Germany's National Airline Faces a Difficult Future

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Post by BubbleBliss on Wed Mar 03, 2010 11:48 pm

Germany's National Airline Faces a Difficult Future

By Dinah Deckstein

The German airline Lufthansa managed to avoid a damaging pilots' strike last month. But the company still faces a challenging future. Plummeting profits and crucial strategic errors have plunged the airline into a deep crisis.

Should the German national airline Lufthansa end up earning millions more in profits this year than expected, it will be thanks in part to one woman: the Frankfurt labor court judge Silke Kohlschitter, 43. On Monday of last week, with the pilots' organization Cockpit already 18 hours into a planned four-day strike, the determined judge had a surprise in store. With charm and skillful diplomacy, she was able to bring the quarreling representatives from the union and from management back to the negotiating table.

The crux of the matter -- whether and to what extent German working conditions should apply to domestic and foreign subsidiaries -- remains unresolved for the time being. Instead, the strike was lifted and, until March 8, formal negotiations will only address salary increases and improved working hours and resting periods for the airline's roughly 4,500 pilots in Germany.

Kohlschitter's decision could have provided cause to rejoice for Lufthansa CEO Wolfgang Mayrhuber and Deputy CEO Christoph Franz. They claim the abrupt end of the strike meant the company was able to save more than €100 million ($74 million) in lost revenues.

But celebration is far from the minds of the company's two top executives. They know full well that the conflict with pilots over pay and hours is the least of their problems.

For decades, the airline was considered one of Germany's most effectively managed companies. In surveys of university graduates, Lufthansa was consistently placed at the top of the list of preferred future employers.

'Blatantly Clear'

But, in the coming months, Lufthansa executives will find themselves having to seriously defend their hard-earned reputation. For the first time in almost nine years since the devastating 9/11 terror attacks in the US, the airline is seeing sharp declines in sales and earnings across the board. But this is not the result of the supposed greed or hubris of its pilots.

Indeed, mere cost-cutting measures or the decommissioning of aircraft is unlikely to be enough. The airline will have to rethink and readjust its entire business model, as Deputy CEO Franz has been saying since last July. "The economic crisis is not the cause of our difficult situation," the top executive warned at the time. "It just makes it blatantly clear where our competitive weaknesses lie."

Franz, who presided over the turnaround of Swiss, was the first to express Lufthansa's problems so clearly. The indirect criticism of Mayrhuber and Supervisory Board Chairman Jürgen Weber inherent in the comments show just how serious Lufthansa's situation has become.

Under Weber and Mayrhuber, Lufthansa grew into the world's fifth-largest airline, based on passenger numbers. At the same time, however, the two men created -- through acquisitions, the development of new hubs and massive expansion of the airline's services from budget to exclusive tickets -- an entity that is difficult to control, even in the best of times.

More and More Fragile

For a long time, the two executives accepted losses on domestic German and European routes to fill seats on lucrative long-haul routes. At the same time, they ordered new aircraft worth a total of about €16 billion, most of which are scheduled for delivery over the next six years.

But the elaborate construct is becoming more and more fragile. The airline faces steep competition from discount players, such as Easyjet and Air Berlin, at the one end of the spectrum and growing Arab carriers, such as Emirates and Qatar Airways, at the other. The new competitors, established much later than Lufthansa, have significantly more efficient cost structures than the former German national carrier, which is more than 80 years old.

In addition, business travelers, long the source of a large share of the company's earnings, have been flying in economy class for some time, instead of sitting in expensive Business Class or First Class seats. When it releases its financial figures for 2009 next Thursday, Lufthansa will have trouble showing even a small profit.

The acquisition of ailing Austrian Airlines (AUA) drove up the company's net debt to almost €2 billion. This prompted major rating agencies like Moody's and Standard & Poor's to downgrade their outlook for Lufthansa's debt months ago, which makes it more expensive for the company to borrow additional funds.

Franz, Mayrhuber's presumed successor, wants to impose an entire package of cost-cutting measures to prevent further erosion of Lufthansa's once-vaunted financial figures. The measures include speeding up the introduction of bigger jets on regional routes as well as bringing down costs in the areas of administration, catering and airport and security fees.

Relinquishment of Amenities

Franz and his 15-member team hope to add hundreds of millions in additional revenues by installing more seats into part of the fleet, improving the capacity utilization of aircraft and delaying the delivery of some of the jets already on order, such as the Airbus A380. Management wants employees to contribute the rest of the planned savings -- about €200 million out of a total of about €1 billion -- through such measures as voluntary termination agreements, longer working hours and the relinquishment of amenities they have come to value.

But management's plans have been met with strong resistance among employees. "Lufthansa's financial burdens are the result of costly acquisitions," says Thomas von Sturm, head of the pilots' bargaining committee. He points out that he and his fellow pilots account for only about 4 percent of the company's total costs today. Instead of demanding additional sacrifices from employees, says Sturm, management should upgrade the interiors of Lufthansa jets, which he says are hopelessly outdated compared with the competition, particularly in First Class.

Representatives of the airline's cabin crews, who are set to begin wage talks in early March, take a similar position. The flight attendants are already displeased over management's decision to reduce the size of cabin crews on long-haul flights by one flight attendant. The service workers' union Ver.di, which represents some of the airline's flight attendants, even suspects Lufthansa management of "making up for past corporate mistakes at the expense of employees, thereby securing the financing for acquisitions."

These are serious charges, and yet, for Mayrhuber and Supervisory Board Chairman Weber, they are not unexpected. At a time when airlines were responding to growing competition from discount carriers by reducing the number of seats in First Class and introducing a new intermediate class between Economy and Business Class, the two executives upgraded Lufthansa into a so-called premium carrier. They reasoned that the profitable long-haul business, with its Business and First Class customers, would offset lower profits in Economy Class.

Wage Concessions

That hope has since proven to be elusive. Franz has said that he wants to put an end to years of cross-subsidization. This would require the entire short-haul and medium-haul business to become more profitable, a strategy that only works if employees cooperate.

Even before the strike, the pilots' representatives at Cockpit were willing to voluntarily forego salary increases and work longer hours. In return, they wanted the company to guarantee their jobs and traditional privileges, as well as to provide assurances that newly hired pilots could quickly rise to the rank of captain. In light of their demands, the newly envisioned negotiations, with their emphasis on salaries and working hours, will hardly satisfy the pilot representatives. Cockpit has not commented officially on the negotiations yet.

The flight attendants represented by Ver.di are also willing to make wage concessions if management can guarantee their jobs and better working conditions. In return, Lufthansa executives would probably have to abandon their plan to reduce the size of long-haul cabin crews by one flight attendant.

Under these circumstances, management and flight personnel are hardly likely to come to an agreement quickly -- unless, that is, the Lufthansa executives resort to an unusual tool that other airlines have already tried.

Franz and Mayrhuber could provide the employees with job guarantees and offer the cabin and cockpit crews profit sharing or Lufthansa stock at preferred terms. This would ultimately benefit both sides. It would allow management to make the company more competitive, and employees would be compensated for their concessions by being given a stake in what management hopes will be the airline's return to rising profits.

Translated from the German by Christopher Sultan
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Post by TexasBlue on Thu Mar 04, 2010 12:45 pm

It's now global, this recession. It affects everyone in different ways, too. Different countries have different systems of business but it all ends up the same way. Not much different than here.
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Post by BubbleBliss on Sun Mar 07, 2010 12:13 pm

The recession has been Global since Lehman brothers collapsed. Luckily Germany has been able to avoid mass layoffs while France has seen a sharp increase in suicides due to mass layoffs.
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Post by TexasBlue on Sun Mar 07, 2010 1:11 pm

Your country paid employers to keep workers if they just lowered their hours, right? It might have worked here but not always. My old job was based on magazine printing. If the internet is destroying that industry, there's nothing one can do to stop it. They had to let people go and downsize. Now they're down to 5 printing presses when they had 7 while i was there. If the work isn't there, nothing can be done to alleviate that.
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Post by BubbleBliss on Sun Mar 07, 2010 3:26 pm

Well this was only in the recession, not layoffs that would have occurred even in stable financial times like the printing factory.
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Post by TexasBlue on Sun Mar 07, 2010 3:51 pm

I feel that what happened to me would've happened in due time if the economy hadn't took a dump. I could see it coming. We were losing titles because they were going digital (internet). The economy sped the downsize up dramatically.
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Post by BubbleBliss on Sun Mar 07, 2010 9:25 pm

That's what I'm saying. The german gov't didn't prevent any layoffs from happening that weren't gonna happen sooner or later.
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