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When the yodel meets the waltz. Can Lufthansa manage a ménage a trois?


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Among the airlines watching Lufthansa’s waltz with Austrian, perhaps none will have keener interest in the outcome than SWISS International. The Lufthansa subsidiary has its hub a mere 700km from the Viennese capital, where Austrian is based. Instinctively SWISS is likely to be more than a little jealously cautious about mutual relationships in the future.

Until now the merger/takeover of the Swiss flag has been a model of the benefits of a small and high quality carrier working semi-autonomously with a larger one. SWISS has continued to grow staff and capacity while remaining profitable, at the same time offering some innovative options for its large parent. But there are great differences of circumstance between SWISS and Austrian.

SWISS international Airlines passenger numbers and passenger numbers growth: Apr-03 to Jun-08

Source: Centre for Asia Pacific Aviation & AEA

As SWISS proudly reported last month, total first-half capacity (ASKs) grew 12.5% year on year. The additional capacity was “fully absorbed by market demand: systemwide seat load factor for the period remained unchanged from 2007 at 78.8%”. It carried 6.45 million passengers in 1H08, “more than in any previous first-half period”. It also turned in EBIT of CHF262 million, which, although down 5.8% on last year, was pretty creditable in the circumstances.

At the time of its takeover, SWISS was lean and essentially undersized (at least compared with its previous existences, before McKinsey intervened to change its world) when it entered the relationship. Austrian, by contrast, is an oversized airline in decline – and indebted – with continuing heavy intrusions and expectations at political level. Shedding necessary Austrian routes will not all be simply a matter of rational planning.

And until now SWISS has enjoyed a place in the sun, with solid fuel hedges in place. So, despite the recent leap in fuel prices, only “around 30%” of SWISS’ total expenses were fuel related during the first half. Unless prices come down in 2009, SWISS will have to work much harder to remain the favoured child, once the hedges run out at the end of this year and it has to go back to paying market prices.

Working out a mutual network strategy to ensure optimum results and minimum cannibalisation is a sensitive task at any time. As with any such relationship, and even allowing for a certain Teutonic rationalism, it relies heavily on personal relationships at the highest level in each company. Unless middle management interfaces are given the appropriate guidance from the very top, the middle range niceties of day-to-day operations can quickly erode even the most complementary of operations.

The particular chemistry between Zurich and Frankfurt has until now been very positive, but faces change from time to time. And the likelihood of a similarly comfortable three-way relationship, once Vienna enters, is questionable.

There will have to be route pruning. If Austrian were to continue to go it alone, cutbacks would have to be aggressive in the extreme, to get it back to profitability. But Austria’s politicians are not looking to deliver their flag to their neighbours, just to see it make cutbacks that it would be making anyway if it stayed “independent”.

SWISS and Austrian have long haul routes with considerable overlap, connecting over their gateways to North America and to Asia. And their intra-European routes essentially overlap at almost every step, offering Lufthansa access to potentially limitless permutations into and from German and other points. That is, in addition to its own network.

Lufthansa may suffer a short term temptation to use Austrian’s added presence to cement its domestic power, as Air Berlin and the likely third force (TUIfly, Eurowings, Germanwings and Condor) stretch their wings.

And to some extent, each airline has its own distinct historic strengths, justifying some apparent duplication – in Austrian’s case, notably its eastern Europe network. But an economic single force will certainly not want to be adding routes; and these are hardly times to be allowing unnecessary fat, just to indulge politicians.

That is all perhaps anticipating what may not eventuate. But, as Air France appears to be renewing its interest in Alitalia, Lufthansa looks increasingly like the only serious contender for the next waltz. SWISS may be hoping that it doesn’t turn out instead to be one of Johann Strauss the Younger’s polkas – Donner und Blitzen, for example.

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