Analysis for Europe

Lufthansa Group: the SCORE so far Part 2. Negotiating from a strong position, to find new partners

In part two of our report on the Lufthansa Group’s SCORE profit improvement programme, which aims to steer the group to a EUR2.3 billion operating result in 2015, we look at some of its major projects and consider its strategic importance.

SCORE follows many previous cost reduction programmes and several of the initiatives launched under the scheme, such as cutting admin costs and pooling procurement across the group, are incremental (and overdue) improvements. However, it has also seen more radical developments, such as ‘New Germanwings’, the transfer of Austrian Airlines operations to Tyrolean and the planned closure of Lufthansa’s historic Cologne head office.

Perhaps the most significant legacy of SCORE may be to change the company culture away from one described by CEO Christoph Franz as “traditional” with a “syndrome of not invented here”. Less than a year after its launch, SCORE co-project manager Josef Bogdanski said that “people understand the importance of what is currently happening. Change is no longer seen as a bad thing.”

This is a vital foundation for survival. A changing world, where consolidation is around every corner, means that you need to be strong to drive the best partnership deals, says Dr Franz.

Royal Brunei Airlines takes another step forward as it becomes first 787 operator in Southeast Asia

Royal Brunei Airlines (RBA) is eager to move on to the last phase of its new business plan as it becomes the first airline in Southeast Asia to operate 787s. An initial fleet of four 787s, which will be placed into service in 4Q2013 and 1Q2014, will significantly improve efficiency and should lead to a further reduction in losses of RBA’s long-haul network.

One of Southeast Asia’s smallest flag carriers has come a long way since restructuring in 2011, when three medium/long-haul and two short-haul routes were cut. So far the results have been positive with RBA’s short-haul operation having already turned the corner and is now growing again in response to surging demand for travel within Asia.

RBA is now looking at also renewing its narrowbody fleet, which would result in further cost savings. But the carrier still has an uphill battle in reaching profitability given its small size and the prospect of increased competition with LCCs.

Monarch Group - not absolute ruler, but on course to profit in FY2013 with strong turnaround

On 12-Jun-2013, privately owned Monarch Group published its annual report and accounts (for the year to Oct-2012) for the first time and issued a trading update for 1HFY2013. The group also says that, following a Nov-2011 re-financing, its turnaround strategy is on course to return the loss-making group to profit in FY2013.

Monarch Group, which includes tour operations and aircraft engineering in addition to scheduled leisure airline Monarch Airlines, is currently considering an order of up to 62 new aircraft for delivery up to 2024. Executive chairman Iain Rawlinson has recently denied that the company is seeking a public listing or new shareholders.

Nevertheless, the size of this planned aircraft order and the first-time publication of an annual report, which reveals an under-capitalised balance sheet, may well fuel speculation that the group is indeed considering just that.

Turkish Airlines turns its attention to Latin America with four new destinations in 2014

Turkish Airlines (THY) is pursuing aggressive expansion in Latin America, where it plans to triple the size of its network in 2014 to six destinations. THY will still be a relatively small player in the Latin America-Europe market but its launch of services to Bogota, Caracas, Havana and Mexico City is primarily targeted at the faster-growing and under-served Latin America-Asia market.

THY will offer the Colombian, Cuban, Mexican and Venezuelan markets the fastest connections to the Middle East, most of Asia and parts of Africa. With the expansion the Star Alliance carrier emerges as an attractive partner to Latin American carriers, which have a very limited presence in any of these regions.

THY is also accelerating expansion in the US market, where it plans to grow its network from five to eight destinations next summer. The carrier will open up new connections to parts of Asia, the Middle East and Africa from Atlanta, Boston and San Francisco. But the THY product from these new destinations will not be as exclusive as is the case with its new Latin American cities.

Lufthansa CEO Christoph Franz: the SCORE so far, as the carrier refocuses strategy and operations

Lufthansa Group CEO Christoph Franz gave what resembled a mid-term “state of the union” address to analysts and investors in Frankfurt and London on 7 and 8-Jun-2013. The presentations in Europe’s two main financial centres were billed as an update on the group’s SCORE programme, which aims to deliver EUR1.5 billion of profit improvement between 2011 and 2015.

Such an update was indeed provided, but Dr Franz also took the opportunity to recall the tumultuous environment in which he took the job in 2011, to review the strategic developments over which he has presided since then, and to give his vision of the Lufthansa of the future.

In part one of our Lufthansa report, we look at the Franz view of the world and the overall progress of SCORE. In part two, we will look at some of SCORE’s major projects in more detail and assess its strategic importance to Europe’s leading airline group.

SAS’ restructuring plan is still on course after improved 2Q2013 results

In 2QFY2013 (Nov-2012 to Apr-2013), SAS has turned around pre-tax losses to report a profit (before non-recurring items) and reversed the pattern of 1QFY2013, when its losses widened. It has made progress with cost reduction and looks to be on track to achieve its FY2013 financial targets. It has also recently agreed to sell its Wideroe subsidiary and made further progress in its fleet modernisation programme.

SAS' recent launch of new fare classes SAS Go and SAS Plus scarcely looks to be the “new service concept” that it claims, but at least the Nordic region’s largest carrier is attempting to differentiate itself from its many and growing competitors. In 2012, President and CEO Rickard Gustafson said the restructuring plan was a “final call” for SAS. It seems that, at least for now, the group has not yet missed the flight.

LOT majority stake attracts airline interest, but restructuring and potential synergies will be key

Recent legislation allows the government of Poland to sell a majority stake in state-controlled national carrier, LOT Polish Airlines (LOT). According to media reports, LOT has appointed Rothschild as its privatisation adviser and a number of carriers have indicated their interest in investing. A lifeline loan from the government in Dec-2012 has been approved by the European Commission, partly conditional on a new restructuring plan expected in Jun-2013.

With losses for each of the four years 2008 to 2011 and a fifth loss expected for 2012, LOT’s cost base is too high for its revenue-generating capabilities. Moreover, it is inefficient versus the LCCs that compete on short/medium-haul, which accounts for 88% of LOT’s seat capacity and where its ageing 737 fleet needs replacing.

A handful of long-haul monopoly routes are finally benefitting from new 787s, but it is difficult to find many other features for LOT’s advisers to highlight. Interest in buying LOT will depend very much on the pricing and potential synergies a buyer might bring to the table.

How easyJet is driving demand

easyJet's May-2013 traffic statistics show that it has carried more than 60 million passengers in a 12 month period for the first time. In her 1H2013 results presentation, CEO Carolyn McCall identified the significant further growth opportunity she sees to take market share from traditional carriers on point-to-point routes at easyJet’s existing airports.

The LCC’s principal attraction versus these competitors is its low fares and this has been the main driver of demand. However, easyJet is evolving its product in order to broaden the basis of competition.

easyJet has initiated a number of digital developments, improved its CRM capabilities, built its brand strength, introduced allocated seating and is making its proposition more attractive to business travellers. CAPA spoke to group commercial director Catherine Lynn about these initiatives.