Buying an airline is like getting a pet. It sounds like a great idea. It can be a great idea. But sometimes, it winds up being a responsibility and burden you wish you never took on.
When Lufthansa originally invested in Brussels Airlines—it bought a 45% stake in 2009—it surely hoped for something better than it got. Just a few years earlier, remember, it had gambled—and won bigly—on a takeover of Swiss. Today, Swiss is the most profitable piece of the Lufthansa empire. Not so Brussels Airlines, which unsurprisingly suffered net losses during the global financial crisis just as Lufthansa was investing. It briefly but barely climbed out of the red in 2010, only to tumble right back in for the next four years. Only when fuel prices collapsed in 2015 did Brussels return to profitability, but with an operating margin of just 3%. Margins ex special items fell to 2% in 2016, and 2% again in 2017. The Brussels bottom line: roughly $142m in net losses since the Lufthansa takeover. Should’ve left that dog at the shelter.
Too harsh? Perhaps. In fairness, Brussels Airlines does provide benefits that don’t show up on the carrier’s own financial statements. And Lufthansa is reforming and repositioning it to play an increasingly important role in its overall strategy. After all, that’s why Lufthansa decided to exercise an option to buy complete control of Brussels in late 2016. So rather than just 45%, today it owns 100%.
Why, after some reluctance, did Lufthansa go all in on a money-losing investment? For one, it was able to renegotiate a favorable price—it wound up paying less than €3m (plus, according to Reuters at the time, the apparent forgiveness of a €45m loan). Don’t forget too that throughout 2015 and 2016, Lufthansa was hell-bent on lowering its unit costs—and specifically its labor costs—in part by moving more ASK production to lower-cost subsidiaries. This led to a damaging conflict with its unions but also a massive buildup in its low-cost Eurowings unit, which continues today. Lufthansa said at the time that Brussels Airlines had from 2014 to 2016 lowered its unit costs by 10%, implying an opportunity to drive down average costs across the group simply by integrating it. CEO Carsten Spohr also spoke of merger synergies expected to be in the mid…
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