European carriers can expect to see their profits almost double to €2.2 billion next year, if forecasts by the International Air Transport Association are anything to go by.
“Airlines are showing they can be profitable in adverse business conditions. Efficiencies are being generated through myriad actions: consolidation, joint ventures, operational improvements, new market development, product innovations and much more,” says Tony Tyler, IATA’s director general and CEO.
“When market forces drive action, we get results that both strengthen the industry and benefit the consumer. Quite simply, stronger airlines can invest more in improving connectivity and service innovations.”
Bottom line is Lufthansa is out to pamper its loyal clients and attract new ones
Christoph Franz, CEO and chairman of the Lufthansa Group, put it in his own words when addressing international journalists at the Lufthansa Aviation Academy recently: “On the basis of an improved bottom line, we will be able to profitably grow in those markets where we see growth potential. That is crucial because in an industry with several growth rates, not growing means that you lose market share and this is an industry that is driven by market share and by size. That is why we are defending our leadership position in Europe.
“We grow through organic growth and perhaps also by consolidation. And if you would like to grow through consolidation, then you have to adopt an active role and you have to have the financial means to do it.”
IATA had just reported a 1.8 per cent profit margin by its members for 2013 which, for Dr Franz – who will be leaving office when his contract expires in mid-2014 – is not enough.
“It’s a positive performance but not enough when you think of the €522 billion revenue this industry is generating on a worldwide basis.”
He points his finger at overcapacity, also because of competition between the “classic” legacy airlines and low-cost carriers, both in Europe and long haul.
Rising fuel costs are another concern. Last year, Lufthansa’s revenue from traffic exceeded €24.8 billion and its fuel bill reached €7.4 billion, more than 30 per cent.
“We have no option but to react: cut unit costs, increase ancillary revenues, stop loss-making routes, optimise the existing network and have more and more sophisticated revenue management rules.”
Growth, he points out, is not equally distributed across the world but is mainly coming from emerging markets, including areas where access to air travel will become available in the coming years.
The giant German carrier knows that to survive, it must be competitive and give passengers what they expect, even more. The only answer is major financial investments.
It has just ordered 25 Airbus A350-900s and 34 Boeing B777-9Xs at a cost of €19 billion. Earlier, it had signed up for 100 planes of the A320 family, spending over €7.5 million.
“We are investing more money than ever to better position the quality of our product both on the ground and in the air. Our aim is to become the first five-star rated airline and the first step has been achieved in spring when we received the five-star rating for our first class. We offer over 1,000 first class seats a day, the biggest choice by any airline worldwide,” Dr Franz proudly points out. Lufthansa has decided to focus on the so-called premium sector.
“Getting revenue premium will work out only if you have high quality products and loyal customers,” he says.
Bottom line is Lufthansa is out to pamper its loyal clients and attract new ones.
It will have full flat business class seats in all long-haul aircraft, new and existing ones, over the next two years. There will be monitors in economy seats and a new, premium, economy class will be launched next year. A new pier in Frankfurt for big, long-haul aircraft, like the B747-8 and the A380, will offer passengers maximum comfort.
This does not come cheap, of course. In fact, it will cost Lufthansa €1 billion. But such a huge investmemt is justified because the airline, every airline, knows that satisfied customers beget more customers, hopefully not just within Europe but beyond too.
International travel markets are shifting, according to figures compiled by tourism consultants IPK International. Whereas countries like Germany, the US and the UK posted moderate growth (two per cent, one per cent and three per cent respectively) and Japan suffered a two per cent decline, China and Russia registered increases of 26 per cent and 12 per cent respectively, with growth in Brazil standing at six per cent.
The meetings, incentives, conferences and exhibitions (MICE) segment grew by six per cent, while conventional business travel declined by 10 per cent. In terms of holiday destinations, culturally-motivated travel, such as city breaks and round trips, were up eight per cent and five per cent respectively, and beach holidays grew by five per cent.
IPK is forecasting unprecedented travel next year, the driving forces being first-time travellers from China, Russia and Brazil. Despite the unsettled economic situation, global travel is still expected to grow, as more people from the new economies make their first trips abroad.
Yet, the civil aviation industry being ever so sensitive, one can never be too sure. Dr Franz acknowledges that the situation is not bad but not rosy either. He sees encouraging signs and this leads him to conclude that “at least, the situation is stabilising”.
Does this mean we have a big upswing? “I would be cautious about it. Our cargo figures are usually a good indicator of economic upswing but, so far, there is no such signal,” he says.
Back in the cabin, almost full to capacity, passengers can sit back and enjoy the flight. The view from the cockpit is generally good but the workload is considerable and it takes a lot of skill to keep the industry at the optimum cruising altitude.