GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY?

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
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

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
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.
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.

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.

Organizational Structure and Control

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Organizational structure was accomplish by restructuring into 6 business segments.

Goal was to avoid duplication of functions among the business segments and resulted in a more
focused corporate strategy.
Main controls: cost cutting, removal of intermediaries in tickets sales, wetleases for regional
airline.
Maintain strong financial discipline, high credit rating, low debt service. Currently it owns 70% of
the air fleet debt free.

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.

How is Lufthansa dealing with the challenge of sustainability?

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Airlines being scrutinized for CO2 and NOX emissions. More of an issue as air travel increases.
Fuel currently not taxed.
Present day testing by other airlines on Bio-Jet and synthetic fuel look very promising.
Lufthansa initiatives:
Technical progress
Improved Infrastructure
Operational Measures
Economic Instruments

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.

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.

General Environment

Global
Demographics
Sociocultural
Economic
IT
Political/Legal

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.

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.
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.
Socio Cultural
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.
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
Mobile Business Model
Conformation-SMS with the flight information
Convenient check-in on cell phone
Alerts you when Flight gets canceled
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

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
Risk Management
Terrorist attack Plane crash
Swine Flu
Oil
Hedging
Airlines % of Hedged Oil
British Air
46%
Southwest
80%
Delta
0%

Level of Savings
5.3%
7.5%
(Paid Spot price)

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
Most Important Force is Economic
Market vicissitudes
Travelers psychologies
Ongoing Airline expense
Porters Five Forces Model
Competitive Rivalry Extremely High
o So many competitors
o Saturated market
o High exit barriers
o Difficult to differentiate
Threat of New Entrants Low/Moderate
o Economic barriers
o Brand recognition of existing companies
o Economies of scale
o Low cost carriers
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
Five Forces Analysis
Competitive Rivalry Extremely High
Buyer/Supplier Power High
Unattractive
Low profit potential
Competitor Analysis

o
o
o
o
o
o
o
o
o
o

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

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
2009

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

Threats:
Economy
Members bankruptcy
Member may leave for
other alliances

in

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

SkyTeam SWOT

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

Threats:
Economy
No Japanese Airlines
Loss of Continental
Airlines

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

Core Competencies
Maintenance, Repair and Overhaul (MRO)
Logistics
IT Services

Who is the Customer

Corporate
Individuals
Government
Travel Agencies

ECONOMICAL SITUATIONAL ANALYSIS

60000
50000
40000

Total Assets

30000

Long-term
Debt

20000
10000
0
2001 2002 2003 2004 2005 2006 2007 2008

RETURN ON ASSETS
0.1
0
-0.1

COMPARISON DATA

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

20
08

20
07

20
06

20
05

20
04

20
03

20
02

20
01

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.

SWOT ANALYSIS: LUFTHANSA

Strengt

Opportuniti

Weaknesse

Threat

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

Weaknesses: Lufthansa
Largest Star Alliance Member
Development of low cost airline structure
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
Threats: Lufthansa
Other Alliances
Low Cost Providers
Alternative Travel Options for Short Distances

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
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
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 Will diversify their holdings and increase profit potential
o Increases the Star Alliances reach in servicing global air travel
o Allows them to be prepared for a changing market
o 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
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.
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
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