Lufthansa Technik plans structural changes to cut costs

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Lufthansa Technik (LHT) plans deep structural change to improve its financial results by at least €110 million ($145 million) per year from 2014.

This is to be achieved through a combination of cutting costs and increasing sales. It will be the company's contribution to the group-wide efficiency programme 'Score' of parent Lufthansa, which targets at least €1.5 billion in total annual savings.

The German maintenance provider's revenues went up 1.9% to nearly €4.1 billion in 2011, but its operating profit was down 4.1% to €257 million. EBITDA fell nearly 9% to €377 million.

The growth in sales was mainly driven by increased custom with its parent group, notably Lufthansa, Austrian Airlines, Swiss International Air Lines and Germanwings, which was up 8.7%.

Business with external carriers was down 2.9%, while the global aviation maintenance, repair and overhaul (MRO) market increased twice as fast as LHT at around 4%.

An earnings safeguarding programme, introduced last June to cut costs and boost sales, as well as lean management processes, "will not be enough" to ensure the company's competitiveness in future, says chief executive August Wilhelm Henningsen.

LHT wants to make lasting structural changes, for example, to reduce duplicated administrative processes across its network.

While the philosophy has so far been to give individual facilities a large degree of management responsibility, which resulted in local overheads, the maintenance provider wants to centralise functions such as sales, marketing, production planning, invoicing and quality management.

This would be applicable to sites which concentrate on similar product lines, says Peter Jansen, chief financial officer. He says that LHT is working on a programme to make its six European narrowbody base maintenance facilities more efficient.

The reorganisation was a "change in [the company's] direction" and would not be possible "without leaving marks", he says.

Shannon Aerospace has undergone restructuring over the last year. The number of employees dropped by around 170 to an average of 586 between 2010 and 2011, with the administration being cut back by 60%. The Irish narrowbody base maintenance hangar is profitable again and has built its niche in end-of-lease checks, says Jansen.

LHT Switzerland in Basle is a location where the situation is "very difficult". The site, which specialises in BAE Systems Avro RJ support and interior completions for smaller business jets, suffers from the high value of the Swiss franc as well as a slow private aviation market.

Jansen says there were a number of facilities which require "strong restructuring". LHT's total number of employees was down 2.3% to an average around 19,820 last year. Jansen adds that the MRO market was evolving from being largely manual work-based to becoming more industrialised, which was partly due to a greater standardisation of aircraft types and equipment.

LHT needs to improve its operating margin, currently at 6.7%, while it is in a position to afford the changes, he says.