Despatches from the Globalisation Front

Head Table Guests

Anne Libby, Owner, Libby's of Toronto Art Gallery and a Director, The Empire Club of Canada; Christel B. Neuman, Vice-President, German-Canadian Business and Professional Association; The Rev. Victor Reigel, Associate Pastor, Christ Church, Brampton; Ulrich Wachter, Vice-President, Lufthansa Canada; Marcia McClung, President, Applause Communications and a Director, The Empire Club of Canada; Bernd Hoehne, Vice-President, German-Canadian Chamber of Industry and Commerce; and Professor Doctor Klaus Conrad, Visiting Professor, German and International Studies, Centre for International Studies, University of Toronto.

Introduction by Julie Hannaford

The Empire Club of Canada's speaking season begins on May 1 of each year, and the beginning of the 1996-1997 season was marked by an address by Helmut Schmidt, the former Chancellor of Germany. It is fortunate, therefore, that we move to the closure of this 1996-1997 speaking season, with an address from Jfirgen Weber, the Chairman of Lufthansa. As we opened our season with Helmut Schmidt, who talked about Europe in the 21st century, we were looking forward to the challenges of globalisation set against the backdrop of unification. Since then, we have heard from leaders in business, politics, finance, and education, all of whom addressed issues of competition and co-operation on the global frontier.

One would think that the airline business would be immune to any challenges or barriers associated with globalisation. After all, in many ways it is the airline industry that permits the blending and breaking down of barriers to communication, trade, and transport over vast distances. Yet, as we have seen in the reports on the progress and challenges facing both our domestic and international air carriers, globalisation presents its own set of challenges to the airline business.

Today, we are privileged to hear from the leader of an airline that has not only survived the challenges of globalisation, but has positioned itself as a winner in the global marketplace.

Jurgen Weber was born in Lahr, in the Black Forest. He studied aeronautic engineering in Stuttgart, and business administration at the Massachusetts Institute of Technology. He is an airline executive who has worked in both the technological and the business sectors, beginning in the Engineering Division of Lufthansa, moving to the Technical Division, where he answered to the Federal Civil Aviation Administration on questions of aircraft maintenance and overhaul. He became responsible for that division's profitability, and in March, 1989, Mr. Weber began his career as Lufthansa's business leader, with his appointment as Deputy Member of the Executive Board, and later, his appointment as Chief Executive for Technical on January 1, 1990. He has served as Deputy Chairman of the Executive Board, and in May, 1991, he was unanimously elected as Chairman of the Executive Board of Lufthansa. In the last six years, Mr. Weber has confronted, overcome, and set an example for steerage of the airline industry into the 21st century.

We are honoured to have Mr. Weber address the Club, particularly since Mr. Weber has agreed to speak on his views as to the effect and future of globalisation in Europe generally. His talk is entitled "News from the Globalisation Front." It is appropriately named because Mr. Weber has served, fought, and led on that front.

Ladies and gentlemen please join me in welcoming to The Empire Club of Canada today, the Chairman of Lufthansa, Mr. Jurgen Weber.

Jurgen Weber

Mr. President, ladies and gentlemen:

Reading the history of your venerable institution, Mr. President, I discovered that one of my German predecessors here as speaker--worthier of admiration than I would ever want to be--was Ludwig Erhard. He is well remembered as our economic minister of the fifties, Chancellor and revered father of the German "Wirtschaftswunder," the so-called "economic miracle."

The memory of Ludwig Erhard as a man of foresight and vision has been revived in my country this year for two reasons.

First, the one-hundredth anniversary of his birth in February caused many people to look back with nostalgia on the enormous tasks that accompanied the reconstruction of our economy after the war. Ludwig Erhard introduced to the Germans the social-market economy which led to an unprecedented phase of over 40 years of stability, prosperity and social peace.

The other, perhaps not so nostalgic, reason was the question: "How would he, the great conceptual thinker and practitioner, tackle the challenges of globalisation, which are worrying so many people in industrialised countries today?"

I have given my address the headline "Despatches from the Globalisation Front," which admittedly sounds rather martial. But many regard the effects and repercussions of globalisation as an attack on their personal career, livelihood and standard of living. Many see them as a threat to the company they work for and their jobs.

Some of the fears may not be without foundation. The other day I read a provocative thought by a German historian who said: "Globalisation and the decline of ancient Rome have one thing in common--they are unavoidable." Ominous as his statement may sound, the historian is probably right: The decline of Rome gave way to a new world order--and so will globalisation.

Many of us sense that this opening of the world which we are witnessing in the wake of the international division of labour, the liberalisation of world trade, the collapse of communism, the start of the World Trade Organization, and the harmonisation of lifestyles that goes with open societies everywhere is, indeed, creating a different world order.

A globalised world is a world following what I call the logistic principle. Its smooth running will only be guaranteed when people are able to meet each other and when goods are made available at the right time, in the right place and at the right price, anywhere in the world. The degree to which for instance the German economy is linked to the world economy and its reliance on foreign trade may be highlighted by the following figures. Since the days of Ludwig Erhard, West German exports have multiplied ninety-fold while imports have grown sixty-fold. Compared with these figures the nominal domestic product has increased only thirty-fold.

A globalised economy simply means that all factors of production, that is natural resources, capital, technology and labour, as well as goods and services move around the world at an accelerating pace.

In the globalised world of today, production goes where the conditions are right and the infrastructure is available. Global sourcing, for instance, has become a matter of course for every German--and I suppose Canadian--shopper these days. The import quota in their shopping carts probably exceed that from many domestic industries.

All that encourages business people to travel, and goods to be flown on airplanes. International lifestyles make tourists fly longer distances to find the relaxation and stimulation which make a vacation exciting. Aviation growth is not only passenger numbers, but also the number of kilometres flown.

This dynamism calls for smooth connections in the world's skies and therefore requires major players in the airline industry to adopt a global perspective in their strategy and work.

The price regime of pre-deregulation IATA times has definitely become obsolete in face of the megatrend towards open markets, the worldwide division of labour and liberalised trade. The removal of trade barriers is playing an important role, but its effects can only bear fruit when efficient transport is available at attractive prices.

So, the need for new perspectives has become particularly urgent with airline deregulation and liberalisation, another megatrend of our times. I would like to dwell on this for a little while because the Lufthansa case is an interesting example of an airline repositioning its strategies under the impact of globalisation.

When I took over the chairmanship at Lufthansa we were facing a critical time. Then, back in 1992, the airline industry was suffering from the repercussions of the Gulf War and excess capacities. To aggravate the managerial challenge, 1993 brought the third package of airline liberalisation in Europe removing virtually all market access, capacity and pricing restrictions.

Yields were falling. In fact, over a five-year span from 1990 to 1995 European airlines lost 25 per cent of their average ticket revenues--a landslide, despite annual passenger growth figures of some four to six per cent. Lufthansa, still majority--owned by the state at the time, faced tremendous adaptation problems. And we were heading towards a loss of some 735 million Deutschmarks--$613 million Canadian.

So we set out to do three things: to put our house in order, to adapt our structures to the challenges of globalisation and liberalisation and to develop a strategic vision.

The first two prongs of this three-pronged approach can be sketched out fairly quickly.

In a drive to achieve operational recovery we slashed our material costs by 15 per cent. We trimmed 17 per cent of jobs from the work force, nearly 8,000 positions, and we improved our productivity by 31 per cent within two and a half years. The reward for these efforts was a return to a profit that turned the red figures I mentioned to more than the same amount in black figures, 756 million Deutschmarks--$630 million Canadian. That enabled us to successfully privatise the company.

As a second step, we re-aligned our core-business activities, outsourced non-related activities, and gave autonomy to important segments of our business, such as cargo, maintenance and overhaul and EDP services. Only a few days ago our passenger airline became a separate, self-managed business unit as well. Small units operate closer to the customer, and they are quicker to respond to market needs and market changes. Their accountability is much greater.

As a third strategic step we have repositioned the company as a global player. It was apparent to me that home markets in the airline industry will no longer serve as a protected niche for flag carriers. Airlines compete not only on service but primarily on price and network quality. Of course, the new open world of commerce and industry corresponds to the wider scope of our customers' activities. They want, and expect, enhanced offers in an enhanced network of air services spanning the globe.

It was clear to me that the task of creating such a network of global magnitude required resources of equal magnitude. This would overstretch the capabilities of a single carrier, even those of an airline of our size, ranked third in international passenger kilometres transported.

Another factor cannot be overlooked. In spite of the global character of flying and the greater freedom a liberalised regulatory regime offers, the airline business still remains fairly restricted. This is due to the bilateral nature of international air agreements, ownership rules--such as the 25 per cent cap on foreign equity in U.S. carriers--and the comparative advantages or disadvantages of locations. It is not easy for airlines to switch production as, say, a car manufacturer could do.

And this is where alliances come in. They are capable of eliminating some of those restrictions that a globally tuned industry is facing.

So we started to create a network of like-minded airlines, well established in the four corners of the globe. Although the notion of airline alliances meant treading on fairly unknown territory we pursued--in retrospect--the right approach and teamed up with blue-chip companies in our branch of industry, such as Air Canada, United Airlines and VARIG on this side of the Atlantic. Our major partner in Europe is SAS Scandinavian Airlines. In Asia it is Thai Airways International and Ansett of Australia. We are presently looking for an additional partner in this large and booming region. In Southern Africa we have teamed up with South African Airways.

The right approach was not to enter into equity partnerships--a concept followed by our major rivals. It has caused them a number of problems or resulted in slow progress in alliance building. We and our partners believe in a freer approach. The fear that someone might try to dominate or exert undue influence is, after all, not a good base for a partnership.

What makes our alliances tick? It is kindred spirits and the pursuit of a policy of mutual benefit and trust. And that is based on comparable interests, comparable quality and complementary networks, where you have little overlap. Cultural fit is all important and we share common values such as flexibility, internationality and the willingness to share our good ideas.

Alliances, and that is our credo, must create added value for our customers.

We have enhanced our networks enormously through code-share flights and improved connections. Our partnership with Air Canada is in a comparatively early stage.

At present, we offer 84 weekly code-share flights to seven destinations. With United Airlines we are already offering 3,100 weekly flights to 106 joint destinations.

Also, we want to make terminal transfers easier to improve flight connections, we have pooled our mileage programmes and we will recognise the status of our partners' frequent travellers, and, finally, we see to it that world-wide standards of safety and comfort are being applied.

We will not deny that alliances are also meant to bring advantages to the airlines. We have pooled a number of our resources. Our passengers, for instance, can use our partner's lounges. We have not had to open up new offices despite a much wider network, and with some partners we have even pooled our personnel. Other synergies will come with joint procurement of materials such as computers and--maybe at a later stage--new aircraft.

This all sounds so very easy. But you might ask me now: "How did you sell all this to your staff?" They, of course, have had to adjust mentally and physically to this new world, make job changes and accept a certain amount of cutbacks in our recovery phase. Yes, there have been job changes, a change in many people's career prospects and there have been cutbacks--both in staff numbers and even in pay. And to make things more complex, we do not cultivate a hire-and-fire culture in Germany. Many other European countries don't either. Some people think this is part of what has generally been termed the European disease caused by an extensive social safety net.

Much has been said about German co-determination law and labour representation on supervisory boards. You may be surprised when I claim that we were able to undertake all these fundamental changes not despite the social rules of the game but by using the opportunities they offer to win the full support of unions and staff representatives. Co-determination is one of the elements of the social-market economy Ludwig Erhard-style. It obliges both sides to communicate. It helps to pave the way for a trusting co-operation, although at some stage the process can become clumsy and awkward. And it has another advantage: It also involves staff representations in sharing the responsibility of important decisions.

Nevertheless, we were able to explain to our employees the need to restructure collective agreements, and negotiate a pay freeze. And we managed to avoid full-scale strikes in industrial disputes like we did at the beginning of the year when we entered into a long dialogue with our air crews. Employee involvement requires a kind of openness which sometimes borders on giving away company secrets. But we can now compare ourselves favourably with the labour cost levels of serious European competitors--like KLM and British Airways.

Twelve days ago, the Financial Times had an interesting report on a recent survey, undertaken in the European Union. It revealed that companies which involved their staff in decision-making processes were quicker in achieving important targets, such as cost reductions, output and quality improvements, and a scaling down of the work force to adjust to changing environments, quicker than companies which do not involve their staff in the decision-making process.

Since customers increasingly take the liberty of global sourcing also in their transport needs, global costing has become the natural rationale for us in our competitive environment. That is the reason why we had to begin to internationalise our costs. We concluded, for instance, a collective agreement with our unions that allows us to recruit up to 10 per cent of our flight attendants outside Germany. They can be hired at local conditions thus bringing down personnel costs.

We process reservations data and tickets in India and have spun-off some maintenance work to our own maintenance subsidiary in Ireland. We also recently established a cargo airline in India. We are not acting differently from companies like, say, Siemens, BMW, Hoechst or Daimler Benz. In a way, Germany can claim to be a highly globalised country. The internationalisation of some of our jobs and certain activities of our company has helped to secure jobs in Germany. And that has been largely understood by our staff.

Altogether, I am rather more optimistic than some of the commentators watching the European scene who concentrate their reporting on the battles of management and labour, and the moaning of politicians. It is rather sad that the claim that Europe is facing a crisis of competitiveness has become conventional wisdom.

It is highly doubtful, however, whether that is really the case. I think the export figures or the productivity levels of countries such as Germany and France speak a different language. Germany continues to be the second-biggest exporter after the United States.

Some economic experts point out that continental Europe's problem is not a failure of productivity growth across all sectors of the economy. They even maintain that Germany loses out on inward investment because its high productivity makes it less interesting to transfer production to the country. Work requiring little or no ingenuity and skill can, indeed, be produced cheaper elsewhere. Labour in countries such as Germany is often overqualified for such jobs and it is certainly highly paid.

Overseas observers also tend to overlook the fundamental consequences for Western Europe caused by the fall of the iron curtain. An opening up of the U.S. Mexican border would be only half as dramatic as that historic event has been for Europe. Billions of marks and dollars have been and are still being transferred to Eastern Europe to kick-start their economies. Their well-trained labour force is forcing their way onto western labour markets. Their availability has caused a drain of work to the East.

Continental Europe's real problem is job creation. Labour cost is high because social costs are high. But as long as productivity is high, the present level of labour costs may even be warranted to a certain degree.

In the table of the world's highest-paid workers, Germany tops the list ahead of Switzerland and Belgium. But when it comes to money in the pocket we fall back to number three behind Switzerland and Japan.

Nevertheless, there are encouraging developments taking place in Europe and in Germany right now. Facing unsatisfactory employment figures, unions and employers are vigorously discussing ways of mastering the problem. Innovative contracts that would allow pay and working hours to even out highs and lows in production cycles have been introduced in a number of companies such as Volkswagen.

Stimulating creativity and developing innovative and so-called intelligent products is becoming widely recognised as the main goal to aim for. Let me cite an example. Lufthansa Cargo AG, our freight airline, has recognised that carrying goods from A to B is a job that can--in the long run--easily be handled by third-level carriers. To counter this situation we have set ourselves the target of changing our number-one cargo airline into the world's leading provider of logistics services. The logic is simple. As a first-world company we must provide an innovative first-world product even in such a mundane business as carrying crates and boxes.

Altogether, I am optimistic that we will overcome the current problems of this, our transitional period leading to a genuine global economy. Many brains are working on solutions and so are we in our particular industry.

There is another development which makes me confident about our role in the triad of the three economic powers, America, Europe and Asia--the gradual integration of the single common market and the European Monetary Union.

I am convinced, the Euro will come and it will be ready for introduction in 1999 because all continental countries are making enormous strides in putting their respective houses in order. The side effect for European consumers has been remarkable. The average inflation rate has gone down from 13 per cent in 1980 to 2.4 per cent in 1996.

Even the U.K., where there is less enthusiasm for a currency not bearing the head of Her Majesty, major industrial companies are preparing for the introduction of the Euro.

Like the partners of NAFTA, the nations of Europe so far have found many advantages in their common market gradually turning into a single market. NAFTA, I trust, has done our partner Air Canada good, and so too, has Lufthansa benefited from the EU. Both of us can participate in a true efficiency contest.

With the European Monetary Union, some 40 billion Deutschmarks of annual costs spent on managing transfers between the various currencies of Europe will disappear. That alone will bring a giant boost to our continent's efficiency.

The European Monetary Union will create a huge financial market and establish a level playing field for the Europeans' money market and stock exchanges. If Wall Street catches a cold in the future that will not necessarily mean that Frankfurt or Paris will go down with flu.

But above all, it will prevent countries from hiding weaknesses in their economies by simply devaluing their currency. The Euro will force politicians to upgrade their operational standards, so to speak. We can presently observe a lot of belt tightening, cost cutting and restructuring going on in the businesses and administrations of Europe. That might be very much along Ludwig Erhard's lines. Today, he might well have given similar advice to that which he gave the Germans 40 years ago: "Work hard, be moderate, do not consume more than you can earn, restrict public spending and trust in the mechanism of the markets. But do not set your social conscience aside, trust your labour force and let your people participate in the vital issues that concern your and their future."

We have begun to let our staff have a share in the ownership of the company. I would very much welcome 25 per cent of the Lufthansa equity being held by our employees eventually. Maybe we will see the day when we can discuss with our unions whether part of our employees' salaries should not be coupled with the well-being of the airline; in other words, whether we should not pay out part of our salaries as shares.

So, in the end, my "despatches from the globalisation front" are far from being gloomy. They report on retrenchment and repositioning rather than retreat. People in my country are beginning to realise that the division of labour that has created wealth has gone one step further with globalisation.

The Germans and their fellow Europeans are in the middle of a learning process. If we rely on our strengths and use our lead in education, knowledge, process technology, capital resources and infrastructure, the industrialised countries of Europe will not miss out. We must be willing to adapt, though. But I am certain we will learn by doing and that globalisation will bring greater opportunities than risks.

Having said that, I found myself--not quite inadvertently--paying tribute to Ludwig Erhard, a great social marketer and leader who once addressed the famous Empire Club.

The appreciation of the meeting was expressed by Marcia McClung, President, Applause Communications and a Director, The Empire Club of Canada.