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Published: June 3, 2008

 
 

Friendlier Skies

The result was a deal crafted to find the upside for both partners, according to Stephan Gemkow, CFO of Lufthansa Group, beginning with the effort to rethink both airlines’ route networks and sales strategies. SWISS kept its strong brand and its intercontinental hub in Zurich, and the combined company realigned its international routes to avoid redundancies and maximize yield, allowing SWISS’s customers to take advantage of broader choices to international destinations on either airline. Meanwhile, Lufthansa and SWISS integrated many of their frequent-flier programs and sales forces. Together, the combined airlines have reaped more than €420 million ($662 million) from the financial synergies created by the deal, nearly 60 percent of which came from SWISS. Revenues at SWISS, which still operates under its own brand, have grown from CHF 3.6 billion ($3.2 billion) in 2004 to an estimated CHF 4.4 billion in 2007 ($3.9 billion), and its loss of CHF 140 million ($122 million) in 2004 has improved to an estimated profit of more than CHF 500 million ($441 million) in 2007. Meanwhile, for Lufthansa Group as a whole, revenues have increased from €17.0 billion ($23.0 billion) to €22.4 billion ($32.7 billion) during the same period, while net profit has gone up from €404 million ($547 million) to €1.7 billion ($2.4 billion).

Yet Lufthansa Group has no intention of resting on its laurels. The company plans to further optimize its route networks for additional savings, to expand its frequent-flier program, and to increase its efforts to integrate the sales force. In addition, the integration of back-office functions, such as purchasing and IT, should generate additional gains, as will combining financing activities such as leasing and fuel price hedging, which remained unconsolidated until late 2007.

As with any industry facing intense competition and escalating costs, market power and scale are the keys to survival. The mergers of Air France and KLM and Lufthansa and SWISS show that it is possible for two flag carriers to work together to boost their competitive positions, and thus to face the future in a stronger position. We expect to see more such deals.

Author Profiles:


Jürgen Ringbeck is a senior vice president with Booz & Company in Düsseldorf. He focuses on strategy and transformation for companies in global transportation industries, such as airlines, tourism operators, postal and logistics companies, and railways.
Stephan Gross is a senior associate with Booz & Company in Munich and the marketing director of the firm’s work in global transportation. He specializes in major transformation and turnaround initiatives for transportation organizations, including large privatization and deregulation projects in Europe and the Middle East.
 
 
 
 
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Resources

  1. Dan Milmo, “Open Skies Deal Leaves Airline Merger Hopes Lost in the Clouds,” The Guardian, April 6, 2007: A useful, if slightly outdated, analysis of the effect of the Open Skies agreement on the potential for increased M&A activity in Europe.
  2. Wole Shadare, “Airline Merger: Route to Global Survival,” The Guardian, March 14, 2008: A more recent look at global airline merger activity that takes a more optimistic view of the future prospects.
 
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