News Backgrounder
Lufthansa draws closer to Air China
February 1st 2014
All options are on the table when it comes to Lufthansa’s intentions to expand into the Asia-Pacific, said the airline group’s chief executive, Christopher Franz. Read More »
“Are we doing something with regard to a lower cost production platform in or towards Asia? Are we investigating the options we have? The answer is: we would not be responsible if we were not doing so”, Franz told Orient Aviation in Frankfurt.
But an LCC partnership won’t happen just yet. “On paper we have a lot of things we are investigating, but we should also clearly focus on improving our existing structure,” the chief executive said.
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| Lufthansa chief executive, Christopher Franz: expansion in Asia is high on the carrier’s medium and long term agenda |
That said, Franz confirmed Lufthansa is in serious discussions with its Star Alliance partner, Air China, about establishing a deeper relationship with the Mainland’s flag carrier. Modelled loosely on the joint venture (JV) Lufthansa has with All Nippon Airways (ANA), its tenets would include a revenue sharing agreement on Europe-China services and domestic flights within China and Europe for both carriers.
The ANA/Lufthansa JV goes far beyond a normal codeshare or interline agreement. It leverages each other’s networks to optimize service offerings. For example, ANA flies non-stop from Tokyo to London and Paris as well as Frankfurt and Munich. Lufthansa operates from Germany to Osaka and Nagoya. The airlines’ sales teams sell tickets on both carriers as well as on ANA’s domestic network and Lufthansa’s operations across Europe.
If a similar agreement could be made with Beijing-based Air China, Lufthansa would have favoured entry into China’s domestic market compared with their non-Chinese rivals. Air China would also benefit from the agreement by gaining access to the German carrier’s European network.
“China will stay as a growing and attractive market so Lufthansa is interested to participate in that development. You always balance out and consolidate new routes and make them successful before going on to the next step and opening new destinations,” said Franz.
“Clearly, we see the infrastructure growth in China. “If we are not able to grow (ourselves) we could co-ordinate with our Star Alliance friends from Air China.”
Nils Ecke, Lufthansa’s senior vice president airline group, alliances and co-operations, added that China was a “great example” of an opportunity for a joint venture that would be similar to the ANA/Lufthansa partnership.
“We do have a very close partner [on the Mainland] in Air China. We are always trying to enhance our means of collaboration with Air China,” said Ecke.
“We are always talking. Our thoughts are circling around a JV, no question. We are very confident they are the best player in the market.”
Both the ANA JV and an Air China JV are revenue-sharing ventures and not based on profit sharing. “The major difference is we focus on sales, product and the customer and not so much on sharing costs such as maintenance,” he said.
“Removing the cost equation for each individual carrier is a very healthy approach from our perspective. It is actually superior to a profit-based joint venture, which can be distracting.”
Franz, who has announced he will step down as Lufthansa chief executive on May 31, told Orient Aviation the carrier is on an expansion drive and increased capacity into Asia is high on the medium and longer term agendas, especially as the carrier’s new airplanes come on line.
This year the Lufthansa went on US$36 billion (at list prices) fleet spending spree that was biggest ever order for a European airline. Last June, The airline ordered 100 A320 family jets, another two A380s and six B777-300ERs. Three months later it confirmed deals for 34 of Boeing’s new 777-9X, as well as the purchase of 25 A350-900s.
In the meantime, Franz is focused on improving Lufthansa’s cost base in a highly competitive market. “Growth will go on, but it doesn’t mean this is an industry enjoying nice healthy margins. It’s exactly the opposite,” Franz said.
“A running gag in our business is that 10 years ago we had Steve Jobs, Bob Hope and Johnny Cash. Now, in our industry we have no jobs, no hope and no cash,” he said.
Lufthansa posted an US$716 million operating profit in its fiscal latest year. “That’s a sizeable amount of money, but given the size of our group it is clearly not enough,” said Franz.
“That’s the reason why, despite the fact we have a strong point of departure, we have to use our strength make these changes happen over time, over several years.” He added the airline’s cost reduction program had produced savings of US$930 million in the last 12 mnths, but that some of those savings were “wiped out” by high fuel costs and a weak cargo market.
