A passion for efficiency and cost-effectiveness

Solid as a rock

The foundations on which Lufthansa is built have proved to be robust and steadfast. They form the best underlying conditions for securing and building on our strong competitive position. This is all the more important when competition sharpens and operating conditions are difficult. Whether we look at the euro crisis combined with turbulence on the financial markets, the political unrest in North Africa or the catastrophes in Japan, 2011 demonstrated in many ways how vital it is to have financial stability and the ability to react flexibly. There are many factors we cannot influence, but in the areas under our control we are ready for action.

Efficiency programmes take effect

Austrian Airlines Airplane flying over the Alps (photo)

The turnaround programme at Austrian Airlines
was intensified

Demanding projects to increase competitiveness are underway in all business segments. With planned savings of EUR 1bn, Climb 2011 at Lufthansa Passenger Airlines is the most extensive efficiency programme. By 2011 a total earnings effect of EUR 640m had been achieved and the measures taken are still to come into full play in 2012. The other segments are also making their contributions, for example Lufthansa Systems with its restructuring programme Jetzt! and the Catering segment, which with Upgradeplus is making structural adjustments and thereby achieving lasting cost savings. There is some headwind, however. Austrian Airlines missed its earnings target for 2011 by a large margin, so that the restructuring endeavours there had to be intensified. All activities contribute systematically to teh Group's profit and cash flow from operating activities. They help us to maintain our investment grade rating and avoid any constraints on our financial flexibility, which is so immensely important for our economic independence. Indeed, it is our sound financial profile that enables us to invest in our business segments, fleet, staff and products for our customers.

SCORE – Change for Success (graphics)

SCORE realises overarching synergies

The airline industry offers great growth potential, which Lufthansa actively intends to capture for itself. The sector is nonetheless also undergoing major structural changes. The economic environment has also altered sharply in recent years – not to mention the additional burdens such as the air traffic tax and emissions trading, which distort competition. In order to achieve our core objective of profitable growth and to safeguard the capital expenditure this requires, we must increase the efficiency of our organisation and improve our operating margin sustainably. One important contribution comes from the Group-wide programme SCORE – Change for Success, which we launched at the beginning of 2012. It supplements the existing initiatives in the business segments. The programme will run for three years and is intended to deliver structural and sustainable earnings improvements of at least EUR 1.5bn for the Group. All segments, airlines and Group functions are to be included in this process and make individual contributions. A further focus of the initiative lies on making greater use of overarching synergies. A small central project team is working closely with project owners in all business segments towards this goal. The first joint projects that have been identified right at the start of the programme are optimising neighbourhood traffic, realising synergies in procurement and reducing administrative expenses. Other projects are to be developed and implemented in close cooperation between the project team, the segments and the Executive Board.

Hedging policy reduces risks

The enormous increases in fuel prices are and will remain a key cost driver. In 2011 the average price for kerosene was about 40 per cent higher than in the previous year, mainly due to price fluctuations on the market for crude oil. Lufthansa has an effective risk management system in place to mitigate the effects of these financial risks. The management of currency and interest rate risks, and since 2011 of emissions certificates as well, follows this structured and effective hedging policy.