GBM.flights

The strategic option must have been fantastic with 100 Mio (CHF?) as recommended amount...
What highly strategic stakes were they going to hunt for with all that crazy amount of money? a couple of bottles of Champagne and some Caviar??

N1003U

In this context, I would define "actual skill" as the ability to identify and analyze a business problem (cash-losing condition) or opportunity (cash-winning condition), and then formulate a practical solution to the problem or integrate the opportunity into existing operations, and then implement the solution or process with measurable and sustainable positive financial results.

In the airline business, there are a lot of consultants who seem by this definition to struggle with the concept of being skilled. For references, see outcomes at places like SAGroup in the 90s, or more recently, say, SCORE, which I am betting cost a fortune to implement and does not seem to have done anything significant for the cost structure at LH. It is certainly difficult to see how re-engineering the catering carts to save a few grams and printing board passes on plain white stock at outstations has made LH cost competitive relative to the rest of the industry. Things like cheap fuel and labor and a low-cost base of operations can go a long way to help traditional cost competitiveness, but seem to be things over which LH does not, at present, have particular control.

My personal observation and experience with large consulting houses is that while actual skill can help one's career, the ability to feed the beast that is the firm's organizational structure (i.e., engage billable hours) is larger indicator of success in a consulting career than demonstrating actual skill. Skill and ability to win engagements do seem to be correlated, but when one has the proper connections, often a vague appearance of skill is all that is required, and at the end it is not the solution, but the fees that count most.

As it has been said: "If you're not a part of the solution, there's good money to be made in prolonging the problem..."


I would add:
1.) this is not true of every consultant, even places like at McK (though McK has a compensation/reward structure that allows them to be a lot more picky), and
2.) while education and experience are often useful, they are neither necessary nor sufficient to demonstrate the above-defined "actual skill".

As has been pointed out (and NOT by me! ), it is a very good idea to keep an eye not only on those cash flows, but the sources and uses thereof.

It seems LH got a great deal on a nicely cleaned-up set of aviation assets from Switzerland, and they so far seem to have at least not degraded them.

N1003U

Thanks for the link.

Manager Magazine very rarely has much good to day about LH management (makes me wonder if one of the editors is a disgruntled SEN ):

Selbst Klassiker am Himmel wie Lufthansa Börsen-Chart zeigen oder British Airways Börsen-Chart zeigen suchen das Heil in radikalen Umbauten ihres Geschäftsmodells - mit jeder Menge Anleihen bei den Aero-Aldis. "Was wir erleben, ist nicht weniger als ein Paradigmenwechsel", sagt Philipp Goedeking, Chef des Airline-Beraters Avinomics, "die Denkschule der Lowcoster wird zum Branchenstandard." Das Ergebnis: Nun trifft es auch die Geschäftsreisenden, die bisher Besseres gewohnt waren.

I guess the question(s) remain(s) if there are enough customers still around who are willing to pay a little more for that "little bit better they are used to", and if there are, can the airlines find them and sell to them without turning them off completely?

HKG1111

You just have to look to the other side of the atlantic. The US shows over the last years already what we will get in Europe - high cost - low service. Just wait and fly

FD1971

Another Gaeehhhnnnn.

But this time around, the Gaaehhhnnn is not for a terrible post, but for copying one of my answers from years ago...

But what do you expect a Consulting Company to do?

a) Act like a Nekkie, so ignore all basic rules of Management and Science, especially Math, resulting in ludicrous recommendations to people like of Bruggy, Franzl or the Wolf

b) Do a lot of research, take a close look at the financial situation and deduct your findings into a realistic recommendation alligned with the goals of the organisation

I know you always prefer A.

And the difference between A and B is exactly the difference between experts and fans, people on the pitch and people in the stands...

FD1971

MM is owned by Der Spiegel, so we know what to expect since 1955.

But do we really have to discuss that low operating costs are influencing the industry in cw 45 of 2015.

That is what I point out since years and that is exactly why LH invested billions into 5 major restructuring schemes over the last 20 years.

That is exactly the reason why the unions are losing it, in London, in Paris and in Frankfurt.

Kudos to LH for being able to grant all their employees such lucrative salaries and pensions for more than 20 years after deregulation...

Salary reductions at carriers like Delta, BA, AA, UAL over the same time frame add up to 40-50%, so LH employees should jump up in joy about the industry leading management of their employer.

And under the bottom line, it is still very simple, the changes will come anyway, simple because three Governments in the Near East are close to $50 billion in the red trying to create something competitive and two of them are losing close a billion each year from ops.

So as long as those Governments are happy bleeding cash trying to establlish an airline, as long as local Governments in Europe are happy giving out cash trying to establish a local airport, the playing field is uneven, so maybe the unions should not form a line at FRA, maybe they should create a barrier at the Emirates Tower or various Government offices in Kiel, Kleve, Kassel, Bremen etc.

And do not forget Norway or Dublin...because those folks working for Ryan or Norwegian will really suffer from Altersarmut...

FD1971

For the first years after deregulation, the path looked similiar, but then some Near East Governments decided to save some broken airlines in Europe, so the consolidation did not continue, or at least, it was halted for some time.

Hence, the prediction that we will be down to 3 major players + one or two major LCC and one or two minor regional players was correct for the US, but not for Europe, at least so far. The flying Dead are still around, at least until January in the case of AB () , probably longer in the case of AZ.

But we have to give credit to all those experts predicting the demise of certain carriers in Europe.

Nobody was able to predict that some folks from the Near East would be willing to invest billions into carriers like AB or AZ in a desperate attempt to gain influence and some el cheapo backpackers into their hubs.

N1003U

Good point. Yes, in the US you can pay a lot of money to get pretty crappy service.

Yet on prime US routes, like (for example) JFK/LAX or /SFO, the premium service is being upgraded, and selling out the C/F cabins (sometimes even a 3-class configuration!) at $1.000+ is not a problem, and last minute upselling into business class, and premium-class promotions seem to be selling well. What over in other forums has come to be called "First Class Monetization" seems to be doing a nice job of adding marginal revenue on the US carriers, whereas before the premium cabin was seen as a free entitlement by status customers.

N1003U

And in sum, those schemes seem to have not achieved very much, mostly as evidenced by the fact that LH is still trying to make one of them work. The recently announced 4-year-plan to re-arrange the deck chairs on HMS Lufthansa doesn't inspire much confidence, either, though some of the re-arrangement appears to make retrenchment, if/when it comes, a bit easier.

I have heard that one of characteristics of the clinically insane is that they tend to constantly repeat their actions, despite strong evidence with respect to the destructiveness of those actions. I have observed similar behavior in dysfunctional businesses.

Operating costs influence quite siginifcantly every industry I am aware of, even those with little competition. However if one is in a competitive industry, and ones own operating costs are among highest in the industry, and appear as if they will remain so in the foreseeable future, trying to become more competitive on the basis of reducing costs does not strike me as particularly brilliant strategy.

However of those interested in appearances to justify their existence, cost cutting efforts do tend to be visible and make one look like they are actually doing something, and I am not personally aware of a consultant who was fired for suggesting their client would benefit from better efficiency.

LH has up to now been able to cover their high cost structure with customers who have willing to pay a premium of their service. I would argue they need to continue to do so to survive and even thrive as a business.

To the above claims about salary reductions I can only speak anecdotally about some neighbors and friends who fly for AA and DL, but they don't seem to be starving on the streets in the mean time, and they are managing to provide decent pensions for themselves. They are not as handsomely compensated as the generation before them, but they are still well-paid, and they also understand that the service their employer offers is not a valuable as it once was, either. Yes, the cabin attendants, especially the younger ones, tend to earn slave wages, but so far, the airlines are not having much trouble recruiting enough staff to meet their needs at the salary levels offered.

My experience is that employees in Ireland and Norway have for some time understood the difference between defined-benefit and defined-contribution pension plans, and they understand that they are pretty much responsible themselves to provide for their old age. If I go by the public statements I have seen in the press here in Germany that past few days, the employees in the LH-world seem to understand somewhat less the harsh realities of 21st century demographics and that the responsibility for Altersversorgung is going to fall on them personally, regardless of what anyone, public or private, promises them.

FD1971

Well,

all those schemes resulted in creating the most successful real airline over the last twenty years and there is not much more to achieve out there.

The airline also served as the backbone helping to establish Germany as the No.1 exporter for many of those twenty years.

I assume you are familiar with the saying about the deutsche Eiche and the Borstenvieh...

gum

Thanks for the link, cas_de!

Just let me discuss one sentence of this article. Manager Magazin wrote:

For the English speaking audience just a rush translation:

Thereby the hustle and bustle about low frills concepts entails large risks for the line of business. There is the danger of a downwards spirale consisting of price wars and service decrease. At its end there are not better but worse transactions [or prospects].
[/rush translation end]

This is an interesting point of view which is normally not openly communicated: Every loss of services or quality will - on the long run - undermine the willingness of the people to pay the (former) high prices or fares.

That said the cost-cutting is only working in period "1", then resulting in a subsequent loss of revenue beginning with period "2". Many people are annoyed by the new, lower product quality and the former premium carrier is no longer their choice.

That's a cocktail of explosives which can cause a whole company being grounded by its financials. Therefore it would be the best if the social partners would negotiate new rates/remunerations.

Therefore the high-density layouts of the medium-haul A321 with 205 seats will never pay back. Finally Lufty is not in the chocolate bar business where many manufactureres reduced the package sizes.

IAN-UK

To be fair, I think it's picture many of us have sketched, though not always as directly as perhaps we could have done.

It's puzzling that the airline, with some of the brightest minds working there, continues to attempt to control the carrier's trajectory with the focus on a single control lever, the cost one. Perhaps, as N1003U points out, cost-cutting is an easy way to be seen to do something, even though those bright Lufties must understand that cutting costs only works if its impact on demand at the desired price points is emolient.

There've been a series of shattering challenges to incumbent full-service carriers, yet Lufthansa has been exceedingly slow to adapt. Perhaps it believes it can live off its past glories, as one of our other illustrious contributor suggests:

kamel123

I would argue LH hasn't really succeeded in doing substantial cost cutting. CASK ex-fuel has been only going up, and they have not been able to break that trend.

Maybe it would be even worse without all their "programs" such as SCORE, but if you look through the old financial reports, you will see that personnel cost increased +2.6% in 2013, +2.2% in 2014, and even +6.7% in 2015 YTD (this is without pensions and one-offs). In order to do a more precise analysis, you would need to adjust by inflation, capacity etc., but on the whole there is clearly no progress.

And that is the issue. They have too high staff costs compared to competition. Yes, their staff may be more qualified than some of their competitors' staff, and customers (may) value that. But especially their pension plans are outsized and unjustifiable. And they don't create value for customers. A customer does not pay more for a ticket so that a purser can retire on a pension that is completely unheard of for most people. Cutting them would not reduce revenues. As far as I know, LH has not had issues in hiring new recruits into e.g., Eurowings, although conditions are substantially worse - simply because salary packages are competitive compared to alternatives.

However, mainline personnel costs are hard to cut, as evidenced by the frequent strikes.
Thus, LH has resorted to 1) building alternative platforms with cheaper labor costs (Eurowings, ...), 2) cutting costs that can be more easily influenced (such as squeezing more seats into the cabin), hoping there is enough customer ignorance/inertia so that they can get away with it.

Strategy 1) makes perfect sense, although the proliferation of Germanwings, Eurowings, Cityline, Jump, ... creates operational complexity which is bad in the long term. Also, employees are not stupid and understand what is the ultimate goal, and therefore strike against exactly that (although they are officially not allowed to)

Strategy 2) is more questionable. There is a strong captive customer base with German corporates, but there is a limit.

malmostoso

While I understand that accepting that our parents will have a better pension than ours (35yo here) is tough, the Ponzi schemes that are current pension benefits are simply non sustainable at the current (non-)growth rates.

The sooner people realize that and start working on an alternative model, shifting from pensionable to non-pensionable remuneration, the better.

And this is clearly not only an LH problem.

Speedbird48

Then I hope Lufthansa stops their stupid "we want to be a 5 star airline" catchphrase