today launched a wide-ranging cost-savings program that is aimed at improving profitability by €1.5 billion ($1.9 billion). Some key points have been presented to senior management of the group’s various divisions, although details have not yet been defined. The savings target is expected to be reached within three years and produce full results for the first time in the 2015 financial year.
The group named Josef Bogdanski and Joerg Beissel as the heads of the new project. Bogdanski previously was in charge of the passenger airline’s distribution and defined its new strategy for the Berlin market. Beissel was bureau chief of CFO Stephan Gemkow. Bogdanski and Beissel are aided by the Boston Consulting Group (BCG).
Three areas so far have been defined as core to the new program: administrative streamlining, more integration of the various subsidiaries and a tougher approach toward joint purchasing.
Lufthansa’s various subsidiaries, such as Swiss and Austrian, are enjoying significant autonomy, which has created duplicate functions in some areas. One idea behind the program is to keep the airlines as separate entities, but to improve back-office cooperation. There is already significant integration of networks, leading industry observers to question the savings potential of more integration.
On the administrative side, the potential for cuts is considerable, officials note. However, Lufthansa has never made large job cuts and would have to depart from its corporate culture if it planned to do so this time.
Joint procurement has been a long-standing issue in the group and has been approached before. At least one previous project failed to generate the expected savings.
- launched a similar profit improvement program last month. Both carriers face the same structural problems: a high cost-base with revenues and yields under pressure because of low-cost carriers and emerging competitors on profitable long-haul routes. Air France-KLM admitted that it is losing about €700 million annually on its short-haul network. Industry sources believe that Lufthansa’s short- and medium-haul deficit totals about €300-400 million. The airline does not reveal details. But it did say that it has not reached the 2010 €876 million operating profit in 2011 and needs to improve profit margins substantially to fund investment in fleet renewal.