The Federal Aviation Administration’s $6.4 million proposed fine of Lufthansa Group, announced right before Thanksgiving, is the latest setback to befall the German airline in what has been a bit of a difficult year.
It’s worth pointing out that the FAA fine — for allegedly operating around 900 flights between Germany and the U.S. cities of Philadelphia and San Diego without proper authorization — is only theoretical at this point and the airline has 30 days to respond. Still, it doesn’t look good, yet another headache for the airline group to deal with.
This past year hasn’t been vintage for the European airline industry. A number of well-known brands have gone out of business and many of the market leaders have struggled.
European profit margins have fallen throughout the year in contrast to those measured in the United States and at a global level.
“Margin degradation has had a material impact on confidence in the sector, and for Lufthansa in particular,” analysts at investment bank Credit Suisse said.
While many of the German carrier group’s problems are shared elsewhere in Europe, some are particular to it.
Labor relations with a number of its key unions are strained. A strike at the beginning of November forced to company to cancel 1,300 flights and prospect of further walkouts remains very real.
Although Lufthansa’s pre-tax profit improved in the third quarter, analysts expect it to make less money in 2019 than it did in 2018.
There’s also the ongoing threat of climate change, which is adding further pressure on to an industry that has historically operated on pretty thin margins.
CEO Carsten Spohr didn’t necessarily help himself with recents comments, where, according to the website Simply Flying, he said that airlines should not be seen “as a symbol of climate change” and that this was “just fake news.”
Regarding the FAA fine, Lufthansa did not respond to Skift’s request for comment but told Bloomberg: “Lufthansa is fully cooperating with the FAA on this matter and will be addressing the regulatory issues involved with the agency.”
Another big challenge for the airline is its underperforming Eurowings business. The low-cost airline has struggled over the last couple of in the face of mounting competition in its home markets of Germany, Austria, and Switzerland from the likes of Ryanair, EasyJet, and Wizz Air.
Lufthansa is trying to reverse this decline and in June announced a strategic revamp of Eurowings. The plan is to streamline the carrier and focus on short-haul routes. In the first nine months of its current financial year it made a loss of €107 million but the plan is to turn a profit by 2021.
One eye-catching idea outlined in the German magazine WirtschaftsWoche is that Eurowings’ existing long-haul program, which offers flights to the United States and Caribbean, will fall under an as-yet un-named new brand.
“A decision as to which name it is, but has not yet fallen,” a spokesperson told the publication.
Big airline groups haven’t always had the easiest time introducing a new brand — just look at the disaster that was Joon. Air France-KLM has seemingly learned from that mistake and is going the opposite way, consolidating its flying under fewer, key brands.
Even though it has been a rough year, there are reasons for Lufthansa to look forward to 2020.
Competition is easing in some of its key hubs, as rivals balk at squandering more cash to fight a fare war. Lufthansa is also in the process of selling off some of its non-core assets. It recently agreed a deal to sell the European arm of in-flight services company LSG Group to Gategroup.
Can Lufthansa get it right? Analysts at Bernstein think so. “German skies are looking brighter into 2020,” they commented in a note to investors last month.
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