Lufthansa: History, Strategy, and Competitive Analysis

Executive Summary

Lufthansa is one of the oldest and most successful commercial airlines in the world, and is the fourth-largest in terms of passengers. However, the company has not always been so successful; in fact, it was teetering on the brink of bankruptcy just a short while ago. By examining Lufthansa's history, structure, governance, and contemporary strategies and goals, one can see how the company has weathered the ups and downs of political and economic history while increasing its market share to become a dominant force in the air transport market. Furthermore, by applying a SWOT and TOWS analysis to the company, one can effectively determine the best course going forward so that the company may retain its historical dominance while preparing itself for the unprecedented technological and social growth expected over the next decade.

The German airline Lufthansa offers an ideal case study of what it takes to succeed in the international transport business, and not only because the airline has been in business, in one form or another, for almost a hundred years. The company has managed to survive a world war, the partitioning of Germany, reunification, and the advent of the euro, all while steadily growing its market share to become the fourth-largest airline in the world, carrying over fifty-six million passengers each year. By examining each area of Lufthansa's business — from its history to its current management — alongside more detailed analyses of its role within the airline sector as a whole, one can see how Lufthansa has managed to succeed even when success was far from guaranteed. Although there have been ups and downs in Lufthansa's history, including some recent, well-publicized blunders, over the long term the company has demonstrated an ability to react and respond to new challenges.

History of Lufthansa

The name Lufthansa did not appear until after the Second World War, when Germany required a new flag carrier airline in the wake of its defeat; all of its previous transport operations had been shut down as part of that defeat. However, the company can actually trace its history back a few decades, to the beginnings of commercial flight, when Deutsche Luft-Reederei became the first German airline to use planes instead of zeppelins, and introduced the same crane logo that adorns Lufthansa's planes to this day. Thus, while the organization named Lufthansa did not come into existence until 1953, the beginnings of Lufthansa's business can be found much earlier. In 1926, Deutsche Luft-Reederei became Deutsche Luft-Hansa, which served as Germany's flag carrier until the end of World War II in 1945. In 1953, Lufthansa was created in West Germany, beginning the growth of the airline well known today.

During the 1950s there were actually two companies named Lufthansa, with East and West Germany each claiming their own. The West German Lufthansa was the actual organization born out of the remnants of Deutsche Luft-Hansa, while the East German Lufthansa was a new company of its own creation. However, after a few years of legal conflict, East Germany ultimately folded its Lufthansa into the larger East German flag carrier airline, Interflug. In the context of Lufthansa's growth as a business, perhaps the most important feature of this era was the fact that the West German Lufthansa was not allowed to fly through East German airspace, meaning that it could not service Berlin's Tempelhof or Tegel airports, and instead had to center its operations around more western cities like Hamburg and Cologne. As air travel picked up in the 1950s, Lufthansa began to grow rapidly, although this growth moved in a decidedly western direction, as the airline serviced western Europe and the United States.

In some ways one may view the trajectory of Lufthansa over the latter half of the twentieth century as a kind of arc or wave: rising during the 1950s, cresting during the 1960s, and beginning to fall in the 1970s until reaching a low point at the beginning of the 1990s, after which dramatic actions served to turn around the airline's fortunes, so that by the new millennium it was once again a global leader. Lufthansa's rise, fall, and subsequent rise is especially instructive because it helps to demonstrate how larger political, social, and technological developments have shaped the air transport sector. Seeing how Lufthansa succeeded where other airlines failed will be crucial to understanding the company's success. Furthermore, as will be seen, Lufthansa's economic history is deeply entwined with the political history of Europe and the Middle East, and understanding how these connections influenced Lufthansa's management offers insight into the company's future.

The 1960s saw Lufthansa's business transform once again, as jet engines rapidly replaced the propellers that Lufthansa's trademark Super Constellation had made famous. The introduction of jet engines transformed not only Lufthansa's business, but the airline and transport industry as a whole, because passengers and cargo could suddenly travel faster and at much larger capacities. The ability to carry more, further meant that transport channels had to be entirely remapped, leading to the beginnings of the so-called hub-spoke networks that characterize contemporary airline services. Although these hub-spoke transport networks would not truly arise until further deregulation opened up the airline market, the introduction of jet engine technology made these kinds of networks possible by reducing the number of legs in any given long-distance journey, allowing a few large airports to service routes that previously required multiple stops and planes.

If the 1950s and 1960s were a heady era of growth and optimism — as new technologies and post-war excitement spurred the airline industry — then the 1970s were a harsh dose of reality, forcing airlines to confront the realities of a new, decidedly global economy. Even as the introduction of jumbo jets meant that Lufthansa could carry even more passengers, with the possibility of fare reductions similar to those that had occurred during the transition from propellers to jets, the political and economic crises of the 1970s nearly crippled the company. In particular, dual oil crises in 1973 and 1979 caused the price of oil to skyrocket, and although Lufthansa made important advances in fuel-conservation technology, the effects of these crises would hamper the airline's attempts to remain profitable for the next decade.

The damage that the fuel crises of the 1970s wreaked on the airline industry cannot be overstated. To appreciate how serious the impacts were, one need only consider the numerous regional airlines that went bankrupt in subsequent years; in the United States alone, twenty-four regional airlines went under between 1979 and 1982. Larger companies, such as Lufthansa and Pan Am, would not feel the full brunt until somewhat later. Although some of these bankruptcies were likely the result of more than just an increase in fuel prices, the oil crises essentially served as a coup de grâce for companies that had thus far managed to survive what might be called the boom era of commercial air transport. Lufthansa managed to survive the oil crises, but by the end of the 1980s the company was on the verge of bankruptcy, and would likely have gone under were it not for a serious internal restructuring coupled with an unprecedented change in international affairs.

Perhaps the most well-known collapse of an airline is that of Pan Am, which occurred in 1991. That airline, like Lufthansa and others, had suffered serious setbacks as a result of the oil crises of the 1970s, such that by the end of the 1980s it was already in a weakened state and subject to increased competition. With the advent of the first Gulf War, oil prices once again climbed, and this served as the final nail in the coffin of an airline that had existed since 1927 — just one year after Deutsche Luft-Hansa's founding. Lufthansa could well have suffered the same fate, except that just as the Gulf War was winding up, the partition of Germany was winding down. By the end of 1990 the airline once again had access to the city of its birth, Berlin. The reunification of Germany meant that Lufthansa was once again Germany's premier airline, and having access to Berlin meant that the company could finally service one of the most important economic and political hubs in Europe.

However, while the reunification of Germany was an important psychological and long-sought-after boost, Lufthansa was still suffering from many of the same problems that had plagued it for years. Less than a year after reunification, the company was literally on the verge of bankruptcy, having recorded an after-tax loss of more than $250 million (USD). To understand just how dire Lufthansa's financial situation was at the beginning of the 1990s, one need only consider what happened in 1992, when — with only fourteen days of operating cash on hand — the then-chairman approached all of the major German banks asking for money to pay employee salaries.

No commercial banks would lend Lufthansa the money, and only one state-owned bank stepped in, allowing the airline to hobble along for a little longer. Because Lufthansa had been a state-owned company throughout its history, observers both inside and outside the organization had never truly considered the possibility that it might fail, and as a result serious, systemic problems were allowed to go unchecked. Without the threat of failure that private companies face, Lufthansa had essentially grown complacent, acting as though it need not worry about the political and economic factors influencing its competitors.

However, all was not lost. The newly appointed Chairman Weber recognized the severity of the situation. Together with Lufthansa's Executive and Supervisory Boards, Weber took rapid action, first organizing a Lufthansa-specific, four-week change management program. After taking the advice of the attendees, he convened a meeting of twenty of Lufthansa's senior managers at the company's training center in Seeheim, Germany. That meeting quickly evolved from a general change management seminar into crisis response planning, and the result was Program 93 — a set of dramatic changes to be instituted at every level, from reducing staff and fleet sizes to cutting waste wherever possible.

In addition to these shorter-term emergency measures, Weber and his associates also instituted longer-term changes, most notably the privatization of Lufthansa in 1997. Although privatization would have been practically unimaginable only a few years earlier, the airline's dire financial situation, coupled with the dedication of its management team, was enough to make the transition a successful one. By 2001, Lufthansa was once again one of the most profitable airlines in the world. The transition is practically unprecedented, and it is a testament to Weber's skill as a leader that he was able to organize the process so effectively.

Since the 1990s, Lufthansa's efforts have largely been directed toward implementing the changes first instigated by the crisis of the early part of that decade. Part of the reason Lufthansa was able to recover from near-destruction was that the changes implemented by Weber and his associates were never intended to be short-term emergency measures, but rather a complete overhaul of how the company does business. Thus, while short-term measures were taken to ensure the company could continue operating, these were complemented by more fundamental changes that would preclude the need for another crisis management scramble.

Aside from privatization, the biggest change Weber made to Lufthansa was to the structure of the organization as a whole. A look at these structural changes provides instructive insight into how important it is for an organization's structure and governance to adapt to contemporary challenges in order to more effectively achieve its mission and goals. Prior to the near-bankruptcy crisis of 1991–1992, Lufthansa was governed by an Executive Board and a Supervisory Board. The entire company was organized into six largely discrete divisions — finance, personnel, maintenance, sales, marketing, and flight operations — each headed by a member of the Executive Board. The problems with this arrangement were manifold.

Structure and Governance

First, the separation between each division was so strong that each Executive Board member was essentially the head of a small fiefdom, a situation that encouraged poor behavior throughout the organization simply because accountability and transparency were practically non-existent. As a result, top-level management of each division frequently inserted itself into lower-level operational decisions rather than allowing managers at each level to coordinate among themselves. This produced micromanaged divisions that nevertheless failed to address issues affecting more than one division. At the same time, the company was exceedingly slow to respond to problems, because systemic issues within divisions rarely came to the attention of other board members, meaning that those responsible for governing the organization as a whole were largely unaware of what was happening within it.

This faulty organizational structure helps to explain why Lufthansa's financial situation was able to deteriorate so far. Aside from the false sense of security offered by its status as a state-owned corporation, the stark separation between divisions meant that bloat, waste, and inefficiency could accumulate within each division, and so long as the board members responsible kept these problems from their peers, they could continue largely unchecked. Thus, as part of the larger movement toward privatization, Weber began a process of reorganization that formally separated three business sectors as legally autonomous and economically independent subsidiaries: LH Cargo AG (airfreight), LH Technik AG (technical maintenance service), and LH Systems GmbH (IT services). These joined the existing subsidiaries Cityline (regional flights), Condor (charter flights), and LSG Sky Chefs (catering).

By splitting off these divisions, Weber was able to make the main organization more agile and efficient while allowing those divisions that did not require central oversight — such as maintenance and IT services — to become their own entities. This enabled management to exercise greater control over areas like sales, marketing, finance, and personnel that were more susceptible to inefficiency and bloat, while freeing Lufthansa from direct financial responsibility for those divisions that could largely support themselves. This plan was exceedingly successful, and Lufthansa has since expanded to include over twelve different airline subsidiaries, including wholly-owned subsidiaries and airlines in which Lufthansa holds a plurality of shares.

The restructuring of the 1990s and the separation of Lufthansa's businesses into distinct entities was a continuing process that has culminated in the organizational structure and governance that exists today. As of 2012, Deutsche Lufthansa continues to maintain an Executive Board and a Supervisory Board, but each member of the Executive Board is no longer responsible for a single division. Instead, the Supervisory Board selects the members of the Executive Board, which oversees the entire company, while subordinate executives oversee specific areas of the operation, including its subsidiaries. Christoph Franz serves as Chairman of the Board and CEO of Deutsche Lufthansa, while Carsten Spohr oversees Lufthansa's passenger airlines as CEO of Lufthansa German Airlines. Stefan Lauer, as Chief Officer Group Airlines and Human Resources, oversees Lufthansa's subsidiary airlines, which include SWISS, Austrian Airlines, Germanwings, Brussels Airlines, and SunExpress. Finally, Chief Financial Officer Simone Menne oversees the rest of Lufthansa's businesses not directly related to passenger travel, including its cargo, maintenance, IT, and catering subsidiaries.

The current organizational structure and governance has proven far more effective than the old model, as evidenced by the organization's success. Although Lufthansa once found itself on the brink of bankruptcy, by 1997 it had become a founding member of the STAR Alliance, the world's first global airline alliance, which as of this writing has expanded to include twenty-eight different airlines. The alliance coordinates operations between member airlines, including shared marketing, coordinated customer reward programs, and other special certifications and events as needed.

Furthermore, the current upper-level management appears well suited to its task, as each of the chief officers are longtime Lufthansa veterans who worked their way up from within the company. In many ways the current executives represent the direct successors to Jürgen Weber's team of transformational leaders, having all begun working for Lufthansa around 1990 — just as the company was in the throes of potential collapse. They are therefore a natural fit for the ongoing development and streamlining that has been Weber's legacy.

One sign of Lufthansa's growth is the degree to which it maintains robust accounting and performance metrics. Not only do its annual reports contain the usual required information, but the company's investor resources section includes robust analysis tools, allowing investors and researchers alike to compare crucial data points over time. This represents a sea change from the lack of transparency and accountability that characterized the company's operations prior to privatization.

Aside from the robust tools available for examining financial data, Lufthansa was careful, in the wake of its near-collapse, to institute stronger internal controls. In particular, the company instituted an Origin and Destination (O&D) revenue management system in order to better manage its inventory — meaning available seats. Although ideally all seats on any given flight will be sold, for an airline such as Lufthansa the most profitable seats are those in first and business class. A crucial part of managing the business therefore involves maximizing the sale of these seats without inadvertently neglecting economy passengers, who still make up the bulk of travelers if not the bulk of profits. By carefully instituting an O&D revenue management system and ensuring that all key employees and stakeholders were fully educated about its function and operation, Lufthansa helped to streamline its business while instituting another set of checks and oversight mechanisms.