lufthansa

LUFTHANSA CASE

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International Business Policy and Strategy

Case Study Analysis

Lufthansa 2000: Maintaining the Change Momentum

Author:

Christian Gerlach (9905388)

June 2004

Table of Contents

Executive Summary 3

1.0 Introduction 4

2.0 Lufthansa - A company overview 5

3.0 Porter's Five Forces 6 3.1 Threat of new entrants 7

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3.2 Bargaining power of suppliers 8

3.3 Bargaining power of buyers 9

3.4 Threat of substitute products 10

3.5 Rivalry among competing firms 12

4.0 SWOT Analysis of Lufthansa 13

4.1 Strengths 13

4.2 Weaknesses 16

4.3 Opportunities 17

4.4 Threats 18

5.0 TOWS Analysis for Lufthansa 21

6.0 Business-level strategy of Lufthansa 24

7.0 Corporate-level strategy of Lufthansa 25

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8.0 Strategic Alliances 26

9.0 Strategic Leadership and German Culture 39

10.0 Evolutionary Patterns of Strategy and Structure 33

11.0 Conclusion 36

12.0 Appendices 37

13.0 References 39

Executive Summary

In 1991 Lufthansa airlines was almost bankrupt. In 1999 the company already announcedrecord results in its 70-year history, helped to found the Star Alliance, the industry's largestnetwork, and is now looking to become one of the leading airlines in the world.

An impressive strategic leadership und human resource management played an important rolein the transformation and in the process of strategic renewal. The implementation of anintegrated cost leadership/differentiation strategy and a related diversification corporate-levelstrategy also contributed to Lufthansa's success.

Having had major involvement in the creation of the Star Alliance also played an important rolein Lufthansa's transformation into a successful company that operates in a quite difficult industryenvironment. Right now, Lufthansa's future looks bright, but they should try to keep the changemomentum alive and possibly apply a few new strategies such as enter the low-fare market inEurope, exploit business opportunities in non-airline related market segments, focus on

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improving in-flight entertainment and customer service, offer Lear jets for lease and improvetheir hedging against fluctuations in the areas of exchange rates, interest rates and fuel prices.

1.0 Introduction

This report will take a closer look at the turnaround of Lufthansa airlines which went from nearbankruptcy in 1991 to a now profitable airline. The evolutionary patterns of strategy andstructure are identified in this report as well as how strategic leadership and German culturecontributed to the turnaround. Furthermore, this paper will analyse the airline industry in termsof Porters five forces and will also take an extensive look at Lufthansa's current situation bymeans of a SWOT and TOWS analysis. Additionally, Lufthansa's business-level andcorporate-level strategy will be identified and the Star Alliance, the world's most important airlinealliance, will be discussed in detail.

2.0 Lufthansa - A company overview

The Lufthansa Aviation Group is considered to be one of the world's leading air transportcorporations. It includes a number of independent group and affiliated companies with businesssegments in passenger airlines, logistics, aircraft maintenance, catering, tourism and ITservices. Lufthansa's headquarter is located in Cologne, Germany and its operational centre forpassenger and cargo services is situated in Frankfurt(Key data on environmental care and sustainability at Lufthansa 2002/2003).

Lufthansa is 78 years old and has currently about 93,000 employees worldwide and in2003-reported revenue of about 16 billion Euros (Lufthansa - Key Figures 2003- see alsoAppendix I).

In terms of traffic performance, Lufthansa is in third position in worldwide passenger transport.For many years the company has also been the market leader in international cargo traffic. In2002, Lufthansa's 368 aircrafts operated on routes to 327 destinations, carrying 50.9 millionpassengers and 1.63 million tons of airfreight. Lufthansa was also one of the founding membersof the Star Alliance in 1997, when 16 partners joined into the world's largest airline alliance (Keydata on environmental care and sustainability at Lufthansa 2002/2003).

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3.0 Porter's Five Forces

Structural analysis of an industry is a useful way of determining a company's long-termprofitability. Comprehending the dynamics of the competitive forces in an industry can give aninsight whether an industry is attractive and whether there are any chances for returns oncapital. Michael Porter, a professor at Harvard Business School, created a framework forunderstanding the structure of an industry. According to Porter, the five competitive forces thatcan have an impact on an industry are threat of new entrants, bargaining power of suppliers,bargaining powers of buyers, competitive rivalry, as well as the threat of substitutes (Analysis ofindustries 2003).

3.1 Threat of new entrants

The threat of new entrants offers the possibility that new firms are going to enter the industry,which will consequently lead to a reduction of industry returns by generally passing more valueto consumers in terms of lower prices and also increasing the cost of competition. Factors likeeconomies of scale, capital requirements, product differentiation, access to distributionchannels, switching costs as well as brand value determine the threat of entry (Analysis ofindustries 2003).

From my point of view it currently seems very difficult to enter the airline industry as this area ofbusiness as well as the world economy is facing a period of recession. Due to large productdifferentiation the entry barriers are fairly high. There is a range of flag carriers, charter airlinesas well as a number of low-fare airlines in the industry. All these different types of airlines offeran extensive range of products that seem to satisfy most customers needs. Additionally,entering the aviation industry requires very high capital investments because aircrafts, technicalsupport and IT services need to be purchased or leased. This industry is also very labour andfuel intensive which requires a lot of funds. Companies with an interest in entering the marketalso require access to distribution channels. This means that it is necessary to gain trust withinthe industry so as to get access to take-off and landing spots. This can be quite challenging asnational policies still play a major role in the aviation industry. Furthermore it is a requirement toobtain permission from governments to enter airspace. Moreover once the market is entered, itis very difficult to exit which raises switching costs to a high level. Throughout the last decadethe market opened due to the deregulation policy, which provided low budget airlines with anopportunity to enter the industry. The first entrants like Ryanair and Easyjet utilized thisopportunity and developed strong brand names due to their first-mover advantage. Airlines thatrecently entered the market that have a similar price and cost structure generally find it moredifficult to generate the traffic that is required to fill the seats in their aircrafts (Jacob & Jakesova

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2003).

All in all it can be said that the threat of new entrants is not that high in the airline industry in thecurrent business environment.

3.2 Bargaining power of suppliers

Factors that are connected with the bargaining power of suppliers include the threat of forwardintegration as well as the concentration of suppliers in the industry. Supplier power decreasesthe ability for competitors in the industry to earn higher profits (Wheelen & Hunger 2000, p. 64).

The main suppliers within the airline industry are the manufacturers of aircrafts like Airbus andBoeing, fuel suppliers such as Shell, British Petroleum and Chevron Texaco. Furthermore thereare technical support and IT services as well as the catering services. Suppliers are veryconcentrated in the airline industry as Boeing and Airbus supply most commercial fixed-wingaircrafts. The concentration of suppliers makes it difficult for the airlines to exercise leverageover the two manufacturers and negotiate lower prices or play one supplier against the other.Moreover, at the current stage, aircrafts for long distance travel cannot be substituted by anyother product, which strengthens the bargaining power of the suppliers even more. Fuelproviders have an excellent bargaining position as they can increase fuel prices withoutregarding the airlines as an important customer group. Forward integration, which is theexpansion of a business' products or services to related areas in order to directly satisfy thecustomer needs, is fairly low. The reason for this is that it can be assumed that neither aircraftmanufactures, fuel providers nor technical support companies will purchase an airline and staffit with flight attendants, commercial pilots, a maintenance crew and operate flights across theworld (Jacob & Jaksova 2003). Nevertheless, the strong position fuel suppliers as well as therelatively strong position of manufacturers of aircrafts need to be taken into account whenoperating an airline.

3.3 Bargaining power of buyers

Buyers can have significant power, as they are able to push down prices, and negotiate forbetter quality and service. Buyer power is determined by relative volume of purchase, switchingcost, standardization of the product, brand identity, elasticity of demand as well as quality of

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service (Del Vecchio 2000). Since customers are not very concentrated and generally don'tpurchase plane tickets in large volumes they do not have a strong bargaining position. A singlepurchase of an airline ticket does not represent a significant fraction of the amount offered.Switching costs are quite low as consumers have a range of choices when selecting an airline.Due to the Internet, information about prices is also less fragmented and much easier tocompare. Quite frequently, a customer can find price differences for the same flight and oneseat is generally not any better, since everyone arrives at the destination at the same time.Considering the worldwide recession as well as the psychological effects of September 11,airline companies are under substantial pressure as customers switch to alternativetransportation like trains. Vacation travelers also tend to shop around for the best price.Traveling by plane is quite expensive and can make up the largest part of the expense of afamily vacation. For that reason, demand is quite elastic for some buyers. As soon as the pricedrops, the demand increases. However, airlines can move their prices in tandem with otherairlines, which forces customers to purchase tickets for the market price until a price war starts(Analysis of Industries 2003).

Nevertheless, all in all it can be said that the bargaining power of buyers is relatively low.

3.4 Threat of substitute products

The airline industry is threatened by a number of substitutes. This threat is quite substantialwithin Europe, where Lufthansa's main customer base is located. Many European countrieshave an excellent railway system with high-speed trains like the ICE in Germanyand the TGV in France. These trains can travel up to 300km/h fast and can cover large distances within the countriesin just a few hours. Trains can be considered the largest threat as they offer a variety ofadvantages over flying. From my point of view it seems that flying is much faster, but on adomestic flight in a European country there is not much of a difference in comparison to trains.The reason for that is that it always takes a while to get to the airport, as they are mostly locatedfurther away from cities; check-in and security checks usually require being there at least anhour before take-off. After the plane has landed, it usually takes at least another 30 minutes toget out of the plane, claim the baggage and organise transportation to leave the airport. Railwaystations on the other hand can be much more easily accessed than airports, there is nocheck-in and security check required and the destination railway station is generally in a verycentral location close to hotels or offices that need to be visited on a business trip. Furthermore,trains offer generally great scenery while travelling and also offer more legroom. Mostimportantly the prices are generally lower than those of prestigious airlines like Lufthansa.Alternatively, travellers could use their own car, which would be more time consuming, butwould have the advantage of increased flexibility and having transportation at the destination

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location and not having to use public transportation or taxis. Depending on the distance, thissubstitute can be either more costly or less expensive (Jacob & Jaksova 2003). Moreover, shortinternational trips to major European capitals are often done by bus and also by ferry if it is a tripto the United Kingdom. From my experience this is the most inexpensive way of travelling throughout Europe.

However, there is no real substitute to flying if the desired destination is overseas. The onlyalternative to planes would be ships and unless the customer is looking for a relaxing trip on theoceans, it will just take too long to reach the destination.

Recently there is also a tendency of larger companies towards purchasing corporate jets ratherthan flying first class. According to Costa et al. (2002) corporate jets might reduce first classtraveller by 10% by 2005.

3.5 Competitive rivalry

Highly competitive industries are generally less profitable as the cost of competition is high orcustomers are receiving the benefits of lower prices. Competitive rivalry is affected by industrygrowth, brand identity, fixed costs, as well as barriers to exit (Wheelen & Hunger 2000, p. 63).

It can be said that the airline industry is highly competitive and that industry growth is fairlymoderate with airlines struggling in taking away market share from each other. The barriers toexit are considered to be very high. Planes that are grounded don't earn any returns and it isquite complicated to dispose of these assets. Due to bankruptcy laws, airlines that are infinancial stress can often remain competitors for a long time (Del Vecchio 2000).

In Lufthansa's home market, the European airline industry has seen some recent changes withthe development of low budget airlines that compete with the more mature airlines. Additionally,recent airline crises like September 11 put even more pressure on all competing airlines. Thisleads to a process of consolidation and the creation of strategic alliances. Airlines within onealliance don't tend to compete directly with each other anymore, which lead to a slight decrease

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of the pressure (Jacob & Jakesova 2003).

By utilizing a range of strategies a company can have an effect on the five forces of competitionand thus reform the attractiveness of an industry. Historically, various strategies shifted theprinciples of competition and future events like war or new inventions are likely to reshape theairline industry again.

4.0 SWOT Analysis of Lufthansa

4.1 Strengths

The Lufthansa organization possesses a variety of strengths. A very strong brand name, qualityand innovation, safety and reliability are some of the major strengths of the Deutsche LufthansaAG which Lufthansa hopes will guarantee success in the future.

An additional strength is Lufthansa's School of Business. This school was founded with the aimto create better links between strategy, corporate culture and organizational and individualdevelopment to assist Lufthansa's priorities for transformation and future performance. Theschool offers all programs from Masters Degrees to non-degree top-management courses. Thecourses are run in cooperation with global companies and famous academic institutions like LondonBusinessSchooland INSEAD (Bruch & Sattelberger 2001a).

Lufthansa's ability to be very cost effective is also of advantage. As part of its strategic change,Lufthansa implemented 'Program 15', a strategic cost management program. The goals of thisprogram included an improvement of the competitive position through a reduction in cost,internationalisation of cost-structure and making staff conscious of reducing costs in their dailywork. This cost management contributed substantially to Lufthansa making profits again in 1999(Bruch & Goshal 2000).

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Generally it can be said that Lufthansa's change management during its crisis was outstanding.Its management was able to identify the signals for the potential problems, showed greatstrategic leadership through CEO Jürgen Weber and transformed the organization into aprofitable company. This experience in strategic change management is very valuable and willsurely help the organization with any challenges in the future (Bruch & Sattelberger 2001b).

Furthermore, Lufthansa's management is very conscious of the need for innovation andcustomer service. They developed the 'brand ambassador concept' where employees with useof personality and dedication create brand loyalty through day-to-day interactions with thecustomer (Rubens 2004).

They recently also introduced a range of innovations and quality improvements at theirpassenger airlines and some innovations will be implemented in the near future. A special focusis on the business class on long-haul routes as this segment is the most profitable one. The keyfeature of Lufthansa's new business class is a technically sophisticated seat that converts into aflat bed, which is 2 meters long, the longest bed in this class (Manuelli 2003). Lufthansa is alsothe first airline in the world that offers broadband Internet access on board its planes(Anonymous 2003).

On the ground, they are also improving procedures for their status customers with Lufthansa'sPriority Service by relying on the Internet, mobile phones and check-in terminals simplifyreservations and ticket sales as well as to reduce check-in times. A good example ofLufthansa's innovative strength is their new terminal at Munich Airport, which was build tooptimise operational procedures. In accordance with the best international standards theyreduced the minimum connecting time to 30 minutes (Lufthansa Annual Report 2003).

An additional strength of Lufthansa is that it has a policy of operating a young and modern fleet.They recently started a fleet renewal program in 2003 and by 2005 they will replace olderaircrafts with ten new Airbus A340-600 jets, as well as ten new Airbus A330-300s. By 2007 thenew Airbus A380 super jumbo will go into service that can carry 40% more passengers than thecurrently largest aircraft. The average age of Lufthansa's fleet is just under 9 years, which putsthem into a good position in comparison to airline world average of almost 15 years (LufthansaAnnual Report 2003).

Another strength, which gives Lufthansa a comparative advantage, is the use of a premiumexecutive jet service on North Atlantic routes like Düsseldorf-Newark and Munich-Newark. This

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involves flights in Boeing and Airbus aircrafts that were remodelled so they fit 48 business classseats only and no economy class. Lufthansa introduced this service, because they identifiedthat these routes were in high demand for business class travellers (Ghazvinian & Fragala2002).

Lufthansa also offers a very good website that has a lot of features the customers can utilize.Online bookings have more than doubled in 2003. Lufthansa are also constantly expanding theirdestinations, which can be reached with 'etix', the company's electronic tickets that offerconvenient paperless travel. The number of passengers that use 'etix' is gradually increasing asit can be used to fly to 70 per cent of Lufthansa destinations (Lufthansa Annual Report 2003).

Lufthansa's Miles & More customer loyalty program is also a great tool to encourage customersto fly Lufthansa again. The program has grown in popularity since it was introduced ten yearsago and developed into the leading frequent flyer program in Europe (Miles & More).

Furthermore, Lufthansa is one of the founding members of the Star Alliance, the world's leadingairline alliance. The alliance was voted "Alliance of the Year" in 2003 on three differentoccasions (Lufthansa Annual Report 2003).

4.2 Weaknesses

The Lufthansa group consists of seven independent subsidiaries. Lufthansa centrallycoordinates their strategy development process. A principal element of the Lufthansa group isclear customer-supplier-relationships between the seven companies. However, the relationshipsbetween the individual companies are a weakness, as they don't function as planned. Lufthansahas not reached the required relationships for a market-based internal coordination. So far, theinternal customers don't act as normal customers yet since the demand conditions, which theywould never demand with other external business partners (Bruch & Ghoshal 2000).

Another weakness is that the openness for change has almost vanished since Lufthansa'samazing turnaround was achieved. During the turnaround, changes were implemented veryquickly, but today it takes a very long time for small innovations to take place. Lufthansa alsoadmits not to be perfect in the areas of punctuality, luggage safety, waiting periods, technicalreliability and telephone availability, but is in the process of improving this situation (Bruch &

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Ghoshal 2000).

Another weakness could be that Lufthansa does not do anything about their low-budgetcompetitors in the European market. Lufthansa's management claims that they would not start alow-fare airline under its name, as it would cannibalize its own traffic and damage its brands(Anonymous 2002).

4.3 Opportunities

Lufthansa has a good opportunity to reduce a number of their costs. These cost reductions canbe achieved with synergy effects that result from partnerships and alliances as well as fromefficiency improvement programs. It is very likely that other airlines will want to join the StarAlliance too, as this alliance is considered to be the best in the industry (Bruch & Sattelberger2001b).

Another opportunity for Lufthansa will be the addition of the Airbus A380 to its fleet in 2007. Itwill be the largest passenger jet in the world seating 555 passengers. The direct operating costsper seat on the new super jumbo will be 15 to 20 per cent less than those for the Boeing747-400, previously the biggest aircraft in the Lufthansa fleet. The Airbus A380 also holds roomfor 40% more passengers. When this new plane will go into service with Lufthansa, it willoperate on the very busy routes to North America and Asia. Additional benefits include a lowernoise level of the new aircraft and its environmental compatibility. Besides the increasingexpenses of higher fuel prices, airlines also need to pay for the noise caused by their planes ata number of airports. With a reduction of noise levels these expenses will decrease.Furthermore, less noisy aircrafts can be used in a more flexible manner, as they are permittedto take off earlier in the day and land later (Lufthansa Annual Report 2003).

The Lufthansa group also has the opportunity to engage in other diversified areas. For exampleLufthansa's Sky Chef and Lufthansa IT services have the opportunity to conduct business in theareas of catering and maybe IT consulting that are not directly linked to the airline industry.

4.4 Threats

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Lufthansa faces a range of different threats. A major threat is competition, which includes themature airlines, and other alliances as well as low fare carriers that have developed over thelast couple years, in particular in Europe.

The organization also has to deal with cyclical risks. General economic fluctuations as well asgeopolitical developments can have a large impact on the performance of the Lufthansa Group.As good examples serve the events of September 11, the Iraq conflict and the outbreak ofSARS in Asia along with a stagnating global economy which seriously influenced the businessactivity of the entire airline industry in a negative way (Heerkens 2003).

Lufthansa is also confronted with some capital market risks as its international businessactivities expose it to exchange rate and interest rate fluctuations in the international money,capital and also the foreign exchange markets (Zea 2003).

A substantial threat is the price of fuel since fuel consumption remains one of the main costitems for the whole airline industry. In 2003, it contributed 7.6% to Lufthansa's total operatingexpenses. Fluctuations in fuel prices can have a significant affect on the organization'soperating result (Lufthansa Annual Report 2003).

Furthermore there is the threat of higher costs of insuring Lufthansa's fleet. Insurance costsincreased dramatically after the events of September 11 and since then stayed at a very highlevel. The reason for that are the massive additional premiums that are being charged forinsuring against war and similar events. In case of more wars and terrorist attacks the premiumsare likely to increase even further (Zea 2003).

There are also a number of infrastructure risks that Lufthansa will have to deal with. There areplans for an extension of the runway system at Frankfurt Airport, which is a major hub forLufthansa's operations, and is extremely important for the long-term competitiveness of theGerman airline. The extension project is also crucial for securing FrankfurtAirport's future as an international air traffic hub, which also applies to the building of the maintenancehangar for the new Airbus A380 super jumbo that will be used from 2007 onwards.Nonetheless, a range of operational restrictions on extending the airport has recently beendebated which would hinder its efficient use. In case a solution can't be found, Lufthansa wouldhave relocate part of their business to alternative hubs. Additionally, bottlenecks in many

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European air traffic control systems cause many flight delays. The infrastructural limitations area huge burden on the profitability of all European air carriers. On top of that, they are inhibitingthe industry to keep up with the growing demand for air transport services (Lufthansa AnnualReport 2003).

There are also a few risks relating to the development of alliances. One of the foundations forLufthansa's commercial success was its integration into the Star Alliance, the world's leadingairline partnership system. Currently, many of the airlines worldwide are in a loss-makingsituation which, in the case of a few of Lufthansa's partners like United Airlines and Air Canada,reached proportions that threatened their existence and also affects Lufthansa negatively. Inregards to the Star Alliance, there are also challenges of coordinating and incorporatingstrategic activities like the establishment of a common global brand, a shared technologyplatform as well as joint training and personnel development (Lufthansa Annual Report 2003).

Being part of the Star Alliance also poses the threat that Lufthansa might lose its identity. It isvital for them to preserve the Lufthansa brand (Bruch & Ghoshal 2002).

Labour unions are an additional threat; especially in Germany they have a lot of power. Labourunions can initiate strikes, which in the past have already led to delays of departures andsubstantial costs to Lufthansa (Steinborn 2003).

5.0 TOWS Analysis of Lufthansa

After application of an extensive SWOT analysis, I developed the following TOWS matrix toidentify some possible strategies for Lufthansa:

SO strategies to make use of strengths to take advantage of opportunities

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As soon as the new Airbus A380 arrives, Lufthansa should focus on equipping it with innovativein-flight entertainment as well as an impressive business and first class to set themselves apartfrom its competitors. Furthermore they could exploit other business opportunities in non-airlinerelated segments with its strong brand name and its core competencies in innovation andcustomer service.

ST strategies to use strengths to avoid the threats

To avoid the threat of competition, Lufthansa should focus on improving its in-flightentertainment and customer service along with coming up with some more innovations. Anexample could be that they obtain a number of Lear/business jets that companies can lease.This diversification might attract wealthier individuals and companies that are worried aboutpotential terrorist attacks on normal passenger aircrafts At the same time they should improvetheir cost-effectiveness even further to achieve a comparative advantage over their competitors.

WO strategies to take advantage of opportunities by overcoming the weaknesses

Lufthansa independent subsidiaries could focus on expanding its non-airline related business.This way they would get used to more professional business relationships, which will hopefullyimprove the relationships and communication between the Lufthansa subsidiaries.

WT strategies to minimize weaknesses and avoid threats

To minimize the weaknesses and avoid some of the threats Lufthansa should probably getinvolved in the low-fare market in Europe. Even though they consider it not to be a threat, I stillbelieve the low-fare airlines are competitors. Therefore Lufthansa could acquire maybe a smallairline with potential within Europe that caters for thatmarket. Moreover they should increase hedging against fluctuations in the areas of fuel prices,exchange rates and interest rates. Lastly they should try to improve things like punctuality,luggage safety, technical reliability etc. Some of these areas could be improved through morestaff training.

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6.0 Business-level strategy of Lufthansa

According to Hitt (2003, p. 122), a business-level strategy is an integrated and coordinated setof commitments and actions the firm uses to gain a competitive advantage by exploiting corecompetencies in specific product markets.

The literature suggests that there are a number of different business-level strategies. However, Ibelieve that in the case of Lufthansa an integrated cost leadership/differentiation strategy isused. The reason for this is that Lufthansa operates globally and therefore it is vital for them toimplement cost leadership strategies as well as differentiation strategies in order to developcompetitive advantages.

Lufthansa's "Program 15" serves as a good example of a cost leadership strategy. AfterLufthansa had undergone privatization they implemented this extensive strategic costsmanagement program with the goal of reducing overall unit cost by 20% within five years (Bruch& Sattelberger 2001a).

In terms of a differentiation strategy, Lufthansa constantly tries to come up with a range ofinnovative ideas to stay ahead of the competition. A list of these ideas could be seen in thestrengths section of my SWOT analysis of Lufthansa.

It can be concluded that Lufthansa has made the right decision to implement an integrated costleadership/differentiation strategy, since the literature also suggests that there is a relationshipbetween the successful use of this strategy and above-average returns (Hitt 2003, p. 135).

7.0 Corporate-level strategy of Lufthansa

According to Hitt, a corporate level strategy involves specific actions by a company to gain acompetitive advantage by having a group of different businesses competing in severalindustries (2003, p. 183).

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In the case of Lufthansa, the organisation consists of seven economically independentsubsidiaries that include LH Passenger Service, LH Cargo AG, LH Skychef, LH GroundServices, LH Technical Services, Thomas Cook Travel Agency and LH IT services. Theindividual Lufthansa companies are quite successful. LH Technical services, LH Skychef andLH Ground Services are number one in their market (Bruch & Ghoshal 2000).

Product diversification, a primary corporate-level strategy deals with the scope of the industriesand markets in which the company competes in addition to how managers buy, establish andsell different businesses to equal skills and strengths. In regards to Lufthansa, the organisationuses a related diversification corporate-level strategy which means that Lufthansa generatesmore than 30% of its sales revenue outside a dominated business and its businesses arerelated to each other since Lufthansa centrally coordinates their strategy development process.Lufthansa's motives for such a corporate level strategy are likely to be issues such as takingadvantage of economies of scope, sharing activities, transfer of core competencies, and anincrease in market power as well as blocking competitors through multipoint competition (Hitt2003, p. 187).

8.0 Strategic Alliances

While concentrating on internal costs and structural redevelopment, Lufthansa also worked onits external relationships by implementing the strategy: 'growth through partnerships' (Bruch &Sattelberger 2001b).

While in other industries globalization triggered a wave of mergers of companies that operateinternationally; airlines had to look for alternatives because national ownership regulations donot allow cross-border mergers. No airline worldwide has the capacity infrastructure to offer asuitable network by itself. Only through cooperating and alliances can the industry cater for themobility requirements of the world economy. Therefore, founding the Star Alliance was a logicalconsequence and Lufthansa was one of the key-founding members of the first airline network inthe world (Global Network - Five years of Star Alliance).

The purpose of the Star Alliance is to realize higher revenues and decrease costs by exploitingsynergy effects. The synergies range from shared use of ground facilities like check-in-counters,a city office in Paris and also airport terminals. At the airports in Frankfurt, Copenhagen, Shanghaiand

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Beijingthe Star Alliance has its own check-in area with staff member of partner airlines. In addition thefirst Star Alliance Lounge went into service 2001 at Zürich airport.

Other advantages include common frequent flyer programs, joint travel agency contractscollective market research and joint purchasing of materials and equipment (Economic effectsfor the airlines).

Alliance members can also use code sharing - a system by which two or more airlines agree touse the same flight number for a flight in order to attract more business by means of extendingtheir networks through partner airlines (Collis 1998).

Besides cost-saving synergies, the combined networks of Star Alliance members also offermany customer benefits. In comparison with other industry alliances, the Star Alliance is therecognized market leader (see Appendix 2). For 82 % of all offered flight connections, the StarAlliance is the fastest network. Every four seconds an aircraft of the Star Alliance starts or landssomewhere in the world and it possible to fly once round the world in 36 hours with Star Allianceairlines. Other fundamentals of its brand value include the presence of its members in importanthome markets and large international hubs, a high degree of customer recognition, excellentservice and good cooperation between the frequent-flyer programs of the individual airlines.Furthermore each airline has its individual strengths with a strong market position in its homebases and regional hubs like Lufthansa in Germany. Due to the good cooperation, a wholenetwork of these hubs was established and regional strengths complement each other (seeAppendix 3). Additionally, most members also have regional alliances with smaller airlines,which improve the Star Alliance network even further (Global Network - Five years of StarAlliance).

Research has also shown that alliances result in lower ticket prices and more flight connections.It is suggested that there is a price advantage of an average 6% in comparison withconventional tariffs. In terms of the Star Alliance this leads to estimated passenger savings ofbetween 50 and 82 million dollars per year.

Additionally due to the sharing of terminals service counters of the airlines are more easily seenand found and walking distances are decreased. Having counters in the same area at airportsalso creates a single contact point and improves changes and baggage loading. Staff membersof partner airlines can also help and advise customers with enquiries on behalf of the entire

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alliance.

For the alliance to work properly certain level of quality needs to be ensured. This is achievedthrough frequent mutual quality checks. Jointly agreed quality standards in the areas of security,services and environmental protection are checked on a regular basis (Global Network - Fiveyears of Star Alliance).

9.0 Strategic Leadership and German Culture

Strategic leadership, which is 'the ability to anticipate, envision, maintain flexibility and empowerothers to create strategic change as necessary' (Hitt 2003, p. 386) was extremely important inLufthansa's turnaround. The main responsibility for effective strategic leadership generally restsat the top, especially with the CEO, but also with other recognized strategic leaders likemembers of the board of directors and the top management team. In the case of Lufthansa, theformulation and implementation of strategies was also in the hands of the top-levelmanagement, in particular Dr. Jürgen Weber, who was Lufthansa's CEO at the time.

In 1992 Jürgen Weber realized the full extent of Lufthansa's problems and called for a "crisismanagement meeting" with 20 carefully selected senior managers. The outcome of this meetingwas "Program 93", 131 key actions aimed at drastically cutting about 8,000 jobs, loweringnon-personnel costs, reducing the aircraft fleet as well as increasing revenues by DM 700million to reduce the losses of DM 1.3 billion. The Executive Board then appointed a number ofdifferent teams that had the task to achieve the implementation of these 131 projects. Linemanagement was responsible for the implementation of the staff cuts. It was seen as importantfor the success of "Program 93 that line managers took that responsibility to realize theunavoidable cuts, on the one hand, but also to motivate the remaining employees, on the otherhand. Jürgen Weber also created the OPS team (Operations Team) as a forceful engine in theprocess of implementing the 131 actions. They constantly monitored, created activities, advisedand supported the line managers who were ultimately responsible for the implementationprocess. Weber showed his total support for the OPS team and personally supported them inmany ways. He also implemented visible actions like a 10% reduction of the salaries of allExecutive board members (Bruch & Ghoshal 2000).

Furthermore, to convey and spread these actions, Lufthansa implemented Town Meetings,which were initially an idea by General Electric. A typical agenda of a Town Meeting wouldmainly involve a talk with the particular Lufthansa unit's management about problems and

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plans. An extensive dialogue then follows with the employees where the top-managementexplains latest plans and also listens to the concerns and suggestions of staff members. JürgenWeber decided to hold as many of those meetings himself as possible when visiting thedifferent Lufthansa units. By 1999, he had taken part in more than 200 Town Meetings (Bruch &Sattelberger 2001b).

It was important for the turnaround of Lufthansa that the management told the employees in anopen manner how problematic the situation was. This allowed for the development of commongoals between employees, management, work councils and unions. Even issues such as staffreduction and productivity could be discussed more openly and personally. Jürgen Weber wasable to win people personally by his open and authentic communication. He had a habit oftelling his employees the straightforward figures and explaining to them how he felt about them.During the turnaround phase, he informed them that he felt an overwhelming responsibility forall his employees and family members. People were taken by his leadership emotionally andwere happy to go where he pointed them because they simply understood what he said (Bruch& Ghoshal 2000).

It can be said that Weber's leadership contributed significantly to the successful turnaround ofLufthansa. Outside of Lufthansa he also received a lot of recognition for his leadership. Forinstance, he was the first non-American to receive the L. Welch Pogue Award by the US trademagazine Aviation Week & Space Technology for individuals who made an outstanding,visionary contribution to aviation. In addition he also received the airline "Oscar", when AviationWeek & Space Technology named him Aerospace Laureate for 1997 for successfully directingLufthansa's turnaround. Germany's Manager Magazine voted him also as Manager of the Yearin 1999 and another German business magazine Wirtschaftswoche named him Germany's BestManager in 2002 (Jürgen Weber joins Sapient's board of directors).

German culture had a substantial impact on Lufthansa's successful turnaround.

Throughout the world Germans are known for their high level of discipline. This disciplinehelped Lufthansa to follow through with its programs of cost reduction and change in general.Lufthansa still represents German values such as precision, technical reliability, high quality andexpertise, which are crucial positive indicators of their business. These typical German traits ofLufthansa are of direct use to their image. However, another German trait worked against them.Germans are not known to be very friendly and open, so the organization had to work very hardto create a customer service oriented organization (Bruch & Ghoshal 2000).

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10.0 Evolutionary Patterns of Strategy and Structure

Lufthansa's evolutionary patterns of strategy and structure can be divided into four sections:The turnaround, corporate restructuring and privatisation, strategic cost savings and alliancebuilding.

The turnaround

Even though Lufthansa had an after-tax loss of DM 444m in 1991 there was no serious crisisawareness as it was thought that being a state-owned company would guarantee immortality.However in 1992 Lufthansa had only 14 days of operating cash requirements in hand andsomething had to be done. Only one German bank had faith in Lufthansa and loaned themmoney to pay employee salaries. The mental starting point of the turnaround was aLufthansa-specific four-week management program about change management at a famousbusiness school in France. This was also where a group called 'Samurai of Change' wascreated. This group discussed the outcome of the change-management program and createdawareness for the necessity to redevelop the organization (Bruch & Sattelberger 2001b).

The redevelopment process was started with 'Program 93', 131 key actions aimed at drasticallycutting jobs, lowering non-personnel costs, reducing the aircraft fleet and losses. This programwas discussed in more detail in the strategic leadership section of this report.

By summer of 1994, non-personnel costs had been reduced as well as staff numbers andmanagement positions had been reduced. Nevertheless Lufthansa knew that the superficialrecovery would not assure sustained success and that another major change had to follow.

Corporate restructuring and privatisation 1994-96

Before the turnaround, Lufthansa's structure included six departments (finance, personnel,maintenance, sales, marketing and flight operations), which were all headed by a member ofthe Executive Board. This structure proved to be inefficient, as there was high involvement oftop management in operational problems, slow decision processes, low transparency, lack of

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accountability and also insufficient market proximity. Lufthansa recognized that with its existingfunctional structure it could not successfully respond to emerging competitive challenges.Lufthansa realized that it would be more successful as a group of co-dependent smaller unitsthan as a massive functional block. Finally, they created the seven economically independentsubsidiaries that I mentioned earlier in Lufthansa's corporate-level strategy. In order to achievefurther operational independence, Lufthansa became fully privatised in 1997 after longnegotiations with the German government (Bruch & Sattelberger 2001a).

Strategic cost savings -- Program 15 for 1996-99

After having been privatised, they realized the pressure to be competitive and strategically costeffective even more. Consequently Lufthansa continued its transformation process byimplementing the strategic cost-management programme '15', which aimed to reduce overallunit cost by 20% within five years (Bruch and Ghoshal 2000).

Alliance building -- the STAR ALLIANCE

In 1997 Lufthansa was one of the key-founding members of the Star Alliance, the world's bestairline network worldwide with the purpose of realizing higher revenues and decreasing costs byexploiting synergy effects as well as offering more customer benefits. The Star alliance hasbeen discussed in great detail in earlier on in this report.

11.0 Conclusion

This report showed that Lufthansa went through a great deal of change in strategy and structurein the last decade and after it successfully turned around from near bankruptcy and the crises ofSeptember 11, SARS, the war on Iraq the future looks very promising again for Lufthansa.Jürgen Weber's leadership skills played a very important part in turnaround. However, the mainchallenge Lufthansa is currently facing is how to maintain the awareness of the crisis and theopenness for change. It is vital that the learning from the crises is preserved.

As the industry analysis and SWOT analysis showed there are substantial threats in the airline

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industry. Therefore Lufthansa constantly has to develop new strategies to overcome thesethreats and work on eliminating its weaknesses in order to stay ahead of the competition.

12.0 Appendices

Appendix I - Lufthansa Key Figures

Business figures 2003

2003

Revenue in million 15,957

Operating result in million 36

Capital expenditure in million 1,155

Cash flow in million 1,581

Stockholders' equity in million 2,653

Total assets in million 16,732

Employees (31.12.2003) 93,246

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Performance ratios 2003

2003

Passengers in millions 45.4

Available seat kilometres in billion 124.0

Revenue seat kilometres in billion 90.7

Seat load factor % 73.1

Cargo and mail in millions t 1,580

Available tonne-kilometres in billion 10,814

Revenue tonne-kilometres in billion 7,089

Load factor % 65.6

Appendix II - The hubs of Lufthansa and its partner alliances

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Appendix III - Airline Alliances in comparison

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