Lufthansa: the hesitant decision maker

As Lufthansa downgrades its profit forecast for 2013 today, Nadejda Popova, senior analyst travel and tourism at Euromonitor, asks whether the airline can be transformed by its latest restructuring project.

"Over the last couple of years Lufthansa has been very hesitant in its decision making (for example with regard to fleet upgrades, cost-cutting measures) at a time when other players have been very aggressively expanding and transforming their operations.

Its financial performance has been seriously affected by poor economic conditions and high taxation in Europe and strong competition from low-cost rivals on its short and medium-haul routes, while on international routes the German player has been squeezed by Gulf operators such as Emirates and Qatar Airways.

The German operator needs to adapt and respond more quickly to the ever changing business environment, making sure that it adopts a more flexible management approach to introducing radical changes.

In an effort to counterbalance these negative factors the airline is undergoing a major overhaul through its new SCORE programme, which aims to restructure all areas of its operations which are major cost drivers, boost profitability, upgrade its fleet as well as introduce a premium economy service, among other things. Although not a popular move among trade unions given ongoing labour disputes, the company is also aiming to reduce its administration costs by cutting 3,500 jobs. This is an approach which has seen rivals such as IAG with the Iberia brand succeed in tough economic environments such as Spain.

This new programme would appear to be a move in the right direction for Lufthansa. The question remaining, however, is how efficient this programme will be given the number of projects Lufthansa has adopted over the years, for example Programme 15, and how capable it will be of delivering its set goals.

Through SCORE, the airline is aiming to become a more competitive player within the budget segment and boost its short-haul operations. Indeed, Lufthansa has shifted its European and domestic flights to its Germanwings brand.

Although a significantly delayed move, buying fuel-efficient aircraft is seen by the carrier as a vital step towards efficacy. In 2013, the carrier has placed an order for over 100 aircraft, both Boeing and Airbus, with an expected delivery timeframe of 2016-2020 and at a cost US$11 billion.

In addition, in September 2013, Lufthansa pledged to invest €1 million per day for the duration of 1,000 days with the purpose of upgrading its product offerings.

Europe and the Middle East are the regions where the airline continues to have a strong presence. Lufthansa, however, remains weak in other emerging markets like Latin America and Asia Pacific. Indeed, the company is almost entirely reliant on Western Europe, where it commands more than an 11% market share.

Trade sources reveal that Lufthansa is considering two major options to facilitate its penetration in Asia Pacific – the establishment of a long-haul budget airline, similar to the move made by Norwegian Air Shuttle (NAS), or entering into a joint venture with another player which can boost its market share in the region. Company sources point out that Turkish Airlines could be an interesting partner to work with in that part of the world, especially as it is already partnering the carrier in Europe through SunExpress.

A long-haul budget airline in Asia Pacific is certainly a very interesting idea, although the fact that it would be an unexplored niche could mean more financial hurdles for Lufthansa to overcome. As such, code sharing with some of the major low-cost players in the region, such as AirAsia, could prove to be a more feasible option."