Lufthansa Technik Suffers Steep Losses on Pandemic Woes

 - March 8, 2021, 1:59 PM
The first German Air Force Airbus A350 arrives at Lufthansa Technik's Hamburg facilities in May 2020 for cabin outfitting. (Photo: Kai Hager for Lufthansa Technik)

Lufthansa Technik swung into a full-year loss in 2020 and revenue plummeted 43 percent year-over-year, but executives of the world’s largest MRO provider expressed optimism it can maintain its leading position thanks to its diverse portfolio, its international footprint, and investments in its Aviator platform for digital products and services. Speaking at the company’s annual press conference on Monday, Lufthansa Technik CEO Johannes Bussmann described last year as “the toughest in our company’s history.” Nevertheless, he added, the MRO giant could end the year “with some confidence.” 

The Hamburg, Germany-based aftermarket subsidiary of the Lufthansa Group managed to retain all its airline customers—despite their pressure for cost savings—and even won 16 new ones, expanding its customer base to 830, including OEMs, aircraft leasing companies, airlines, and operators of VIP jets. It concluded 515 new contracts with a total volume of €2.3 billion for 2021 and the following years.

Several of the contracts signed in 2020 involved specially developed crisis products, including temporary conversion of passenger aircraft into auxiliary freighters, as well as parking and storage services for decommissioned aircraft, engines, and components. However, Bussmann did not expect the passenger-to-freighter business to become “a longer-term or not even a medium-term trend” because belly capacity will return once passenger service picks up again and airlines must amortize the cost of the conversion. 

Bussmann refrained from giving an outlook for the current year and said he does not expect the global MRO market to return to 2019 levels, when Lufthansa Technik reported a record €6.6 billion in revenue and an adjusted operating profit of €463 million, “until the end of 2023, [or] the beginning of 2024 at the earliest.” The company expects demand for engine maintenance, repair, and overhaul to recover after 2024, he said.

The aftermarket will change “permanently,” asserted the Lufthansa Technik boss. “The interim decline of the MRO market is primarily driven by the lack of passenger traffic but in the medium term it also will be impacted by the secondary effects of the crisis on the global fleet structure,” he noted. Airlines are rapidly retiring older aircraft and/or postponing deliveries of new aircraft, the trend by airlines to deploy smaller gauge aircraft—for instance, Airbus A220s instead of A320 family aircraft or Boeing 737s, A321neoLR/XLRs instead of A330s— will continue, and the use of four-engine aircraft will continue to fall significantly, Bussmann predicted.

“The MRO of these [four-engine aircraft] engines and components will disappear,” he said. “The competitors that have invested in technology to maintain new-generation aircraft will benefit compared to the ones that focus on the more traditional technologies.” His comments followed remarks by Lufthansa Group CEO Carsten Spohr, who told analysts last week that “modern aircraft of new technology, which are just too sophisticated to be maintained by the operating airline...will be outsourced to MRO providers like Lufthansa Technik.”  

Lufthansa Technik has prepared itself for the change of the market, Bussmann stressed, while acknowledging that airlines’ fleet decisions also might lead to a change of Lufthansa Technik’s product portfolio. “A portfolio analysis will be part of the RISE project,” he said. RISE, the company’s restructuring program initiated last year to address the Covid-19 crisis, aims to secure the company’s position in the MRO market through a leaner and more efficient corporate structure. Eight product divisions will shrink to only five: Aircraft Component Services, Aircraft Maintenance Services, Engine Services, and Original Equipment & Special Aircraft Services, and Digital Fleet Services.

Revenue in 2020 fell in all regions, but most significantly in Europe, Lufthansa Technik’s most important sales market. In the Europe, Middle East, and Africa (EMEA) segment, sales declined from €4.6 billion to €2.6 billion. In the Americas, revenue fell from €1.45 billion to €821 million, while the sales losses in the Asia-Pacific region proved comparatively small, falling from €573 million to €430 million. About one-third of its business comes from Lufthansa Group airlines, which encompasses Lufthansa, Swiss, Austrian Airlines, Brussels Airlines, and Eurowings.