Lufthansa's next chairman Wolfgang Mayrhuber brings a new lightness of touch to the group's management style
You do not have to spend long with Wolfgang Mayrhuber to realise why there is so much talk about the changing management culture at Lufthansa. His easy, approachable style is well in evidence walking around his old stomping ground in the maintenance bays in search of an interesting photo opportunity. Mayrhuber is keen on emerging from the cockpit escape hatch of one of the row of Boeing 747s. At no time is there the faintest hint of the stiffness or hauteur for which Lufthansa management was once legendary.
Yet if Mayrhuber, an Austrian by birth, represents a new wave of management, then it is one that has been generated within the airline itself. Like much else at Lufthansa, the talk is of evolution rather than revolution. Mayrhuber's own career was "born and bred" in Lufthansa, starting typically enough in engineering. He began in the Hamburg engine overhaul plant more than 30 years ago and eventually came to head technical operations. In the mid-1990s, when the unit emerged as the standalone Lufthansa Technik business, Mayrhuber became its chairman. This background perhaps explains his ease on the maintenance shop floor, and his undisguised enthusiasm for technology.
Mayrhuber makes no apology for an engineering background in an airline world where finance and marketing more often seem to rule. Rather, he argues that the complexity of running a dynamic airline network can make good use of the skills learned by an engineer. In both cases, the aim is to bring together a mass of different processes and materials to work as an efficient whole. For an airline, those materials are its people, but the same fundamentals apply and the overall operation will only be as strong as its weakest links. He adds that it is like conducting an orchestra.
Chairman elect
Over the last 18 months, Mayrhuber has had the chance to conduct Lufthansa's passenger business. After a surprise boardroom shake-up towards the end of 2000, Karl-Frederich Rausch was ousted as president of the core Lufthansa German Airlines, and Mayrhuber emerged as his replacement. Then, earlier this year, Lufthansa came under mounting pressure to name a successor for Jürgen Weber, who has dominated Lufthansa for over a decade, but must stand down next year. So in April Mayrhuber was duly appointed deputy chairman and effectively anointed as successor.
Weber is officially staying until the end of next year, having once already had his tenure extended by two years. But there is much speculation that he may in effect hand over before then. In the meantime Mayrhuber makes it clear that Lufthansa's current "clear strategic vision" remains firmly in place. He has kept his old functional office at the heart of the passenger operation, alongside planning and pricing, rather than leave for the executive block. In any case, he is quick to add, anything could happen in the meantime. "We are stable, but we never stand still, it's a dynamic business, its exciting," he says with a twinkle in his eye that suggests that he would not have it any other way.
Colleagues warn, however, that despite his lightness of touch, Mayrhuber can be "very determined", and there are occasional flashes of steel beneath the charm. Overall, the impression is of a team of managers who are comfortable working together and, at least for the present, quietly confident of their abilities. Karl-Ludwig Kley, who joined Lufthansa as chief financial officer (CFO) four years ago from the chemical giant Bayer, remarks on the level of understanding that already exists within the board.
It was not always so. When Weber came to head the group in 1991 in the midst of the Gulf War crisis, Lufthansa was flying close to the edge with heavy losses and little sense of direction. It needed a dose of tough, uncompromising leadership and some radical surgery for an organisation which at times seemed to live up to its stereotype as the flying arm of the German civil service. Weber, aided by his equally formidable CFO Klaus Schlede, set about providing the required grit, dragging the company back from the brink and through the final stages of privatisation. As Weber himself remarked at the time, he hails from Schwabia, an area of southwest Germany known for its straight talking and thrift. He is also renowned for getting quite intense at times when fighting his corner.
Although, outwardly, his style could not be more different, Mayrhuber at 55 is only six years Weber's junior, and both men have followed remarkably similar paths to the top. Weber too is an engineer who worked his way up through the group's technical arm. And back in the Gulf War crisis, it was Mayrhuber who was chosen to head a team of six executives charged with seeing through Lufthansa's restructuring and privatisation: "You learn more by managing a crisis than running a going concern," says Mayrhuber.
Lufthansa had been coasting, with a 40-year track record of constant profits and revenue growth. "All of a sudden we were hit, and much harder than the rest," says Mayrhuber. In part, that was due to the bubble created by the distraction of German reunification which had delayed the full force of the crisis. When the downturn did catch up, the airline was not prepared.
"We had to ask why it had happened, and tackle the root causes," says Mayrhuber, adding that it was essentially "an engineering approach" designed to examine and fix a failure. In those fixes, lie the group's subsequent strategy and its robust response to the 11 September crisis a decade later.
"It made us look very thoroughly at why we didn't have the sensors out there to pick up and react," he says. The solution was to move profit and loss responsibility further down the company and ultimately to create a structure which saw Lufthansa progressively set up its engineering, cargo, systems and service divisions into standalone businesses. The core passenger operation too is a focused division, for example, outsourcing its maintenance to Lufthansa Technik. "Deutsche Lufthansa doesn't own so much as a torque wrench," says Mayrhuber, adding that while others talked about creating a virtual airline in the 1990s, Lufthansa has in some respects done so.
He is a keen supporter of the group structure. Not only do the standalone businesses gain economies of scale from their third-party work, but it also brings back knowledge into the group. For example, Lufthansa flies the Airbus A330, but it services plenty of Boeing 777s too. "It's knowledge power as well as buying power," says Mayrhuber. "You have the integration capability that others do not have. You have control of the total processes, costs and technology."
Crisis response
If Lufthansa was slow to react to the last recession then it has worked to produce a model response to the crisis after 11 September. Capacity cuts were swift and deep, with 43 aircraft grounded. Costs and staff numbers came under intense scrutiny with managers leading the way with a 10% pay cut. "We moved into the shade so we didn't get burned," says Mayrhuber. Around 35% of capacity was removed on the North Atlantic in the immediate wake of the crisis, despite the fact that it pushed Lufthansa's market share down from third to fifth place behind British Airways and three US majors. As a result, prices were held steady and yields have even improved on some sectors, says Mayrhuber. Certainly, the group has stayed cash positive throughout, with a steady performance from the standalone business units. Results for the first three months of 2002 have actually shown an improvement over last year, with operating profits doubled, albeit only to a modest €12 million ($11.3 million). Average passenger yields in the quarter were also up by 1.2% thanks to the balance of supply with demand.
But managing this crisis has not just been about avoiding past errors, says Mayrhuber. Last time, Lufthansa learned the need "to dive quickly and land safely" once crisis took hold. This time the challenge has been to stay flexible and get back in the air once demand returned. This was helped by working with unions to avoid outright redundancies, looking instead for voluntary unpaid leave. So while overall capacity remains down, Lufthansa has been able to restore services rapidly this summer. Frequencies on the North Atlantic will be at 188 a week, not too far from the 193 of last year.
Then there is the business class executive jet service which operates between Düsseldorf and New York, using a Boeing BBJ from Swiss corporate jet operator PrivatAir. In fact, the move looks more tactical than strategic. Düsseldorf produces reliable business demand, but volume is problematic: it is tough to feed due to slot restrictions and has a relatively weak leisure market. The experiment could be repeated on other selective markets, but Lufthansa is not exactly hyping the potential.
The accent throughout appears to be on staying pragmatic and keeping a sense of perspective. If the events of 11 September had initially raised the prospect of a dramatic shake-out in the overcrowded European market, then Lufthansa since appears to have accepted that the number of flag carriers in the region is not yet ready to thin out. Despite the collapse of Sabena and Swissair, both quickly replaced by alternatives, Kley believes the political "exit barriers" have been raised rather than reduced by the crisis, and that consolidation is off the agenda for at least three years. "Airlines are like football stars, they never die, they simply fade away," says Kley, a devoted soccer follower.
He suggests consolidation will come not through a big bang but a gradual shift as some carriers find themselves in niche positions. In the meantime, as it waits for opportunities to emerge, Lufthansa can only concentrate on keeping its own business on track, he adds. "We need to stay with our feet on the ground even when the airline is flying high. It is not all about strategy but about quality of operations."
Mayrhuber too sees European consolidation as a slow process. "It's not a revolution, the system can only evolve," he says, adding as an aside that the number of rival international carriers, as well as alternative road and rail systems, makes Europe one of the world's toughest air markets. "The competition in Europe is tougher than in the USA, which is a perception not shared by many," he says.
Mayrhuber believes deregulation is gradually eating away at arguments for the imperative for each state to retain its own national carrier. He points out that Brussels is still "connected to the world" without Sabena and may even find itself better so. The global alliances too help weaken the case, not least Lufthansa's own Star grouping. Based on an analysis of the routes of one European flag carrier, Lufthansa calculated that Star already served them all save one to a tiny Eastern European capital. The alliance alone could have taken up two-thirds of the carrier's routes straight away. "This has not been communicated clearly enough," says Mayrhuber.
The more immediate threat facing Europe's national airlines has been the unstoppable rise of the low-cost carriers. With Ryanair now aggressively targeting the German market and with others not far behind, Lufthansa has been accused of complacency and failure to mount a direct response. Mayrhuber does not accept either charge. He makes it clear that Lufthansa has no intention of setting up a low-cost operations. "We have looked at it but we still believe that we shouldn't go there," he says. "That is sometimes seen as arrogance, but it's simply an analytical response about where we should spend our money." If the alternative is to invest in a Boeing 747-400 to serve Shanghai, then there is no contest.
Low-cost threat
While Mayrhuber acknowledges the low-cost sector has some valuable lessons to teach (such as making the customer pay even if they do not show) he suggests some of the hype may be overdone. He points out that Southwest Airlines took 31 years to capture 18% of the US market. Germany remains the least penetrated of the European markets, and he believes there are still good reasons why it is not a natural low-cost market. Germany's federal structure means there are not mass markets on the scale of London or Paris with a natural captive base of origin and destination traffic.
German geography has already meant that Lufthansa has had to live with fierce competition from neighbouring flag carriers keen to take European traffic out of its cities. Mayrhuber argues that German published prices are simply not as high as they were in the UK when it became the birthplace of the European low-cost movement. He also claims that the spread of prices is not as broad in Germany as in markets such as the US domestic.
In short, Lufthansa does not see the same open spaces for low-cost competitors in its market as they found in the UK or USA. If other majors have entered the low-cost fray then he suggests that it has been because they have been more exposed. "Some have moved into the market because of weaknesses not strengths," he says with a smile.
Whether Lufthansa is correct in its reading of the low-cost threat remains to be seen. Mayrhuber himself acknowledges that much could still change in the 18 months before he is officially due to move into the chairman's office. Yet what already seems certain is that as this latest generation of management takes the helm, Lufthansa can afford to be more relaxed and perhaps a little more self-assured about its role in the world.
Source: Airline Business
