Network Dogfight

Juergen Weber has piloted the Lufthansa Group into profitability, but he’s still playing catch-up with rival British Airways and hoping his global network alliance will be the ticket to success.

January 1 1996 by Lorri Grube


Dressed in a crisp navy suit and blue tie enlivened by yellow airplanes, Juergen Weber shows little visible sign of jet lag from a rather busy day: Flying early that morning from Hamburg to Paris, where he spent an hour and a half on the phone with his office, he then whisked off to New York to give a speech to the American German Chamber of Commerce before heading to Frankfurt that afternoon.

“This is a normal day for me,” says the chairman of Frankfurt-based Lufthansa Group, the 18.84 billion deutsch mark ($11.75 billion) holding company for recently privatized Lufthansa German Airlines, the No. 2 international carrier behind British Airways.

It’s also somewhat of a departure from his early days at Lufthansa’s controls, when Weber spent most of his time from 1991 to 1994 overseeing 100 cost-cutting efforts, which included eliminating unprofitable routes, selling planes, slashing the work force, and exhorting the remaining employees “to work more for less money.” The result: In 1994, the 69-yearold airline posted a profit—DM303 million—after three years of losses.

But Lufthansa isn’t out of the woods yet. En route to losing $15 billion since 1990, the $250 billion global airline industry has been buffeted by overcapacity, price pressures, currency devaluations, a poor air-traffic-control system, and deregulation complications—and the situation isn’t likely to improve any time soon.

“Airfares keep going down, and no one is making good money,” says Weber, who was born in Lahr, Germany, studied aeronautical engineering at Stuttgart‘s Technical University, and joined Lufthansa’s Engineering Division in 1967. Indeed, Weber points out indignantly, a flight from Frankfurt to New York in 1955 cost about DM2,500, the smallest Mercedes in those days cost DM9,500. Today, a comparable Mercedes costs almost DM50,000, but a ticket to New York goes for DM999. “We produce a perishable good: We can’t sell the seat that isn’t filled today tomorrow. If the lowest price isn’t just for the last seats that aren’t sold, but for the whole plane, the airline industry will be ruined.”

The solution, Weber believes, lies in forming global networks, such as the alliance Lufthansa has forged with UAL’s United Airlines, Thai Airways International, South African Airways, and Scandinavian Airlines System. As such, the carrier industry no longer will pit airline against airline, but rather network against network, Weber says.

A July 1994 survey of the world’s airlines in Airline Business revealed that there are 280 various alliances at 136 air carriers, ranging from marketing agreements to joint catering services. The Lufthansa-United partnership competes with KLM Royal Dutch Airlines-Northwest, British Airways-USAir-Qantas, and Delta-Swissair-Singapore Airlines. Another, looser intercontinental group links Air France, Continental, Air Canada, Sabena, and JAL.

In most cases, the partners use code-sharing, which allows a carrier to fly passengers to one city and then offer them onward flights to destinations it does not serve but which its partner does. In the past 18 months, Lufthansa and United have increased the number of destinations they serve jointly from 27 to 87.

But Weber, 54, isn’t satisfied. He resents the fact that the U.S. won’t grant his alliance anti-trust immunity as it has for rival network KLM-Northwest, allowing it to set prices together, to develop and market a joint identity, and to provide common incentives to travel agents. Before considering the anti-trust issue, the U.S. is waiting for Germany to accept an “open skies” agreement that will eliminate its policy of restricted capacity as Holland did.

Meanwhile, Northwest recently accused KLM, which owns 18.8 percent of the U.S. airline’s voting shares, of being “hell-bent on seizing control of the company.” KLM retaliated by filing a suit that contends the U.S. carrier breached an agreement between the two companies when it adopted a “poison pill” plan in November. Now rumors are roiling that KLM might ally with British Airways, possibly dissolving all other partnerships in the process because of U.S. regulatory scrutiny.

Such an alliance could present formidable competition to Lufthansa, particularly since the German carrier has not been able to match BA or KLM’s low cost per available seat mile—the number of seats an airline provides times the number of miles they are flown.

To boot, Lufthansa goes head-to-head receiving DM10 million a day since April 1991. “That’s DM10 million a day we don’t have,” says Weber, an avid morning jogger and former ski instructor. The gap looms particularly large since the strong mark cost Lufthansa DM440 million in lost revenues and write-downs in the first nine months of 1995. Pretax profits before special items crept up eight-tenths of 1 percent to DM506 million.

Lufthansa has just about pared costs to the bone. What else is left to cut? “Lufthansa can’t expect to make further headcount cuts,” says Goldman Sachs airline analyst Glenn Engel. “It will have to turn to internal outsourcing, in which you create separate profit centers within the company such as engineering, which can only charge market costs to the airline. That pushes the business to become more efficient. Juergen Weber has done a great job of getting rid of the fat; now he has to change the business.”

One broad-based change already on the way is a ticketless reservation system, although Weber draws the line at adding inflight videogames and gambling to Lufthansa planes. “Telephones on planes, yes. Fax machines, yes. Games, no,” decrees Weber, whose polished European courtliness doesn’t quite mask his iron will. “We are not Las Vegas.”

DOING MORE FOR LESS

Boeing projects that yields or revenues per passenger mile on a long-term decline. Given that, what can you do to cut costs and become more efficient?

I don’t believe all the stories that yields will continue to decline as they have the last 20 years. True, there have been significant decreases, but if this trend of lowering airline prices continues, someday passengers could get money when they fly.

The cost spectrum of an airline varies from region to region. Some are fixed costs you cannot influence at all, such as air-traffic-control charges, landing fees, and fuel prices. And these just keep rising: Each year, air-traffic-control charges jump about 8 percent and landing fees 6 percent.

So where can you cut costs? Well, we aim to fly more efficient aircraft—if they are available. This year, we plan to replace the older 737s with A3-19s. But there is not much room left for improvement.

The only thing you can change or influence is personnel costs. Here, the idea is to persuade your people to work more for less money. In this, I feel we have an edge on our competitors, because Germany adheres to the co-determination principle, which entails worker participation on company boards. This requires much discussion and energy. But it also brings employees closer to management, because they see what we are trying to do and how much cost we have to cut to make this company succeed.

Now the challenge is to make clear to the Lufthansa people that our restructuring is not at an end, that we must continue to improve every day. Most of our employees are proud of what we have achieved. And they have accepted the challenge of hard work. I can tell a workers’ assembly of 7,000 people, “Ladies and gentlemen, you still have to work more for less money. If you don’t like to do this, you will run into trouble pretty soon,” and they accept it.

That’s a tough sell. How long can you push that philosophy?

As long as they trust me and know I am not saying this because I want to but because I am trying to save the company. Some 100,000 people rely on this company. That’s a great responsibility.

Don’t they need an incentive?

The greatest reward we can give to our employees is that we try to safeguard their jobs. Anyone who believes he or she needs extra pay as a reward is in the wrong company.

Does this mean you won’t offer your employees opportunities to own Lufthansa stock?

I’m a great fan of employee ownership. My dream is to have 20 percent of Lufthansa shares in employee hands within the next five years. We did give a one-time bonus to compensate employees for the extra efforts they have made in the last three years during our restructuring program. Fifty percent of the people chose to take DM500 in cash, 25 percent opted for three shares of Lufthansa stock at no charge, and 25 percent paid 50 percent of the stock price for seven shares. To date, we have distributed about 100,000 shares, roughly 2 percent of the total.

Over the past two years, Lufthansa has shown a 31 percent increase in productivity. What further productivity increase do you hope to achieve?

Our goal for the next few years is to have a 5 percent annual productivity increase. Of course, there are certain areas where you hit a wall and simply can’t increase productivity any more, particularly in terms of service.

Do you face any competition from the fast-rail trains?

We don’t compete at all. We like fast-rail travel, because it complements us by transporting passengers to the airport and taking away short-range passengers, giving us free slots and greater capacities for the more expensive long hauls.

GLOBAL NETWORKS

You have said that the fish e of the airline industry is not airline vs. airline, but network vs. network. As such, how did you choose your alliance partners, United Airlines, SAS, and Thai Airways?

We wanted to build a three-pronged network that covered Europe, the Americas, and. Asia. We sought airlines that are a good fit with Lufthansa as far as their business ethics, quality level, and cooperative spirit are concerned.

What does United give you that American or Delta couldn’t?

United gives us a network with hubs in Washington, Chicago, and San Francisco, which connect our gateways with the broad area of the U.S. It also is a major player from the U.S. westward over the Pacific.

What differentiates Lufthansa and its alliance partners from its competitors and their partners?

We have no capital investment. Most of the other airlines, such as USAir-British Airways and. KLM-Northwest, have an exchange of capital. Capital investment doesn’t help in reducing cost. It just impacts shareholder structures, which should have no influence on the business. If they do, something is wrong. The business should be run to make the highest revenue at the lowest cost.

As networks are solidified, will we see more sharing of overhead responsibilities or outsourcing?

Yes. Someday, we could outsource the technical unit. And we can join forces to do ground handling and purchasing worldwide. Clearly, the combined purchase power of United and Lufthansa is more than that of Lufthansa or United alone.

What markets present the biggest opportunities for you and your network?

The big opportunities are in China and India. I’m sure most of the air-traffic growth world-wide will be in those regions in the next 10 to 15 years. Central Europe also presents a variety of opportunities for us.

FLYING THE FRIENDLY SKIES

To what degree do you think further airline deregulation may be adopted in Europe?

People think the big step is coming in 1997. But about 98 percent of the deregulation in Europe is already done, because everybody can fly everywhere, at any price, at any capacity. At the moment, we are only still limited in capacity if we are doing arbitrage within other countries. Eliminating that restriction is the only change we’re still counting on to go into effect Jan. 1, 1997.

Are you really at risk from subsidized European-owned carriers?

We are at risk, as are British Airways and KLM. Because, going back to April 1991, subsidized airlines have been getting DM10 million a day. That’s DM10 million a day we don’t have.

Eventually, these airlines either will have to be restructured or they’ll go out of business. Would Lufthansa be permitted to buy up some of these distressed carriers?

We are not interested. If we want to do business in other countries, we are looking for partners without any capital investment. Always remember: Money alone doesn’t make business. Cultures, people, and corporate histories must fit together.