Lufthansa announces number of cost-cutting measures

Over the week, German flagcarrier Lufthansa (LH) announced a number of moves aimed at improving the profitability of Lufthansa and Lufthansa Group. A series of announcements regarding many aspects of the airline's operation led many to believe that LH might be in trouble. This was also fueled by some statements from the executives, although they did not admit that the situation at the airline or the group is alarming.

After posting a small net loss (€13 million) in 2011, largely attributable to larger-than-expected losses and disposal costs at bmi, LH decided to initiate a three-year cost-reduction program named SCORE across the group. Thanks to SCORE, LH plans to save €1.5 billion, of which €900 million will come from Lufthansa alone.

What raised the dust among industry circles later the previous week was a rumor that LH is considering merging its LCC unit Germanwings (4U) into its own short-haul operations and possibly brand. Although the rumor turned out to be false, LH did admit that it is looking at ways of improving the situation at 4U as part of "Direct4You" project. It is questionable what LH could gain from this merger as the flagcarrier already announced that it will rely more on 4U's nonstop operations from non-hub cities rather than its own services on short-haul. I fail to see how the merger would benefit LH, so I will take this only as a wild rumor for now. A merger between 4U and LH's regional carrier Eurowings is also rumored, but LH denied this as well.

What LH did reveal was a number of changes to its hard on-board product. Apparently, LH will remove First Class from a number of routes. First Class will remain on some selected routes, but only where it makes economical sense for the carrier. On the other hand, LH is considering introducing Economy Plus or Premium Economy Class, which is a popular trend among airlines today.

The carrier also announced it would finally retire all of its aging 737-300 and -500 aircraft by 2016 to reduce fuel expanses, as well as phase out its Bombardier CRJ700 and Q400 70-seaters. LH also claims it will halt fleet expansion by not ordering new aircraft, but took delivery of its first Boeing 747-8I two days ago.

bmi sold to IAG, price reduction expected
LH has also completed the sale of bmi to IAG, but it did not manage to sell bmi Regional and LCC bmibaby, which means that IAG will receive a significant price reduction on already low-priced deal. The original price of £172 million could now be, according to some sources, reduced to as low as £20 million to compensate for receiving the unwanted subsidiaries. If it does not manage to find a buyer for bmi Regional and bmibaby, the two will be closed down, but IAG says that it has one party interested in the former and three in the later. You can read more about the deal here.

Austrian Airlines scraps plans of transferring operations to Tyrolean Airways
Over at Austrian Airlines, which is part of Lufthansa Group, the executives came close to transferring the carrier's operations to its regional subsidiary Tyrolean Airways to achieve lower labor costs, but it now seems that the move will not be carried out as management and unions came to an agreement. Both sides wanted to avoid the transfer as it would likely bring long legal dispute and agreed to suspend automatic wage increases.

UPDATE: Austrian Airlines announced Monday it will go ahead with previously abandoned plans to transfer operations to Tyrolean Airways. According to Air Transport World, the carrier issued a statement saying that the negotiations over the past two weeks "proved impossible to reach agreement over principles" with the company's works council. Austrian Airlines and Tyrolean Airways have formed a team to carry out the integration work by the end of 2012.

News that came from Lufthansa this week were conflicting, unclear and lacked focus, while the rumors seemed to interfere with real news from LH. The carrier also announced labor cuts, but did not provide much details. However, I think this is crucial. Today, the airline is talking about saving on operations, but tomorrow, it will be talking about redundancies and saving on salaries. To me, this whole thing looks like a mixture of typical and expected cost-cutting measures with overblown "concerns" to ensure that the carrier receives concessions from its workers, suppliers, etc. The airline is by no means in trouble - in fact, it is one of the better standing European carriers - and we might have to wait a bit more to see what LH really has on its mind.