Lufthansa must restructure or shrink: Franz

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Outgoing Lufthansa chief executive Christoph Franz says the board and his successor will have “no alternative” but to continue with the controversial Score restructuring programme or the airline will be forced to shrink or risk losing its coveted investment grade status.

Despite recently posting operating profits, the Lufthansa Group must persevere with its deep cost-cutting and increase the “magnitude of our profits” if it is to afford the 34 Boeing 777-9X widebodies and 25 Airbus A350-900s it has ordered to replace its A340 and 747-400 fleet at the end of the decade, says Franz.

“Being encouraged to drive this change in a situation where many employees are looking at the bottom line and thinking: 'Hey, we are not loss-making, other airlines are losing money – why should we change?' The order of magnitude of our profits will not be enough to basically replace older aircraft with new aircraft in a way that we can keep the current size of the Lufthansa Group. This is something you have to bring over. If we continue like this, we will have to shrink,” warns Franz.

He adds that the group also risks losing its investment grade rating from Standard & Poor’s and the downgrading of its Ba1 rating with Moody’s if it does not increase its profitability and convince the markets it is making real changes.

The Lufthansa boss, who will leave his position in the middle of 2014, notes that a shift in corporate culture is critical to the airline group successfully restructuring: “The biggest challenge to our Score programme is clearly the willingness to implement change throughout the companies. Top management makes the decisions but broad management across all business segments really does the thinking about the necessary changes and bringing ideas.”

Score is intended to raise Lufthansa’s operational profit of €820 million ($1.1 billion) in 2011 to at least €2.3 billion by 2015, and should it succeed, the airline will be able to consider growing “organically” by expanding its network or “inorganically” through further airline acquisitions, says Franz.

Based on current progress, he is confident Lufthansa will successfully restructure its operations: “We are performing our plan successfully; there is no deviation from our plans. [There are] quite strong and heavy headwinds... but we did not expect backwinds in this industry. That would be not very prudent.”