Even Lufthansa Is Carrying Too Much Baggageby
When Jurgen Weber was made chairman of Lufthansa last August, the appointment restored an old tradition: In past decades, the German carrier plucked top engineers from its ranks to run the show.
But after 12 months as chairman, the former aircraft engineer finds himself on anything but a traditional path. Earlier this year, Lufthansa announced its first loss in 20 years--$315 million in 1991--and fears it could lose as much as $1 billion for 1992. The losses, exacerbated by rising interest rates and a falling dollar, are whittling down its capital base. Now, after decades of nurturing, the carrier can no longer depend on the German government to shore it up. The situation has even shaken labor enough to prompt a dramatic move: For the first time in 30 years of German industry, a union has offered givebacks.
The pressures come at a time when the carrier can least afford them. With $11 billion in revenues, 51,000 employees, and 228 jets, Lufthansa is one of Europe's largest airlines. But as the European Community moves toward deregulation of its skies, the carrier will find itself severely tried unless it can cut its costs below competitors' (chart).
PARTNER WANTED. On a larger scale, the industry is entering a global age in which less-efficient airlines will be driven into the embrace of powerful competitors. Already, British Airways PLC is forging an alliance with USAir Inc. that will give it unparalleled access to the U.S. market. Lufthansa has also been seeking a U.S. partner, though it admits it can't afford to buy a stake. Yet the carrier realizes it must become far more efficient--taking more stringent measures than many European rivals that have already tried restructuring--if it is to be a survivor.
Weber, 51, has drawn up a rescue plan dubbed Program '93. It calls for some service cuts, such as dropping first class within Europe and discontinuing service to two U.S. cities--Charlotte, N. C., and Philadelphia. But for the most part, Program '93 is about slashing costs--to the tune of $1.1 billion, or 10% of total annual costs, over 18 months. About a third of that can be achieved by selling unprofitable assets. Another third will come from cutting administrative and nonessential operating costs. The rest, says Lufthansa spokesman Rolf-Dieter Grass, must "come from reducing staff costs."
Easier said than done. As long as Lufthansa operated within the government's protective cocoon, employees could ignore the facts of market competition. But now, the airline plans to cut as many as 7,000 workers from its payroll before 1996. Roughly 35% of its employees belong to two powerful unions: German Corporate Employees (DAG) and Public Workers' Union (OTV).
OTV, which includes most flight attendants and ground-service staff, insists Lufthansa must first trim bulging management and administrative payrolls that have grown by 47% over five years. The union is also pointing the finger at the airline, and its government owner, for problems overseas. OTV's President Monika WulfMathies is demanding that Germany renounce the German-U.S. air-traffic treaty she claims favors the U.S.
`FLEXIBILITY.' DAG, which represents about 5,000 Lufthansa pilots, engineers, and technicians, takes the same position on the treaty. But the union has also shown an unexpected willingness to compromise: DAG has offered to take an 8% wage cut and to work up to 40 hours a week instead of an average of 37.5. DAG spokesman Ingo Schwope says such a move would save the airline about $360 million and 1,000 jobs. "We want to show our flexibility," he says. So far, OTV's leaders have refused to back DAG's proposed changes.
Union troubles also threaten Lufthansa Express, a new shuttle service that Weber hopes will save its domestic business. Intra-Germany flights have long been a major money-loser, costing Lufthansa $250 million last year. Weber wants to create an airline within an airline--paying wages 30% lower than at the parent--to make domestic traffic profitable. The shuttle is scheduled for takeoff on Oct. 25, carrying all Lufthansa's domestic flights. But the unions are squabbling among themselves over how much ground to give, and Weber will have a tough time winning their approval.
If Weber can't get his cost-cutting plan under way before yearend, Lufthansa may be forced to draw from equity to bankroll wages. For now, it can't turn to its biggest shareholder for help. Faced with huge unification costs, Germany's Finance Ministry is trying to sell off as many assets as possible, including part of its 51% stake in Lufthansa, worth an estimated $2 billion. But privatization will go over a lot better if Weber can rev up Lufthansa's performance. He has little time to spare.