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A Crack Navigator And Lufthansa Is Back On Course


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A CRACK NAVIGATOR--AND LUFTHANSA IS BACK ON COURSE

CEO Weber is paring costs, preparing for deregulation--even cutting fares

German travelers are delighted: Lufthansa is offering them a good deal. Passengers willing to meet certain restrictions can soon fly tourist class to Munich's Franz-Josef Strauss Airport from Cologne or Hamburg for as little as $62 one way, down from $121 now. That's about the same as cab fare for the 45-km ride from the airport into Munich. The new service, dubbed Euro Shuttle, will offer 20% discounts to the briefcase brigade of regular business travelers and will eventually branch out elsewhere in Europe. Euro Shuttle will also feature faster ground service with self-service check-in.

It's an innovative plan from an airline long known for its stolid ways. But Chief Executive Jurgen Weber, a 53-year-old engineer and former head of technical services, has transformed the German national carrier into a different kind of company. In less than three years, he has coaxed Lufthansa's unions into accepting deep staff cuts, lopped off unprofitable routes, signed a major alliance with United Airlines Inc., initiated Euro Shuttle, and paved the way for Lufthansa's liberation from government control. The reforms should soon restore profitability to Lufthansa after years of losses.

NEW RIVALS. But if Lufthansa is an airline transformed, so is the market it operates in. By 1997, all European Union airline markets will be fully deregulated, opening the field to pesky upstarts and powerful giants itching to muscle in on one another's home turf. Already, British Airways PLC has an affiliate in Germany, Deutsche BA, which flies domestic German routes and vows to match any fare cuts by Lufthansa.

As Lufthansa prepares for this new era, Weber has a bleakly simple formula for survival: "Our people," he says, "have to work more for less money." That idea was alien to the company culture when he assumed command on Sept. 1, 1991. The airline had a bloated payroll, too many planes operated by featherbedded cabin and cockpit crews, and too few passengers. It posted a record $280 million loss that year. It seemed destined to remain on permanent life support from the state.

That was a future Weber didn't want, even if his main shareholder, the federal government, had been ready to bankroll it--which it was not. His biggest challenge was to convince Germany's militant and powerful labor unions that they did not want it either.

So Weber presented Lufthansa's plight as one of bankruptcy in short order without

a radical makeover, says Manfred Martzke, a top negotiator for the Public Service & Transport Workers' Union and a Lufthansa supervisory board member.

The unvarnished truth worked, as did Weber's direct manner. Says Martzke: "He is credible, honest, and a Lufthansa man to his fingertips." In August, 1992, Weber won a wage standstill of one year--"the first company in Germany" to do so, he points out. Then he cut a deal to slash his payroll by 8,400 people from 48,100.

BIG ISSUE. Later, Weber coaxed unions into letting him set up Lufthansa Express, a forerunner of Euro Shuttle, with 20% lower pay for crew. It was a key to Weber's turnaround, because it established that the Lufthansa labor contract wasn't set in concrete. "We got new work rules, which resulted in higher efficiency and more flexibility," says

Weber. The Lufthansa chief rounded off the cost-cutting by replacing nearly 10% of the fleet with new planes of a size better suited to handle Lufthansa traffic profitably.

After cutting operating costs by nearly $1 billion, Lufthansa should report a profit this year of some $140 million on sales of $11.5 billion. The Bonn government has also boosted the airline's fortunes by agreeing to assume some $1.4 billion in pension obligations, a burden that, says one Frankfurt banker, "would have bankrupted Lufthansa." With the airline basking in good news, Lufthansa shareholders meeting on July 6 should approve a new stock issue to raise $1 billion for the airline. In a separate move, the federal government plans to slash its stake in the carrier to about 38% this fall, from 51.4% now. The government eventually will sell all its shares, leaving Lufthansa as a stand-alone company.

CONTRACT PLAYERS. That's not to say Bonn will stop running interference for Lufthansa entirely. In a new air treaty with the U.S., it wangled a provision blocking carriers from adding new flights on key transatlantic routes through 1997. The same treaty clears the way for cooperation between Lufthansa and United. One big gain for Lufthansa: code-sharing, whereby passengers on Lufthansa flights from Germany can transfer to UAL planes operating under the same flight number in the U.S. The arrangement will increase U.S. destinations served by Lufthansa to 40 by yearend, from 10 before the alliance, and enable the two airlines to forge a strong U.S.-Europe-Asia global linkup.

With managements at Air France and Alitalia only now facing up to painful restructurings, Lufthansa's transformation stands out as a model. Now the challenge, says Chris Avery, aviation analyst at Paribas Capital Markets in London, is "to reduce costs not just once, but to keep on doing it." To achieve that goal, Weber is forcing stricter accounting so that all costs--from maintenance to catering and data processing--will be precisely known and better controlled. If it turns out that in-house operations are significantly more expensive than they should be, Weber would eventually like to invite in lower-cost outside contractors to run all of Lufthansa's services except the core airline operations.

Such a move could result in a clash with the unions, which insist that Weber pledged to find only "internal solutions" to Lufthansa's problems. Bad union trouble, coupled with some tough fare wars, could certainly unsettle the flight plan. But for now, Weber's Lufthansa is looking like one of the scrappiest competitors in Europe's new skies.

THE NEW

LUFTHANSA

PRIVATIZED

A sell-off this year will reduce the government's 51.4% stake to 38%, which will be sold later

SLIMMER

Won labor union agreement to slash employment by 17% over two years

MORE COMPETITIVE

New no-frills shuttle service across Europe will offer cut-rate fares

PROFITABLE

Expected to earn $140 million this year, after losing $580 million since 1990

DATA: PARIBAS CAPITAL MARKETS, BUSINESS WEEKJohn Templeman in Cologne


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