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Home | Update | Latest Issue | Gallery | FR Profile | Datafiles | FR 3/97 YIELD DECLINE ENDANGERS AIRLINE PROFITABILITY Guest column by Dr. Klaus Nittinger, Lufthansa Vice President Operations. He analyzes the largest problem of the Lufthansa concern: the yield decline - the continuos decrease of average proceeds. The significance of yield can best be assessed by analyzing its effect on the growth and profitability of a company. Today, a large airline can only win market shares or even participate in the market growth if it manages to create a more reasonable offer than other airlines. In a market with increasingly homogenous products, more reasonable means cheaper. Cheaper tickets immediately result in lower than average proceeds. A phase of growth almost inevitably causes larger losses for the yield. A company's profitability is also directly affected by the yield. In case that the average proceeds surpass the unit costs, the company is generating a profit. However, if the average proceeds don't measure up to the unit costs, each flight kilometer is generating losses. In 1955, the smallest Mercedes costed approximately DM 9500 and a return ticket to New York DM 2500, which is approximately one fourth of a car. Today, the smallest Mercedes costs almost DM 50000 while a flight to New York can be purchased for below DM 1000 - only one fiftieth of the price for a Mercedes 180. This fact is not a specialty for the New York route but symptomatic of the tariff development for the airline industry. By decreasing the ticket prices the average proceeds decrease accordingly. On the other hand, there is a significant market growth of approximately five to 15 percent per year. The development of the yield (in US dollars) has been statistically recorded and evaluated since the sixties as part in a Boeing study. The permanent decline began 35 years ago with an annual decrease of 3,2 percent. Today, this number is around 1,1 percent per year. The Boeing market researchers are predicting a slightly declining tendency for the next 15 years. Lufthansa is facing significantly higher yield losses in all markets. Just in the past five years the company's yield (in DM) has decreased by an average of 5,1 percent per year. All together this means that five years ago we were able to generate average proceeds which were one third higher than today's. The change of the aircraft from an individual into a mass means of transportation is the main reason behind the yield decline. Still, the steep incline of economy class bookings is not only due to larger numbers of private travelers. We see a fundamental migration from the first and business classes. The future significance of the economy class is well documented by the decreasing share of first and business class passengers on Lufthansa flights since 1990. Assuming a profit of DM 500 for the business class per ticket and DM 250 for the economy class (domestic flights) results in average proceeds of DM 400 in 1990. For 1995 these tickets only give average proceeds of DM 350, always assuming constant tariffs. Another reason for the decline of the yield is - from the German perspective - unfavourable currency effects. Lufthansa's main problem in that respect is related to the overproportional dependence of the company's proceeds on the foreign currencies. While approximately 43 percent of the proceeds are accounted for in foreign currencies, this applies to only 24 percent of the expenses. With each devaluation of another currency obviously, the proceeds are decreasing faster than the expenses. Furthermore, governmental subsidies are often generating declining yields. Since August of 1991, just European governments have made more than DM10 million per day available to single airlines. The result: Overcapacities are offered for dumping prices on the market. Looking toward the future, the prospects concerning the yield development don't look very favourable. Europe, and Germany in particular, are in an extremely risky situation since overproportional yields are generated (in the worldwide comparison) in this region. The yield per transported seat kilometer generated in intercontinental and European domestic traffic is more than double the yield generated in the comparable domestic traffic in the USA. At the same time, Europe, with a total average of minus 22 percent over the past five years, is facing the highest yield decline worldwide. A change in trend is not very probable due to the enormous differences between the yields inside and outside of Europe. An accelerated continuation of this development looks more likely. The "high-yield island" Europe/Germany is attracting many airlines, in particular the low cost carrier. Magnetized by high proceeds this traffic region promises a significant profit at favourable costs. Considering the European liberalization of air traffic also makes a development likely that is similar to the one that came about in the USA in the eighties. One cannot underestimate the danger that the market entry of a low-cost carrier represents for Lufthansa. More than half of our turnover proceeds are accounted due to the traffic region in Europe and Germany. The main competitors in our entire route network are European airlines on the European market. Companies such as Virgin, Ryan Air or Easyjet just prove how real the threat is. These airlines are just waiting for the implementation of the third liberalization package of air traffic, which clears the way for cabotage traffic beginning on April 1, 1997, scouring the German market with cheap tickets from that point in time. Flights to Great Britain are already being offered for prices which Lufthansa can currently not compete with. The price gap between LH and some of the competitors has gotten too big. While in the core market of Germany our customers may be willing to pay an additional 15 to 20 percent "brand surcharge" for a Lufthansa flight, a difference of up to 40 percent is not being accepted, resulting in a migration of the customers. However, a price reduction of 20 percent in the German market equals proceeds of approximately DM1,4 billion. In conclusion, I would like to say: The current yields along with their development trend are the main factors for the strategic company development. The next push of the yield decline is already programmed due to the coming European liberalization of air traffic. Lufthansa cannot afford to ignore this. Lufthansa must submit to the pressure of cutting costs and increasing productivity resulting from the yield decline. Otherwise, Lufthansa will shrink and disappear from the market in the end. From page 22 of FLUG REVUE 3/97 Home | Update | Latest Issue | Gallery | FR Profile | Datafiles | FR 3/97 Copyright 1997 by Motor-Presse Stuttgart. All rights reserved. Last updated February 13, 1997