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Germany’s aviation sector is comprised of many airlines; the national flag carrier Lufthansa (Deutsche Lufthansa) is the largest airline in Germany and one of the largest in Europe. Its main hubs are Frankfurt am Main Airport, Munich Franz Josef Strauss Airport and Düsseldorf International Airport. Deutsche Lufthansa Group is a global aviation group with subsidiaries Lufthansa Regional, Lufthansa Italia, Austrian Airlines, British Midland (bmi), SWISS and Germanwings with further stakes in Brussels Airlines, JetBlue and SunExpress. Air Berlin is Germany’s second largest airline, which also owns LGW (Luftfahrtgesellschaft Walter mbH) & LTU International. TUIfly is the third largest airline in Germany.
Air navigation service providers for German airspace are conducted by DFS (Deutsche Flugsicherung GmbH) and EUROCONTROL, whilst the Federal Agency of Aviation (LBA - Luftfahrt-Bundesamt) is the government regulatory body responsible for developing and maintaining aviation safety standards, as well as certifying airlines, airports and training devices.
Airports in Germany
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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.
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.
British band The Jam’s debut single included the lyrics: “In the city, there’s a thousand things I want to say to you… In the city there’s a thousand faces all shining bright, and those golden faces are under 25”.
London’s City Airport is no longer growing with the youthful energy captured by The Jam. Indeed, it turned 25 last year, but it has matured into a successful airport with an increasingly diversified route portfolio. Business routes remain very important, but you are now also likely to find business people there looking to recapture their lost youth in one of the several leisure destinations served.
In London City, there might not be a thousand things to say, but it does reflect a number of key trends and issues in European aviation today: airline consolidation, the battle between the alliances, EU liberalisation, capacity constraints, the importance of high yield passengers, the development of surface infrastructure and the shift to new generation aircraft technology are all evident at the airport.
The only shining bright faces that are missing are the low-cost carriers.
When reporting its first net loss in 30 years, Luxair observed that “Many traditional, independent, small size European airlines which do not operate long-haul services are facing financial disaster and are fighting for survival. The only airlines which operate an intra-European network and which are managing to do well are the low-cost airlines.”
With this in mind, the Luxembourg-based operator of scheduled and charter passenger operations, cargo handling and aviation services is embarking on a crucial turnaround plan. It targets a breakeven result in 2015 by achieving annual profitability improvements of EUR25 million, or almost 6% of 2012 revenues. This looks an ambitious target given its 2012 operating loss margin of 4% of revenues.
Austrian Airlines has not made an operating profit since 2007 and has been consistently the weakest Lufthansa Group carrier in terms of margins and passenger growth. It is more exposed than its sister companies to short/medium-haul markets, where price-based competition is fierce, and its long-haul network is relatively light.
However, it has strong market positions on its long-haul routes and is looking to grow this area of its business with an additional Boeing 777, approved by the parent company. Moreover, its recently completed rationalisation of its narrowbody fleet from 11 Boeing 737s to seven Airbus A320 family aircraft will both reduce its exposure to short/medium-haul markets and allow it to serve them more efficiently.
Meanwhile, the centre-piece of its radical restructuring programme, the transfer of flight operations into its regional subsidiary Tyrolean Airways (effective from Jul-2012), and the concentration of administrative operations at Vienna should lead to further cost savings if legal challenges can be repelled.
Hainan Airlines' first 787s go to Chicago, Seattle & Toronto but Air China gets Beijing's key routes
Originally due to arrive in China in time for the country's 2008 Beijing Olympics, the 787 even missed the 2012 London Olympics. Once the aircraft were finally ready in 2012, Chinese certification lagged and then the 787's battery-induced grounding put a further hold on delivery. But now in sight is an end to the saga and start of commercial service of the 787 in China.
Three operators hold 35 orders: China Southern for 10 787-8s, Hainan Airlines for 10 787-8s as well and Air China for 15 787-9s. Xiamen Airlines has a pending order for six 787-8s. China Southern is due to be the first carrier to take delivery and Hainan the second, but Hainan was first to announce deployment plans, which include domestic services and long-haul flights to Chicago, Seattle and Toronto.
But, as a less privileged, private airline, Hainan Airlines could be constrained by its own government on which routes it can use the full 787 fleet, as the airline faces route restrictions out of Beijing, its main long-haul base – as China Southern painfully experienced when it sought to fly from the capital with its A380.