Deutsche Lufthansa Aktiengesellschaft

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Deutsche Lufthansa Aktiengesellschaft

Von-Gablenz-Strasse 2-6
D-50679 Cologne
Germany
(49 221) 826-24 44
Fax: (49 221) 826-22 86
Web site: http://www.lufthansa.com

Public Company
Incorporated: 1926 as Deutsche Luft Hansa
Aktiengesellschaft Employees: 58,250
Sales: DM 23.15 billion (US$12.87 billion) (1997)
Stock Exchanges: Frankfurt
Ticker Symbol: DLAGY
SICs: 4512 Air Transportation, Scheduled; 4522 Air

Transportation, Non-Scheduled; 4725 Tour Operators;
4729 Arrangement of Passenger Transportation, Not
Elsewhere Classified; 4789 Transportation Services,
Not Elsewhere Classified

Deutsche Lufthansa Aktiengesellschaft (commonly referred to as Lufthansa) is the largest airline in Germany and one of the five largest airlines in the world. Its passenger business, run as the autonomous business unit Lufthansa German Airlines, is the flagship operation of the Lufthansa Group. More than 33 million passengers take Lufthansa flights each year, choosing among 25 destinations in Germany, 112 in Europe (excluding Germany), 11 in the Middle East, 72 in North America, seven in South America, 15 in Africa, and 36 in the Asia-Pacific region. Additionally, the May 1997-formed Star Alliance joined Lufthansa, Air Canada, Scandinavian Airlines System (SAS), Thai Airways International, United Airlines, Varig (of Brazil), Air New Zealand, and Ansett Australia in a cooperative venture serving more than 640 destinations in 108 countries. Lufthansa’s young fleet includes a mix of Airbus models (A300, A310, A319, A320, A321, and A340) and Boeing 737s, 747s, and 757s.

The Lufthansa Group also includes Lufthansa CityLine, an all-jet regional airline; Condor Flugdienst, air charter service;Lufthansa Cargo, air freight specialist; Lufthansa Technik, aircraft maintenance service; LSG Lufthansa Service, global catering arm; Lufthansa Systems, data processing; and Lufthansa Flight Training. Each of these units are wholly owned, autonomously operated subsidiaries of Deutsche Lufthansa.

Lufthansa’s history parallels the development of aviation in Germany, dating back to a time when the first aviators were just beginning to fly. However, it was not established as a commercial airline in Germany until the 1920s.

Founded in the 1920s

After World War I the German government favored the development of a national airline system made up of a number of associated regional airlines. One of the largest airline companies, Deutscher Aero Lloyd, was incorporated in 1923 and centered its operations around Berlin’s Temple Field. The following year Junkers Luftverkehr was founded. Junkers built airplanes in addition to operating an airline. Together the two companies dominated German aviation.

The two companies merged with all the other German aeronautic concerns in 1926 to form Deutsche Luft Hansa Aktiengesellschaft (the name “Hansa” was taken from the north-German Hanseatic trading league, which had contributed most of the airline’s private capital). Luft Hansa was a government-private monopoly—the chosen instrument for all German air services. The company’s logo was taken from Aero Lloyd and its blue and yellow colors were taken from Junkers. By May 1926 Luft Hansa served 57 domestic and 15 international airports.

In 1934, under the new name “Lufthansa,” the company opened an airmail service between Stuttgart and Buenos Aires. As an instrument of state commerce and diplomacy Lufthansa flew to numerous destinations around the world including Beijing, New York, Cairo, Bangkok, and Tokyo. Regarded as an instrument of the state, Lufthansa increasingly came under the control of the ruling Nazi party. Lufthansa began service to destinations in the Soviet Union during 1940. These routes provided the German Luftwaffe (air force) with valuable strategic information used in Hitler’s surprise invasion of the Soviet Union two years later. In 1941 the Luftwaffe assumed control of Lufthansa’s airplanes and converted many of them for military use. As the war continued many Lufthansa employees were drafted into military service in support of the Luftwaffe; by the end of the war in 1945 many had lost their lives.

After the war Germany was occupied by the Soviet Union, the United States, France, and Britain. The Soviet-occupied zone later became the German Democratic Republic (East Germany), and the American, French, and British zones became the Federal Republic of Germany (West Germany). A general state of belligerency between the Soviet Union and the Western allies further divided East and West Germany. Under the conditions of the occupation both East and West Germany were forbidden to establish their own airline companies. British, French, and American airlines had a monopoly on air service in West Germany, while the Soviet airline Aeroflot assumed all air services in East Germany.

Lufthansa Reborn in the 1950s

By 1951 the reestablishment of a national airline for West Germany was proposed. The following year the West German government in Bonn set up a preparatory airline corporation, and then in 1953 Luftag was created. Hans Bongers, who joined Lufthansa in 1926, was reinstated as director of the national airline. Luftag began service with four Convair 340s, later joined by three DC-3s, and four Lockheed Constellations.

Luftag’s airplanes were piloted by foreign airline personnel while former Lufthansa pilots were retrained in the United States. The Germans later flew as copilots until 1956 when all-German crews were assigned. In 1954 Luftag instituted its old name, Lufthansa, and in the following years reestablished its services to North and South America and the Middle East.

Lufthansa began flying Boeing 707 passenger jets on its international routes in 1961. The introduction of jets marked the beginning of an equipment rotation at Lufthansa. The older propeller-driven airplanes were slowly phased out and replaced by passenger jets. With this new equipment Lufthansa had firmly reestablished itself as one of the world’s premier air carriers.

The expansion of Lufthansa continued with the reintroduction of services to Africa. The airline established service to Nigeria in 1962 and later that year began service to Johannesburg, South Africa. Despite the heavy investment required for the airline’s expansion, Lufthansa was able to declare its first profitable year in 1964. Previously the airline had charged its losses to the federal government.

Lufthansa joined a maintenance pool called ATLAS in 1969. As a member of ATLAS, Lufthansa cooperated with Air France, Alitalia, Sabena, and Iberia in the repair and maintenance of aircraft and other equipment. Lufthansa’s Hamburg facility was designated to perform repairs for the pool’s B-747s, DC-10s, and A-300s.

The updating of equipment at Lufthansa continued over the next few years as the airline introduced Boeing’s 737 for short distance shuttle routes, and a 747 jumbo jet for heavily traveled long distance services. In addition to the 747, Lufthansa purchased several McDonnell Douglas DC-10s. The new aircraft replaced the older propeller-driven airplanes, the last of which was removed from the fleet in 1971. During this period Lufthansa developed its air freight services with a fleet of 747s specially designated to haul cargo. The airline constructed automated freight handling facilities in a number of destinations across the world. Lufthansa recognized the importance of cargo services before most of its competition. The company established one of the most modern freight handling systems in the world. Cargo services became a major source of revenue for Lufthansa.

Survived Spate of Hijackings in the 1970s

Being a European airline Lufthansa was dangerously exposed to terrorist activities during the 1970s. Security was inadequate at many airports served by the company, which made it easy for terrorists to board and later commandeer an airplane. However, not one Lufthansa passenger lost his life despite numerous hijackings on the airline. The chairman of the company during the 1970s was Rolf Bebber and he must be credited for Lufthansa’s success in ending the hijacking peacefully. He established a crisis management procedure which enlisted the diplomatic influence of the West German government. Through this procedure the company could respond quickly to terrorist demands in order to resolve a crisis. In addition, security at all Lufthansa airports was significantly upgraded.

The airline experienced considerable problems with German air traffic controllers who staged a “go-slow” from May to November 1973. Lufthansa estimated that it lost $71 million due to flight cancellations during that period. The controllers, who were civil servants, had been demonstrating their displeasure with working conditions in this manner since 1962. Lufthansa tried to persuade the federal government to change the status of the controllers in an effort to avoid future slowdowns but was unsuccessful.

Lufthansa received its first A-300 jetliner in 1976 from Airbus, the French-German-British-Spanish aircraft consortium. The A-300 was the first commercial aircraft to be built primarily by Germans in over 30 years. The German member of the Airbus group, Messerschmidt-Bölkow-Blohm (MBB), continued to contribute to the development of more advanced Airbus jetliners and Lufthansa continued to add them to its fleet. In 1983 the airline commissioned its first A-310 and later purchased the consortium’s A-319, A-320, A-321, and A-340 jumbo jets.

Company Perspectives:

The guiding principle of all our entrepreneurial activities is to enhance Lufthansa’s market value on a lasting basis. We believe that the optimal conditions for achieving an attractive return on investment are created by achieving a balanced synthesis between the interests of shareholders, customers and employees.

MBB was particularly willing to involve Lufthansa in the Airbus projects. Since both companies were German they were encouraged by the Federal government to coordinate and serve each other’s economic interests. As a result, Airbus was especially sensitive to Lufthansa’s design requirements. Moreover, because Lufthansa was a highly respected modern air carrier, the jetliners built to its specifications were, in turn, more marketable to other airline companies.

In 1982, 80 percent of Lufthansa’s stock was owned by the West German government. The board of directors, however, was appointed by Lufthansa’s private investors. On June 22 of that year the board of directors narrowly elected a new chairman to succeed Herbert Culmann. Culmann was a popular chairman, but he retired two years early to save his company embarrassment over allegations of kickbacks to travel agents.

The new chairman was Heinz Ruhnau, a career bureaucrat with strong affiliations with the West German Social Democratic Party. His appointment generated an unusual amount of concern because many feared the ruling Social Democrats were attempting to politicize the airline. Ruhnau was an undersecretary in the Transport Ministry and a former chief assistant to the head of West Germany’s largest trade union, IG Metall. He did not, however, have experience in private enterprise, and Lufthansa was being prepared for a further privatization of its stock. In 1985 the federal government held 74.31 percent of Lufthansa, 7.85 percent was held by government agencies, and the remaining 17.84 percent was held by private interests.

Ruhnau assumed his post on July 1, 1982, in a smooth transition of leadership. Ruhnau’s immediate tasks were to improve Lufthansa’s thin profit margin and win the support of the company’s 30,000 skeptical employees. The company’s performance in 1982 was impressive and resulted in its selection as airline of the year by the editors of Air Transport World.

A New Lufthansa Evolved During the 1990s

The early to mid-1990s was a period of enormous change in Europe, change that proved extremely challenging for Lufthansa. Most obvious was the 1990 reunification of Germany, a difficult process which nonetheless afforded Lufthansa the opportunity to fly to Berlin under its own colors for the first time since the Allied occupation. The period also featured steadily increasing competition which forced down ticket prices worldwide and cut into Lufthansa’s market share. The company was particularly vulnerable because of its cumbersome bureaucracy and its relatively high-wage workforce, with the workers traditionally protected by the company’s state-run status. Other forces reshaping the operating environment for Lufthansa included the gradual deregulation of the airline industry in Europe, the trend toward privatization sweeping the continent, and the planned economic integration of Europe during the 1990s. By the turn of the century, Lufthansa had made numerous changes in response to these challenges, emerging as a very different company.

Leading Lufthansa through most of the 1990s was Jürgen Weber, who became chairman in September 1991. The company was hemorrhaging at the time, amid fierce competition and the first decline in European air travel in history in 1991—with the Gulf War a major catalyst for the drop. For the first time since 1973, Lufthansa lost money, posting a net loss of DM 425.8 million in 1991, followed by another loss of DM 391.1 million in 1992. Starting in mid-1992 Weber began working feverishly to bring the company’s costs in line. By 1994 job cuts totaling 8,400 had been made, and Weber got workers to agree to an unprecedented one-year wage freeze in 1993. He also dumped unprofitable routes and cut some services, such as first class within Europe. US$1 billion in annual cost savings were realized through these efforts, leading Lufthansa back into the black by 1994, when it made DM 302 million.

Not everything went smoothly. A new low-cost domestic shuttle service, Lufthansa Express, was launched in 1992 but caused confusion among customers and was eventually scrapped. Meantime, Lufthansa faced a new and potentially formidable competitor in its home market when British Airways PLC in 1992 acquired a 49 percent interest in a Berlin-based carrier, newly dubbed Deutsche BA. The regional airline offered highquality service to business travelers and competed directly with Lufthansa’s regional airline, known as Lufthansa City Line, which also catered to business travelers and which Lufthansa gained 100 percent control over in 1993. By the mid-1990s Deutsche BA had firmly established itself as Germany’s number two scheduled airliner, with a market share of 14 percent.

By 1993 the German government still held 51.6 percent of Lufthansa. A rights issue soon reduced the stake to 35 percent, giving company workers less government protection. In July 1993 Weber began restructuring Lufthansa. With a vision of the company as a holding company for several separately operated units, he spun off Lufthansa Cargo as a stand-alone (but wholly owned) business, the largest specialized air cargo carrier in the world. In succeeding years, several additional operations were similarly spun off, creating Lufthansa Technik in the maintenance area, Lufthansa Systems in data processing, LSG Lufthansa Service in catering, and Lufthansa Flight Training. Lufthansa CityLine and air charter specialist Condor Flugdienst also operated autonomously. The culmination of this process came in April 1997 when Lufthansa’s flagship scheduled passenger business was made independent as well, under the name Lufthansa German Airlines. Deutsche Lufthansa had thereby evolved into a holding company for what was referred to as the Lufthansa Group.

Another key goal of Weber’s was to seek out international partnerships, as alliances became increasingly common and vital for survival in the 1990s. In October 1993 Lufthansa and United Airlines, the leading U.S. airliner, began a code-sharing arrangement, whereby a single flight number in a reservation system could involve a journey consisting of a Lufthansa leg and a United leg. This partnership eventually led to the May 1997 formation of the “Star Alliance,” which initially involved Lufthansa, United, Air Canada, Scandinavian Airlines System (SAS), and Thai Airways International. The Star Alliance included not only code-sharing but also reciprocal frequent flyer programs, reciprocal lounge access agreements, and scheduling and pricing coordination efforts. In October 1997 the Brazilian airline Varig joined the alliance. In 1997 and 1998 Lufthansa also entered into separate bilateral partnerships with Singapore Airlines and All Nippon Airways of Japan. In May 1998 Air New Zealand and Ansett Australia agreed to join the Star Alliance during 1999. Regulators in Europe, however, were taking a close look at this and other alliances and were likely to require that changes be made before granting final regulatory approval.

In October 1997 Lufthansa was fully privatized with the sale of the government’s remaining 37.5 percent stake in the airline, raising about DM 4.7 billion (US$2.77 billion). The company was now free of its government ties, operating within a new group structure, and considered one of the most profitable airlines in the world (net profits for 1997 were DM 834.7 million), an amazing turn of events from the depths of the early 1990s. With the airline industry fully open to competition throughout the European union, Lufthansa at the turn of the century was presented with new challenges—even greater competition—as well as additional opportunities. In the globally competitive industry environment, it seemed likely that the company’s future depended heavily upon that of the Star Alliance.

Principal Subsidiaries

Passenger Business: Lauda Air Luftfahrt AG (Austria; 20%); Luxair Société Luxembourgeoise de Navigation Aérienne S.A. (Luxembourg; 13%); Günes Ekspres Havacilik A.S. (Sun Express) (Turkey; 40%); Condor Berlin GmbH. Cargo Business: DHL International Ltd. (Bermuda; 32.3%); Hinduja Lufthansa Cargo Holding B.V. (Netherlands; 40%); Airmail Center Frankfurt GmbH (40%). Technical Services: Aircraft Maintenance and Engineering Corp. (China; 40%); Lufthansa Airmotive Ireland Holdings Ltd. (90%); Lufthansa A.E.R.O. GmbH; Condor/Cargo Technik GmbH; Shannon Aerospace Ltd. (Ireland; 50%); Lufthansa Shannon Turbine Technologies Limited (Ireland; 90%); Lufthansa Technik Logistik GmhH. Information Technology Sales: Lufthansa AirPlus Servicekarten GmbH (48.8%); AMADEUS Global Travel Distribution S.A. (Spain; 29.2%); START Holding GmbH; Lufthansa City Center Reisebüropartner GmbH (50%); LIDO GmbH Lufthansa Aeronautical Services; Lufthansa Revenue Services GmbH. Catering: LSG Lufthansa Service Deutschland GmbH; LSG-Food & Nonfood Handel GmbH; LSG Lufthansa Service Europa/Afrika GmbH; LSG Lufthansa Service Asia Ltd. (Hong Kong); LSG Lufthansa Service USA Corp.; Onex Food Service Inc. (U.S.A.; 23.49%). Handling Services: Lufthansa Airport- and Ground-Services GmbH; Berliner Lufthansa Airport Services GmbH (49%); AFC-Aviation Fuel Services GmbH; Lufthansa Engineering and Operational Services GmbH. Others: Delvag Luftfahrtversicherungs-AG; Lufthansa Gebáude Management GmbH (51%); Lufthansa Consulting GmbH; Lufthansa Technical Training GmbH; Lufthansa Leasing GmbH (49%); Lufthansa LOEWE Druck und Distribution GmbH (51%).

Principal Operating Units

Lufthansa German Airlines; Lufthansa Cargo AG; Lufthansa Technik AG; Lufthansa CityLine GmbH; LSG Lufthansa Service Holding AG; Condor Flugdienst GmbH; Lufthansa Systems GmbH; Lufthansa Flight Training GmbH; Lufthansa Commercial Holding GmbH.