Lufthansa compete with other Even in the current downturn, air transport is a airlines in this harsh market environment? growth industry. While aircraft size has doubled, fuel efficiency has improved by 70 per cent over the Mayrhuber: First of all, it’s our people. I am proud of past four decades. One main trend that’s clear in the Visit INSEAD Knowledge http://knowledge.insead.edu 01

Copyright © INSEAD 2021. All rights reserved. This article first appeared on INSEAD Knowledge (http://knowledge.insead.edu). aerospace industry is to find new answers for total liquidity base of the group, therefore, currently environmental challenges, as demand for mobility amounts to about 5.2 billion euros. rises and resources are limited. Our declared objective of being able to call upon a Consequently, improvements on the ecological side strategic minimum liquidity of two billion euros at will positively influence the economic figures. The any time, continues to be pursued even in these aim is to continuously improve operating costs and times. We also continue to have bilateral credit lines increase productivity, while simultaneously totalling approximately 1.7 billion Euros at our reducing environmental impact. disposal.

According to IATA, airlines worldwide will record In addition to liquidity, our group fleet is valued at losses amounting to $9 billion this year. Lufthansa nine billion euros. Our short depreciation period of appears to be leading consolidation in Europe with its 12 years and our strategy of relying mainly on recent partnerships and acquisitions. Is consolidation ownership rather than leasing particularly pays out one of the ways to combat these losses? in the current situation. Some 70 per cent of our fleet is financially unencumbered – that means that these aircraft do not serve as securities for financial loans or are encumbered with other access rights of third parties.

What is the near-term outlook for the industry and for Lufthansa?

We expect that weak demand will persist this year. It is not yet certain if it has reached rock bottom. The priority, therefore, is to safeguard our profitability. In the long term, we believe that consolidation offers We are relying on strict capacity and cost the best opportunities for remaining competitive in management in all our business segments. We are the world market. It ensures that hubs are retained well equipped and can decide independently to and it provides better connections and better fares, boost capacity as needs dictate. and it also helps to secure jobs in the downturn.

Besides making the future of our group more secure Find article at through meaningful acquisitions, new partnerships https://knowledge.insead.edu/economics- and tie-ups, we have also shown with (the finance/consolidation-in-turbulent-times-1609 acquisition of) Swiss (International Air Lines) that this approach works: once Lufthansa stepped in, Swiss was able to invest over one billion euros in Download the Knowledge app for free new aircraft and expand its selection of long-haul flights. Not only did Switzerland profit as a travel hub but the economy in Baden-Württemberg also benefitted a great deal.

It is true that the underlying conditions at the time of our decision to integrate Swiss were conducive and it was followed by boom years, and that is not the case at present. The economy is in crisis but it will not last forever.

With Brussels Airlines, Austrian Airlines and bmi we will be able to link several hubs and create added value for our customers and ourselves.

You mentioned that Lufthansa has a robust financial base. What is it like?

Our liquidity adds up to a current figure of 4.8 billion euros. In addition, Lufthansa holds 366 million euros in long-term securities which, however, could be made liquid at any time and is part of the strategic minimum liquidity reserve. The Visit INSEAD Knowledge http://knowledge.insead.edu 02