Flying high

Lufthansa considers trimming service units to focus on airlines

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Maintenance is complicated. Source: Reuters

As profit margins for airlines widen, Lufthansa is looking at spinning off its catering and maintenance units to concentrate on its core business of transporting passengers and freight.

Company sources told Handelsblatt that the German flagship airline, which has prized its diversification into ancillary services, may get rid of them as the business model underpinning them is changing.

“The talk in the group has shifted significantly in recent weeks, with the emphasis clearly on the topic of airlines,” said one top manager at the company.

Lufthansa’s profit margin on network airlines – the connections from hub to hub – widened to an adjusted 9.7 percent last year, compared to just 6.1 percent in 2015, and 2.9 percent the year before that. The margin on the freight business was also a cushy 9.6 percent last year.

Onboard meals have lost significance in competition

The airline business makes up 80 percent of company revenue and that portion is due to increase as its Eurowings unit reaches its target of lowering unit costs by 20 percent. With 210 planes, the discount airline is the second-largest airline brand in the company.

The margin on Lufthansa’s catering unit, meanwhile, shrunk to 2.1 percent. In the world of discount airlines, onboard meals have lost significance as a competitive factor. Lufthansa’s LSG Sky Chefs has become the world’s second-largest airline caterer but most airlines have done away with meals on short stretches or sell them as extras.

The question is whether under these circumstances the catering unit is the best situated for this task. In any case, LSG Sky Chefs has been looking for ways to cut costs and plans to reduce its current workforce of 5,500 by as much as 2,000.

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Similarly, airline maintenance is changing as vendors, notably engine producers like Pratt & Whitney, move into the business and take over maintenance chores. Airlines now often buy operating time – that is, engines with a maintenance package – rather than just engines.

Maintenance issue is complicated

The issue is a complicated one for Lufthansa because most of its fleet consists of Airbus models and the airline works closely with the French-German planemaker on maintenance.

Lufthansa has recently been studying ways to integrate line maintenance into the airline business itself and leave the periodic base maintenance with the Lufthansa Technik (LHT) unit. Executive board member Harry Hohmeister is pushing this idea as a way to alleviate the delays and cancellations of the past summer by ensuring smooth handling of operations.

However, CEO Carsten Spohr reportedly returned the initial proposal to Mr. Hohmeister and asked for revisions.

The maintenance unit has also expanded its services to other airlines and the question for Lufthansa is how important this additional revenue and profit is. On the other hand, some of the services performed by LHT, such as in-flight entertainment and internet service, might be better performed by the planemakers themselves.

It is not the first time Lufthansa explored these kinds of options. Former CEO Wolfgang Mayrhuber toyed with a satellite concept of an airline business orbited by various ancillary service units. Some managers, even those in the profitable freight business, worried that this concept made it too easy to detach their operations from the airline.

The freight business is not under consideration now, the company sources said, and management is nowhere near deciding on the future of the service units.

Jens Koenen leads Handelsblatt’s coverage of the aviation industry. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the author: koenen@handelsblatt.com.

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