Market and competitive risks affecting capacity and load factors

Growth in international passenger air traffic continued in 2011, contrary to macroeconomic developments. Global passenger demand went up, despite the effects of the catastrophic earthquake in Japan, the political upheaval in the Arab world, higher oil prices and other negative factors. On the basis of passenger numbers, the industry is back at its pre-crisis level. Premium business with First and Business Class customers also picked up again, especially on long-haul routes. The rapid pace of demand growth is losing momentum, however. According to the IATA forecast, global passenger demand is to increase by 4.4 per cent in 2012. In view of the situation on financial markets and the potential consequences for the global real economy, the forecasts for trends in demand are nonetheless marked by considerable uncertainty. More details can be found in the chapters “Sector developments” and “Sector outlook”.

As well as demand trends, it is the development of airlines’ available capacities that have a decisive influence on the risk profile of the industry. The number of new aircraft ordered and the lower growth prospects mean that overcapacities are expected to persist in all markets. This could increase the pressure on average yields. Airlines’ competitiveness under these conditions depends primarily on how flexible the company is and how fast it can react to changes in demand. For example, the airlines in the Passenger Airline Group have cut capacity growth for 2012 from 9 to 3 per cent.

In the current environment, keeping costs variable is a decisive competitive factor. Top of the list is the flexibility to adjust aircraft capacities to potential changes in demand, also medium-term ones. Our far-sighted order policy, with phased orders for new aircraft and the option of replacing a number of older aircraft at any time with new deliveries, enables Lufthansa to follow demand by adjusting capacities. As the majority of the aircraft are wholly owned by us and have partly been depreciated already, they can be grounded temporarily if necessary at short notice and without high residual cost.

All the business segments in the Lufthansa Group operate in highly competitive markets. The subsidies that can be observed in many quarters could possibly distort competition to the detriment of Lufthansa. Competitors also keep developing, influencing both European and international markets with new business models and cheaper cost structures for instance. The companies in the Lufthansa Group respond above all with customer-focused, high-quality products and services. This is discussed in detail in the comments on the individual “business segments”.

The ability to make constant improvements to the cost structure is vital if we are to stay ahead of the competition. In the Lufthansa Group we achieve this by setting up and executing programmes to safeguard earnings as required and at the same time by constantly reducing the cost base of our everyday business and making it more flexible. All the companies are required to adapt their costs to the new competitive environment and the trend towards ever lower prices and to deliver positive earnings and value contributions in the short or medium term. As with all measures aimed at reducing risks, there is also a risk that the effect of these steps on earnings may be delayed.

International competition is increasingly developing into a competition between entire systems of airports, air traffic control organisations and airlines. This is because these players have a considerable effect on the efficiency of the whole value chain at a given location and thereby on the competitiveness of the airlines stationed there. The significance of the infrastructural environment extends not only to the necessary capacities but also to seamless processes and competitive cost and price structures. By bringing us together with our partners at airports, air traffic control organisations and public authorities, the Air Traffic for Germany initiative has created a common platform to secure and develop Germany’s position as an air traffic location. The demand-driven extension of the runway and terminal system at Frankfurt Airport is a key condition for maintaining its position as a leading air traffic hub. This applies all the more in view of the megahubs being built elsewhere in the world, which aim to attract global traffic flows by means of low-cost structures. For Lufthansa on the other hand, the expansion of the domestic hub offers the opportunity of implementing extensive product and process improvements, thereby increasing its own competitiveness.

Bottlenecks in the fragmented European air traffic control system continue to be a serious problem. They still result in considerable delays to air traffic, unnecessary detours, holding periods, increased fuel consumption and avoidable emissions. These deficits have a negative impact both on the earnings of all European airlines and on the environment, as well as jeopardising growth in air traffic. Lufthansa and its competitors are therefore continuing their demands for the European Commission and national governments to create an effective European air traffic control system in the immediate future. For the progress made in this respect see also chapter „Regulatory and other factors“.

Open skies agreements, like the one between the USA and the EU, create both opportunities and risks for Lufthansa. Unrestricted access to each other’s airspace for airlines from the EU and the USA will add considerably to competition in transatlantic traffic and lead to pressure on prices. At the same time, it will give rise to new potential in neighbouring markets, which Lufthansa intends to watch closely and use to the best advantage. The joint venture Atlantic++between Lufthansa’s airline group companies, United Airlines and Air Canada also opens up new revenue opportunities, by for instance coordinating flight timetables, integrating sales programmes and agreeing on common pricing. Additionally, increasing complexity, in revenue sharing for example but also in coordination between carriers, gives rise to new risks, which are identified, managed and reported.

In this competitive environment alliances and more in-depth forms of global cooperation play an increasingly important role. Star Alliance remains the leading association of its kind, with the broadest scope worldwide. Lufthansa adds to this scope in particular by developing and joining specific regional cooperation groups. Based on experience gained in the North Atlantic, a new programme of cooperation known as Japan+was also arranged with All Nippon Airways and is due to start in April 2012. Further information on the development of the Star Alliance can be found in the chapter “Passenger Airline Group”.

Finally, Lufthansa has the customer loyalty programme Miles & More, which has proven its worth over many years. Its range of offers is refined continuously, as evidenced not only by ever growing membership figures but also by the attraction of the HONCircle, the most exclusive club for frequent flyers.