Four months before he leaves Europe’s largest airline group to become chairman of drug industry giant Roche, Lufthansa Group’s CEO says the group’s three-year restructuring plan is on track to meet its financial goals.
Briefing media representatives in New York on January 30, Dr. Christoph Franz, Lufthansa Group’s executive board chairman and CEO since January 1, 2011, says the SCORE restructuring program the group’s supervisory board launched in 2012 “is on course, despite massive headwinds: We are very confident we will achieve our targets.”
SCORE – which stands for ‘Synergies, Costs, Organization, Revenue, Execution’ – includes thousands of separate revenue-enhancement, cost-cutting and restructuring elements.
Every company in the Lufthansa Group, including its massive maintenance and technology-development subsidiary Lufthansa Technik (which owns a large group of companies in its own right) and the group’s subsidiary and affiliate airlines, has its own SCORE elements and targets.
The SCORE elements are designed to improve the bottom line of every Lufthansa Group company and cumulatively to improve the group’s bottom line by at least €1.5 billion a year over the €800 million operating profit it achieved in 2012.
Franz and his board colleagues launched SCORE after calculating that only by achieving at least a €2.3 billion operating profit a year could Lufthansa Group be sure to withstand successfully another massive financial downturn.
Two such downturns jolted the world’s airline industry severely within the space of a decade: from 2002 to 2004 (after the terrorist attacks of September 11, 2001) and from 2008 to 2010, during the global financial crisis precipitated by the collapse of Lehman Brothers.
Although Franz reckons no-one at Lufthansa Group can foresee all the potential financial headwinds which could affect the group over the next two years, nevertheless he says he is “confident” the group will achieve its SCORE goals in 2014 and 2015.
“In 2013 I said we had to show we were capable of implementing it and in pure volume terms we over-achieved in 2013,” says Franz. Now, “I think we’re very well on the way.”
In part this is because 2014 is looking a better year than 2013 in global economic terms, according to Franz, who arrived in New York immediately after attending the 2014 World Economic Forum in Davos, Switzerland.
“Not every issue of the [European] financial crisis has been resolved, but a lot of restructuring has been completed in the Mediterranean countries,” remarks Franz. The European Union’s gradual emergence from financial uncertainty has been a little like Lufthansa Group’s own restructuring experience, he feels.
Franz credits Lufthansa Group’s decision to transfer all of Lufthansa’s European point-to-point flying outside its main Frankfurt and Munich hub airports to lower-cost subsidiary Germanwings as one of the key reasons for the group’s promising response to the SCORE initiative.
“We are seeing very satisfactory consequences of this on the bottom line,” says Franz. “It’s a very attractive product with attractive pricing and we’re getting very positive feedback from customers.”
Adds Franz: “We feel that with the Germanwings product, we are clearly dramatically improving the situation with regard to all the low-cost carriers.”
One constant irritant to Lufthansa Group, however, is that it is burdened to the tune of more than €360 million a year by the “special air service tax” levied by the German and Austrian governments on airlines.
This tax raises about €1 billion a year from all airlines flying to and from Austria and Germany – but because Lufthansa Group carriers have large hubs at Frankfurt, Munich and Vienna, Franz says the group is disproportionately affected compared to other airlines. (Airberlin might argue.)
“We would prefer to invest this [€360 million] in environmental technologies,” says Franz “It’s equivalent to 50 per cent of our profit last year.”
Such taxes are short-sighted, he argues: “By withdrawing financial resources from the industry, the consequence is a slowing down of the introduction of new technology” which can help aviation achieve its ambitious environmental-performance goals more quickly.
However, adds Franz, “I’m very confident we will master future environmental challenges.” To minimize the effects of global climate change, humanity has to do so: “This is one of the real challenges of mankind, not just the airline industry.”
One area where Lufthansa Group is making a huge investment is in its in-flight service product. Franz reveals Lufthansa is spending “€1 million a day” to refurbish its long-haul aircraft, including installing lie-flat seats in their business-class cabins.
“We are perceived as a quality airline group,” says Franz. “We have to play the quality card. We see a lot of positive feedback” in carrying out such programs. Notably, in 2012 Lufthansa became the first European airline to achieve a five-star rating for its First Class long-haul service from the massive, independent Skytrax survey of many millions of airline passengers.
Franz also notes that Lufthansa Group is embroiled in its “biggest-ever program” of investment in new aircraft.
The hundreds of new Airbus, Boeing and Bombardier jets ordered by Lufthansa, Swiss International Air Lines and Lufthansa Cargo and yet to be delivered are going to cost the group €2 billion to €3 billion annually in capital expenditure for the foreseeable future, he says: unlike most other airlines, Lufthansa Group insists on owning at least 80 per cent of the aircraft its carriers operate.