Lufthansa’s MRO business unit Lufthansa Technik is benefitting from the strong upward trend in air travel. After a record Adjusted EBIT of €511 million last year, this year promises to become even better. LH Technik expects the MRO industry to surpass pre-Covid levels again in 2023 with a global volume of around €96 billion, the company said on March 7. But like elsewhere within the industry, Lufthansa Technik is confronted with supply chain and staff shortages that it expects to continue well into 2024.
The maintenance, repair, and overhaul (MRO) business turned positive again following the recovery of air travel. More aircraft and engines needed checks and repairs and this drove revenues of LH Technik to €5.6 billion, up from €4.0 billion in 2021. Europe, the Middle East, and Africa contributed €3.3 billion to the revenues, ahead of the Americas with €1.5 billion, and the Asia Pacific with €719 million.
LH Technik won €6.1 billion in new contracts in the EMEA regions, €2.4 billion in the Americas, and €1.1 billion in Asia Pacific or €9.6 billion in total from 706 contracts. The company has more than 800 customers and services a fleet of 4.242 aircraft, which makes it the biggest MRO specialist worldwide. One new contract that stands out is a components servicing agreement with Indigo Partners, which brings the serviceable fleet to 1.000 aircraft over the next ten years.
Earnings of €511 million compare to €362 million in the previous year and include the effects of cost-saving measures from the internal RISE project as well as currency benefits of €100 million. LH Technik had to stop its Russian activities following the sanctions on Russia in 2022, which has cost the company some €240 million in annual revenues from 450 aircraft.
Skilled labor
CEO Soeren Stark, who started his role last year, noted that the ramp-up hasn’t been without challenges. During the Covid crisis, LH Technik reduced its global workforce by about one-fifth to 19.500. “The recovery caught out not just us, but also many of our suppliers. Almost all of them were facing serious supply disruptions which were preliminary attributable to a shortage of people. Skilled workers are difficult to come by. We expect these significant difficulties to not go away this year, so these bottlenecks will remain this year and beyond this year. This is something structural that will continue at least until next year. We are looking what are the root causes and if there is anything we can do to ease these struggles. I hope we only have to deal with only two more years with this.”
Still, Lufthansa Technik succeeded in recruiting 2.100 new staff in Germany and will recruit another 2.000 in Germany this year, plus 4.000 around the world, but Stark admits that finding people with the right skills remains difficult.
A380 expansion
As part of the cost reduction and efficiency gains, LH Technik also sold a number of business units in 2022 including those in Shannon, Brussels, and Frankfurt, but will invest in the ramp-up for overhaul capacity of CFM LEAPs and Rolls-Royce engines for the A350 and 787. The company also acquired SWISS Aviation Software and Lufthansa Industry Solutions to expand its digital activities like its AVIATAR product. It will invest €150 million in a new hydraulics facility and in a new VIP interior workshop in Hamburg. LH Technik plans to grow in the Americas and Asia Pacific region.
Stark announced that LH Technik will open a third A380 base maintenance line at LH Technik Philippines in Manila in the second half of the year to cope with sustained demand for MRO capacity. Manila already services the A380s of British Airways, Korean Air, Asiana Airlines and Lufthansa, now that the German airline will bring back four A380s this summer and two more in 2024. LH Technik announced a long-term service agreement with Emirates last week for maintenance and repairs in Manila, as the Dubai-based carrier is short of capacity at home. “The increased demand for the A380 is not something that we had expected. We didn’t expect the A380 to come back at this intensity say two years ago,” said Stark.
Lufthansa Technik intends to grow its revenues to €8 billion in 2026, with a double-digit Adjusted EBIT margin. By then, the company should no longer be wholly owned by Lufthansa. As Group CEO Carsten Spohr said last week, Lufthansa will continue its plans to partially sell LH Technik and is already in talks with potential investors.
“I would assume that by the middle of this year, we would have a decision, the latest by the end of Q3,” said Stark. “We have always said that the financial aspect and the gains from the partial sell-off are not the primary target. Lufthansa and Lufthansa Technik are looking for a second shareholder with complementary capabilities which have the potential to make us even stronger in the future.”
