As a leading European airline group, the aim of the Lufthansa Group is to strengthen its market position by means of profitable growth and so remain the first choice for shareholders, customers and employees in the future. In this context, the strategy aims to systematically develop the Group, which consists of Network Airlines, Eurowings and Aviation Services.
The airlines form the core of the Lufthansa Group. The differentiated portfolio of Network Airlines and Eurowings, which offers point-to-point connections, makes it possible to fully serve all relevant market segments and geographic markets with an attractive offering both for premium customers and for more price-sensitive travellers. Compared with Aviation Services, the airlines are planning to grow faster than average in the future.
Consolidation, flexibility and digitalisation continue to be regarded as the key value drivers in the aviation market. They form core elements of the Group strategy and are advanced both across segments and within the individual segments. The ongoing optimisation of cost structures and maintenance of operating quality remain the basis for the Lufthansa Group’s long-term success. In addition, responsible business is an integral part of the corporate strategy, which is why the Lufthansa Group is developing its corporate responsibility activities.
In the fast-growing airline industry, the airlines in the Lufthansa Group operate in Europe’s most attractive markets. The Lufthansa Group is the market leader in its home markets of Germany, Austria and Switzerland, and it is one of the leading carriers in Belgium. It also has attractive market positions at its hubs in Frankfurt, Munich, Vienna and Zurich. Limited capacities at these airports and bottlenecks in airport infrastructure and air traffic control mean that market growth will be slower than in recent years, which should support efforts to increase profitability, especially at the leading carriers. Growth of around 2% a year is targeted for the Network Airlines.
The sale of the catering business signifies the transition from an aviation group to an airline group. It contributes to a sharper focus on the core airline business and is also intended to open up growth opportunities for the LSG group.
In addition, shifting line maintenance at the hubs in Frankfurt and Munich from Lufthansa Technik to Lufthansa German Airlines as of 1 January 2020 will further strengthen the aeronautical core of the Lufthansa Group.
Structuring the Group along the airline value chain helps to maximise synergies between segments and makes it possible to scale business from external markets at the same time. The aim is to consistently exploit potential synergies around the core of the Lufthansa Group. Key drivers here are joint production in the cargo business for example, by which Lufthansa Cargo transports almost half its freight in the belly capacities of the Lufthansa Group’s passenger aircraft, or revenue synergies between the airlines and Miles & More in the loyalty business.
The European airline industry remains highly fragmented. The five biggest airline groups – Lufthansa Group, Air France-KLM, International Airlines Group (IAG), Ryanair and easyJet – have a cumulative market share of just 51%. In the USA, by comparison, the five leading providers account for a share of 86%. Considering this, the Lufthansa Group assumes that the consolidation of the European market will continue. This should also enable improvements in the industry’s earnings.
The Lufthansa Group regularly reviews organic and inorganic options for market consolidation in all segments. At the same time, the Lufthansa Group maintains discipline in its M&A strategy.
The airline industry remains defined by dynamic market and competitive conditions, including increasing exogenous uncertainties and shifts in the value chain. These include new data-driven decision-making tools that have an increasing influence on airlines’ distribution, increased activity from aircraft and engine manufacturers in the maintenance business, and a political and macro-economic environment that is marked by increasing uncertainty. This dynamism makes versatility and flexible cost structures increasingly important success factors. As a shaper and innovation driver of the airline industry, the Lufthansa Group therefore persists in aligning its services, business models and organisational structures with a complex, networked and dynamic market environment. For example, the cost efficiency and adaptability of the Lufthansa Group are safeguarded by means of flexible organisational structures and competition between providers of infrastructure and other suppliers. The flexibility of the fleet is also increased by reducing the number of sub-fleets and standardising them. Adopting new aircraft technologies also contributes to reducing costs.
The Lufthansa Group strives for greater effectiveness and efficiency in its administrative areas, strengthens the establishment of lean methods as an intuitive element of everyday work, and promotes intra-Group project management.
These measures contribute to continuous improvements in process efficiency and quality and to reducing complexity. Furthermore, developing the performance and cost culture and establishing agile organisational structures for projects and decision-making also make the Group fast, flexible and attractive as an employer.
Focused digitalisation measures help the Lufthansa Group to keep building on its position as one of the most innovative airline groups. The emphasis is on boosting efficiency and revenue in the core business and on establishing innovative new business models. The focus in the core business segment ranges from optimising the use of assets and improving the marketing of available seats through to extending digital customer services along the travel chain. One example is biometric boarding, a service currently being tested in Miami and Los Angeles, which makes the customer’s travel experience more convenient and processes more efficient.
Successful examples for the development of innovative digital business models are the carbon offset platform Compensaid and the Rydes app for intermodal loyalty among young customer groups. In addition, the Lufthansa Group invests specifically in complementary digital business models, like the Canadian start-up Hopper.
Developing and identifying such new business models is the job of the multiple award-winning Lufthansa Innovation Hub. To do justice to the enormous relevance of the Asian market for travel and mobility start-ups, the Lufthansa Innovation Hub opened a second site in Singapore in 2019.
Given the great importance of IT, digitalisation and innovation, responsibility for these topics was pooled in the new Executive Board function IT, Digital & Innovation, led as of 1 January 2020 by Thorsten Dirks.
The Network Airlines in the Lufthansa Group offer a locally differentiated premium product to pursue a consistent quality strategy and make optimal use of the attractive customer potential in its home markets. The Five Star rating awarded to Lufthansa German Airlines by the renowned agency Skytrax, which for the first time has awarded an airline outside of Asia, is a tangible result of this quality strategy.
In the future, the focus will remain on further improving the customer’s travel experience, optimising the route network and the fleet, and pursuing cost reduction initiatives. As a result, the consistent use of the potential to digitalise throughout the travel chain as well as individualised products contribute to aligning the portfolio even more closely with customer needs and opening up new sources of revenue.
In order to exploit opportunities in the growing long-distance leisure travel market, the range of long-haul connections from the hubs in Frankfurt and Munich aimed at private travellers is being increased. Some of them are carried out under the Eurowings brand, whereby on the one hand passengers benefit from the broad feeder network and high-quality ground processes of Lufthansa German Airlines, and on the other hand its global distribution strength is put to use. There will also be continuous improvements to aircraft interiors and service at all points of customer contact. Brussels Airlines is also to be positioned closer to the Network Airlines in order to make optimal use of potential synergies. To keep offering leading product quality, the Lufthansa Group invests continuously in its fleet. The Network Airlines are growing organically, largely by replacing older aircraft with recent models that boast higher seating capacities and greater fuel efficiency without significantly increasing the total number of aircraft.
The Network Airlines strive to offer an attractive, high-quality product over the long term on the basis of a stable multi-hub system. To do so, the Lufthansa Group implements measures to enhance quality in the areas under its control. Reallocating capacities within the multi-hub system, for example, is one way of supporting more even capacity use of airport infrastructure. In addition, the Lufthansa Group works with its system partners to create the conditions for high operational stability and sustainable growth in line with demand. We work with our partners to extend the position of our Network Airlines as one of the leading airline groups in both European and global hub traffic. Today, the Network Airlines already have commercial joint ventures in key long-haul markets.
Strategic initiatives by the Network Airlines are intended to achieve sustainable increases in unit revenues. Individualised services, dynamic pricing and more direct sales should have an increasingly positive impact on unit revenues, adding up to around 3% by 2022.
A consistent focus on costs remains the basis for sustained financial success. Cost-cutting continues to this end, especially in areas that have no effect on customers’ perceptions of quality. They include streamlining the organisational structures of the Network Airlines and systematically harmonising their commercial management and system landscape, cutting supplier costs and those for infrastructure providers, and modernising wage agreements. Further drivers for cutting unit costs are efficiency gains in crew areas and improvements to the operating performance. Overall, the unit costs at the Network Airlines (without fuel) are planned to go down continuously by 1% to 2% per year.
Furthermore, Austrian Airlines and Brussels Airlines have adopted concrete turnaround programmes to cut costs and increase profitability. With its PE20 process efficiency programme, Austrian Airlines is aiming to increase productivity by means of significant reductions in operating and staff costs. This is intended to deliver annual cost savings of EUR 90m from 2021. Brussels Airlines plans to increase its Adjusted EBIT margin to 8% by 2022. Its focus is on simplifying and standardising operating structures and processes. This should significantly reduce costs, restructure the route network, standardise the fleet and improve reliability and punctuality. Brussels Airlines will benefit from close cooperation with the Network Airlines.
With Eurowings, the Lufthansa Group has an innovative and competitive offering in direct traffic, which addresses both price-sensitive and service-oriented customers with low-cost basic fares and additional service options that can be booked flexibly.
Following its rapid growth in 2018, Eurowings focused particularly on implementing turnaround measures in 2019. At the forefront of these measures are the simplification of the group’s business model and the reduction of operational complexity. As part of its new strategy, Eurowings will in future concentrate exclusively on short-haul routes, whereas responsibility for the commercial management of long-haul routes will be transferred to Lufthansa German Airlines from 2020. Brussels Airlines will be managed separately in future and moved closer to the Network Airlines. Improvements to the cost structure of Eurowings are to be driven in particular by a reduction to just one flight operation in Germany, increases in aircraft and crew productivity by adapting the network and reducing the misallocation of crew, modernising and harmonising the fleet by retiring old, high-maintenance aircraft, and reducing costs in administrative areas in line with the new exclusive focus on European short-haul routes. By simplifying its business model and cutting costs sustainably, Eurowings will lay the foundations for future growth. Break-even is planned for 2021 and unit costs are to be reduced by 15% by 2022. In the long term, the Adjusted EBIT margin should come to 7%.
To achieve lasting success in this highly competitive market, Eurowings continues to develop its point-to-point business model and digital competences. Technological developments enable greater personalisation of product and service offerings to increase ticket and other revenue. Eurowings Digital was established in summer 2018 as a multi-channel distribution platform and is responsible for connecting new portfolio partners, such as FREE NOW (formerly: myTaxi) and Flixbus, and for selling additional services along the entire travel chain. Eurowings aspires to increase other revenue by around 9% per passenger and year, for example by introducing dynamic pricing for luggage and seating. The increase was at the desired level in 2019.
Eurowings is managed largely independent of the Network Airlines, in order to make optimal use of the structural cost advantages of the point-to-point model. At the same time it benefits from belonging to one of the world’s largest airline groups and its wide range of aviation services; from economies of scale in fleet purchases, for instance, and the maintenance competence of Lufthansa Technik.
With its Aviation Services, the Lufthansa Group has several companies that are global leaders in their respective sectors. In order to build on their successful positioning and deliver profitable growth, Aviation Services are permanently adapting their business models to changing value chains and competitive environments. Lufthansa Technik will expand its portfolio in the field of intelligent maintenance management by means of data-based products and services, for instance, and continue to invest in digital innovations to improve its product portfolio. Expansion will target attractive, synergetic segments that increase the appeal of the Lufthansa Group’s digital environment. Miles & More increasingly focuses on greater benefits to customers and its synergy potential with the airlines, whereas AirPlus is growing in the lucrative market for payment and settlement solutions for business travel.
Aviation Services will be scrutinised continuously for their value contribution and developed with a clear focus. The Lufthansa Group regularly reviews the attractiveness of individual market segments, their current competitive position, the future revenue potential of the segments and the synergies realised by them, and, in particular, the value contribution for the airlines. At the level of the segments it may make sense to develop companies in the Aviation Services segment within or outside the Lufthansa Group using a differentiated approach or with partners, in order to ensure their long-term growth and sustainable profitability. One example is the sale of the LSG group’s European business.
Acting responsibly has a direct impact on commercial success and so is an integral part of the Group strategy. The Lufthansa Group therefore builds continuously on its environmental commitment, is dedicated to many social issues and treats its employees responsibly and fairly.
In terms of environmental protection, the Lufthansa Group invests continuously in the renewal of its fleet and in operating measures aimed at reducing the specific fuel consumption and the resulting CO2 emissions per passenger-kilometre. In addition, the Lufthansa Group offsets the CO2 emissions of all its employees’ business flights worldwide and has set a target of becoming carbon neutral in its ground operations in Germany, Switzerland and Austria by 2030. The Lufthansa Group is also committed to noise abatement and reducing the amount of in-flight waste.
Above and beyond its actual business activities, the Lufthansa Group continues to assume responsibility in addressing today’s social challenges. The central pillar of its global social engagement for disadvantaged people is the help alliance, which celebrated its 20th anniversary in 2019. The help alliance supports educational projects that are largely initiated by employees. Furthermore, the Lufthansa Group provides fast, professional emergency aid in humanitarian crises and natural disasters.
To reflect the growing importance of corporate responsibility for the Lufthansa Group, all activities in this area now report to the new Executive Board function Customer & Corporate Responsibility.