Swiss Mulling 747-8 for Fleet Upgrade Following Parent Lufthansa

Swiss International Air Lines Ltd. said it will consider ordering Boeing Co. (BA)’s 747-8 as a potential replacement for its aging Airbus SAS A340s, following the lead of parent Deutsche Lufthansa AG (LHA), the model’s first customer.

Swiss could choose to scale up the wide-body fleet to add capacity as part of a fleet overhaul, with the 747 offering 362 seats in the layout chosen by Lufthansa, versus 219 in its own A340-300s. Boeing’s 777 and the new Airbus A350 are also in the running, Chief Executive Officer Harry Hohmeister said.

Lufthansa became the first buyer for the passenger version of the 747-8, known as the Intercontinental, with an order for 19 of the planes in 2006. Swiss is also working with Bombardier Inc. (BBD/B) on specifications for the 30 CSeries jets it has ordered, and that model, too, could win more purchases for a wider application across the group, Hohmeister said.

“We want to substitute our A340 fleet at some point,” he said in an interview in Frankfurt, where Lufthansa has its hub. “We’d rather grow with bigger planes. For Swiss, the A380 is hardly an option, but we’ll look at the Boeing 747-8 and 777 and the Airbus A350. We’ll have to see what makes sense.”

Basel-based Swiss has 13 A340s in its fleet, offering eight seats in first class, 47 in business and 164 in economy and used on routes including Zurich to Beijing, Tokyo, Shanghai, San Francisco and Los Angeles. Lufthansa’s 747-8s have eight seats in first, 92 in business and 262 in coach.

High-End Pitch

While the contribution of operating profit to Lufthansa by Swiss fell 13 percent to 259 million euros in 2011, the unit remained the group’s most profitable passenger airline. Operating profit was 6.6 percent of sales, compared with 1.6 percent at Lufthansa’s passenger business, while Austrian Airlines and Germanwings had operating losses.

Swiss, taken over by Lufthansa in 2006, has generated consecutive annual operating profits ever since that year.

Hohmeister said that Swiss’s strategy aims to make it “fit to face” the competition on key Asian routes and from Middle Eastern carriers such as Dubai-based Emirates, Etihad Airways of Abu Dhabi and Qatar Airways Ltd.

“We’ve positioned our brand as premium, we don’t want to be a cattle-train carrier,” the CEO said. Most of Swiss’s inter-continental routes are operating with about 90 percent of seats occupied, he said.

Lufthansa, which ordered the 747-8 to replace its 747-400s, received the first to be delivered to an airline by Boeing last April and has since taken three more. The German carrier has fitted the planes with its first flat-bed seats and a brown and grey business cabin aimed at producing a “living-room feel.”

CSeries Customization

A follow-on order from Lufthansa for Swiss would boost a 747-8 order book that amounts to only 40 planes, 12 of which have been delivered. The last new contract, for five aircraft, came from Air China Ltd. (753) on Sept. 6. Boeing also has orders for 67 747-8F cargo variants, of which 28 have been handed over.

The 110-seat CS100s that Swiss has on order will arrive from next year. Twenty of the planes will replace the carrier’s 97-seat BAE Systems Plc (BA/) Avro RJ100s, with the deployment plan for the other 10 yet to be decided. Lufthansa has options with the model’s Canadian manufacturer for a further 30.

“We’ll develop it with Bombardier and if other Lufthansa units want it, it’ll be similar or the same,” Hohmeister said.

Swiss has 91 aircraft in its fleet, 28 of them wide-bodies, according to its website. The CEO said the total is likely to rise to about 95 by 2016 and 100 as of 2020, though there’s not necessarily any aspiration to reach 120, with the focus on bigger planes more pressing.

Franc Challenge

Spending on fleet renewal is likely to total 3 billion francs, Hohmeister said, of which 1.5 billion francs is already committed on the CSeries. That need can’t be met simply from earnings and is spurring cost cuts, he said.

Hohmeister said he plans to deepen a savings drive as the franc’s gains against the euro hurt the value of his airline’s earnings contribution to Lufthansa’s business.

Swiss may end up contributing 160 million francs to its parent’s “Score” efficiency plan, almost 40 percent more than first planned, to meet its targeted share of group savings.

“We must ensure we’re not running to stand still,” the CEO said. “The appreciation of the franc is dramatic for us. It’s a unique disadvantage no other airline in Europe suffers from. We’ll see where we can cut costs in procurement or information technology. We may also have to cut staff at some point.”

Lufthansa CEO Christoph Franz plans to lift operating profit to a record 2.3 billion euros ($3.1 billion) by 2015, aided by a 1.5 billion contribution from Score.

Hohmeister said that Swiss needs to consider what it will do if the franc appreciates toward parity with the euro. Earnings at the unit fell in 2011, though it was still the highest-margin business among Lufthansa’s airline assets. Profit fell again in 2012, the CEO said, declining to give a figure.

To contact the reporters on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net; Alex Webb in Munich at awebb25@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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