... In the 1990s, Lufthansa’s market share was plunging as were its revenues. Its turnaround strategy holds valuable lessons for Air India’s revival.
The only Maharaja who did not lose his privy purse after 1971 was Air India’s and Bobby Kooka reminded us of that on the hoarding in front Air India’s Nariman Point headquarters, by quipping “Not with my privy pursers, you don’t!”. The Maharaja has now lost it all — the sheen of his yellow red striped head gear and shine of the brass buttons on his red sherwani. He is no longer able to serve caviar garnished with crumbled, hard-boiled egg and chopped onion on lightly buttered toasts and vodka or Blue Label to his ‘preferred guests’, their families and office clerks who travel in his first-class home by paying only the ‘full fare’ economy class fare through a very highly secretive but effective process called ‘upgradation’. The government has been busy of late (actually pretty late) to repair the Maharaja’s clothes and, if possible, buy him some new ones.
As expected the government’s belated response has been three-fold — the first one is the traditional stereotyped response of the Government called ‘find the scapegoats’. Like the queen in Alice in Wonderland, who held the croquet mallet and screamed ‘off with his head’, it has been determined now that ‘some heads will have to roll’. The only difficulty with that approach in the case of Air India is that if not done selectively, there may not be many spare heads left to roll. The second response is that the management must come out with its own restructuring plan and the financing involved. But this again may prove to be difficult, because the management has been outsourcing this activity to the administrative ministry for decades. The third and the most sensible response has been to induct professional managers and business leaders to the board of Air India. This should be effective provided, of course, the board is allowed to function without interference (as was the case with Satyam Computers) and no further committees are appointed to study the recommendations of the board. The implication of this measure could be far-reaching, as it will enable the transition of Air India from an ‘administrative ministry-managed company’ to a ‘board-managed company’. It will require a Himalayan change in mindset on the part of the administrative ministry, to curb its natural proclivity to pick up the phone. The main problem with Air India is not its poor financial health. The real cause is the singular failure of leadership and governance. Any attempt to resuscitate Air India through financial restructuring without a deeper organisational restructuring (going beyond a few knee-jerk punishment transfers) will result in Air India sliding down the slippery slope and good money chasing bad. A transformational change is necessary. Nothing short of it will work. Is the government ready for it?.
Lufthansa in the 1990s did just that.
A combination of factors such as deregulation of air fares in US, increased competition from US airlines and tremendous price competition had lowered the yields of all European airlines. But Lufthansa had all along laboured under the belief that, being a national airline, it was programmed for success; so it could grow stronger merely by increasing assets, and employment would rise in any case as people would seek ‘secure’ jobs in a state-owned enterprise. “We are the German Airline Company, state-owned and a prestige organisation. They will never let us die” was the refrain, according to Jochen Hoffman, Lufthansa’s senior vice-president at the time. As a state-owned enterprise, its immortality was assured. This delusion underpinned Lufthansa’s strategy to pursue higher growth, by increasing the number of aircraft from 120 to 275 between 1987 and 1991, with its revenue growing only from 11 billion Deutsche Marks to 16 billion Deutsche Marks. The Gulf war brought in a steep fall in air traffic. The passenger load factor (the ratio of passenger kilometers flown as a percentage of seat kilometers available), which measures how much of an airline’s carrying capacity is used and tests the efficiency of asset utilisation, declined rapidly. Lufthansa reported an after-tax loss of 444 million deutsche Marks, followed by worse results in the second half of 1991 and 1992. In 1992, Lufthansa had cash to meet only a fortnight’s operational expenses and no cash to pay salaries. No bank in Germany was prepared to advance money. Lufthansa’s response to the looming crisis was characteristic of a state-owned, monolithic and unprofitable enterprise.
Sounds familiar? Between 1996-97 and 2005-06 (not to take into account the latest figures), Air India’s operating ratio was close to 100 per cent or more, signifying that the airline was hardly earning any profit or was in the red. The PLF was around 65 per cent, far below the international average; it was losing on the revenue hours flown, the average revenue tonne kilometer per employee was erratic, the service standard was declining, and there was no staff rationalisation. But all this was not motivation enough to stir up either the board or the management of Air India or the administrative ministry.
Lufthansa’s turnaround from near bankruptcy in 1991 to sound financial health by the end of the 1990s was orchestrated by Jurgen Weber, who was appointed the chairman in May 1991. In June 1999, Lufthansa announced the best results in its 70-year history. Simultaneously, with the restructuring plan Jurgen Weber persuaded the government to step up its efforts to privatise Lufthansa. By 2000 Lufthansa was a privately-owned, profitable company — and a core element of the strongest worldwide alliance in the airline industry.
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Jurgen Weber’s main strategy plank was the commitment of the people. It began with his weekend meeting in June 1992, with some 20 senior managers at the training centre at Seeheim. The title of the meeting was changed from ‘Mental Change’ to ‘Crisis Management Meeting’ shortly before it began. The Seeheim meetings produced a set of 131 projects or key actions, known as ‘Programme 93’. These projects involved financial restructuring, cutting costs and redundancy, renegotiating landing slots, route restructuring, and cooperation with other airlines by creating ‘Star Alliance’. But the reason why these projects worked was because there was enough
Air India is different from Lufthansa, and India is different from Germany. So what worked for Lufthansa may not work for India. But the short lesson that emerges is that the inflow of resources is a necessary but not sufficient condition for transformational change in an organisation. We have to drive for hard success through soft processes. Air India is a great national asset, too precious to be frittered away. At least this much is to be owed by Air India to a tall and lean Parsi gentleman who used to fly a De Havilland Puss Moth regularly and on time, to carry mail from Juhu in Mumbai to Karachi via Ahmedabad and gave the country its first national airline.
The author is associated with the World Bank and the IFC’s Corporate Governance Forum. He is a former Executive Director of Sebi)