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Penny Wise, Pound Foolish – How Saving Programs can lead to lower profits
Dear Lufthansa,
What happened?
You used to be the best airline in the world.
And now?
Aged fleet, flight delay because of technical problems, flights canceled for profit, a hotline that is not hot at all, a customer service that is a
rude claims avoidance machine, no courtesy just cost avoidance . What are you doing?
From personal experience to back up my above claims. Flight from Frankfurt to Washington. Had to deboard the plane due to technical difficulties. Service Center rebooked us on a flight three days later as this was presumably the most cost efficient for Lufthansa. After three hours at the counter we finally got a flight the next day via Munich. Complimentary hotel as required by law. Middle of nowhere, old, smelly, in short a disgrace for a supposed 5 star airline. Next example. Flight from Boston to Frankfurt. Canceled days earlier. Let me guess. Not enough passengers. Not profitable for Lufthansa. “Let them eat cake”. Rebooked a day later via Montreal. Got to the airport. Luggage too heavy for Economy but we booked Premium Economy. This is Air Canada “we don’t care” instead of “Sir you have been upgraded to Business Class as we have no Premium Economy on this fight”. Flight delayed in Boston. Late arrival in Montreal. Flight to Frankfurt missed. Lufthansa flight leaving one hour later. Seats available but only Business. “Sorry we can’t take you as you are now booked on Air Canada”. End of conversation with hotline and hang up. Rebooked on flight to Malpensa. No Upgrade but at least Premium Economy. Didn’t feel like it though as the plane felt like it was from the 90s. Malpensa to Frankfurt. Cheapest Economy seats in the back. Finally got there. Outfield position past the maintenance
hangers. Long bus ride. Is that premium I wonder. One hour wait for our suitcase. In conclusion. Never again Lufthansa if I can avoid it.
Lufthansa has become a prime example of a company that is only internally focused. Due to years of mismanagement cost savings are necessary. Instead of slaying the internal dragons of overbearing unions, overarching bureaucracy and back office staff, the easier way is to cost optimized every journey for Lufthansa instead of delivering the best quality service for the customer. A perfect example of a weak management focused on trying to optimize profit margins in the short term while sacrificing customer loyalty and thereby long term profits.
Some simple math to proof it. I fly about 10 times a year within Europe and 3 times internationally. I used to always look for Lufthansa flights. Let’s do the math. Ten European flights are probably around €7.000 + 3 international flights are probably around €5.000. That doesn’t make me an MVP for them but its €12.000 of revenue annually. I still plan to travel for the next 35 years easily which means Lufthansa has sacrificed €420.000 of revenue on me alone because they were thinking of themselves instead of the customer. Let’s now assume that the Boston flight was 50% utilized and that the capacity of the plane was 281 passengers in various classes i.e. 140 passengers got canceled and reacted the same way as me. By focusing on cost optimization instead of customer service, Lufthansa has jeopardized €58.8M of long term revenue.
Now, how much did they save? According to the FAA a flight hour on a wide body airplane is $9.097 per hour and with a flight time of 8:30 hours, Lufthansa saved the whooping amount of $77.324,50 or approximately €70.000. Congratulations Lufthansa, you just shot yourself in the foot, or is it the head?
Of course this is all hypothetical math and assumptions and I don’t pretend all my assumptions are right or even well researched, but it’s fun to think about how one bad short term focused decision can have significant impact on a company’s future.
So what’s the lesson here:
First: If you have to save cost, make sure to look from the outside in to evaluate your decisions. Customers always come first, in good times and in bad times.
Second: Restructuring takes guts. If you choose the easy way like Lufthansa you are just administering your own decay. Slay your inner dragons, take the most fortified hills, tackle the hardest issues. Restructuring is not a popularity contest but an act of survival.
Third: Do it for the right reasons and with the end goal in mind. Your Why is to retain as many associates and customers as possible in a health and successful company. Loyalty always pays off in the long run. Your How is to trim the fat! It doesn’t server your customers
but only itself. Take out the under-performers, they create an internal cost to all other associates and to your customer reputation. Ensure performance and reward are balanced, it’s a business not the salvation army. Automate what can be automated, it’s the only way to stay
competitive, but always with the customer in mind and to provide a better product not for the sake of cost saving.
In short – Don’t be Penny Wise, Pound Foolish!
