Lufthansa Group’s Central Planning Strategy

The company is moving more power to Frankfurt and taking it away from the local airlines. I don't think that's such a bad idea.

Dear readers,

When I travel abroad to conferences, I hear one question more than others — what’s wrong with American Airlines?

The close second is: what’s wrong with Lufthansa?

Ah, but do they mean just the airline, or the entire group? Honestly, take your pick. My sources might be talking about the very-high-cost home market airline, which remains hamstrung by fleet decisions made decades ago (someone clearly believed in four engines for long-haul), and by the U.S. military’s former presence at Frankfurt Airport, which forced Lufthansa to split its hubs between Frankfurt and Munich and ruined the airline’s opportunity to build the Atlanta of Europe (something Carsten Spohr complained about as recently as last month).¹

Of course, just as often, they’re speaking about the motley assortment of airlines within the group, most of which (with the possible exception of Africa-focused Brussels Airlines) don’t seem to have a clear network or product strategy that differentiates them from any other of the group’s airlines. Yes, I know, Lufthansa and Swiss are supposed to be the premium entrants, but other than the fact that both have first class, can you name that many things that differentiate them from Austrian?

With apologies to those of you who want to know what’s wrong at Lufthansa German Airlines, today I will concentrate on the full group — specifically the plan that executives outlined late last month at their Capital Markets Day to address (hopefully for the last time?) what they believe is the biggest problem. They want Lufthansa Group’s global network airlines to finally operate in harmony, rather than in quasi-competition. To do so, they are giving more power to planners in Germany.

‘Turning size into an advantage’

Instead of operating five disjointed global airlines that have their own priorities, the group mostly will operate as one, albeit with some local flair so white asparagus lovers can still get their fill on Lufthansa during the springtime, plus soft pretzels in the lounge year-round.

This plan to consolidate power surely will cause consternation in certain European capitals (ministers do not like to lose their nonstop links), but I think it’s a fine idea. If re-organization is done well, and the group can keep central control and still harness local culture, I think Lufthansa Group can succeed and boost its margins.

“Lufthansa is No. 4 in the world [by revenue], and all three ahead of us are the three American mega carriers,” Spohr told investors on Sept. 29. “We need to turn the size into an advantage.”

I think Spohr is right to accelerate this strategy. Already under his leadership, the group has begun consolidating power in Frankfurt, but I still think the company has more to do. The world’s fourth-largest airline group is unlikely to succeed if it keeps the status quo at its hubs. Some of the routes in Zurich or Vienna might only be operating because someone believed there must be a flight to a city for “strategic” reasons, or national pride, or because it had always been that way.

I think you only have to look at Air France-KLM or IAG to see how Lufthansa Group has lost out on some synergies by not making more decisions at the group level. And with a different model, Ryanair has done even better. It has five operating certificates but — critically — only one major passenger-facing brand that is run by a group CEO with near-limitless power.

We know Lufthansa Group can’t go that far, as its subsidiaries are flag carriers with grand histories. Spohr made that part clear, just in case investors wondered. “We believe in multi-brand,” he said. “There will be no such thing as Lufthansa Switzerland.”

Let’s get to the specifics Lufthansa Group laid out at the end of September. I found two aspects of the plan most interesting. First, the group will make adjustments to the network so that each hub has a clear strategic direction. And second, it plans to push the group’s brand alongside each airline’s brand.