Discover Adds Connectivity in Lufthansa Group Transformation

Madhu Unnikrishnan

June 21st, 2021 at 12:01 AM EDT

The Lufthansa Group has long wanted to get into the long-haul leisure game. Efforts have ranged from flying high-density Airbus widebodies at Lufthansa Cityline and Eurowings, with neither generating hoped-for returns before both came to an end with the coronavirus pandemic. Enter Eurowings Discover.

Discover is the group’s latest operating subsidiary with an eye on the holidaygoers who are flocking back to the skies. Flights begin with three high-density Airbus A330s to long-haul destinations on July 24, and expand to more than 13 destinations — including new service Halifax, Canada, and Victoria Falls, Zimbabwe — by next summer. German officials granted Discover an air operator certificate on June 16. The new carrier, like the Airbus A340s at Cityline before it, will directly feed Lufthansa at its Frankfurt and Munich hubs.

But, with the group’s repeated emphasis on simplifying its operations through the crisis including the closure of its Germanwings and SunExpress Deutschland operations, analysts are understandably wary of the plan for a new subsidiary. Speaking with analysts last week, group CEO Carsten Spohr described Discover as an operation closely integrated with Lufthansa to ensure “maximum connectivity” in Frankfurt and Munich.

“It’s a lot of innovation for the network in there,” he said. “If it turns out to be as positive as we think, we can indeed grow that business.”

Of course, that’s what executives said of the Cityline A340s when they were just an idea nicknamed “Jump” in 2014. The aim then — as now — was to expand into more leisure-oriented markets with high-density aircraft that would operate at lower costs under amended labor agreements. The crisis put an end to this with Lufthansa planning to retire its last A340s — part of a larger push to streamline its widebody fleet — by 2023.

Discover will fly 11 A330s by next summer, plus another 10 Airbus A320s that will be used for medium-haul routes. For example, the narrowbodies will connect Frankfurt and Munich to the Canary Islands, Egypt and Morocco this winter.

Fleet, however, is not the raison d’être for Discover. That is to cost-effectively expand Lufthansa’s Frankfurt and Munich hubs by capturing a greater share of leisure travel flows. This differs from the group’s main budget arm Eurowings that is focused on point-to-point travel outside of the group’s hubs.

“Eurowings Discover is in the Amadeus world [and] fully integrated into our commercial model here in Frankfurt and in Munich, like Edelweiss is in Zurich, and complementing our network,” said Spohr. Amadeus is the reservations system for the group’s network carriers. Eurowings uses the separate Navitaire platform.

“It’s how they are commercially integrated,” he added when asked by analysts about the differences between Discover and Eurowings.

With the leisure travel recovery seemingly at hand in Europe, Lufthansa is looking ahead to its future. That includes further cost cuts across its businesses and a corporate restructuring that will create a distinct separation between Lufthansa the airline and the group.

Bookings have doubled since April, with the group anticipating a jump in passenger numbers to 55 percent of 2019 levels by August from 30 percent in June. Passenger numbers could even reach 70 percent of where they were before the crisis by year end. European travel is recovering first but, with talk of a reopening of travel between the EU and U.S., Lufthansa is preparing for an uptick in transatlantic travel from July. Full year group capacity plans remain at 40 percent of the level two years ago.

With the improving outlook, Lufthansa expects overall cash burn to be less than the forecast €200 million ($243 million) in the second quarter with operating cash flow turning positive.

The group has laid out a target of an at least 8 percent earnings before depreciation and taxes (EBIT) margin by 2024. Achieving this will require €3.5 billion in annual cost savings, with the majority coming from workforce reductions. The group shrank its workforce by roughly 26,000 staff in 2020 and targets another 10,000-person reduction by 2023. Most of those additional reductions will come in Germany with some 1,700 full-time staff equivalents leaving Swiss — including 550 layoffs — by the end of the year.

Swiss is one of the hardest hit in the group, which also includes Austrian Airlines and Brussels Airlines. Known as a business-focused airline, management in Zurich is forecasting a 20 percent reduction in demand over at least the medium term. This has prompted the staff reductions as well as pruning 15 aircraft from its 90-strong fleet. Five widebody A330s or A340s will go as well as 10 narrowbodies.

Fleet is a big focus of Lufthansa’s restructuring. It has already retired its Airbus A380s and older Boeing 747s along with four more types. These aircraft will slowly be replaced with new, more efficient models over the next decade. Boeing 787-9s begin arriving later this year and, barring further delays, Boeing 777-9s in 2023.

“It’s all about modernization and standardization,” said group Chief Financial Officer Remco Steenbergen on Tuesday. The new jets will also help Lufthansa meet its climate goals.

Other cost saving initiatives that are in the works include planned sales of AirPlus and LSG Group, as well as a possible partial divestiture of Lufthansa Technik.

“We at Lufthansa are switching from the crisis mode to the transformation mode,” said Spohr of what’s ahead for the group.

Edward Russell

U.S., EU Agree to End Civil Aircraft Dispute

After almost 17 years of legal wrangling and mutual recriminations, the U.S. and the European Union have ended the dispute over state aid for large civil aircraft. The two sides agreed to drop punitive tariffs on goods and to set guidelines for future state aid. But the real reason for this newfound comity may be countering China.

The U.S. and the EU duked it out in the World Trade Organization (WTO) in two cases that, broadly, alleged that Airbus benefited from illegal launch aid for the A350 and A380 programs, while Boeing benefited from illegal launch aid for the 787 program. The WTO ruled that the U.S. could impose tariffs on $7.5 billion in EU goods, and the EU could do the same on $4 billion in U.S. goods. With last week’s announcement, those tariffs will be lifted. The tariffs did not apply just to aerospace: Wine, chocolate, and exercise equipment were among the goods both sides levied.

The new agreement will establish a working group for future aircraft launch aid and will provide research and development and launch aid financing on market terms, among other measures, both the White House and the European Commission said.

“Boeing welcomes the agreement by Airbus and the European Union that all future government support for the development or production of commercial aircraft must be provided on market terms,” a spokesperson for the airframer said. “The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action.”

Airbus lauded the agreement as leveling the playing field in the large civil aircraft competition, and through a spokesperson added, “It will also avoid lose-lose tariffs that only add to the many challenges that our industry faces.”

But the final provision of the agreement could be the most controversial. The European Commission said the two sides agreed to “collaborate on addressing non-market practices of third parties that may harm their respective large civil aircraft industries.” The White House spelled it out more directly, saying the agreement will “confront the threat we face from China’s ambitions to build a sector upon non-market practices.”

China has made no secret of its ambitions to develop a widebody civil aircraft. Now, the EU and the U.S. have agreed to scrutinize any such development more closely. The move is yet another example of the escalating trade row between the West and China, with aerospace again caught in the middle. China has yet to re-certify the Boeing 737 Max, a delay that Air Lease Corp.’s Steven Udvar-Hazy recently said had far more to do with political concerns than any issue with the aircraft itself.

Madhu Unnikrishnan

Dubai Steps in With Aid As Emirates Posts Massive Loss

Emirates reported almost $6 billion in losses for the year that ended on March 31, not surprising in a year that saw it ground much of its fleet and carry 88 percent fewer passengers than the year prior. The carrier benefited from an additional $1.1 billion in aid from the government of Dubai, bringing its total amount of state aid to north of $3 billion.

This was the first loss the carrier has reported in three decades, Emirates said in its earnings report last week. Capacity over the year declined by 60 percent. Costs fell by 46 percent, as Emirates implemented its first-ever layoffs, reducing headcount by more than 30 percent, the carrier said.

Emirates hedged its forecast for the future. “No one knows when the pandemic will be over, but we know recovery will be patchy,” CEO Sheikh Ahmed bin Saeed Al Maktoum said in a statement. Vaccination rates in many of the markets it serves are slow, and new outbreaks in Asia threaten the supeconnector’s recovery.

Passenger revenues plunged by 85 percent, but — in a common theme during the pandemic — cargo revenues grew, by an astonishing 52 percent to almost $5 billion, comprising 60 percent of the company’s total revenues.

Emirates said its orderbook for 200 aircraft remains unchanged. The carrier ended the year with 259 aircraft in its fleet, including three new Airbus A380s and after retiring 14 aircraft: Nine Boeing 777-300ERs and five A380s.

Madhu Unnikrishnan

Sabre Sale of Tech Firm Airpas Aviation Gives Opening to Private Equity

Earlier this year, travel technology company Sabre quietly sold Airpas Aviation, a software provider and consultancy, to Ventiga Capital Partners, a private equity firm. Ventiga, in turn, has merged Airpas with FuelPlus Group, which offers software for airlines to administer jet fuel usage — the largest cost center for most carriers.

The private equity firm plans to support additional acquisitions. Its goal is to build a travel tech group focused on airline cost management via cloud-based software. Airpas Aviation offers cost management for airport, ground handling, and airport navigation charges.

FuelPlus had been independently owned for six years after being spun out from Lufthansa Group until Ventiga bought it this year. FuelPlus has 21 airline groups as customers, including Lufthansa Group. It claimed to manage 28 percent of jet fuel consumption by commercial passenger airlines worldwide. The combined entity has its headquarters in Brunswick (Braunschweig), Germany, and claimed to help airlines manage $76 billion a year in costs.

Sabre, the travel technology company based in Southlake, Texas, had acquired Airpas Aviation in April 2016 for $9 million. It touted the subsidiary’s skill at helping airlines manage route profitability and manage costs through software. It has run the subsidiary under its airline solutions business segment.

Sabre hadn’t made a public statement about the sale, and it didn’t mention it during recent financial filings. But a spokesperson confirmed the company has divested Airpas Aviation without revealing transaction details. Sabre has recently pursued a streamlining of its portfolio.

“Both companies [Airpas Aviation and FuelPlus Group] are profitable,” said Michael Charalambous, vice president of commercial operations at FuelPlus Group. “They’ve had very strong results over the last 18 months, even during Covid, mainly because most airlines are looking to control costs. For instance, FuelPlus brought in Spirit, Royal Brunei, and Hong Kong Express as customers in the past 12 months.”

The deal is less notable for its size than for the underlying trend in digitization that it represents. Yet at first glance, Ventiga’s purchase of FuelPlus and Airpas Aviation isn’t an obvious move. What do jet fuel and airport flight charges have in common?

“The thesis behind the merger is that airlines need to rationalize and digitize their costs in a more sophisticated way,” Charalambous said. “It’s crazy that an airline will pay $100 million-plus for an aircraft but might still have manual paper-based systems to collect invoices to manage costs for it. It’s just outrageous.”

Ventiga has invested in travel tech before. In 2017, it acquired Infare Solutions, a Danish-based provider of airfare data and analysis software.

Even airlines with digital processes often run them in hosted systems or data centers. FuelPlus and Airpas can help airlines move their tools to the cloud, where it’s easier to get a faster and more complete picture of business intelligence, the companies said.

That said, the technology part doesn’t appear that groundbreaking. Many software vendors have developed similar tools across all types of businesses.

The more significant potential is sharing best practices in aviation on cost management when the aviation sector is struggling to recover from the pandemic.

Airlines Have a Cost Management Opportunity

No one airline does everything perfectly in managing all of its operational costs. Competencies differ across airlines — and across departments within airlines. The opportunity for aggregators like FuelPlus Group and Airpas is to bring the best practices together. Many carriers appear to need help finetuning their capabilities to identify where their costs are leaking and how to address them.

Ventiga appeared likely to acquire other businesses to bolt on to its new acquisitions. The typical airline needs a full-spectrum view of its flight data and its commercial invoice data and verify the data across each other and inform decisions. But right now, airlines commonly use separate systems to do this.

In short, there’s an opportunity for a unified cost management system used by an airline’s fuel team, its user charges team, its operations analysts, its procurement teams, and its C-suite executives. For example, an airline chief experience officer or chief commercial officer could have one view of cost trends and even break it down by route or flight.

FuelPlus and Airpas overlap on only two customers out of 103. So cross-selling is a short-term opportunity once they’ve built a unified system within a year or so. A growth area for the merged business will be helping airlines report and comply with global emissions reporting to various governmental authorities worldwide.

“Aviation companies are very margin sensitive,” Charalambous said. “But they’re strangely behind in adopting tech to protect those margins.”

“Today, it would be crazy for a corporation of any type and any size not to have one cloud-based platform or one place to manage all of its costs and customers. Yet many airlines are behind the ball in adopting what other sectors used to call ERP [enterprise resource planning] or CRM [customer relationship management] software. We expect a big airline push to catch up in the next five years.”

Sean O’Neill

In Other News

  • Australia is seeing record levels of competition, something that’s good for consumers but less so for airlines, a report from the Australian Competition & Consumer Commission (ACCC) last week found. Since the entry of Rex Airlines onto several of the country’s trunk routes earlier this year, the number of domestic markets where travelers have a choice of three airline groups increased to 18 percent from 1.5 percent before the crisis. On the Melbourne-Sydney routes, the busiest in Australia, fares fell to their lowest in a decade with Rex’s entrance.

    The new competition comes as the Australian domestic market is on track to recover to pre-crisis capacity levels in the second half of the year, the ACCC estimated. Qantas and its subsidiary Jetstar Airways plan to resume 95 percent of their 2019 capacity levels in June, and Virgin Australia 85 percent the same month. Capacity stood at 55 percent of levels two years ago in March.
  • Irish regional carrier Stobart Air ceased operations on June 11. The carrier that flew franchise routes for Aer Lingus cited the affect of the coronavirus pandemic on its business for the decision to close it doors and enter liquidation, according to reports. Stobart flew ATR 42 and 72 turboprops. Aer Lingus and BA CityFlyer have temporarily taken over several of Stobart’s former routes, with the latter planning to assume four by August.
  • President Joe Biden has nominated Chesley “Sully” Sullenberger as the U.S. ambassador to the International Civil Aviation Organization (ICAO). Sullenberger rose to fame as a pilot in 2009 when he successfully ditched a US Airways Airbus A320 in the Hudson River after bird strikes took out both engines on the aircraft.

Edward Russell and Madhu Unnikrishnan

Madhu Unnikrishnan

June 21st, 2021 at 12:01 AM EDT