Lufthansa Cuts Costs Faster than Expected, Says CEO

 - January 22, 2021, 10:58 AM
Lufthansa Group CEO Carsten Spohr oversaw a cost-cutting exercise that saw the exit of all four-engine jets and a fifth of the airline's workforce. (Photo: Lufthansa Group)

Lufthansa Group has taken €3 billion of a €9 billion Covid relief package commitment from the German government and management believes it will get through the pandemic without drawing on the entire allotment thanks to aggressive cost-cutting, Lufthansa Group CEO Carsten Spohr reported during a Eurocontrol “StraightTalk” interview Thursday. Since the onset of the Covid crisis last spring, Lufthansa has effectively slashed its cash burn in half, from €1 million per hour to €1 million every two hours, he added.

“It shows that our cost-cutting has gone a lot faster than we would have thought,” said Spohr. “But there a few things we need to do that go beyond the pandemic, so we have decided to shut down two airlines within the Lufthansa Group. We started with 14 airlines; we’ll come out of the pandemic with 12 airlines only.”

Meanwhile, fleet renewal efforts saw the airline permanently remove all its Airbus A380s and A340-600s. But one of the more visible and painful initiatives came in the form of layoffs that resulted in a workforce reduction of about one-fifth, from 135,000 to 106,000, by the end of last year. Spohr added that “more people will leave” this year, while not specifying the precise number. “That was the sad part of it,” he said. “But it has to be done to adjust for the new normal and to survive the crisis."

As for flying reductions, Lufthansa adopted a strategy centered on maintaining only those routes that created a positive cash contribution, which resulted in the German group cutting capacity more than most other network carriers, explained Spohr. Other moves included allocation “more or less” of connecting traffic to a single hub in Frankfurt rather than five, he added.

“So the other four hubs are running at a minimum—that helped,” said Spohr. “And, of course, the cargo contribution helped. There are some flights by Swiss, for example, where we even blocked the passenger compartment. We just use the bellies and still make a positive cash contribution.”

Regarding the evolution of the competitive environment once the world emerges from the pandemic, Spohr opined that the 12 major network airlines will remain intact over the next five to 10 years, but that the rankings would likely change to reflect an entry of one of the three big Chinese players into the group of the world’s four largest, now consisting of American, United, Delta, and Lufthansa.

“So Lufthansa will do its very best to stay among the top four or five, but I think one of the Chinese [airlines] getting in will be a major change,” he said. “I think in the next years we'll see a shift toward the hubs because with less volume many [origin and destination routes] cannot be served anymore point-to-point directly. The remaining passengers will have to travel via hubs like 10, 20 years ago because those are the volumes we’ll be seeing for a while.”