- Lufthansa Group had the best year in company history in 2017.
- Profits surged more than 33% to $2.74 billion and operating cash flow jumped more than 55% to $5.8 billion year over year.
- Lufthansa Group operates using a multi-brand strategy with more than half a dozen airlines in the portfolio.
- According to CEO Carsten Spohr, the secret to the strategy’s success is to take advantage of the synergies of having a large conglomerate while differentiating the brands to avoid cannibalizing business.
Lufthansa Group had a historic year in 2017. The German aviation conglomerate saw profits surge more than 33% to $2.74 billion year over year, and its operating cash flow increased more than 55% to $5.8 billion.
“Costs down, quality up, and efficiency increased in balance with the interests of our customers, staff, and shareholders,” Lufthansa Group CEO Carsten Spohr told us in an interview when asked how his company has managed such a dramatic increase in profitability.
“This is not just the best year in history for our shareholders, but the best Lufthansa ever for our customers and the highest level of happiness for our staff.”
This is in stark contrast to the years of painful labor disputes the company faced between 2014 and 2017
“We had three and half years of labor conflict with pilots of our core airline which brought us to the limits of what the Lufthansa family could deal with,” Spohr said.
According to the Spohr, who has been the company’s chief executive since 2014, Lufthansa’s previous trajectory of contracting down to its most profitable routes was not acceptable for an airline of its size and market position.
Even though the labor dispute was financially and emotionally taxing for everyone involved, Spohr believes it was necessary to put the company in a better position to succeed.
Lufthansa is one company with many airlines
While the German airline and its iconic flying crane logo are well known amongst the flying public, Lufthansa the company is a much more complex organism with nearly 130,000 employees.
Lufthansa Group is a conglomerate consisting of several hundred subsidiaries that range from catering to aircraft maintenance.
The company also operates more than half a dozen separate airlines including Austrian, Swiss, Edelweiss, Eurowings, Brussels Airlines, Air Dolomiti, and Lufthansa.
Complicating the situation even further is the fact that the Lufthansa Group’s various brands operate using drastically different business models.
For example, Lufthansa, Swiss, and Austrian are premium, mainline network carriers using a hub and spoke business model. These full-service airlines are designed to funnel passengers through major airport hubs in Frankfurt, Munich, Zurich, and Vienna.
On the other hand, Eurowings and Brussels Airlines are point-to-point low-cost carriers that operate without a hub network.
Edelweiss, a subsidiary of Swiss, is a leisure travel airline, while Air Dolomiti is a regional airline that focuses on flights between Germany and Italy.
So how is Lufthansa able to successfully operate all of these brands alongside one another without becoming bogged down in the complexity of the setup or cannibalizing business?
To make the strategy work, the Group consciously pushed its core brands – Lufthansa, Austrian, and Swiss -upmarket.
“In our dual-brand strategy, we were able to position our premium brands as premium,” Spohr explained. “It was important to keep Eurowings far away enough from the core brands.”
At the same time, Lufthansa invested heavily in Eurowings and its products to make sure it develops its own personality and brand value. This way, the low-cost carrier won’t have to subsist by feeding off of its more established siblings, but rather be able to stand on its own two feet.
But the brands also take advantage of the financial and operational synergies created by the scale of the Lufthansa Group.
“We buy aircraft together, we buy fuel together, we buy insurance together, and we sell (tickets) in the US together,” the Lufthansa Group CEO said. “It’s the best of both worlds.”
How to sustain success
In addition, one of the secrets to his company’s sustained success is the flexibility with which the multi-brand strategy is run.
For example, the close geographic proximity of its major hubs allows Lufthansa Group to modulate any overlapping traffic flows based on demand.
And then there’s the matter of being able to react quickly in an increasingly competitive environment.
“Can you bring your cost down fast enough? Can you pull out of markets? Can you grow fast enough?” Spohr said.