Lufthansa Turns Around European Short-Haul With Germanwings Help

Deutsche Lufthansa AG (LHA) said it’s managed to turn around most of its European routes as the German airline narrows its focus on the profitable legs and cost reductions bear fruit, the regional head of sales said.

“This year, Lufthansa has been extremely successful with its European network,” Goetz Ahmelmann said at an event in Seeheim close to Lufthansa’s main Frankfurt hub. European services using Frankfurt or Munich, where three-quarters of passengers pass through, have been making money as the business experienced “a significant lift,” he said without elaborating.

Lufthansa’s Germanwings subsidiary will become the operator for all its routes within Europe that don’t use Frankfurt and Munich. Operations outside the two hubs accumulated losses of almost 1 billion euros ($1.3 billion) in the past 10 years, said Germanwings Chief Operating Officer Oliver Wagner. Germanwings plans to be profitable by 2015 and is seeing higher load factors on routes taken over from Lufthansa, while ancillary sales, yields and profit all rose.

Turning its European home market around is a key part of Lufthansa’s plan to lift operating profit to 2.3 billion euros by 2015. The company placed its largest-ever order for new aircraft this month to rejuvenate its fleet and better compete against carriers from the Middle East and Asia. It’s also spending 3 billion euros on new seats and lounges.

Air France

Air France KLM-Group (AF), Europe’s largest carrier, on Sept. 18 said it scrapped a plan to break even at its main French unit this year, prompting management to deepen job cuts and retire planes to pare costs.

Lufthansa’s traffic in Europe improved as the company reduced the number of plane types for regional routes and used bigger aircraft with more seats, Chief Executive Officer Christoph Franz said. The executive, who on Sept. 16 said he won’t extend his contract when it expires in May, said cost-cutting will have to continue beyond the current program, which runs through the end of next year.

“Working on the bottom line will continue, whether in the form of a new program or a continuous effort,” Franz said. “Our focus going forward is very clear: We’ll profitably grow in the markets where we see growth. Not growing in a growing market means you lose market share, and this industry is driven by market share and size.”

Joint Ventures

While foreign ownership rules limit scope for mergers and acquisitions in the industry, and joint ventures within Europe face scrutiny by antitrust authorities, international joint ventures beyond Europe may provide an attractive option, said Lufthansa executives who attended the event.

The company in May won approval from European Union regulators for its A++ trans-Atlantic venture with United Continental Holdings Inc. (UAL), and it has a similar agreement with All Nippon Airways Co. for Japan-Germany flights.

Lufthansa may end up engaging in “a handful” of such ventures, and is in talks with its Star Alliance partner Air China Ltd. (601111) and Turkish Airlines (THYAO) about closer cooperation, executives at the event said, without being more specific. Lufthansa also seeks to expand its catering and maintenance activities in Asia, said Sadiq Gillani, the company’s strategy chief.

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

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

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