Cost-Cutting at Lufthansa German National Carrier Undergoes Mass Restructuring

The CEO of German flag carrier airline Lufthansa has been forced to make cuts in the face of growing losses. With the restructuring, Christoph Franz is dismantling the legacy of the company's former CEO and future supervisory board chairman. Is he steering directly into a conflict?



April 23, 2012 may well go down as an important date in Lufthansa's 57-year history as the start of a cultural revolution. Early last week, employee representatives at the airline's budget carrier subsidiary Germanwings first received internal news as to how their CEO Christoph Franz envisions the near future.

In an attempt to finally turn a profit in the difficult business of German and European air transportation, Lufthansa is planning to establish a new, particularly low-budget business for these flights under the project name "Direct4U." The project is scheduled to launch by the end of this year, operating under the Germanwings license and serving all European short- and medium-haul flights that do not depart from Lufthansa's main hubs in Munich and Frankfurt.

Germanwings is to contribute 35 Airbus A319 planes, and Lufthansa will provide another 35 aircraft from the A320 family, with the remaining 20 planes coming from the company's regional branch, Eurowings. Whether this unified fleet will bear Lufthansa's flying crane image or the Germanwings logo won't be decided until the fall of 2013 at the earliest, nor has the location for the company's headquarters been decided.

But one thing is clear. The company's upcoming annual meeting on May 8 will likely see heavy debate not only over the new budget airline platform, but also on another pressing question: Who should lead Lufthansa's supervisory board?

Up to now, that role belonged to Jürgen Weber, a former Lufthansa CEO. Weber, 70, plans to retire in May 2013, and he already knows who he wants to take over the reins: Wolfgang Mayrhuber, 65, the same man who also succeeded Weber as CEO.

Mayrhuber, originally from Austria, stepped down as CEO of Lufthansa in late 2010 and is currently supervisory board chairman for Infineon Technologies. He is also a member of the supervisory boards for BMW and insurance giant Munich Re, as well as for two Lufthansa subsidiaries.

'People Are in a State of Panic'

The agreement not to have Mayrhuber succeed Weber until another year has passed was a carefully planned one. For him to do otherwise would violate the rules of corporate governance, which require a two-year cooling-off period before a former CEO can join a supervisory board, so that these managers can't block changes to corporate policy from their position on the board. But Mayrhuber's example shows just what bizarre configurations that well-meaning regulation can bring about.

Since Mayrhuber left Lufthansa, his successor, Franz, has been making changes to this long-established company at a dizzying pace. Franz, 51, and Carsten Spohr, 45, CEO of Lufthansa Passenger Airlines, have divested many shareholdings bought under Mayrhuber, pushed through cost-saving programs and reversed previous decisions concerning staff and products, as if trying to stake their claim in as many areas as possible before the former CEO returns as chairman of the supervisory board.

During the first three months of 2012, Lufthansa posted a loss of €381 million ($500 million), compared to a loss of €169 million during the same quarter a year earlier. But revenues have risen so far this year by 6 percent, to €6.6 billion. The company has blamed rising fuel costs for the increased losses.

On Thursday, the company announced it planned to eliminate 3,500 administrative positions globally out of a total of 117,000 employees. Last month, Lufthansa sold its British Midland International (bmi) subsidiary to International Airlines Group, the parent company of British Airways. The company also closed down its Lufthansa Italia subsidiary in 2011 after only a few years in service. Lufthansa has also said it wants to sell its money-losing Chinese joint venture Jade Cargo.

"People are in a state of panic," one long-term employee at Lufthansa's operations base in Frankfurt says, describing the mood among the company's staff.

One company spokesperson refutes the charge that Franz and Spohr are looking to make preemptory changes and then present their former boss with a fait accompli. Mayrhuber has been "included completely" every step of the way, the spokesman insists.

'It Would Be Better If New Chairman Came from Outside'

But the breakaway path Franz and Spohr are taking can be seen most clearly in the example of Germanwings. "A bit of uncontrolled growth is necessary," Mayrhuber once said in defending Lufthansa's wide range of offerings and his desire to give the company's subsidiaries a high degree of autonomy. But that approach is now a thing of the past, with Franz and Spohr consolidating everything they feel should be consolidated and paring down the company's product range.

As a result, several members of the Lufthansa supervisory board believe making Mayrhuber chairman of the board will be a very hard sell. "These guys are laying his legacy to waste, and I believe it would be better if the new chairman came from the outside," one board member says.

A second board member takes a similar view, offering this straightforward analysis: "What we're currently experiencing is a renunciation of the Mayrhuber doctrine." A third member considers Mayrhuber's credibility already "very much called into question."

Support for Mayrhuber, on the other hand, comes from a respected employee representative, who says one shouldn't forget that the executive and supervisory boards "participated in and approved" all these decisions.

Mayrhuber himself declined to make a statement last week, but his mentor, Weber, expressed his opposition to the supervisory board members' position in an internal memo, informing the board that he would "adhere to the planned course of action" and that his "personal wish concerning Mr. Mayrhuber's role" remains unchanged. In other words, he still intends for his protégé to join Lufthansa's supervisory board in May 2013.


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