When a crisis hits, do as the Germans do. At least, that’s the message the country’s top airlines are transmitting through the airways, for many obstacles lie on their routes to the future.
The Eurozone debt crisis, record-high fuel prices and fierce competition from the big three Arab carriers (Emirates, Etihad Airways and Qatar Airways) and more recently Turkish Airlines represent an unprecedented tri-vector of challenges for Europe’s aviation businesses that has thrown carriers young and old into a tailspin.
But the mantra being practised by Germany’s airlines, despite some notable setbacks in recent years, has a very British essence to it: keep calm and carry on flying.
Structural changes
Germany’s two largest carriers, Lufthansa and Air Berlin, who collectively own 97 per cent of the country’s aviation industry, have been forced into radical structural changes in an effort to claw back a decreasing market share and international superiority.
Graham Dunn, Editor, Flightglobal Pro, tells GN Focus in an emailed statement, “This illustrates the size of the task all European network carriers have faced in recent years, as they have found themselves battling heightened competition at a time when economic growth in their own markets has been weak or non-existent.”
Looking at the European carriers’ winter of discontent in 2011, International Air Transport Association (IATA) claimed the continent’s carriers would amass losses of up to $600 million (Dh2.2 billion) as the gravity of the commercial challenges sunk in last year.
And the forecast look gloomier still when old guards Malev and Spanair collapsed within a week of each other, as passengers with less cash to splash decided air travel and short European breaks were an expendable commodity.
Lufthansa has implemented its drastic restructuring programme (named Score) that aims to make savings of $1.95 billion and eliminate one in five administrative jobs by 2015.
In the first six months of 2013, Lufthansa posted a net loss of $270 million, down from a net profit of $69 million from the first half of 2012, according to a report released by the German carrier in August. Total revenues faltered by 0.3 per cent to $19.8 billion and passenger numbers fell to 49.5 million.
“But these are short-term hiccups necessary for a long-term recovery,” says Carsten Schaeffer, Vice-President, Sales and Services for South-East Europe, Africa and Middle East, Lufthansa.
“Our business is very volatile to any political and economical situation and we have to adjust to it,” he tells GN Focus. “We are always, somehow or another, in one pocket of the world in somewhat of a crisis mode, because there is always something going on. And we’ve learned from previous crises that the strongest survive the best.
“We decided last year that we will not participate in the full growth of the market until we have revamped our structure. That’s the process we’re in now, to allow us to compete in markets that are very competitive on the yield side by 2015,” he says.
Schaeffer goes on to say that Greece is one of the German carrier’s best performing European routes because competing carriers have been forced to pull out, but it felt the impact on routes to Italy, Spain and Portugal, which continue to suffer from the European recession.
Meanwhile, Germany’s second-largest carrier, Air Berlin, has been cutting costs and routes in a scrambling effort to get back to the black, despite seeing Etihad take a total stake of 29 per cent in 2011. Persistent delays in the completion of the new Berlin Brandenburg Airport (BER) have reportedly cost the airline up to $6 million a month as it haemorrhages customers from Tegel airport. The airport, originally slated to open in 2010, is not expected to be inaugurated until 2014 or beyond.
Spearheaded by Chief Executive Officer, Wolfgang Prock-Schauer, Air Berlin — Europe’s sixth-largest carrier by passenger numbers is cutting 900 jobs and 16 aircraft in a wide-sweeping savings plan dubbed Turbine 2013, which aims to save $552 million by 2014.
Air Berlin’s earnings before interest and tax losses increased from $247 million in the first half of 2012 to $272 million in the first half of this year, though second-quarter losses were down year-on-year.
The way forward is neither easy nor clear. Cutting routes and selling aircraft won’t get the job done overnight. One of the greatest and foremost challenges for Air Berlin is getting the new BER facility up and running, which will allow Air Berlin to expand its network hub and get more passengers through the gates.
Codeshare and equity agreements will play a large role in Air Berlin’s future, according to a Centre of Aviation (CAPA) report.
“Air Berlin’s codeshare with its strategic partner Etihad continues to progress. In the first half of 2013, common bookings with Etihad increased by more than 250 per cent to reach 267,000.
“Air Berlin expects common codeshare bookings with Etihad to double in 2013 versus 2012 on a full-year basis. In July 2013, Air Berlin announced codeshares with two other members of the Etihad equity alliance, Virgin Australia and Air Serbia,” the August report states.
Many, including CEO of Etihad, James Hogan, have declared the set-up of Oneworld and Star Alliances as defunct models anathema to the customer getting the best deal. Schaeffer says the opposite model, deployed by Etihad, of codeshares and hefty percentage stakes is a “complicated” way of doing business that isn’t yet proven.
Then there’s what some are calling the low-cost carrier (LCC) factor. The array of budget travel now available in Europe has driven costs and passenger numbers as travellers opt for high-speed rail or a young LCC over a legacy carrier with long-established routes.
“We don’t live in a time where air travel is for the elite only,” Schaeffer says. “Today people realise it’s a commodity. You use it to go from A to B. I think the legacy carriers underestimated [the LCC movement] at the beginning — and that’s one thing we have to respond to.”
Tackling problems
Lufthansa has moved to tackle the challenges on short-haul networks by moving its non-hub short-haul flights to its revamped low-cost unit Germanwings, which is one of the best performing entities of the Lufthansa Group today.
Along with acknowledging and entering the LCC market, German carriers will need to look to ancillary revenues as a way of generating further profits.
But Schaeffer is adamant Germany’s top carrier will not end up looking like any other carrier in the market.
“It’s responding to customer demand. We still offer the customer the all bells-and-whistles product. But we talked a lot to the German business community about the sort of product they want. And we don’t want a Ryannair product, we want a Lufthansa product that guarantees quality all the way,” he says.
