Lufthansa Technik: Strict Cost Management Remains Crucial Factor for Success

In the rapidly growing maintenance, repair and overhaul market for commercial aircraft, the Lufthansa Technik Group achieved pre-tax earnings of 242 million euros on revenues which rose by 9.4 percent to 3.4 billion euros. This represents an increase of 8 percent over the previous year.

"Very positive growth in business with customers outside the Lufthansa Group was primarily responsible for the Group's increase in revenues," said Chief Executive Finance Dr. Peter Jansen at the company's annual press conference on 9 March in Hamburg. With a 12.5 percent increase in revenues from external customers, Lufthansa Technik was able to grow more rapidly than the international MRO market in general, which showed growth of 7 percent. Revenues from Lufthansa and other members of the Group rose by 5.1 percent as a result of an increase in fleet size in the Lufthansa Passage Airline and the inclusion of Germanwings in the group of consolidated companies. The proportion of revenues generated with external customers increased by 1.7 percent to 60 percent compared to 2005.

"Another decisive contributing factor to the improvement in earnings was the continuation of our strict cost control and capacity management program," explained Jansen. "We have further improved our cost situation, our efficiency, our productivity and our work processes. With the many individual measures which constitute our cost reduction and efficiency programme 'Perspektiven Technik,' we were able to achieve long-term savings amounting to 243 million euros. We therefore slightly exceeded our target for 2006."

Jansen described Lufthansa Technik's financial situation as continuously stable. At year-end 2006, the equity ratio stood at 23.4 percent and the debt-to-equity ratio at 30.4 percent. These figures partly reflect the first stage in the process of transferring pension obligations to the Lufthansa pension fund, which is not included in Lufthansa Technik's financial reports.

Operating expenses rose by 8.5 percent in 2006 and remained, as a result of further measures to reduce costs and increase efficiency, lower than the 9.4 percent increase in sales revenues. Despite increases in the number of staff, personnel expenditure fell by 2.5 percent to 922 million euros, due to a sharp reduction in provisions for partial retirement programs. Depreciation expenses were reduced by 17.0 percent to 76 million euros, as a result of the extraordinary impairment of goodwill in 2005 pertaining to a US subsidiary. With a slight reduction of 0.3 percent, other operating expenses remained almost unchanged at 535 million euros.

Investments in tangible and intangible assets, amounting to 111 million euros, were down 6.7 percent as compared to 2005. These investments were primarily utilized for the purchase of new machinery, plant, licenses and additional spare engines, as well as the commencement of building work on the new A380 maintenance hangar in Frankfurt.

The 19 companies consolidated in the Lufthansa Technik Group employed a total workforce of 18,426 as of the end of 2006; this represents an increase of 3.1 percent on the previous year. The Lufthansa Technik Group employed a total of more than 25,000 staff worldwide in all of its affiliated and associated companies.

With regard to the future development of the Lufthansa Technik Group, Jansen remarked that persistent price pressure compelled airlines to cut costs further and to increase productivity, whereby the effect of these measures is passed on fully to their suppliers, including MRO companies. Attention is therefore being directed at further cost reduction issues in the area of purchasing, as well as at projects to increase productivity. An entire range of lean management projects follow the objective of creating an ideal balance between successful cost management and high quality standards. According to Jansen, continued cost reduction measures and further increases in efficiency are essential.