Lufthansa and the German Reputation for Efficiency

Lufthansa is still mostly German-owned, but it varies.

The adjective "German" evokes mostly positive images in the minds of modern consumers: efficient, high-tech, and even lovable. While the first two are well-established parts of German renown for engineering, the third is somewhat newer as recent BBC and GfK polls have shown Germany cementing its grip as the world's best-loved country. In large part Germany's popularity is attributable to excelling in nearly all fields of human endeavor: From selling name-brand manufactures ranging from apparel to automobiles; punching above its weight in sports by winning the World Cup in 2014 for the fourth time for instance; and generally acting as a good global citizen, Germany excels. (Although the Greeks may take exception.)

Then we come to Lufthansa. The airline industry should fascinate IPE scholars for two reasons: First, the industry is truly a globalized one impacted by fuel costs, jetliner acquisitions, and international competition. In recent years, I have discussed the emergence of low-cost airlines and Middle Eastern carriers alongside mixed fortunes for flag carriers--most notably the crisis-hit Malaysia Airlines. Today, unfortunately, the mantle falls to Lufthansa. The deliberate crash of one of its low-cost affiliate's jets by a suicidal co-pilot has brought it to worldwide attention. However, like Malaysia Airlines, trouble was already brewing beforehand:

But Lufthansa has been criticised for its apparent ignorance of co-pilot Andreas Lubitz’s previous history of severe depression — a problem that worsened on Tuesday when the airline conceded that Lubitz had told its pilot training school about his condition in an email. Lufthansa can ill-afford that kind of bad press as safety is the cornerstone of its brand. “They are potentially vulnerable in the short term to the as yet unproven allegation that something went wrong in pilot selection and care," says Mr Grossbongardt.

Even before last week’s horror, that reputation for reliability had taken a knock. As a result of 15 days of strikes, Lufthansa had to cancel 8,600 flights last year at a cost of €222m, about half of which the airline attributed to lost future bookings. In the week before the Alps crash, pilots had gone on strike for an additional four days in a row. Management wrote to customers to apologise.

Lufthansa does not yet know whether the strikes will have a long-term affect, nor has the airline published any data on bookings in the wake of the crash. But the company — which spans the no-frills Germanwings and Eurowings carriers plus cargo, maintenance and catering units — last year fell to a €732m net loss under German accounting rules. Net debt doubled to €3.4bn and it was forced to scrap its dividend for the second time in three years.

The crash has negatively affected the airline's image and profitability, but there's more. Like Malaysia Airlines, Lufthansa needs to deal with "legacy" costs in the form of fat pensions. Competition is also intense from budget carriers Germanwings was partly meant to compete with. In effect, Lufthansa is squeezed from above and below. From below you obviously have the low-cost, no-frills carriers offering competition on European routes. From above, you also have Middle Eastern carriers on international routes with the advantage of being situated in the region between Asia and Europe offering intense competition not only on fares but also on the quality of service (including frills like limousine services):

This loss partly reflected higher pension liabilities but Lufthansa’s chief problem remains tough competition. Having underestimated the challenge from budget carriers Ryanair and easyJet, it finds itself being undercut on long-haul routes to Asia by the Gulf carriers.

Lufthansa hoped a cost-cutting plan that included shedding 3,500 administrative jobs (3 per cent of group headcount) would help transform its fortunes. But while the programme led to a €2.5bn gross improvement in Lufthansa’s results between 2012 and 2014, those savings were eaten up by cost inflation and lower fares.

With revenues stagnating, the airline has frozen the size of its fleet, even as the world aviation market continues to grow. “Our most important priority, apart from safety, is our future viability,” Mr Spohr told shareholders last month, before the crash.

Even for this proud German carrier, profits don't come easy. What can I say? It's a tough industry where nobody cares what your home country is.