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Journal of Air Transport Management 9 (2003) 5155

Airline strategy in the 2001/2002 crisisthe Lufthansa example


Holger H.atty*, Sebastian Hollmeier
Deutsche Lufthansa AG, Frankfurt/Main 60546, Germany

Abstract
This article presents a European view of the global airline crisis in 2001/2002. The underlying cyclical nature of the airline business
and exibilization as a strategy to manage the cycles are described. Crisis management at Lufthansa German Airlines following the
terrorist attacks of September 11, 2001 is discussed in depth. In Europe, the slump in air trafc demand was soon matched by an
industry-wide capacity reduction. Reduced overcapacity helped to stabilize yields and corporate results. However, managing the
current crisis does not only aim at restoring the pre-crisis state, but rather at forming a more healthy business environment.
r 2002 Elsevier Science Ltd. All rights reserved.

1. Market cycles in the airline business


Over the last decades the airline business has proven
to show stable long-term growth. Until the year 2000,
world air trafc has been growing every single year with
the only exception of 1991 (Fig. 1). Air trafc growth
rates, however, show a high degree of cyclicity. This
cyclicity correlates with economic growth cycles measured by the gross domestic product (Fig. 2).
Economic downturns are felt by the airlines immediately with no delay. Airlines, however, face the problem
not to be in the position to react as fast and exible as
they would need to. Expansion rates have to be carefully
planned long in advance, due to the lead times for
aircraft orders and pilot training. Moreover, the airline
industry is both capital and personnel intensive. With
airline personnel being strongly unionized, both means
very limited exibility in case of market disruptions. In
times of low demand, airlines are burdened by high xed
costs.
A typical cycle downturn in the airline industry shows
the following dynamics: When demand declines, capacity cannot be adjusted immediately due to the
insufcient exibility. Load factors decrease and therefore specic costs per revenue passenger rise. In their
need to ll the empty seats, airlines start market share
battles with signicant cuts in ticket prices (yields).

*Corresponding author.
E-mail addresses: holger.haetty@dlh.de (H. H.atty), sebastian.hollmeier@dlh.de (S. Hollmeier).

In a normal business environment, the weakest


unprotable airlines would exit the market and overcapacity would be eliminated. However, competition in
this industry means competition between private-held
and state-owned airlines. Many large carriers worldwide
enjoy distinct governmental protection. Although there
has been a tendency of states to reduce their stakes in
airlines, national governments still defend their ag
carrier for both strategic and symbolic reasons. Even in
a liberalized environment like the European Union,
common treatment of airlines proves to be a most
difcult task as once more national interests conict
with the European Commissions demand for free
competition and non-discrimination. In the airline
business, market exit barriers prove to be extraordinary
high. When mismanaged unprotable airlines fail to exit
the market, distinct recurring prot and loss cycles for
the industry are the inescapable consequence (cf. Fig. 3).
Managing airlines has always meant managing the
cycle. Publishing good results in 1 or 2 years does not
sufce; the true challenge is to create value over the
whole cycle. Stern Stewart & Co. has analyzed the 11
largest North American airlines nancial performance.
Over the decade 19901999, which basically represents
the last airline business cycle, the aggregate economic
losses by far exceeded the sum of economic prots
(return on capital minus cost of capital) (Pettit and
Goldberg, 2000). Airlines can now chose either to accept
this situation and to rely on public backing in the long
term, or to commit themselves to protability as their
highest maxim. Lufthansa has chosen the second
alternative, with its clear emphasis on risk averse and

0969-6997/03/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.
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S. Hollmeier / Journal of Air Transport Management 9 (2003) 5155
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Fig. 1. Stable long-term growth in air travel demand (International


Air Transport Association, 2002).

Fig. 2. Correlation of air travel demand (RPK) and world economy


(GDP).

Fig. 3. World airline industry net prot and loss margins (International Air Transport Association, 2002).

controlled growth, permanent focus on cost control,


efcient yield management and exibility in production.

industries corporate travel budgets rose considerably,


the IT sector generated a signicant number of business
travelers. As the stock markets reached unprecedented
highs, pretending substantial private wealth, leisure air
travel became a commodity.
Airlines went through extremely good years with
record prots (although not enough to balance out the
value destruction of the previous cycles trough).
However, most airlines failed to prepare for the next
downturn, to build up a solid balance sheet and
adequate exibility. After numerous consecutive years
of airline protability, employees demanded an everlarger share of the cake, reminding of their earlier wage
restraints. For many airlines, labor costs rose dramatically.
In 2000 the economic situation started to deteriorate,
and with this air travel demand weakened. The world
airline industry was in the middle of a replacement cycle
of elder Stage 2 aircraft, like the DC9s and 727s. Newly
acquired A320s and 737NGs with their higher productivity had contributed to capacity increase. In early
2001, overcapacity reigned and yields eroded. US major
airlines reported immense rst quarter losses; the
downturn of the cycle had arrived. However, it seemed
like the formal recession in the USA was not inevitable.
The Fed reducing interest rates maintained a ne
balance, inspiring condence.
This was the environment of September 11, 2001. It
was evident from the rst minute that the terrorist
attacks in New York City and Washington, DC, with
scheduled commercial aircraft had initiated a catastrophe for the world airline industry. The fear of
further terrorist acts was inevitable, since the simultaneous hijacking of four aircraft had obviously revealed
deciencies in the US security standards. In light of
what was to follow, the revenue lost due to the complete
closure of US air space for 4 days seems almost
insignicant. Irrespective of the direct consequences
for commercial aviation, it was the events of September
11 that paralyzed the economy and made the recession
inescapable. For the rst time since 1974, all major
economic regions/countries faced a simultaneous economic downturn.

3. Crisis management at Lufthansa


3.1. Anticipating the cycle downturn

2. Characteristics of the airline crisis 2001/2002


In the late 1990s, after eight consecutive years without
recession in the US, the myth of the new economy
changing the rules provoked a certain carelessness in
many industries and growth expectations surged. The
Asian Flu was soon overcome and forgotten. In most

In reminiscence of the last crisis 1991/1992, it has been


Lufthansas strategy to realize growth in a cautious way.
Flexibilization has been an important instrument to
reduce risk. When the economy tilts and economic
forecasts as the planning basis for the airlines expansion
become obsolete, exibility becomes the essential success
factor to reconstitute the balance. Consequently labor

H. Hatty,
S. Hollmeier / Journal of Air Transport Management 9 (2003) 5155
.

contracts have been agreed to contain a signicant


amount of workload (and subsequent pay) exibility.
The eet strategy accounts for upward and downward
exibility through its choice of aircraft types, aircraft
age structure and contracts with suppliers for short-term
delivery options as well as aircraft sales opportunities.
In late 2000, when the rst signs of a weakening travel
demand became apparent, a company-wide program, to
realize long-term efciency increases and sustainable
cost cutting has initiated. Formally launched in spring
2001, this program has been dubbed D-Checkjust
like the aircraft overhaul eventas it was similarly
designed to be a major overhaul of the whole company.
In September 2001, when every single investment,
project and process needed to be critically reviewed, it
proved invaluable that the base work had already been
performed by the D-Check project. This enabled the
management to take quick and effective decisions.
However, in early 2001, when D-Check was launched,
it was a challenging task to sensitize employees.
Lufthansa had just published record results for 2000,
and wage disputes with the labor unions were on the
agenda. Lufthansas pilots went on strike in May 2001
asking for signicant increases. In this environment, DCheck was eyed critically.
In summer 2001, when the economic situation further
deteriorated and demand was already weak, airlines
thought to cope with the situation by minor capacity
reductions hoping for a turnaround. In July 2001,
Lufthansas board had decided to ground two longrange aircraft.

3.2. Emergency measures after 9/11


With the news coming in from New York City on
September 11, 2001, crisis reaction plans were taken out
of the drawer. The complete closure of the North
American air space led to major disruptions. In all, 23
Lufthansa aircraft with a total of 5000 passengers were
on their way to or from the US. Aircraft were redirected
to Gander, Halifax, Toronto, Montreal, Vancouver, the
Bermudas and Icelandmost of which were only able to
return after 5 days. In the meantime Lufthansa had sent
its Special Assistance Team to Gander and Halifax to
take care of their stranded passengers.
Flight plans to the US and the Middle East were
adjusted immediately. Crew layovers in the Middle East
were abandoned, so an interim hub was established in
Antalya, Turkey, to serve as a crew base. Families of
Lufthansa employees were evacuated from sensitive
Middle East stations.
New security procedures were introduced worldwide
immediately. Insurance companies soon refused to
further cover war and terror risks, so interim solutions
had to be found. However, most important in the week

53

of September 11 wasboth public and internal


communication.
3.3. Revised medium-term planning basis
Looking back in history, the airline crisis in 1991
indeed is comparable to todays crisisthough todays
situation is substantially more severe. Back then the
crisis was triggered by the Gulf war and the explicit
threat of airplane hijackings. In January 1991, the
airline industry saw a trafc demand slump by 30%
just like in September 2001. Moreover, in 1991 US
economy went into recession as well. However, the
geopolitical crisis was soon resolvedthe Gulf war
lasted for only 2 months, hijackings did not occurand
trafc demand recovered accordingly. It took roughly a
year to reach pre-crisis plan levels.
In September 2001, no one expected air trafc
demand to recover as quickly as in 1991. But still, due
to the similar constellation of causes, those trafc
developments were used as a role model to set up
scenarios.
Monthly trafc numbers (in terms of Revenue
Passenger Kilometers, RPK) of AEA-airlines1 were
analyzed (Association of European Airlines, 2002):
Fig. 4 shows the trafc slump during the Gulf war.
Characteristic for the airline business is the seasonal
nature of trafc demand with highs in the summer
months and lows in winter. With the beginning of the
Gulf war in January 1991 actual trafc was 30% less
than originally expected. Fig. 5 shows the deviation of
actual trafc numbers from the original growth path. In
this format generic patterns can be recognized (cf.
Fig. 6): A V-pattern typically accompanies singular
effects. A sharp downturn is followed by a quick
recovery. In the airline crisis of 1991 this represents
the passengers momentary unease to y during the
(relatively short) Gulf war facing the explicit threat of
hijackings. The U-pattern is similar, however, indicating a continued persistence of adverse circumstances. This could be an external threat as well as an
unfavorable economic environment. An L-pattern,
nally, would be the consequence of a permanent
change in attitude or environmental factors. In this case
the original level would not be reached again. The crisis
pattern of 1991 shows a superposition of a V- and a
U-pattern. After 12 months, trafc had recovered and
reached the original growth path.
In September 2001 uncertainty prevailed. A strike of
the US armed forces against Afghanistan seemed likely,
though the prospects of fast success were doubtful. The
American, European and Asian economies went into
recession simultaneously for the rst time since the oil
crisis in 1974. A trafc pattern similar to 1991 was
1

AEA: Association of European Airlines,

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H. Hatty,
S. Hollmeier / Journal of Air Transport Management 9 (2003) 5155
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Fig. 7. Crisis scenarios chosen by Lufthansa in 2001.

Fig. 4. Decline in air trafc demand of European airlines during the


Gulf war 1991.

Fig. 5. European airlines RPK deviation from the long-term growth


path during the Gulf war 1991.

Fig. 6. Generic crisis patterns.

chosen as a most optimistic scenario (Frost) (cf.


Fig. 7). More likely was the expectation that a recovery
would rather take twice as long24 months instead of
12 months. This scenario (Winter) was chosen as the
Lufthansa baseline scenario for the initial crisis management. A worst-case scenario (Ice-age) assumes that
the original growth path will be missed and airlines
would have to re-dimension permanently.

3.4. Decisions and actions taken


On the basis of the three crisis scenarios described
above a set of measures has been decided:
Lufthansa, like most airlines, has immediately reacted
to the decline in air travel demand by reducing capacity
by 20%. In all, 43 aircraft have been withdrawn from
service temporarily. However, through comprehensive
coordination with its partners, Lufthansa managed to
reduce capacity without abandoning markets.
After September 11, many airlines immediately
announced massive lay-offs, US airlines typically in
the range of 20% of their total personnel. Expecting a
recovery after 2 years according to the baseline scenario,
Lufthansa took a different approach and refrained from
any lay-offs. Already before the crisis labor contracts
had been negotiated to contain a substantial degree of
workload (and pay) exibility. An additional employee
contribution has been negotiated with the unions in
return for job guarantees. Furthermore, a recruitment,
promotion and job rotation freeze applied, and part
time contracts as well as unpaid-leaves were offered to
the employees. The very special Lufthansa spirit and
solidarity made signicant capacity reduction possible
without incisive personnel measures. Furthermore, the
exibility obtained enables Lufthansa to react quickly to
any recovery and build up capacity accordingly. In
order to maximize the companys cash ow, a shortterm freeze was called on all investments and projects.
Only (a) legally required, (b) operationally essential, or
(c) strategically most important projects and investments were continued. After a detailed review 65% of
2002s project expenditure could be saved.
The capacity reduction soon showed the desired
effects, load factors rose, and yields stabilized. By the
year 2002, load factors reached the previous years levels:
capacity supply met the decrease in trafc demand
(Fig. 8). In the coming months, capacity was deliberately held short industry wide in order to reduce
overcapacity and secure yields. Very cautiously capacity
is added since (Fig. 9). Looking back at the scenarios set
up after Sept. 11, the forecasts proved to be right (cf.
Fig. 10): Due to the fast success of the allied forces in
Afghanistan, the initial rebound of European air trafc

H. Hatty,
S. Hollmeier / Journal of Air Transport Management 9 (2003) 5155
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3.5. Towards a new organization of the industry

Fig. 8. Capacity cuts to align production level with decline in trafc


demand after September 11.

Fig. 9. Cautious capacity increases in 2002.

As airlines around the world tumbled, for many of


them state subsidies seemed to be the ultimate hope.
Lobbying for or against state aid became an important
part of crisis management. Lufthansa supported the EU
Commissions position, that state aid in Europe be
strictly limited to award damages directly caused by the
closure of the airspace in the US after 9/11, which
ultimately was a governmental intervention preventing
airlines for pursuing their business.
Any other form of state aid must be inhibited.
However, the perception of airlines as national symbols
and their protection by visible or hidden subsidies is still
widespread.
When nancially weak and subsidized carriers use the
state aid to lower fares in order to stimulate trafc,
increase load factors, and gain market shares, protable
airlines are punished for their proper management.
When executed consequently, the EU Commissions
hard position would lead to the overdue industry
consolidation in Europe. It would initiate the last step
of full deregulation and liberalization, and hence in the
long-term facilitate a protable European airline industry. However, these mechanisms should already
work in normal business cycles and not only in
exceptional situations, like the major market distortion
following 9/11. In a fully liberalized environment, all
airlines will be forced to manage the cycle and create
value in the long term to succeed.

4. Conclusion

Fig. 10. Development of trafc demand in line with expectations.

came earlier than expected. The lower level of demand


that can be observed after April 2002 is capacity
induced, representing the deliberate reduction in supply
in the summer schedule. The key question remains
how long will it take the industry to eventually nd back
its way to its previous growth path? Or what size should
be a re-dimensioned system to start a more healthy
growth from?

The cyclical nature of the airline business is well


known and needs to be managed. The coincidence of the
industry downturn and the terrorist acts of New York
City and Washington, DC on September 11, 2001 have
led the airline industry into its most severe crisis in
history and challenges the crisis management capabilities of the worlds airline leaders. However, managing
the current crisis does not only aim at restoring the precrisis state, but rather at forming a more healthy
business environment.

References
Pettit, J., Goldberg, M., 2000. North American Airlines. The New
Math: 4>8, Stern Stewart Research, September 2000.
International Air Transport Association, 2002. World Air Transport
Statistics, 46th Edition, June 2002.
Association of European Airlines, 2002. European Airlines Trafc
Results. August 2002.