Lufthansa

Going Global, but How to Manage Complexity?

Adel Donnych Jason Myat-Hsu Yusuke

Company History
1926: Created by Weimar government 1931: Had established most comprehensive air route network in Europe 1935: Expanded to the USSR and China Early 1940s: Led coup against Nazi leadership 1954: Allies allowed the recapitalization of Duetsche Lufthansa

Lufthansa

History
1966: Resumed service behind the Iron Curtain under partner company names 1990: The reunification of Germany 1991: Lufthansa operates in the red for the first time since 1973 Mid 1990s: Formed Star Alliance Early 2000s: Began to sell of diversified business components

Lufthansa

Relative Current Situations

Operates more than 500 aircraft from hubs in Frankfurt, Munich, and Zurich Services approximately 250 destinations Acquired full ownership of SWISS Acquiring significant stakes in other airlines

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Lufthansa
Key Strategic Issues
Acquisition and Restructuring Strategies
o Restructuring focused on corporate strategy to unite 6 business segments under one strategy that reinforced the core businessPassenger travel. o 5 current segments: Passage, Logistics, MRO, IT, Catering & Tourism and a services group offering Insurance, Flight training and Business Travel management. o Acquisition strategy focused on expansion in Europe and Globally. Geopolitical events made this strategy economically unviable. o Current strategy focuses on equity stakes in other companies.

Lufthansa

Lufthansa
Key Strategic Issues
International Strategies
o Industry changes, deregulation and the economic pressures of sustaining a profitable business, Lufthansa formed The Star Alliance with other airlines to provide a seamless network of intercontinental connections. o Mergers and acquisitions were costly and ran into governmental regulations and limitations. The alliance would provide the needed expansion sought by Lufthansa with limited regulatory hurdles and reduced investments. o Emphasis is on maintaining a Global strategy that offers the customers a similar level of service throughout the network.

Lufthansa

Lufthansa
Key Strategic Issues
International Strategies
o Formed Lufthansa Regional a regional airline to compete with the low cost carriers that sprung up as a result of deregulation. o Lufthansa Regional was a regionalized part of the International strategy adding to the economies of scale and to the Lufthansas market size. o Recently acquired 100% stake in Austrian Airlines.

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Lufthansa
Key Strategic Issues
Cooperative Strategies
o The Star Alliance was a global strategy requiring efficient operations across the network. Coordination and cooperation were vital to its success. o As a cross border strategic alliance the goal was to increase market share and profits. o Limitations in domestic growth and foreign government policies made the alliance an attractive strategy.

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Lufthansa
Key Strategic Issues
Organizational Structure and Control
o Organizational structure was accomplish by restructuring into 6 business segments. o Goal was to avoid duplication of functions among the business segments and resulted in a more focused corporate strategy. o Main controls: cost cutting, removal of intermediaries in tickets sales, wetleases for regional airline. o Maintain strong financial discipline, high credit rating, low debt service. Currently it owns 70% of the air fleet debt free.

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Lufthansa
Key Strategic Issues
Miscellaneous o Integration of personnel across globe, employee training programs, diversity, safe place to work. o Increased CRM strategy customer centric focused services and products.

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Lufthansa
Key Strategic Issues
How is Lufthansa dealing with the challenge of sustainability?
o Airlines being scrutinized for CO2 and NOX emissions. More of an issue as air travel increases. o Fuel currently not taxed. o Present day testing by other airlines on Bio-Jet and synthetic fuel look very promising. o Lufthansa initiatives:
Technical progress Improved Infrastructure Operational Measures Economic Instruments

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Lufthansa: External Analysis

Industry Definition Lufthansa competes in the international airline industry Its business segments include passenger business, logistics, repair and overhaul, catering, leisure travel and IT services.

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Lufthansa
Defining the Industry
Low Low Profit High Growth
Industry Price Movements The elasticity of demand, the economy, IT, socio-cultural, political/legal, demographics, from the general environment has claimed massive movements in this industry and Lufthansa core business units. Passenger Transportation Maintenance Repair and Overhaul (MRO) IT Logistics (Cargo) Catering (Passenger Food Service) Lufthansa will continue to do what it does best: focusing on the customers by providing the best customer service, ramping up their IT, and reducing cost; in addition, conservative risk management practices.

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Lufthansa
General Environment
Global Demographics Sociocultural Economic IT Political/Legal

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Lufthansa
Demographic
Each of Lufthansa's customer segments has different profitability and different service level requirements and expectations.
Each service offerings are tailored differently to each of the segments. Differentiating customers by demographic factors but by more business related attributes such as their purchase history or profitability.

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Lufthansa
The Good, The Bad and The Ugly
Platinum customers: Most Profitable customer, who are typically heavy users of the product, who are not overlay price sensitive and whose commitment to the enterprise is high. Gold Customers: The profitability level is lower and the commitment is not as high as the platinum members, even though they are heavy users. Iron Customers: These customers provide the volume needed to utilize the firms capacity but whose spending levels, loyalty and profitability are not so substantial enough. Lead Customers: Customers that cost the company Money. The company must minimize the customer segment, either by trying to upgrade customers or by disassociating from them.

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Lufthansa
Global Outlook
Looking at the Airlines from a global standpoint

Lufthansa facilitates economic growth, world trade, international investment and tourism; and is therefore central to the globalization taking place in many other industries.

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Lufthansa
SocioCultural
In the work Place Now Approximately one-third of the workforce is non German. Continuous education and training is on Lufthansa top priority list not only for employees but also for managers. Lufthansa School of Business CSR
Lufthansa environmental activities engage a wide range of social and environmental projects from supporting children in need (via the help alliance) to protecting endangered animals and recycling or introducing fuel efficiency initiatives.

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Lufthansa
IT Customer to Business interfacing Got Rid of legacy This Helped Lufthansa Reduction in maintenance cost Improved site usability and functionality More flexible booking process Customer Relationship Management
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Lufthansa
Mobile Business Model Conformation-SMS with the flight information Convenient check-in on cell phone

Alerts you when Flight gets canceled

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Lufthansa
Political/Legal In 1978 Deregulation Allowed foreigners to own 25% of an airline EU non-European ownership limited to 49% ASIA, it is not illegal to own an airline Government Taxes has imposed taxes heavily Government Fines Government Funding
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Lufthansa
Economic Economic forces can have an effect on Lufthansa daily business operations.
Lufthansa/Consumer Fear Index Wars Systemic Terrorist attack Systemic Plane crash Not Systemic Banking industry Systemic Swine Flu Not Systemic Unemployment Rate Systemic Oil Not Systemic
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Lufthansa
Risk Management Terrorist attack Plane crash Swine Flu Oil

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Lufthansa
Hedging
Airlines British Air Southwest Delta % of Hedged Oil 46% 80% 0% Level of Savings 5.3% 7.5% (Paid Spot price)

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Lufthansa
How does hedging work? If an Airline does not hedge it can severely impact their profitability

June Spot Price 70/barrel of OIL (locked in)

August Spot Price Forecasted by Lufthansa85/Barrel (actual 80) Lufthansa Can buy Oil at 70 vs. 80
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Lufthansa
Most Important Force is Economic

Market vicissitudes

Travelers psychologies Ongoing Airline expense

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Lufthansa
Porters Five Forces Model Competitive Rivalry Extremely High
o o o o o o o o
Lufthansa

So many competitors Saturated market High exit barriers Difficult to differentiate Economic barriers Brand recognition of existing companies Economies of scale Low cost carriers
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Threat of New Entrants Low/Moderate

Lufthansa
Five Forces Analysis Supplier Power High
o Mainly dominated by Boeing and Airbus o Suppliers goods are critical to buyers success

Buyer Power High

o Low switching cost o Low differentiation

Availability of Substitutes Low

o Road, rail, and ship o Internet
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Lufthansa
Five Forces Analysis Competitive Rivalry Extremely High Buyer/Supplier Power High Unattractive Low profit potential

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Lufthansa
Competitor Analysis

o o o o o o o o o o Lufthansa

American Airlines British Airways Cathay Pacific Finnair Iberia JAL LAN Malv Quantas Royal Jordanian

o o o o o o o o o o o

Aeroflot AeroMexico Air France Alitalia China Southern Continental Airlines Czech Airlines Delta KLM Korean Air Northwest Airlines
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Oneworld SWOT
Strengths: Focus on quality Complementary global network None of its members declared bankrupt Opportunities: Anti-trust immunity JALs presence Expecting growth Mexicana joining in 2009

Weaknesses: Smaller than the other two Cant compete in equal terms North America

Threats: Economy Members bankruptcy Member may leave for other alliances

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SkyTeam SWOT
Strengths: 2nd biggest alliance Market share in the North America Opportunities: Vietnam Airlines joining in 2010 Growth in Asia

Weaknesses: Oceania and Middle East Lost $19.5 billion in 10 years

Threats: Economy No Japanese Airlines Loss of Continental Airlines

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Lufthansa: Internal Analysis

Tangible and Intangible Resources Fleet - owns and operates about 350 aircrafts Transportation to and from airports Lounges at more than 60 airport destinations Catering services

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Lufthansa
Core Competencies

Maintenance, Repair and Overhaul (MRO) Logistics IT Services

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Lufthansa
Who is the Customer Corporate Individuals Government Travel Agencies

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Economical Situational Analysis

60000 50000 40000 30000 20000 10000 0 2001 2002 2003 2004 2005 2006 2007 2008

T otal A s s ets Long-term D ebt N et I nc ome Revenue

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Return on Assets
0.08 0.06 0.04 0.02 0 -0.02 -0.04 -0.06

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Comparison Data

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Cash Vs. Capital Expenditure Ratio

C as h vs . C ap. E xp. Ratio 1 .8 1 .6 1 .4 1 .2 1 0 .8 0 .6 0 .4 0 .2 0

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

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Research & Development

MOZAIC - Measurement of
ozone, water vapor, carbon monoxide and nitrogen oxides aboard Airbus in-service aircraft

CARABIC Civil Aircraft

for the regular Investigation of the Atmosphere

IAGOS - aims to create a

measuring infrastructure that records atmospheric trace substances.

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SWOT Analysis: Lufthansa

Strengths Weaknesses

Opportunities

Threats

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Strengths: Lufthansa
Global Operations Largest Star Alliance Member
Refocusing of Diversification and establishment of Divisions Lease planes IT Division Strategic ability to predict future trends

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Weaknesses: Lufthansa
Largest Star Alliance Member Development of low cost airline structure

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Opportunities: Lufthansa
Encourage Growth of Star Alliance Increase Ownership Stakes in Different markets Use IT Division to Develop Operational Stakeholder Relationships Use Wet Leasing to Improve Regional Network Expand presence in growing market

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Threats: Lufthansa
Other Alliances Low Cost Providers Alternative Travel Options for Short Distances

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Strategic Alternative 1
Low-End Investment / Responsiveness / Action Status quo keeping the cost saving, leasing regional airlines and reducing intermediaries, controlling air ticketing fees
o Cost leadership focus o Help maintain debt rating and good financial investment standing

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Strategic Alternative 2
Moderate Investment / Responsiveness / Action Focus on customer segmentation using IT CRM implemented on a detailed level
o Data mine CRM information to get higher level of profitability o Accounts for changing customer needs to maximize profit potential o Differentiate customers by new market divides: purchase history, profitability, expected lifetime worth as opposed to demographic, geographic, and economic means o Through implementation of new technologies, like mobile device check-in, they will be able to adjust service to a wider audience

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Strategic Alternative 3
High-End Investment / Responsiveness / Action
Attempt to acquire stakes in other airlines within anti-trust government regulations in EU and other countries
o o o o Will diversify their holdings and increase profit potential Increases the Star Alliances reach in servicing global air travel Allows them to be prepared for a changing market Must limit stakes in international acquisitions to not encourage government interaction o Improves air route network and increases flight availability to loyal Lufthansa customers o Allows increased presence in new, emerging, and current markets

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Recommended Actions
Hybrid Strategy of Alternative 2 and 3 Focus on customer segmentation through newly developed IT systems while attempting to acquire legal stakes in either competitor or partner airlines.

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Reasoning
Why are they going to do it? Hedges company stability given global and current economic situation Prepare to gain entrance to new markets given the possibility of relaxed antitrust laws Allows focus on customers changing needs as they continually become more demanding Encourages the use of technology to increase ease of access and use of services

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Reasoning
How are they going to do it? Continue to use their strong IT Division to develop innovative technologies Use their positive debt rating to encourage financial growth and the purchase of stakes in competing/partner airlines Use their influence as the largest member of the Star Alliance to encourage some troubled members to allow partial ownership or acquisition

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Lufthansa Case analysis

Thank you! Closing questions or comments?

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