Deutsche Lufthansa AG

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Deutsche Lufthansa AG

Von-Gablenz-Strasse 2-6
D-50679 Cologne, 21
Germany
Telephone: ( +49) 69-696-0
Toll Free: (800) 645-3880
Fax: ( +49) 69-696-6818
Web site: http://www.lufthansa.com

Public Company
Incorporated: 1926 as Deutsche Luft Hansa AG
Employees: 93,246
Sales: EUR 15.96 billion ($20 billion) (2003)
Stock Exchanges: Frankfurt
Ticker Symbol: LHAG.F
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 488119 Other Airport Operations; 488190 Other Support Activities for Air Transportation; 722320 Caterers

Deutsche Lufthansa AG (commonly referred to as Lufthansa) is the largest airline in Germany and one of the three largest airlines in the world. More than 45 million passengers take Lufthansa flights each year on a network that is spread relatively evenly around the world. Lufthansa operates a fleet of about 370 planes, most all of them owned rather than leased, and is a founding member of the Star Alliance.

The Lufthansa Group also includes Lufthansa CityLine, a regional airline. Other units, such as data processing specialist Lufthansa Systems and Lufthansa Flight Training, have developed into world-leading businesses. Lufthansa Cargo AG is considered the world's largest carrier of international airfreight, according to the Journal of Commerce, while LSG Sky Chefs heads the world's largest alliance of in-flight caterers. Lufthansa also holds a 50 percent interest in Thomas Cook AG, Europe's second largest travel group and majority owner of the Condor Flugdienst GmbH air charter service.

1920s Origins

The history of Lufthansa (LH) parallels the development of aviation in Germany, dating back to a time when the first aviators were just beginning to fly. However, LH was not established as a commercial airline in Germany until 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 on 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-run 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.

Intercontinental in the 1930s

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, and many 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 on January 6, 1953, Luftag (Aktiengesellschaft für Luftverkehrsbedarf) was created in Cologne. 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 (Deutsche Lufthansa Aktiengesellschaft), and in the following years reestablished its services to North and South America and the Middle East.

Jet-Powered Expansion in the 1960s

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, and cargo services became a major source of revenue for Lufthansa.

Challenges 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, Rolf Bebber, 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.

Company Perspectives:

Shouldering Responsibility—Keeping a Balance. Service is our vocation. Our staff constitute our most important asset. As an attractive employer of present and future staff, we endeavour to offer our employees job security, good working conditions, career opportunities and convincing corporate ethics. Our staff honour that endeavour with customer-friendly service and thereby underpin future growth. We are committed to creating sustainable value for our investors. The norms are set by the capital market. We aim at a performance level that stands as a benchmark for the European airline industry. Business success does not rule out a corporate policy geared to sustainable development and care for the environment. We are fully committed to keeping a balance between them. Protecting the environment is therefore a prime corporate objective, to which we subscribe with total conviction.

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-Bolkow-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.

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.

A World Leader in the 1980s

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.

Weathering Change in 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 that 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 21st 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 Jurgen 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 DEM 425.8 million in 1991, followed by another loss of DEM 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. Through these measures, $1 billion in annual cost savings were realized, leading Lufthansa back into the black by 1994, when it made DEM 302 million.

Not everything went smoothly, however. 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 in 1992 British Airways plc acquired a 49 percent interest in a Berlin-based carrier, newly dubbed Deutsche BA. The regional airline offered high-quality service to business travelers and competed directly with Lufthansa's regional airline, known as Lufthansa CityLine, 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 airline, with a market share of 14 percent.

Key Dates:

1926:: Deutsche Luft Hansa is formed from consolidation of German aviation interests.
1934:: Lufthansa launches airmail service to Buenos Aires.
1941:: Luftwaffe assumes control of LH's aircraft.
1945:: Germany banned from operating its own airlines after World War II.
1953:: A new airline is launched in West Germany as Luftag.
1954:: Luftag, renamed Lufthansa, reestablishes intercontinental routes.
1964:: LH posts its first postwar profit.
1976:: First Airbus A300, a mostly German-made airliner, enters the company's fleet.
1990:: LH flies to Berlin after German reunification.
1995:: MRO division Lufthansa Technik is spun off as independent subsidiary.
1997:: Star Alliance is formed with LH as a founding member.
2001:: LH undergoes a comprehensive "D-Check."

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 Lufthansa 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.

Star Alliance Formed 1997

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 DEM 4.7 billion ($2.77 billion). The company was now free of its government ties, operating within a new group structure, and was considered one of the most profitable airlines in the world (net profits for 1997 were DEM 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 21st 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.

In 1999, Lufthansa subsidiary GlobeGround GmbH acquired Hudson General Corp., the world's largest publicly traded airport services company. The deal was worth $132.6 million. GlobeGround had been formed in 1990 as Lufthansa Airport and Ground Services. A subsidiary of Lufthansa Commercial Holding, it was renamed in January 1999 and was acquired by Penauille PolyServices of France in 2001.

Profits rose 9 percent to $620 million in 2000, even in the face of rising fuel costs. Revenues were about $14 billion. Nearly 47 million people flew the airline during the year. Lufthansa had about 250 planes, plus another 60 operated by CityLine. Operationally, LH was developing a second hub at Munich as its Frankfurt base became crowded.

Lufthansa Cargo AG was considered the world's largest carrier of international airfreight, according to the Journal of Commerce, carrying more than 1.6 million tons of cargo a year among 450 destinations. The unit operated a fleet of 22 dedicated freighters and utilized cargo capacity on the passenger flights of Lufthansa and partner Spanair. Its revenues were $2.64 billion in 2000, when it had 5,000 employees.

A "D-Check" in 2001

In April 2001, chairman Jurgen Weber, a former maintenance head, announced a "D-Check" for the entire company (the name refers to an aircraft's most comprehensive inspection). D-Check hoped to generate an additional $1 billion a year in cash flow by 2004. The next month, a pilot's strike cost the airline more than $50 million.

In the Future European Operations initiative, LH reorganized its regional services. A new commuter subsidiary, Lufthansa CityLine, was formed, while PrivatAir of Switzerland was contracted to handle certain business routes. These were both low-cost operations, unfettered by traditional collectively bargained wage agreements. Lufthansa also acquired a 25 percent stake in budget startup Eurowings.

The airline also upgraded its business class service and made plans to provide a broadband Internet connection on flights. The Star Alliance continued to attract new members among the world's airlines, bringing Lufthansa additional feeder traffic sources from abroad.

Following the September 11, 2001 terrorist attacks on the United States, LH coped with the general downturn in aviation by reducing capacity while retaining employees. The company's SkyChefs catering business was particularly hard hit, an executive told Airfinance Journal, leading to layoffs of 30 percent of staff.

The world's aviation industry reeled from the effects of 9/11 in 2002. Forbes Global remarked at how well Lufthansa was able to fare, given Germany's reputation for high social costs. By November, the airline was planning to add 2,000 jobs while some of the biggest airlines in the United States were trying to stave off bankruptcy. Analysts credited Lufthansa's survival to its quick and flexible responses to the crises of the previous decade, as well as its ability to forecast future business conditions. Net profit was EUR 717 million for 2002.

Lufthansa made a couple of key divestments in 2002, selling its 25 percent holding in DHL World Wide Express for $514 million to Deutsche Post World Net, and disposing of its Start Amadeus GmbH travel package company for $95 million.

In 2003, a very difficult year, LH posted a net lost of EUR 984 million ($1.2 billion) on sales of EUR 15.96 billion ($20.03 billion). Like other airlines, Lufthansa struggled with the SARS crisis in Asia and the war in Iraq; the economy was also slow, particularly in Germany. The year also saw some significant changes. Wolfgang Mayrhuber, formerly head of Lufthansa Technik, then the passenger business division, replaced Jurgen Weber as Lufthansa Group's new chairman and CEO. The airline had a fleet of about 370 planes and more than 93,000 employees. Lufthansa was again tweaking its regional operations and searching for cost-cutting opportunities. It was also looking for places to grow, as with a new non-stop route from Frankfurt to Portland, Oregon.

The airline was aiming to grow its capacity to China by 50 percent, a company source told China Daily, after a new 2004 bilateral agreement increased access to the country's skies. Lufthansa finally hammered out a new pay agreement with the pilots' union Vereiningung Cockpit in December 2004. The pilots agreed to a pay freeze and extra hours.

Principal Subsidiaries

LSG Sky Chefs, Inc. (USA); Lufthansa Cargo AG; Lufthansa CityLine GmbH; Lufthansa Flight Training; Lufthansa Systems Group GmbH; Lufthansa Technik AG; Thomas Cook AG (50%).