Airline Crisis

Lufthansa Must Seek a New Path

lufthansa logo DPA
Lufthansa logo with a Germanwings plane in the background.
  • Why it matters

    Why it matters

    Lufthansa was already struggling before an airplane flown by budget subsidiary Germanwings crashed into the French Alps. The company’s chief executive must now revive a company in dire straits.

  • Facts

    Facts

    • 150 people were killed when the co-pilot of a Germanwings aircraft deliberately crashed  the side of a mountain in France on Tuesday.
    • Prosecutors say the co-pilot Andreas Lubitz hid an illness from his employers.
    • German airlines will now change their rules to make sure there are two people in the cockpit at all times.
    •  
  • Audio

    Audio

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The journey Lufthansa’s chief executive Carsten Spohr made this week to the crash site of Lufthansa’s budget subsidiary Germanwings flight U4 9525 in southern France is one he never wanted to make.

As the head of a major airline, comforting the families of those killed in an air crash is one of the worst parts of the job. And Mr. Spohr must take on that role while also trying to save a struggling flagship carrier.

Mr. Spohr was a pilot himself and understands the responsibility that comes with the job. He looked visibly shaken on Thursday when confirming that one of his staff, the co-pilot  Andreas Lubitz, had locked out his captain and deliberately flown the Airbus 320 into a mountain.

His formal suit and careful words could not hide his dismay. The accident was, he said “beyond our worst nightmares.”

The prosecutor’s office in Düsseldorf said in a statement Friday that police who had searched the 27-year old Mr. Lubitz’s house had found evidence that he was unwell. They also found  a torn up sick note – a letter from a doctor saying the patient is too ill to work – for the day of the crash. Mr. Lubitz had gone into work regardless and the prosecutors statement said there was “the assumption that the deceased hid his illness form his employer and his professional circles.”

The prosecutor added that police had not found any sort of suicide note or confession and that there are “no indications of a political or religious background to the incident.”

Ilja Schulz, president of Vereinigung Cockpit, the German pilots’ union, urged people to wait until the second black box  containing flight data is recovered.

In a statement, he said: “We should not rush to conclusions based upon limited data. The reasons that led to this tragic accident will only be determined after all data sources have been thoroughly examined.”

It is clear that the security will be overhauled yet again after this crash. After 9/11 aircraft design and crew procedures changed to keep unwanted people out of the cockpit. Now, there will be a focus on checks on people inside the cockpit. U.S. airlines have a rule that two people must be in the cockpit at all times.

On Friday afternoon, German airlines said they would adopt the same practise. Lufthansa said in a statement that German aviation authorities and the country’s airlines had introduced new rules requiring two crew members to be in the cockpit at all times. The rule will apply to all Lufthansa subsidiaries including Germanwings.

Other airlines including Norwegian Air Shuttle, Britain’s easyJet, Air Canada, Air New Zealand said that they now had introduced similar measures.

Flying is a matter of trust. Lufthansa, which prides itself on its safety record and the caliber of its pilots, was betrayed by one of its own employees.

Mr. Spohr also made it clear that airline can meet any financial liabilities from the crash, including compensation for victims.

Whatever happens, Mr. Spohr will have to live with the fact that one of his employees, trained at Lufthansa’s own respected pilot school in Bremen, may have intentionally caused the deaths of 149 people.

Officials say there are no indications that Andreas L. had any ties to terrorists.

Flying is a matter of trust. Lufthansa, which prides itself on its safety record and the caliber of its pilots, was betrayed by one of its own employees.

The company was about to celebrate its 60th anniversary on April 15. This anniversary is now overshadowed by its worst-ever aviation disaster.

The question now is: When customers book a business or vacation trip, will they think of Germanwings flight 4U 9525? Will travelers feel more anxious in the future when they fly with Lufthansa or one of its subsidiaries?

“In the eyes of passengers and employees, the sort of thing that just happened was impossible. Almost no other airline has as strong a reputation for safety as Lufthansa. There is now a risk that this could change,” warned Gerald Wissel of Airborne, a consulting firm that specializes in aviation.

 

Lufthansa and its Competitors-01

Mr. Spohr now faces the biggest crisis his company has ever had. He is not afraid to tackle the challenges head on.

The disaster affects a company that has long been caught in turbulence. A company that depends on a myth that is getting weaker and weaker, the myth of German workmanship and the quality that the Lufthansa brand represents.

After this incident, Lufthansa is no longer the company it once was.

The company must find a way to cope with the enormous emotional burden on its employees. Where is the carrier headed after this disaster? How can it revive its image and contain the threats to it? Does Mr. Spohr already know exactly what needs to be done in the wake of the accident? And does he have the strength and the power to lead Lufthansa out of its slump? Or does he have one too many adversaries?

Lufthansa’s challengers are budget carriers and competitors that offer more service for a better price. Its own pilots have gone on strike 13 times in the last year, over plans to move them to cheaper contracts with less onerous pension plans. Its supervisory board, the German equivalent of a non-executive board that must sign off on management decisions, is also not sure about Mr. Spohr’s plans to expand its budget airlines branch.

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Lufthansa CEO Carsten Spohr. Source: imago/Eibner

 

Lufthansa and its subsidiaries saw an increase in passenger volume of only 1.3 percent in 2014, small by international standards. The rising stars in the airline industry are carriers backed by their national governments, like Turkish Airways, Emirates, Abu Dhabi-based Etihad and Qatar Airways. Etihad recently saw a 25-percent increase in passenger volume, while Emirates reported a 12-percent gain.

Another airline that has been making headlines is the irreverent and aggressive Irish budget carrier Ryanair, which aims to capture a 20-percent market share in Germany and saw a healthy increase in passenger volume of more than 6 percent in 2014. All of this creates a headwind for Lufthansa, making it more difficult for the carrier to make necessary investments in new aircraft.

Mr. Spohr and Germanwings chief executive Thomas Winkelmann now faces critical questions. How can Lufthansa rebuild trust? Can it stick to its confusing multiple-brand strategy? Investors are growing skeptical.

The investment bank Jefferies investment recently lowered its targets for Lufthansa. Analyst Mark Irvine-Fortescue said in a note that he is becoming increasingly cautious and cites growing capacities and high costs in the market. “The airline faces a strong headwind,” he said. HSBC analyst Andrew Lobbenberg notes the strained relationship between management and employees. “In addition, sales trends and the balance sheet are weakening,” he said.

High operating costs weigh heavily on the balance sheet. The company is complex and there is a lot of duplication of functions, especially across its multiple hubs in Frankfurt, Munich, Zürich, Brussels and Vienna. Lufthansa has now hired the McKinsey consulting firm to analyze its organization.

 

036 Lufthansa - Neu 2015-03-27-01

 

An even more serious problem is the fact that Mr. Spohr’s dual strategy involving Lufthansa and Germanwings has angered customers. It was only in 2012 that Lufthansa announced that it intended to make a big impact in the market with its Germanwings brand, launched in 2002. The planes were repainted for about €5 million ($5.5 million), and a new advertising campaign was launched for what Germanwings’s Mr. Winkelmann described as a “budget carrier that offers its passengers a selection of amenities.”

He said the brand was constantly evolving and he said it expected to be in its final shape by 2015.  But now it’s 2015, and instead of coming into its own, Germanwings is disappearing as a brand. This fall, it will be merged into the larger Eurowings brand, with which Lufthansa aims to transfer its budget concept from Europe to Asia and other markets. Germanwings, it turned out, wasn’t really a budget airline. It offered air miles and lounge access: in other words, it was just another version of Lufthansa.

Eurowings begins operations this year with only two aircraft. They are being leased from the leisure airline Sun Express, a joint venture with Turkish Airlines. This is supposed to be the beginning of a “red Lufthansa,” the airline’s new low-cost, long-haul carrier, alongside the standard “blue Lufthansa.”

The pilots union believes this new business, which looks shabby by Lufthansa standards, is a way of hiring pilots on cheaper, non-unionized contracts.  Labor relations between crew and management are breaking down, and the repeated strike action is giving Lufthansa an unprecedented reputation for unreliability.

Lufthansa has struggled with dismal economic and financial results for some time. In 1992, the airline, which was still almost entirely state-owned at the time, almost maneuvered itself into bankruptcy. The company had relied too heavily on being protected from the market, so that Lufthansa was virtually unprepared for growing competition in a market that was slowly being deregulated. In 1991, the core business was in the red to the tune of almost a billion deutsche marks. This led to a radical restructuring and layoffs.

After 1992, Lufthansa was also not quick enough to recognize trends in aviation. Management underestimated the budget airlines for many years, long believing that the new rivals would never capture enough market share to become relevant. The then chief executive Wolfgang Mayrhuber, who is now the chairman of the supervisory board, launched the Germanwings subsidiary in 2002 but it never had enough aircraft to become a serious threat to Ryanair.

 

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Lufthansa staff in Düsseldorf observe a minute’s silence on Thursday. Source: AFP

 

These past mistakes make it difficult to embark on a new strategy.

Mr. Spohr is also caught in a personal dilemma. He knows that the “Score” austerity program that his unpopular predecessor Christoph Franz implemented does not go far enough. In his first 11 months in office, Mr. Spohr has made it clear that he thinks in far more radical and strategic terms than his predecessors.

He wants structural reforms instead of periods of hairshirt austerity that ultimately lead nowhere. At the same time, he is also a product of the Lufthansa Group, which has promoted a pronounced culture of consensus over the years.

Mr. Spohr, who lives near Munich and likes to work at the city’s Franz Josef Strauss Airport on Fridays, has enjoyed the complete support of management in the supervisory board over his cost cutting and his pay dispute with pilots. However, a few board members are skeptical about his plan to use a budget carrier to compete on long-distance routes with rivals such as Condor, formerly part owned by Lufthansa, and Air Berlin.

Karl-Ludwig Kley, one time Lufthansa finance director and now the chairman of the Darmstadt-based pharmaceutical company Merck, is one person on the Lufthansa supervisory board who has clashed with Mr. Spohr.  Other supervisory board members like Nicole Leibinger-Kammüller and Adidas CEO Herbert Hainer are also urging Mr. Spohr to focus more heavily on profitable subsidiaries like Lufthansa Technik and catering and in-flight services provider LSG Sky rather than the difficult passenger business.

In the supervisory board meeting in December 2014, it took Mr. Spohr a great deal of effort and extensive debate to secure approval for the purchase of two Airbus A380 jumbo jets. But the plan to issue a convertible bond, intended to raise about €600 million, money that should have been used to modernize the fleet, failed and the finance director Simone Menne had to issue a statement warning of threats to liquidity.

But perhaps the tragedy in the Alps will end up having a completely different and, for many, unexpected consequence for Europe’s largest airline.

Marc Tüngler, managing director of DSW, or the German Association of Private Shareholders, said: “The terrible accident involving the Germanwings aircraft overshadows all other issues and makes the enormous operating challenges faced by Germany’s largest airline seem insignificant at the moment. When something this bad happens,” he added, “it becomes a moment that puts everything else in perspective. The same thing applies to stakeholders in the Lufthansa Group.”

But it is also possible that the mutual distrust within the workforce will increase in the short term. Pilots and copilots could begin to have doubts about the person sitting next to them in the cockpit, wondering whether there could be others capable of committing similar crimes.

In fact, however, a new sense of family was palpable at Lufthansa after the Germanwings crash. Many employees were in a state of shock.

Employees of catering subsidiary LSG Sky Chefs and aircraft maintenance subsidiary Lufthansa Technik were “deeply affected,” according to a senior Lufthansa executive. Entire cabin crews apparently broke out in tears when they heard the news of the crash. “Suddenly it doesn’t matter whether you work for the Lufthansa, Germanwings or Eurowings brand,” said a Lufthansa employee.

The refusal by some crews to begin their flights immediately after the crash is also a sign of this sense of family. None of the crew members said that they were refusing to fly because they were concerned about safety: more that they needed to grieve for the colleagues they had lost.

“It’s just that we know each other. There were some who knew the pilots and crew very well. It’s a little like losing a family member,” explained one Lufthansa flight attendant.

But this was in the early hours of the crash, when the cause was unknown.

The news that a Lufthansa employee was responsible could loosen the ties that bind.

 

Jens Koenen is Handelsblatt’s bureau chief in Frankfurt, Thomas Hanke is the paper’s Paris correspondent, Christoph Schlautmann covers the consumer goods industry,  Meera Selva is an editor with Handelsblatt Global Edition. Florian Kolf, managing editor of the Handelsblatt newsroom, contributed to this report. To contact the authors: koenen@handelsblatt.com, hanke@handelsblatt.com, schlautmann@handelsblatt.com, selva@handelsblatt.com

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