ANALYSIS: Chief's departure untypical of Lufthansa

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Christoph Franz’s unexpected decision to step down as Lufthansa chief executive in 2014 appears to reflect deep divisions within the airline group.

Certainly, his departure after just one term – before the planned end of his signature three-year restructuring programme, Score – is untypical of the German flag carrier.

Instead of renewing his Lufthansa contract, which expires on 31 May 2014, Franz will become executive chairman of Swiss pharmaceutical group Roche. He has been board member of the Basel-based chemical giant since 2011.

Franz will leave Lufthansa after less than four years at the airline’s helm. He succeeded Wolfgang Mayrhuber as group chief executive in January 2011, having previously been responsible for Lufthansa’s passenger arm. But persistent opposition from staff to his rigorous cost-cutting plans and management style may have played a part in Franz’s move, along with a wish to spend more time with his family: his home is in Zürich, and he has five children.

Lufthansa chief executives have traditionally served for much longer: Mayrhuber led the group from 2003 until 2010, and his predecessor, Jürgen Weber, had been at Lufthansa’s helm since 1991. Both managers had spent their entire careers at Lufthansa – having started as engineers at the carrier’s MRO division – and later became chairmen of the supervisory board. Franz, now 53, also started young with Lufthansa, after completing his industrial engineering studies in 1990, but he did not pass through the operational or technical ranks as his predecessors did; and he is arguably less steeped in the airline’s corporate culture as a result.

Part of Weber’s team between 1992 and 1994, Franz then left the company to work for German railway operator Deutsche Bahn. He returned to the aviation sector as chief executive of Swiss International Air Lines in 2004, before that carrier became part of Lufthansa.

While Lufthansa has a long history of efficiency programmes, Franz’s current Score scheme – which aims to improve the group’s annual operational profit from €820 million ($1.1 billion) in 2011 to at least €2.3 billion by 2015 – has met with particularly strong opposition from employees.

Planning to save around €920 million, Lufthansa’s passenger arm is to generate the bulk of the targeted €1.5 billion of profit improvement to be realised by the end of next year. Management wants to slash around 3,500 administrative jobs, while the group’s operating margin is to increase from 3.4% in 2011 to 7-8% in 2015. Some analysts consider this unrealistic for a legacy network carrier.

The most obvious measure thus far has been Lufthansa's transfer of European traffic outside its Frankfurt and Munich hubs to low-cost subsidiary Germanwings, with the long-established main brand disappearing from the routes in question.

This followed an operational transfer from wholly owned Austrian Airlines to that airline's regional arm Tyrolean Airways in 2012. This slowed down pay growth rates for pilots and cabin crew, although the Alpine flag carrier's brand remained in place. However, the legality of the Austrian move has since been called into question by a Vienna court.

Lufthansa’s own operations were temporarily crippled in August and September 2012, when flight attendants went on strike after months of failed pay negotiations. The airline eventually managed to reach a deal for the approximately 18,000 cabin crew members and avert walkouts at Germanwings.

Reaching a labour agreement with Lufthansa’s pilots might be harder, however. The pilots are in no mood for compromise, complaining that they have suffered real-terms salary losses over the past five years, whereas the airline registered a net profit of nearly €1 billion in 2012. Negotiations with management are technically under way, but have not made any progress for some time.

German pilot union Vereinigung Cockpit (VC) has accused management of creating a false picture of Lufthansa’s financial situation and using fear as an instrument to make employees more co-operative. While Franz has argued that the Score savings are necessary to afford new aircraft and product improvements, VC counters that the airline is financially strong enough for the investments without making employees pay for it. For example, cash flow grew over 20% to a near-record €2.8 billion in 2012, while liquidity stood at nearly $5 billion, more than twice as much as Lufthansa’s own target, the union says. It adds that the cutbacks are instead directed at improving profitability for the benefit of shareholders and investors.

The argument about sufficiently sound finances for future investment seems to be supported by Lufthansa’s latest aircraft acquisitions. In December 2012 – less than a year into the three-year Score programme – Lufthansa was confident enough to order 100 Airbus A320s. Soon thereafter, it added two A380s and, for Swiss, six Boeing 777s, while the group is now negotiating a widebody deal to replace Lufthansa’s A340s and 747-400s.

Franz’s plan to restructure the European network in the face of growing competition from low-cost carriers and order replacements for Lufthansa’s ageing widebody fleet have found wide support among staff. The decisions were long overdue and arguably should have been made by Mayrhuber.

However, Franz’s confrontational management style and his argument that Lufthansa’s long-term future depends on deep cost-cutting and staff sacrifices have drawn criticism. VC says that the employees' trust in the senior management has been “severely damaged by the mantra-like repetition” of the Score assertions in what the union calls a “fear campaign”.

With Lufthansa’s previous leadership changes, succession plans were put in place early, but Franz’s departure revelation has caught observers – both within the group and outside – by surprise. It is not clear who will succeed Franz at the helm.

Carsten Spohr, chief executive of Lufthansa’s passenger arm, is a likely candidate. He started with Lufthansa as a pilot, but has had managerial roles since 1994.

Swiss chief executive Harry Hohmeister has also been named as a potential successor for Franz. Hohmeister joined Lufthansa’s executive board in July, where his duties include responsibility for subidiary airlines and logistics. He also chairs Austrian’s supervisory board.

A successor for Franz will be appointed by Lufthansa supervisory board, which has its next meeting on 18 September.