Lufthansa Case Study

1. Lufthansa Going Global, but How to Manage Complexity? Adel Donnych Jason Myat-Hsu Yusuke

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

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

Acquisition and Restructuring Strategies

Restructuring focused on corporate strategy to unite 6 business segments under one strategy that reinforced the core business- Passenger travel.

5 current segments: Passage, Logistics, MRO, IT, Catering & Tourism and a services group offering Insurance, Flight training and Business Travel management.

Acquisition strategy focused on expansion in Europe and Globally. Geopolitical events made this strategy economically unviable.

Current strategy focuses on equity stakes in other companies.

International Strategies

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.

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.

Emphasis is on maintaining a Global strategy that offers the customers a similar level of service throughout the network.

International Strategies

Formed Lufthansa Regional a regional airline to compete with the low cost carriers that sprung up as a result of deregulation.

Lufthansa Regional was a regionalized part of the International strategy adding to the economies of scale and to the Lufthansas market size.

Recently acquired 100% stake in Austrian Airlines.

Cooperative Strategies

The Star Alliance was a global strategy requiring efficient operations across the network.Coordination and cooperation were vital to its success.

As a cross border strategic alliance the goal was to increase market share and profits.

Limitations in domestic growth and foreign government policies made the alliance an attractive strategy.

Organizational Structure and Control

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

Integration of personnel across globe, employee training programs, diversity, safe place to work.

Increased CRM strategy customer centric focused services and products.

Lufthansa competes in the international airline industry

Its business segments include passenger business, logistics, repair and overhaul, catering, leisure travel and IT services.

Low Low Profit High Growth

Industry Price Movements

The elasticity of demand, the economy, IT, socio-cultural, political/legal, demographics, from the generalenvironment has claimed massive movements in this industry and Lufthansa core business units.

Passenger Transportation

Maintenance Repair and Overhaul(MRO)

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.

Global

Demographics

Sociocultural

Economic

Political/Legal

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.

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.

Looking at the Airlines from a global standpointLufthansa facilitates economic growth, worldtrade, international investment and tourism; andis therefore central to the globalization takingplace in many other industries.

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

Lufthansa environmental activities engagea wide range of social and environmental projectsfrom supporting children in need (via the help alliance) to protecting endangered animals and recycling or introducing fuel efficiency initiatives.

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

Conformation-SMS with the flight information

Convenient check-in on cell phone

Alerts you when Flight gets canceled

In 1978 Deregulation

Allowed foreigners to own 25% of an airline

EU non-European ownershiplimited to 49%

ASIA, it is not illegal to own an airline

GovernmentTaxes has imposed taxes heavily

Government Fines

Government Funding

Economic forces can have an effect on Lufthansa daily business operations.

Lufthansa/Consumer Fear Index

WarsSystemic

Terrorist attackSystemic

Plane crashNot Systemic

Banking industrySystemic

Swine FluNot Systemic

Unemployment RateSystemic

OilNot Systemic

Terrorist attack Plane crash

Swine Flu

Airlines% of Hedged OilLevel of Savings

British Air46%5.3%

Southwest80%7.5%

Delta0%(Paid Spot price)

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

Marketvicissitudes

Travelers psychologies

Ongoing Airline expense

Competitive Rivalry Extremely High

So many competitors

Saturated market

High exit barriers

Difficult to differentiate

Threat of New Entrants Low/Moderate

Economic barriers

Brand recognition of existing companies

Economies of scale

Low cost carriers

Supplier Power High

Mainly dominated by Boeing and Airbus

Suppliers goods are critical to buyers success

Buyer Power High

Low switching cost

Low differentiation

Availability of Substitutes Low

Road, rail, and ship

Internet

Competitive Rivalry Extremely High

Buyer/Supplier Power High

Unattractive

Low profit potential

American Airlines

British Airways

Cathay Pacific

Finnair

Iberia

Quantas

Royal Jordanian

Aeroflot

AeroMexico

Air France

Alitalia

China Southern

Continental Airlines

Czech Airlines

Korean Air

Northwest Airlines

Fleet - owns and operates about 350 aircrafts

Transportation to and from airports

Lounges at more than 60 airport destinations

Catering services

Maintenance, Repair and Overhaul (MRO)

Logistics

IT Services

Corporate

Individuals

Government

Travel Agencies

MOZAIC -Measurement of

ozone, water vapor, carbon

monoxide and nitrogen oxides

aboard Airbus in-service aircraft

CARABIC Civil Aircraft

for the regular Investigation of

theAtmosphere

IAGOS -aims to create a

measuring infrastructure that records

atmospheric trace substances.

Global Operations

Largest Star Alliance Member

Refocusing of Diversification and establishment of Divisions

Lease planes

IT Division

Strategic ability to predict future trends

Largest Star Alliance Member

Development of low cost airline structure

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

Other Alliances

Low Cost Providers

Alternative Travel Options for Short Distances

Status quo keeping the cost saving, leasing regional airlines and reducing intermediaries, controlling air ticketing fees

Cost leadership focus

Help maintain debt rating and good financial investment standing

Focus on customer segmentation using IT CRM implemented on a detailed level

Data mine CRM information to get higher level of profitability

Accounts for changing customer needs to maximize profit potential

Differentiate customers by new market divides: purchase history, profitability, expected lifetime worth as opposed to demographic, geographic, and economic means

Through implementation of new technologies, like mobile device check-in, they will be able to adjust service to a wider audience

Attempt to acquire stakes in other airlines within anti-trust government regulations in EU and other countries

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

Improves air route network and increases flight availability to loyal Lufthansa customers

Allows increased presence in new, emerging, and current markets

Focus on customer segmentation through newly developed IT systems while attempting to acquire legal stakes in either competitor or partner airlines.

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

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

Thank you!

Closing questions or comments?

Lufthansa Case Study

Documents

lufthansa regional

airlines lufthansa

lufthansa acquisition

lufthansa industry definition

external analysis lufthansa

lufthansa core business

business segments

passenger business