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New Lufthansa CEO may step up challenge to low-cost rivals

07/08/2014 | Reuters

With state-owned Gulf airlines and low-cost rivals poaching more of its customers, Germany's biggest airline Lufthansa may have decided it has little choice but to join them.

New Chief Executive Carsten Spohr will say this week how he aims to win back investors after a profit warning knocked $2 billion off Lufthansa's market value. A new round of cost cuts, a deeper push into cheaper no-frills services or a possible alliance with a Middle Eastern airline could be on the menu.

All would mark a shift for a company that has its own low-cost division but still prides itself on being a full-service airline distinct from the likes of Ryanair and easyJet and has accused the state-owned Gulf airlines of distorting the market.

Lufthansa has said plans by Etihad of the United Arab Emirates to take stakes in ailing European carriers Air Berlin and Alitalia amount to part-nationalization.

Analysts are now calling for Lufthansa to work more closely with airlines it has criticized the most.

"If you can't beat them, join them," said Jonathan Wober, chief financial analyst of independent aviation market analysis group CAPA. "Probably at some point they need to find a way of embracing the Gulf airlines or Turkish Airlines in a partnership, although that's easier said than done."

Other large airlines have struck various alliances with the Middle Eastern carriers that are investing heavily to funnel more passengers through fast-growing hubs halfway between European and Asian markets.

Air France and British Airways already work with Etihad and Qatar Airways, while Emirates partners with Qantas, a member of the OneWorld alliance that competes with Lufthansa's Star Alliance.

Lufthansa said on Monday it was launching a joint venture with Star Alliance partner Air China to sell tickets for each others' flights, improving the German airline's access to the world's second-largest aviation market.

More angry unions ?

Kepler Chevreux analyst Ruxandra Haradau-Doeser said she expected new cost-cutting measures from Spohr, a 47-year-old native of Germany's industrial heartland who took the top job in May after heading the airline's passenger business.

A Lufthansa restructuring already under way has seen the expansion of its Germanwings low-cost brand and 3,500 administrative job cuts, plus tough pay negotiations with staff.

Media reports suggest Lufthansa could even set up a new low-cost business. But any further cost cuts from Spohr could antagonize unions again after a spate of damaging strikes in the past two years.

"The previous management never said they would tackle the Gulf airlines or the low-cost carriers head on, only that we had to cut costs and become cheaper. This was the wrong thing to do," said Nicoley Baublies, head of cabin crew union UFO.

He welcomed Spohr's apparent acknowledgement that Lufthansa needed new concepts and to become more modern, but warned he could aggravate tensions with employees if he followed predecessors in trying to outsource services to cut costs.

Reports that Spohr may even expand low-cost services to long-haul flights have unnerved some investors. Fund manager Michael Gierse from one of Lufthansa's top 15 shareholders, Union Investment, said he believed trying to implement low-cost on long-haul routes would be foolhardy.

As an alternative, he said, Lufthansa could buy another low-cost airline in Europe.

Too many seats

The need for urgent solutions has grown since Lufthansa said last month it was cutting back its profit targets for the next two years because of competition from the Middle Eastern and low-cost rivals, sending its shares plunging.

Part of its problems stemmed from a miscalculation - the airline added capacity on North Atlantic routes this year only to find the demand was not there.

Its 7.4 percent increase in North Atlantic seat numbers over the summer far outstrips increases by other airlines such as British Airways.

"This had a strong impact on pricing, which will undeniably require capacity cuts and of course a need to speed up the restructuring process in the company," said Euromonitor senior research analyst Nadejda Popova.

But Lufthansa's efforts to mark itself out for quality of service may be hard to square with any new push into no-frills flights.

It still offers checked baggage and complimentary refreshments on short-haul Lufthansa-branded flights and is investing over 3 billion euros in its seats as it tries to gain a five-star rating from airlines reviewer Skytrax.

Business passengers still expect top service on feeder flights - short flights which connect to its Frankfurt and Munich hubs for longer onward travel - while rivals have long given up trying to provide full service on connecting routes, said Gierse.

"If Lufthansa could give that up, it would be a huge strategic coup," the fund manager said. "But I don't think that Spohr, given he has been at the company for decades, is in a position to do that, and even if he were Lufthansa would be 10 years too late."

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