German flag carrier Lufthansa AG will hand off the bulk of its tech operations to IBM under a seven-year deal worth up to $1.2 billion, the companies said Tuesday. Lufthansa, which issued profit warnings earlier this year, hopes to cut its information technology costs by $87.5 million annually as a result of the agreement.
IBM will help the airline build out a range of services for customers and employees, including new cloud, mobile and analytics tools. “Outsourcing the IT infrastructure to IBM will strengthen the competitiveness of the Lufthansa Group as a whole,” Simone Menne, Lufthansa's chief financial officer, said.
Menne said Lufthansa is “not only looking to lower our cost but also to continue digitalizing our business processes in order to increase efficiency and customer focus.”
Lufthansa is facing a number of challenges, including Europe’s economic malaise and labor issues. The company was forced to cancel more than 1,500 flights last month due to a pilot strike. CEO Carsten Spohr said the airline wouldn't meet the $2.52 billion in previously projected earnings.
It was the airline’s second profit warning for 2014.
IBM is facing its own hurdles. The company failed to meet analysts’ expectations for its third quarter, announcing earnings per share of $3.68, down from $4.08 a year earlier. At the same time, CEO Ginni Rometty said the company had abandoned a previous pledge to deliver EPS of $20 by 2015.
The Lufthansa deal should provide Big Blue with a revenue boost in its key services unit, which saw sales fall 3 percent year-over-year in the third quarter.