Lufthansa May Expand Reorganization If Savings Miss Goals

Deutsche Lufthansa AG Chief Executive Officer Christoph Franz said he’s prepared to revisit a savings program should some of the initiatives prove insufficient to turn around Europe’s second-biggest airline.

While the carrier feels “very comfortable” that it can deliver on profitability targets set out in the so-called Score earnings-growth project, management would be willing to adjust or extend the plan to reach the desired results, Franz said today in an interview at the carrier’s main hub in Frankfurt.

“Obviously any program which is triggering this kind of change in a company is also linked with implementation risks,” Franz said. “If there are any signals of substantial shortfalls we will have to think about additional activities.”

Franz, who last month announced his surprise departure from Lufthansa next year to become chairman of Swiss drugmaker Roche Holding AG, is cutting thousands of jobs, moving much of the short-haul operation to low-cost subsidiary Germanwings and adjusting long-distance premium offerings, including the removal of first class on routes where demand is insufficient.

Lufthansa introduced “tourism first-class” tickets in March for about half the full fare that comes with booking restrictions. In July, it started testing a system to overbook first class, a practice so far limited to cheaper tickets.

‘Sacred Cows’

“You cannot allow for any kind of sacred cows in this industry,” Franz said. “Competitive pressure has increased to an extent that you always have to question yourself and challenge yourself.”

Lufthansa rose as much as 1.1 percent to 14.17 euros and was trading up 0.5 percent at 14.08 euros as of 1:45 p.m. in Frankfurt, heading for the first gain in three days. The shares have lost 1.1 percent this year, valuing the carrier at 6.48 billion euros ($8.75 billion).

The share performance contrasts with a gain of 4.3 percent for Paris-based Air France-KLM Group, Europe’s biggest airline by traffic, and a 78 percent surge for London-based International Consolidated Airlines Group SA, owner of the British Airways and Iberia brands.

Earnings Target

Spending cuts at Lufthansa include 3,500 job reductions in administration, contracting out some positions at its German passenger-airline business and freezing the fleet size. The company, which has its second-biggest hub in Munich, also plans to shut its corporate headquarters in Cologne, Germany, though it has yet to disclose where the offices will relocate.

The program is part of Lufthansa’s target to more than quadruple operating profit by 2015 to 2.3 billion euros from 524 million euros in 2012. The goal exceeds the 1.82 billion-euro average of 14 analyst estimates compiled by Bloomberg.

“We feel very comfortable here inside Lufthansa that we are able to deliver the 2.3 billion euros we have set out with our measures,” Franz said.

The executive said Lufthansa is in discussions to possibly enter into another commercial joint venture with Air China Ltd. to allow for better connections to and from Europe.

“In the future, we will not only link our mutual hubs, but it will be important to also have direct links between major European markets and Air China’s hubs, and the other way round,” the 53-year-old executive said. “It’s imaginable we could create a joint venture but that takes time to develop and create a commercial balance.”

Chinese Partnership

Lufthansa already has a joint venture with its Chinese Star Alliance partner for plane maintenance. The company has joint ventures with United Continental Holdings Inc. for trans-Atlantic traffic, and with All Nippon Airways Co. on Japan-Germany flights.

While Lufthansa only recently started shifting traffic to Germanwings outside its main hub airports, data reviewed so far show “very good” customer satisfaction as well as a “substantial” improvement in the bottom line, Franz said.

There’s a “substantial likelihood” that Franz’s successor in the CEO post will come from within the company, and that he’s working to prepare the ground for the next leader to help the airline through an increasingly competitive environment, he said.

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