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Se ABSTRACT Jn 1991 Lufthansa was almost bankrupt, Bight years late, at the general business meeting on the 16th of June 1999 Jrgen Weber (CEO) announced record results in Lufthansa’ ore ‘han 70-year history. in eight yeas, the company had gone ‘from the brink of bankruptcy to becoming one of the world’s leading airline companies, a founding member of the STAR ALLIANCE —the airline industry's most comprehensive net work—aspiring to become the leading aviation group in the world, Lufthansa had undergone some radical changes that reversed a record loss of DM 730 milion in 1992 10a record re-tax profit of DM 2:5 billion in 1998 (an increase of 4256 compared to 1997 when the pre-tax profit was DM 1.75 bil. lion). Revenues increased by 4.896, from DM 21.6 billion in 1997, to DM 22.7 billion in 1998, The Seat Load Factor {SLF-—proportion of seats filed) reached 73%, a record per formance in Lfthansa’s history (1.5 percentage points increase compared to 1997 and 9 percentage points increase compared to 1991). After the first step of the turnaround it was apparent hat transformation had just Begun and that a much ‘more fundamental change had to follow to assure the company’s future. The Lufthansa Bxecutive Board ( Yorstand) and the Supervisory Byurd tAnyfsichsrat) decide t fallow a concepr of sustuiting reuetsul tree 124 CASE 13 LUFTHANSA 2000 Lufthansa 2000: Maintain the Change Momentum _ velopment) at 3 levels, operational, structural, and strates ‘ic. In 1999, none ofthese processes were fully completed In fact, sustaining the change pracess was seen as the key ‘management challenge. In 1991 Lufthansa was almost bankrupt, It was the national airline carrier of the Federal Republic of Germany, state ‘owned, monolithic, and unprofitable, Eight yeas later, in 1999, it was a privately owned, prof itable company, core element of the strongest world-wide alliance in the airline industry, aspiring to become the leading aviation group in the world. During the years of 1992-1999, Lufthansa went from a record loss of DM 730 million o a record profit of DM 2.5 billion (Appendix 1) ‘The number of passengers increased from 33.7 milion in 1992 to 40.5 million in 1998, while the nurnber of employ- ces decreased from about 64,000 in 1992 to about $5,000 in 1998, This cave was writen in co-operation beteen LBS and Luhons School of osines by Dr Heke Bruch, Visiting Scho a Litem the Uncen 1 St allen (Switzerland, undsr the supervchatuf Pr Seno {walt isin wo be ava bax dntssen rat toe i inthe hang ots Iunes stn MAINTAINING THE CHANGE MOMENTUM eee RECENT HISTORY fl BEFORE WEBER {os'ed in 1926, liquidated in 1945 and reborn in 1953, julilwnsd historically represented the characteristic uhs of German industry: a strong focus on reliability, grder aied technical excellence, Majority owned by the ean amalgam ofa strong technical orientation, dom- “jpn by engineers, together with the bureaucratic values i pulic administration Its role as an organ of the state reflected in its values and belief: formal, rule-driven dn inleibte, the yellow badges of Lathansa symbolized igedence, permanence and sovereign dignity. Inthe second half of the 1980s, under the leadership of f Higioz Rulinan, Lofthansa pursued « policy of “growth ihronsh own strength Based on the belief that only the rg airlines wil survive in an era of global competition, P Gunn had committed the asine to a rapid fleet expan: siowin order to capture marketshare, When Jrgen Weber BBP! asappoirted as CEO in 1991, Lufthansa had enlarged its Hier by some 120 aircrafts to 27 ‘SULF WAR AND THE BREAKDOWN OF THE AVIATION MARKET the tate 80s, deregulation triggered intensive price com- fltion, This process, coupled with the steep fall in air fei during the Gulf War and the subsequent recession, lid to.» serious over-capacity for the airline industry on a bal basis, and severe market slump in Europe. In 1991, B te Seat Load Factor (SLF-—proportion of available seats bps) went down to about 57% in Europe, compared to a Worldwide average of about 65%, The problem was aggravated because of a remarkable ffx wlosibility concerning capacities and services offered. Hii Ueregulavion of the airline industry started in 1978 in the ff Ss Gurope, in contrast, while there was some relaxation HEL uregilnvions, over the 1980s most airlines continued to be ‘owned by their respective national governments who con: \inued to maintain strict control over both routes and Hiring slots at airports REUNIFICATION AND PLANS FOR GROWTH \ifibaiss noticed the crisis later than other companies. Tscaws: of the German reunification, Lufthansa enjoyed a lWoous a6 a time when the rest of the industry faced this vevere mack downturn, |i 191, while overall traffic dropped by 996 in Europe, ‘tthonva had an inerease of passenger numbers by 11% because of the German reunification. But despite this growth, Lufthansa reported an after-tax loss of DM 444 million in 1991. This result was largely attributed to unique nnon-influenceable factors like the Gulf Wer. But results in the second half of 1991 and in the beginning of 1992 also fell below expectations. Although an awareness of a serious crisis began to spread in early 1992, Lufthansa was so pro- grammed on growth and success that employment contin- ued to rise during the frst six months. Being a state-owned company, immortality was taken for granted. “Even when the crisis became very obvious people sll ‘thought: We are the German Airline Company, state ‘owned and a prestige organisation. They will never let sd?” — Jochen Hoffnann, Senior Vice President & Executive Vice President Personnel and Labour Relations, Deutsche Lufthansa AG LS ‘THE TURNAROUND BANKRUPTCY Outsiders were not so sure about the survival of Laflhansa, In 1992, with only 14 days of operating cash requirements in hand, jargen Weber went to all the major German banks asking them for money to pay employee salaries, No pri- vate bank believed in the survival of Lufthansa: only 2 single state-owned institution—the Kreditanstalt fr Wiederaufoau—agreed to give Lufthansa the money it needed to pay its people REDEVELOPMENT WORKSHOPS The starting point of the redevelopment concept was a four-week management program about change manage- ment, which atthe same time was also the birthplace of a group called the "Samurai of Change.” The members of this group discussed the results ofthe program with Jtugen, Weber and convinced him of the urgency of a redevelop- ment process On a weekend in June 1992, asa result, Weber invited about 20 senior managers to the training centre at Secheim! fora mectng that was orginally entitled “Mental Change: It was aimed at building a network of change ‘minded managers who would drive the redevelopment process within the company. Shortly before the workshop Jurgen Weber got a deeper insight into the acuteness ofthe crisis and changed the ile from “mental change” to “crisis ‘management meeting” The turnaround began, The process ofthis meeting was as important asthe out come, For some managers this Saheim crisis management CASE 12 LUFTHANSA 7000: MAINTAINING THE CHANGE MOMENTUM 125 ‘meeting was one of their first experiences with interdepart ‘mental co-operation and non-bureaucratic problem solv- ing. The opinions concerning the necessity of drastic actions and the directions of change did not differ much Facts were too obvious. “Noone had an idea of the gravity andthe brutality of the crisis After a long phase of denial ot “not wanting to believe there was a next phase of ‘searching forthe guilty people’ which was followed by an awareness that there was a massive pressure 1 act. After this everything went very fst. The goals we committed oureelves to at Secheim were very antbitious and nobody believed that we could ‘ever meet them, but aftr this proces we coninited our selves to them, The critical question was how to win over ‘other managers and employes for these ‘stretching’ goals and activities” — Wolfgang Mayrhuber, CEO Lufthansa Technik AG and former member of the Operations Team One way to involve a larger group of managers was to repeat the Secheim workshop three times with different groups of 50 people. This was done in order to let them live through the same proces, et them fel the threat and the turgency and not just inform them of the facts and the appropriate strategy which they had to implement. After the meetings the majority of senior managers within the company were convinced ofthe necesiy for drastic change and committed toa set of extremely ambitions goals, “In the tumaround ve have consciously tried to win the commitment of people through workshops, Town Meetings, ec. With everything Ido, I ty t demonstrate that at first we have 0 reach the emotional mobilisation before a rational mobilisation becomes possible at all. Briefly one could sey: Hard success through soft roceses” —Dr. Heiko Lange, Chief Executive Personnel, Deutsche Lufthansa AG “The most important decision was downsizing the fet, hich meant putting aeroplanes into the desert. Ths was 4 completely unconventional step, Jt was necessary for the second important decision: the reduction of staff wich also demanded a complete change in mentality because it was simply the opposite of what we had planned” ~ Dr Peter Hach, Senior Vice President Corporate Controlling ‘The output of the Seeheimn meetings was a set of 131 projects or key actions concerning drastic cuts in staff numbers (8000 positions), lower non-personnel casts including downsizing of the feet (savings of DM 400 mil lion), and increasing revenues (DM. 700 million) in order 126 CASE 13 LUFTHANSA 2000: MAINTAINING THE to reduce the loses of DM 13 billon.oimplmesedige actions Lufthansa adopted the idea of Town Meetings ant, Fargen Weber decided to hold as many such meetings : selfs possible when visting diferent Lathan unis the summer of 1999 he had personally participated ison 200 Town Meetings Other senior managers also held Town Meetings i i departments and in 1999, his pracice stil remained vt prevalent allover the Lfthansa organisation. Town Meetings Lufthansa Town Meetings follow a certain strucjures ‘When they take place in a foreign country, Jirgen Weber first gets together with key contacts (eg, transport ni, ters) and then meets key customers. After this he tala i & the local Lufthansa management about their situation, problems plans tc. Finally the main item of the egenca i o Along end intensive dialogue with the employees, ingen Weber explains to them the latest plans and the staf ‘questions and present their perspectives on problems and potential improvements “It was decisive forthe eurnaround that we told the ‘employees openly what the situation was. It allowed uso develop common goals herween employees, management work councils, and unions. We could even dius iss such as staff reduction and productivity increase open; ‘and personaly” — Jiirgen Weber, Chairman and CEO, Deutsche Lufthansa AG “Jrgen Weber wins people personally by his open anc ‘authentic communication, He tells them the unvarnshe {Figures and explains how he feels about ther, During the ‘urmaround phase he to them tha every morning when looking nt the mirror he hud an overwhelming feng of responsibilty knowing that Lufthansa would aguin ‘ro. duce’ DM 4 milion of loses that day. There was a staf o 60,000 and an average of 2 ot 3 other people with them depending on Lufthansa, so that he we responsible for 200,000 peopl. That gave hint the enormous urge to change the situation... People are taken by his leader: ship emotionaly and wing to go the way frgen Weber points them because they simply understand what he says. 18 ingenious because i sso simple, However, i — Ursel Reininger, Staff Manager, Chairman's Office “With an almost superhuman involvement Jirgen Weber ‘was getting in contact with people in onder to make cent that we ere in a serious criss. The explicit articulation of he crisis was one ofthe central eons in the turnaround Anes importa ape wns diesologue with saying in those days: “Sede is rome Weber is colting the people” in Hans Schmitz, Chief Executive of the Lufikansa Technik Logistik GmbH ‘A.ccond implementation measure was the installation «1 specol “redevelopment contolling” under te divec- igo ofthe corporate controller Dr. Peter Hach, This pro- _agi ated at monitoring progress and results concerning epoinel and non-personnel cost-cutting and the Jnbancement of revenues. last but not least, the Exceutive Board appointed @ gyrup of 12 senior managers representing the main depart- jneuts of the company — called the San Team (Sanier- : f uigscam = Redevelopment team). This San Team had the suk of implementing the 131 projects of “Programm 93: {jut the team turned out to be too large and not effective ‘ough Therefore, Jurgen Weber decided to form asmaller ‘ox! move forceful group. The so-called OPS Team (Operations Team) became an important motor in the i B implementation process. It consisted at first of Angelika F likod, head of Cabin Services, Wolfgang Mayrhuber, ‘Tica Director of Lufthansa Maintenance, Matthias flere Senin Manager Personnel anda ete con lo. Later the OPS Team was joined by Dieter Heinen, ht of Sas in Germany. and Dr Chraoph Fra or {neat consultant with experience in various change pro- 1 ssThe OPS Team putin enormous effort and succeeded ‘Seiving ce Programm 93 initiatives into action by defin- ly concrete activities and by constantly monitoring, advis- DBs 01x! supporting the line managers who had the ulti- Zama responstiity for implementation Principles of OPS procedures were: as “We made clear that we would not accept excuses. We weve pte, persistent and unconditional concerning the inplementtion ofthe measures. Compared to const ‘ants and the Executive Board we had an important sahantage: We ew the company and therefore we had 10t only personal networks but we also knew what was ‘eats. We were credible for the people. But the most impostour factor was that we wee siting inthe same boat them. It was obvious thar we did not want to harm 'm but that we were serious becuse we had the same pessnial interest to survive. We did not have a formal icnnchiol empowerment—only the power to convince rp ofthe vital ncesty of fundamental change” — Wolfgang Mayrhuber, CEO Lufthansa Technik AG ‘and former member of the OPS Team ‘inser: Weber showed bis unconditional commitment to ‘he's Team and personally supported all their needs, His ‘vuensteated involvement with the change process was accompanied by various visible actions such asthe Executive Board's waiver of 1096 of their annual slaves in. 1992. In total, about 70% of the 131 projects of Programme 93 were successfully implemented during the turnaround, ‘The remaining 30% were put into action later and imple- ‘mentation was still going on in 1999, Jargen Weber inten- tionally did not insist on immediate implementation of the remaining 30% in order not to risk the consensus with the unions. The absence of strikes and a high level of con- sensus between management and other stakeholders, in particular the labour unions, was a remarkable feature of the Lufthansa crisis management. And the same philoso: phy continued to influence all the subsequent decisions and actions as the change process continued into the 1990, Gorisenssis as. phenomenon of Lufthansa’ sor “Umpementation wally doesn't come eniy at Lufthansa Fiefove pun iniplentent anptting you need @ consensus. ‘Move often an not ue vestive Rourd wuld refs to eck sma it ecnus i dnote sufficed of Jaeger Web, fodtowing that paiey ww noe only achieved a zero uy ese In 4995, tt ago the privatisation of Lufthansa, {he restructuring of one pesian seme, the madeeisation af ous enmpany structs ond-—Hast but not least—a dras- of workforce resulting in a badly needed ase in prviuctiity. These were dramatic changes. or wonld never have occured without the consent of all eoititnent” sins. Ope cl wns the watzpoben pol He dec Implementation of staff cuts was the responsibility of line management. For the implementation of Programm 98 it was important that line managers take responsibility for the process in order to realise the unavoidable cuts, on the one hand, and to motivate the remaining employees, on the other hand, “The mos important factor during this hard phase was credibility. Ths is communication during the eri. The ‘Sying personnel are not only the producing staf but also hhave direct customer contact. $0 they should be well informed and must be loyal-even in hard tintes, This took a lot of energy but was worth —Jtirgen Raps, Senior Vice President Flight Operations and Chief Pilot Certainly the cuts of staff caused problems and some very talented “high potentials’ left the company because of the perceived threat to their prospects and career aspirations, But, there were also many who concluded exactly the oppo- site; they were attracted by the challenge to widen the existing, scope of thinking and action in order to redevelop Lufthansa in spite ofall the ficulties and personal sacrifices needed, CASE 19 LUFTHANSA 2000: MAINTAINING THE CHANGE MOMENTUM 127 “During the crisis it was avery importent experience that working under pressure was aleo exciting. Nobody com: plained. On the contrary, people accepted the challenge ‘nd really gave their est” —Dr. Peter Jansen, General Manager Costmanagement, Programm 15 1993 the first effects ofthe effort were noticeable, Numbers of passengers increased, revenues increased, and costs decreased. In November 1993, 18 months after the crisis management meeting, the first success was reported in press and television: “The crane has upwind pot Lafthanse was quite aware that the super recovery could not guarantee a sustaining success and that 4 more fundamental chenge had to follow. To secure its future, the company had to deal with some broader issues including strategic cost savings, privatisation, and the organisational structure. Ssid Weber: “We have learned our lesson: don't invest in growth counting on ‘tomatic! economies of scale Instead, get your costs down fist, then hit the market ready and able fo fight price war. We have 10 ackieve cost leadership ‘and are not yet there. Tha’ why we need a second phase inthis uarmaround: we can’t reduce personnel or salaries Jurther or else the good people wil leave. So, we have 0 restructure Lufthansa, to create cost conscousntss to ee ‘ate transparency ana to push responsibility and entrepre eurship tothe lowest posible level” At the outset of the turnaround, Lufthansa hed embarked on negotiations with the German government to privatise the airline. One important stumbling block for privatisation was replacing the pension fund “VBL” (VBL—Versorgungsanstalt des Bundes und der Lander) binding Lufthansa to the German state It was extremely Aiffcult to untie these “golden chains.” “There ere many discussions about VBLand it was quite obvious that it was almost imposible to get out ofthese obligations. f someone had asked, 8056 would "You will never achieve thi But we made it —Jochen Hoffmann, Senior Vice President & Executive Vice President Personnel and Labour Relations, Deutsche Lufthansa AG In May 1994, the problem of the pension fund was resolved. The German government diluted its holdings to 3696 and agreed toa payment of DM 1 billion into the VBL to cover disbursements to present retizees as well as to offer an allowance and guarantee for constituting a separate Lufthansa pension fund. In 1997, Lufthansa became fully privatised. 128 CASE 13 LUFTHANSA 2000 MAINTAINING THE STRATEGIC COST SAVINGS — PROGRAMM 15 ‘Asa private company, Lufthansa experienced in egy Pressure to be competitive and strategically cost ein ‘This pressure became even more acute because ofthe gr tinuing decline of yields (average proceeds per tcke sh driven by strengthening price competition within the a line industry and a threat of substitution by other wag, por alternatives (primarily high speed trains). Asa yrsy gic answer to these developments Lufthansa continued, transformation process and started “Programm 15, Programm 15 Progeemm 15 was & wide-ranging strategic cost mate ‘ment: programy designed to mak Fatihanst more compet. itive through cost management and cultural change "ye propean’s goals included: Improv reduction 1 biternationatsation of cost stnctare and i the competitive position through cost BH Making, staf at every fevel highly cost-conscious sid cost-effective in thei dally work. The number 15 stood for 15 pfennig per KO ("sett kilometers offered”; the cost target for transporting dnt aircraft seat one kilometer) Lufthansa intended to rel its costs from 17:7 pfennig in 1996 to 15 pfennig in 2001 ‘This implied an overall cost reduction of 20% withia Live years (486 annual reduction all over the Lufthansa Grou All Lufthansa departments and companies were effected: Like the OPS team that monitored and maintained progress on Programm 93, a Programm 15 team wat but} Place and it worked with certain principles that were liv tinctively applied making use of the experiences ‘turnaround: he rules of the game for the Program 15 team BB Wecontron! contentions sues We eat wey 8 BE Weweter fets not popu, 5 Welet uursetes be monitored whenever requiced We inform continvously sid eutrentytogether si the esponsible depaetaaent w employees and ther repre i tives before the external public. a infaree manage We utilise informal networks to ensure inerd ‘mental and hierarehy-oveelapping communis 8 Wetry to.void catchphrase and sell-overestinns = HANGE MOMENTUM + 18-was based on integrated responsibility I Fine managers had the responsibility for cost reduc ions whieh meant that the achievement of Progeanum 15 twas Integr tt within rheit “normal” managemsent objec tives aad was part of their performance expectations. fxamins 15 consciously set stretching goals which were hallenging but achievable, Concerning the goals, na com- pvnuises were made, but the Programm 15 team con- ste Tine management about the means of cost savings tnd tried to solve problems through open and honest dis- ‘assion with those who were responsible for implementa- tion. A tight monitoring and public sharing of results {actual performance data for each individual manager ‘vere published regularly) ensured accountability and con- tinwous feedback ‘Programm: 15 had 19 take into account some issues that could be calle ‘ypically Lufthansa? One ofthe character= ite features of the “Tafthansa styl’ isthe specific combi- nation of consensus orientation and persistence. Nobody ‘aes to force certain solutions ana people axe willing 00 mmpromise but only in terms ofthe way of gol achieve- ‘mot, not concerning the goal itsele” — Dr. Peter Jansen, General Manager Costmanagement, Program 15 ‘Wo preserve discipline and attention to strategic cost {goals Programm 15 initiated @ number of both symbolic ‘inl substantive measures. Those included, for example, the {ocation of its office next to the office of Jigen Weber, dis- cisions of cost reduction measures in Town Meetings, iwgokly reports in the “Lufthanseat” (the staf journal), and widespread publicity for a few well-selected impressive ‘CORPORATE RESTRUCTURING ‘At the beginning of the 90s, Lufthansa was functionally ‘organised with six departments (finance, personnel, main tenauce, sales, marketing, and flight operations) each led bya member of the Executive Board (Appendix 2). this structural solution turned out to be inefficient shovring symptoms such as high involvement of top man- sgement in operational problems, slow decision processes, luck of accountability, low transparency and, finally, an insufficient market proximity. These problems were ‘baaced by developments in the external environment: wilines were more and more confronted with time-based sonipetition, price competition, and a need for trans pareney of products and services. Liles, realised that it could not effectively respond. whe emerging competitive challenges with its existing CASE 13 LUFTHANSA 2000 functional structure, The goals uf Lufthans’s restructuring process thereto both market proximity and transparency of costs and proceeds, and fragmentation of decision processes. The guiding behind the restructuring as that Lufthansa would be ore successful asa federaive group of independent small units than as a monolithic functional block Lufthansa considered various organisational alterna- tives, both in terms of how to break up the integrated oper: ations into smaller, self-contained units and the specific legal and administrative structures for governance ofthese units. The key criteria for choosing among these alterna- tives included detailed assessments ofthe strategic scope of each business, their needs for entrepreneurial freedom, responsibility and accountability, the role of third party business and the nature ofthe resulting internal customer- supplier relationships. Finally three business areas were formally separated as legally autonomous and strategically independent subsidiaries: LH Cargo AG (airfreight), LIT Technik AG (technical maintenance service) and LH Systems GmbH (IT Services). These joined the existing subsidiaries CityLine (domestic Sights), Condor (charter flights), and LSG Sky Chef (catering) At the same time the tasks and responsibilities of the Executive Board were rede- fined by strengthening their strategic focus and giving the core business “Passenger Service” (so-called “Passage”) a stronger weight. Persistence with the idea of decentralisation led Lufthansa in 1997 to further operational independence of Lufthansa Passenger Service—the original core ofthe for- mer airline company “Lufthansa.” With 26,000 employees. including 12,500 flight personnel in the cockpit and cabin, Lufthansa Passenger Service was restructured as a Profit Centre, to be led and directed by a six member Management Board. While tax and landing slot considers- tions prevented the Passenger Service business area from. becoming a separate legal entity, this restructuring clearly separated the business from day-to-day influence of corpo. zate top management. In 1999 the Lufthansa Group Management Board directed the activities of the entre Group through three cen- tral functions: the Chairman's Office and the Finance and Human Resource Management functions (Appendix 3). BUILDING A STRATEGIC NETWORK—STAR ALLIANCE Apart frorn the focus on internal costs and structural rede- velopment, Lufthansa constantly worked on its external relationships. Having experienced extreme overcapacities by following the philosophy of “growth through own MAINTAINING THE CHANGE MOMENTUM 129 strength,” it decided to choose an alternative strategy: “growth through partnerships. Lafthansa was one of the central founding members of the most comprehensive and probably the most competi tive airline network in the world, Since April 1999, when Air New Zealand and Ansett Australian joined the STAR ALLIANCE, the network included 8 members operating in 720 destinations in 110 countries (Appendix 4). In October 1999, ANA (All Nippon Airways) joined the STAR ALLIANCE. This was an important step for the Asian expansion strategy ofthe alliance (Appendix 3) CHANGING PATTERN OF COMPETITION IN THE AIRLINE INDUSTRY ‘The STAR ALLIANCE started functioning in May 1997. By 1999, three other global alliances had emerged: Oneworld, Wings and Qualiflyer (Appendix 6), With the launch of Oneworld in February 1999 competition in the airline industry had taken on a new dimension. This new alliance had five founding members, a common logo and shared the STAR ALLIANCE vision of seamlessly linking the part ner airlines’ route networks, Lufthansa believed that the Anglo-Saxon culture binding the Oneworld partner aiz- lines could facilitate mutual understanding end shared

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