Lufthanas: Challenges for the Future
Keywords: lufthansa problems, lufthansa recommendations
This case report aims to identify some issues and problems Lufthansa faces and the causes of and possible solutions to those problems. Specifically, I discuss the cost cutting and employee diversity problems and offer some possible solutions to them. Note that most information in the report is from the case documentation from the CEO of Lufthansa.
Problem identification and analysis
Air industry appears to be a glorious industry, but the industry as a whole has been suffering from financial problems. Specifically, the case documentation says the air industry has never made enough profits to cover its cost of capital over the business cycle since as early as the Second World War, particularly after the deregulation. Liehr et al (2001) argue that “the airline market is a highly cyclical business with relatively poor returns on invested capital”. Fortunately, Lufthansa is one of the three airlines in the world with its debt rated as investment-grade. However, despite the fact that Lufthansa being one of the few profitable airlines world widely, it still faces some problems in its process to go global. Luckily, in the previous crisis, Lufthansa weathered the storms successfully relying on its own strengths (Bruch and Sattelberger, 2001). Moreover, as the case documentation says, mergers and acquisitions across many nation borders in the air industry are not available, or sometimes even not legal. Pitelis and Schnell (2002) find that mobility impediments still exist despite the removal of regulatory mobility barriers. So airlines tackle the problem by forming alliances to go global. Lufthansa is no exception. Lufthansa currently is an important member of the largest airline alliance in the world, the star alliance. However, alliances bring complexity as they have no hierarchical conflict resolution mechanisms which individual airlines have.
The air industry has been negatively influenced by the recent economic and political developments, such as the 9-11 and the rising oil prices. According to the case documentation, the increasing oil prices make fuel costs the second highest cost category per sea kilometer for European airlines, accounting for 26 percent of operating costs. Although Lufthansa has been very successful in cutting costs as its cost base has been cut by about 40 percent in spite of rising wages, security and airport fees and the roller coaster of fuel prices (the case documentation), Lufthansa still needs to further cut costs to ensure case flow, particularly fuel costs and labor costs.
As joining an alliance seems to be a good way, or sometimes even the only available one, to expand its presence in the world without making investments in an economically unsustainable way, Lufthansa endeavors to expand its business via the world’s largest air alliance, the star alliance. However, managing an alliance is much more complex than managing a single company, particularly as Lufthansa is said to be the leader and integrator of the star alliance. One constant debate is about the alliance members’ independence and the demand for common processes (in IT and quality insurance particularly). Another one is regarding the needs and expectations of global customers. So far, the management team of Lufthansa aims to stay neutral in alliance members’ affairs and build the image of a dominant force. As developing being a member of the star alliance, Lufthansa manages to accept 80 percent workable solutions and accept solutions that might work against its optimal interests or values. The airline alliance make passengers better off (Park and Zhang, 2000), and it also brings benefits to Lufthansa as according to the case documentation, the airline company earns approximately ï¿¡500 million per year due to the star alliance. The membership of the star alliance benefits Lufthansa’s international business mostly. Lufthansa created “Lufthansa Regional” to develop its regional business. Compared to Lufthansa’s core fleet, Lufthansa Regional requires a lower cost framework. Lufthansa has taken several methods to cut and control costs such as lower wages, smaller planes and lower service standards compared to its core fleet and so on. Besides, Lufthansa benefits from the “feeder function” to intercontinental flights and the density of the connections. However, in spite of the soundness of the business logic of Lufthansa Regional, the idea actually leads to the “two-class society”, which then leads to some kind of friction or tension among employees and in some cases among customers.
Lufthansa, being a German company, used to be well known for its strong culture which was partly due to its engineering excellence. Nowadays, about one-third of its workers are foreigners. Consequently, Lufthansa enjoys the diversity of cultures, which are shown in different interests, perceptions, communication channels and expectations held by employees. Hence, human resource management ought to pay special attention to unionize all employees to work together towards the company’s targets.
The airline industry is being challenged by a completely new dimension – global warming. Environment protection has become an increasingly serious and important issue in the entire world. Besides, fuel for airlines has not been taxed yet, but the situation is likely to change in the future. Therefore, Lufthansa faces future possible increase of costs.
Statement of key issues and problems
Although several problems or issues have been described or discussed in the above section, I am not going to suggest possible solutions to all of them partly because of the limited space of this report. On the contrary, I am going to discuss only a few major problems in further details in the remainder of this case report. Specifically, in my opinion, Lufthansa needs to go further in the road of cutting costs specially to ensure cash flow. The challenges from previous business cycles have made Lufthansa pay special attention to financial disciplines and learn to focus its cost cutting on the cash flow impact. However, cost cutting requires further attention and efforts. Besides, further efforts are also demanded on the revenue side. Furthermore, as Lufthansa enjoys increasingly diversified employee base, I think Lufthansa ought to work out a way to combine all its employees and provide sufficient initiatives.
Generation and evaluation of alternative solutions
There are several ways to cut costs. For example, Lufthansa may take a relatively more conservative way in employee wages and service standards. It is a rather direct way to reduce costs, but I think it is a short-sighted way because lower wages and lower service levels will ultimately drive good employees and customers away respectively. As Lufthansa has been decentralized as a holding company with six business lines, such kind of organization might inevitably have some organizational overlaps. Therefore, Lufthansa ought to avoid any duplication of functions in the organization to minimize costs, or even go through some kind of reorganization to streamline its business model. But improving the business structure is a relatively time consuming plan and particularly demands good visions from the management team.
The diversity of employees requires special attention from Lufthansa management and the management team can tackle the problem from several different perspectives. For example, Lufthansa can improve the communication channels among employees and between employees and managers. In this way, employees can better understand the plans of Lufthansa and thus are more able to work towards targets. However, sometimes some information cannot be shared among all workers and then information asymmetry might lead to misunderstanding. Besides, employees may have different targets. Another possible way to manage diversified cultures is to provide continuous training and education to employees so that staff can improve their abilities and put company interests above cultural differences. However, some cultural differences cannot be easily made up.
In my opinion, there is no single method to solve the above problems. On the contrary, several different methods ought to be employed together to achieve maximal effects. As to cost cutting solutions, I think simply cutting staff wages and customer service levels is not a reasonable way because it will no doubt damage the reputation and the viability of Lufthansa. I believe streamlining the business model to improve the efficiency is a better solution to the problem.
Regarding the culture diversity in employees, I think Lufthansa can employ the measures discussed in the above section together in order to achieve the best results. Without those measures, the business may not go smoothly enough. For example, Bulow et al (2006) find that employees were not willing to embrace the purchasing new role and others simply did not have the required capacity. In such a case, no matter how good the plan is, they could not achieve the results. People are the ultimate key to Lufthansa’s success so human resource management is vital to its business. As Lufthansa did in the past, they relied on people to succeed (Bruch and Sattelberger, 2000). In a word, Lufthansa should respect the difference in its employees and drive them work to the same goals at the same time.
In order to reduce costs first a detailed plan should be made out. Lufthansa should first list all the departments that may have duplications. Then according to the list, Lufthansa can decide which departments can be cancelled or combined with others. Through this process, Lufthansa can improve its efficiency and cut any unnecessary departments to reduce costs.
Regarding managing its employees, Lufthansa can organize meetings or talks to share the company’s plans with its employees, such as the ongoing “town wall” meetings. Moreover, continuous training and education are necessary for employees to feel appreciated by Lufthansa and then can be devoted to the company despite some differences.