-
Strategic ManagementCases
Competitiveness and Globalization
8th Edition
Michael A. Hitt
Texas A&M University
R. Duane Ireland
Texas A&M University
Robert E. Hoskisson
Arizona State University
HITTIRE
LAND HO
SKISSON
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Strategic Management: Competitiveness
and Globalization (Cases) 8th Edition
Michael A. Hitt, R. Duane Ireland, and
Robert E. Hoskisson
VP/Editorial Director: Jack W. Calhoun
VP/Editor-in-Chief: Melissa Acua
Senior Acquisitions Editor:
Michele Rhoades
Developmental Editor:
Rebecca Von GillernBookworm Editorial
Services
Executive Marketing Manager:
Kimberly Kanakes
Marketing Manager: Clint Kernen
Marketing Coordinator: Sara Rose
Senior Content Project Manager:
Colleen A. Farmer
Technology Project Editor: Kristen Meere
Manufacturing Coordinator: Doug Wilke
Production Service: LEAP Publishing
Services, Inc.
Compositor: ICC Macmillan, Inc.
Senior Art Director: Tippy McIntosh
Photo Manager: Sheri I. Blaney
Cover Image: Don Hammond/Design
Pics/Corbis
Printed in Canada
1 2 3 4 5 6 4 11 10 09 08 07
2009, 2007 South-Western, a part of Cengage Learning
ALL RIGHTS RESERVED. No part of this work covered by the
copyright herein
may be reproduced, transmitted, stored or used in any form or by
any means
graphic, electronic, or mechanical, including but not limited to
photocopying,
recording, scanning, digitizing, taping, Web distribution,
information networks,
or information storage and retrieval systems, except as
permitted under Section
107 or 108 of the 1976 United States Copyright Act, without the
prior written
permission of the publisher.
For product information and technology assistance, contact us
at
Cengage Learning Academic Resource Center, 1-800-423-0563
For permission to use material from this text or product, submit
all
requests online at www.cengage.com/permissions
Further permissions questions can be emailed to
[email protected]
Library of Congress Control Number: 2007940878
Student Edition ISBN 13: 978-0-324-58113-3
Student Edition ISBN 10: 0-324-58113-0
Instructors Edition ISBN 13: 978-0-324-58122-5
Instructors Edition ISBN 10: 0-324-58122-X
Concepts and Cases ISBN 13: 978-0-324-65559-9
Concepts and Cases ISBN 10: 0-324-65559-2
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit
academic.cengage.com
Purchase any of our products at your local college store or at
our
preferred online store www.ichapters.com
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
In the glamorous, but financially not so glorious, airline
industry, Lufthansa is one of the three companies world-wide whose
debt is rated as investment-grade. For most of the other companies,
if they are not already in bank-ruptcy procedures or being bailed
out by the govern-ment, the financial situation is simply a
nightmare. Since World War II the industry has never earned its
cost of capital over the business cycle. Especially after the
de-regulation (beginning in 1978 in the United States), which
increasingly replaced the government-organized IATA cartel,1 the
situation got worse. By 2005, the cu-mulative losses of airlines
since 2001 amounted to about US$40.7 billion.2 As mergers are still
legally prevented across many country borders, the airlines
response to globalization was to form alliances (refer to Exhibit 1
for
characteristics of globalization and how it relates to
com-plexity), alliances are even more complex to manage than
Lufthansa: Going Global, but How to Manage Complexity?
Simon Tywuschik, Ulrich Steger
International Institute for Management Development
Case 18
individual companies because they lack the hierarchical conflict
resolution mechanisms that individual companies can employ.
But despite their pride in mastering the turmoil of the past,
some nagging questions remain for Lufthansas management as the
globalization of the airline industry moves full speed ahead.
Is the current strategy sufficient to maintain Lufthansas
position as one of the few profitable air-line companies, given the
uncertainties and dynam-ics in the highly competitive but cyclical
market?
Has Lufthansa done enough to reduce complexity in the right
places and to survive the competition, especially against the
background of customer satis-faction and high value added?
Are all employees in the corporation embraced
Is Lufthansa prepared for the sustainability challengesin
particular global warmingwhich create new uncertainties?
D
on
Ham
mo
nd
/De
sig
n P
ics/C
orb
is
233
Research Associate Simon Tywuschik prepared this case under the
supervision of Professor Ulrich Steger as a basis for class
discussion rather than to illustrate
either effective or ineffective handling of a business
situation. This case has been compiled purely from public sources.
Copyright 2006 by IMD, International
Institute for Management Development, Lausanne, Switzerland.
Exhibit 1 Key Facts for the Main Airline Alliances
Key Features Star Alliance One World Sky Team
Year of formation 1997 1999 2000
Members 18 8 10
Passengers (in millions) 425 258 373
Destinations 842 605 728
Fleet Size 2800 2161 2151
Market Share (Rev.) 28.4% 15.8% 23.9%
Headquarters Frankfurt (Ger) Vancouver (Can) None
Organization type Formalized organization Governing Board
Committee
Sources: Web sites of the alliances, 2006; PATA, 2006.
www.staralliance.com; www.oneworld.com; www.skyteam.com.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
uft
han
sa: G
oin
g G
lob
al, b
ut
How
to
Man
ag
e C
om
ple
xit
y?
234
Exhibit 2 The Six Features of Globalization
Feature Explanation
(1) Eroding Borders Never before in history have so many
boundaries in the social, political, and economic realm
been weakened or abolished. However, boundaries fulfill two core
functions: First, they contain
effects (inside a certain entity); and second, they define the
difference between us and others
(identify creation). As a consequence of the erosion of
boundaries, complexity increases (see also
Exhibit 3).
(2) Mobility The erosion of boundaries facilitates greater
mobility of goods, capital, knowledge/technology, and
people.
(3) Heterarchy Organizations across all industries are not
structured hierarchically (top down), but rather
heterarchically (i.e., changing dependencies and interdependent
influencing channels are common).
Due to the interdependency between different organizational
layers, the process of power exertion
has become more costly.
(4) Erosion of Legitimacy Because it is almost impossible to
clearly identify one-way cause-and-effect relationships within
complex systems, responsibilities (institutional as well as
personal) are difficult to establish.
This process leads to the erosion of legitimacy within many
organizations, in particular of
democratically elected governments. Although they can no longer
provide for the welfare
of nation states, they remain the only addressee of the voter,
which therefore leads to
disenchantment with politics.
(5) Variety of Options In complex systems no foreseeable and
stable structures are evident (from a persons choice of
profession to a global players determination of corporate
strategy), but the number of options
can (on a personal and institutional level) also lead to
information overload and failure (anxiety).
(6) Asymmetry between
Past and Future
Asymmetry between past and future: The future is not a smooth
continuation of the past; rather
abrupt breaks are characteristic of development of the economic,
social, and political spheres.
Exhibit 3 Complexity and Consequences for Corporations
Situation Challenge Approach
De
fin
itio
n a
nd
Ke
y C
on
ce
pts In systems theory, complexity is
defined by the number of different
potential states of a system that
depend on certain complexity drivers
(see below for drivers).
Ashbys Law of Variety suggests
that organizations can handle high
external complexity only by a similar
internal complexity. The internal
implementation of such complexity
would create problems particularly
for multi-business line corporations.
Hence, these corporations look for
drivers that decrease complexity (see
below).
The more open and globally spread
out a system is, the greater the
velocity of change. The main
challenge of corporations is to
manage complexity. A global
company must be characterized by
certain features in order to manage
complexity and survive competition
(see below).
Ke
y D
rive
rs a
nd
Fe
atu
res
Difference and diversity of values,
aims, interests, cultures, and types of
behaviors.
Interdependence that provides for
greater interaction.
Ambiguity of situations and of informa-
tion in its meaning.
Fast flux: Through eroding borders, the
number of actors and interdependen-
cies increases. The different interests
and information uncertainty increase
the number and intensity of actions
that influence a system. It means that
adjustment processes occur continu-
ously, which again cause interventions.
A common business culture and val-
ues and one clearly formulated and
focused business strategy should
help to establish one clear direction.
Standardized processes decrease
variations (and hence complexity) in
the course of business and create
more transparency.
Focus on certain activities (such as
core competencies).
Decentralization of decision power
reduces the need for coordination
(and hence of interaction) and early
warning systems allow for more
time to adjust.
Activities in several world regions
provide for a certain homogeneity
of demand on the one hand and
advantages for corporations on the
other hand, among others economies
of scale.
One global strategy for the fulfill-
ment of common aims.
Employees of different ethical and
professional backgrounds.
Standardized norms and processes.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
ufth
an
sa: G
oin
g G
lob
al, b
ut H
ow
to M
an
ag
e C
om
ple
xity
?
235
Surviving the Changes in the Airline Industry
In 1992 Lufthansasimilar to other airlineswas close to
bankruptcy, as the first Iraq war reduced international air
traffic. It became obvious that the massive European and global
expansion strategy that Lufthansa had been pursuing since the early
1980s was not economically vi-able (refer to Exhibits 4 and 5 for
an overview of passen-ger sales and growth rate).
The fixed costs were too high for a cyclical business. On the
other hand, strong reasons supported the belief
that the network effect and economies of scale were leading to a
global airline industry, dominated by a hand-ful of key players
(similar to the car industry).
However, the deregulation process had not gone far enough to
allow for major mergers (in the United States, foreigners can own
only 25 percent of an airline; in the EU non-European ownership is
limited to 49 percent; in most of Asia any acquisition of a major
airline might not be illegal, but it is practically impossible).
But deregula-tion and the erosion of the IATA cartel went far
enough to allow for scores of new competitors. No-frills low-cost
airlines spread from the United States to Europe and
18.6%
ROW
14.2%
Dtl
22.0%
NA
13.0% AP
32.2%
EU
1980
15.1%
Dtl
30.5%
EU
21.3% AP
22.4%
NA
10.6%
ROW
1990
17.1%
Dtl
31.8%
EU17.8% AP
23.2%
NA
10.1%
ROW
2000
Note: Data for 1980 and 1990 also include cargo and mail
services. Data for 2000 excludes CityLine.Note:
Abbreviations: NA North America; AP Asia Pacific; ROW Rest of
the World; EU Europe; Dtl Germany
Sources: Lufthansas annual reports; authors calculations.
Exhibit 4 Lufthansas Passenger Transportation Turnover by
Region, 1980, 1990, and 2000
1981
5.0%
0.0%
5.0%
10.0%
An
nu
al C
han
ge in
%
15.0%
16.2 16.2
7.28.1
2.2
6.1
8.1
11.3
8.1
11.1
3.9
6.8
2.93.8
10.7
2.4
1.5 1.12.1
9.2
15.5
10.1
7.6
0.3
4.0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Note: From 1995, only passenger revenue is considered (excludes
mail and cargo). Figures represent net sales.Note:
Sources: Lufthansas annual reports from 1981 to 2005; authors
calculations.
Exhibit 5
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
uft
han
sa: G
oin
g G
lob
al, b
ut
How
to
Man
ag
e C
om
ple
xit
y?
236
then Asia, nurtured by the abundance of used aircraft and
leasing opportunities (e.g., easyJet was started with less than 5
million). Unlike the flag carriers, with their hubs, they offered
point-to-point connections on high traffic density routes. Also
business class passengers were targeted with new offerings (such as
Virgin Airlines). Overcapacity and persisting government subsidies
(es-pecially in southern Europe, Asia, and Latin America) combined
to create permanent price pressure: From the early 1990s, a minimum
of 3 percent reduction in costs was needed every year, which was
likely to continue.
Economic and political developments did not have a positive
effect on the airline industry either. After recov-ering from the
effects of the first Iraq war, air traffic was once again slowed
down by the Asian financial crisisstarting in 1997followed by
similar events in Russia and Latin America. However, everything the
airline industry had experienced so far was dwarfed when terrorists
used airplanes as flying bombs on September 11, 2001.
The succeeding War on Terrorespecially the sec-ond Iraq waralong
with spreading tensions through the Middle East and the SARS scare
delivered a three-year nightmare for the industry, which was in a
cyclical business downturn anyway: Worldwide air passenger volumes
fell by 3.3 percent and 2.4 percent in 2001 and 2003,
respec-tively, and remained flat in 2002.3 Lufthansas traffic
turn-over even decreased between 2001 and 2003 by 4.6 percent.4
Then, once passenger demand began to recover, oil prices
escalated dramatically in 20052006. Currently, fuel costs are the
second-highest cost category per seat kilometer, ac-counting for 26
percent of operating costs in Europe airlines (labor costs account
for approximately 30 percent).
Add in the issue above and the traffic jams and queues at major
airportswhich makes high-speed trains a more attractive alternative
for journeys up to 500 kilometersand a picture emerges. As such,
the airline industry ap-pears as a high-growthlow-profit industry.
Everybody expects air traffic to growdespite a highly volatile
environmentbut nobody expects a similar surge in profits. Because
airline companies are now mostly priva-tized (Lufthansa since 1996,
with about 40 percent held by diverse foreign owners), they have to
fight for survival on their own. The bankruptcies of Swissair and
Varig, for example, and the financial difficulties of Japan
Airlines (JAL) indicate that the former flag carriers cannot bank
on governments coming to their rescue. The fate of Pan Amonce the
dominant international carrier and now defunctis a sobering lesson
for everyone.
Lufthansa: Continued Challenges
Since Lufthansas turnaround in 19921993, in only one year have
no new cost-cutting initiatives been launched, implemented, or
(after 2001) even accelerated. In fact, a
certain management routine on how to implement and control such
cost-cutting initiatives has even been estab-lished. Compared to
1992, the cost base has been reduced by approximately 40 percent,
despite rising wages, secu-rity and airport fees and the roller
coaster of fuel prices.
Lufthansa needed to ensure cash flow (especially after 2001),
and it needed to reduce costs (e.g., by hiring for-eign crew
members). Lufthansa transformed fixed costs into variable costs (by
outsourcing), and rationalized every step in the value chain,
especially via electronic processes which is very tricky when it
comes to interfac-ing with the customer.
The art of the endeavor was to push the cost-cutting through,
without losing consensus with the employeeswho, like everywhere in
the industry, are highly union-ized6and the strong work-councils,
who had several levers to derail the whole process or at least slow
it down considerably. With one exception of the strike in early
summer 2001 by the pilots who have a separate union and felt
disrespected, the magic worked. But employ-ers always face the risk
of a burn out syndrome, when everybody asks: Will this ever
stop?
However, sometimes Lufthansa executives think that cost-cutting
is easier, relatively speaking, than managing the Star Alliance
(refer to Exhibit 6 for an overview of its 18 members), now the
biggest of the global airline alli-ances, with 28.4 percent market
share and 842 destina-tions in 152 countries.7 Many think of
Lufthansa as the leader and integrator, because the biggest member,
United Airlines, was preoccupied for more than three years with
emerging from Chapter 11 bankruptcy procedures in the
From the beginning, Lufthansas strategy was to drive the Star
Alliance from the revenue side by keeping more passengers in the
network. This idea of seamless travel is implemented through
code-sharing, coordinated flight schedules, common lounges, baggage
handling, and so forth, leading to a higher utilization of planes
and infrastructure (lower cost per unit), and sometimes also to
economies of scale in purchasing and sales.
A constant balancing act is necessary between the alliance
members independence (including the right to leave) and the need
for common processes, especially in IT, and quality insurance.
Another constant point of debate centers on the needs and
expectations of global customers. Are they the same or do they
differ by culture (e.g., in terms of greeting during the boarding
process)? A crisis of individual members (especially Varig and
United) could endanger the whole alliance, and Lufthansa was pushed
to save Air Canada from bankruptcy in 1999, but could not prevent
the Australian partner Anselt from going out of service (Varig and
United still flew during the bankruptcy process and received only
technical aid from Lufthansa). In any case, Lufthansa
management
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
ufth
an
sa: G
oin
g G
lob
al, b
ut H
ow
to M
an
ag
e C
om
ple
xity
?
237
risks) of the other airline members and creates the per-ception
that Lufthansa is seeking a role as a dominant force (e.g., looking
for shareholdings in other airlines), a factor that contributed
considerably to the downfall of SWISS in 2001. However, when its
new incarnation, SWISS, was up for grabs in 2005, Lufthansa
violated this principle and acquired the airline to prevent it
fall-ing into the hands of arch rival British Airways and the
OneWorld Alliance. And more acquisitions may be in the cards:
Lufthansa maintains 10 percent of its own shares (the legal
maximum) for the purpose of a reserve.
For Lufthansatrained in the art of consensus more than othersit
seems to be easier to accept only an 80 percent workable solution,
if everybody is behind it and has bought into the compromise.
Nevertheless, it was a learning process over several years; many
com-promises ran counter to a Lufthansa culture that takes pride in
engineering excellence and maintaining stan-dards, not only in
back-office processes like IT, but also with customer interfaces
(e.g., Lufthansa thought that the electronic check-in should be
completed in half the
time than the other alliance members found acceptable for their
customers). Sometimes alliance initiatives run counter to the
interests of Lufthansa divisions: The idea of creating a common
Star Alliance IT infrastructure would rob the IT systems divisions
of most of their customers.
Despite the time-consuming negotiation and con-sensus-building
processes in the Star Alliance manage-ment superstructure (refer to
Exhibit 7) and despite the higher transaction costs, Lufthansa
executives remained strong supporters of the alliance. The reason
is quite sim-ple: Because no alternatives (mostly M&As) are
(legally) available, alliances are the only way to operate in a
global network without increasing ones own investments in an
economically unsustainable way (a lesson learned the hard way). It
is estimated that for Lufthansa the net op-erating profit increase
through the Star Alliance is about 500 million per year, which
roughly corresponds to the profits for 2005. Hence, in the overall
profitability equa-tion for flag carriers, the regional business
seems to fulfill a marketing activity for international routes
rather than being a profit source of its own.
1. AerLingus
2. American Airlines
3. British Airways
4. Cathy Pacific
5. Finnair
6. Iberia
7. LAN
8. Qantas
1. Aeroflot
2. Aeromexico
3. Air France/ KLM
4. Alitalia
5. Continental
6. Czech Airlines
7. Delta
8. Korean Air
9. Northwest
Market Share: 15.8% Market Share: 23.9%
1. Air Canada
2. Air New Zealand
3. ANA
4. Asiana Airlines
5. Austrian Airlines
6. bmi
7. LOT Polish Airlines
8. Lufthansa
9. SAS Scandinavian Airlines
10. Singapore Airlines
11. South African Airways
12. Spanair
13. SWISS
14. TAP Air Portugal
15. Thai Airways International
16. United
17. US Airways
18. Varig
Market Share: 28.4%
Exhibit 6 Global Airline Alliances and Their Members
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
uft
han
sa: G
oin
g G
lob
al, b
ut
How
to
Man
ag
e C
om
ple
xit
y?
238
Although the Star Alliance is great for intercontinental and
business travel, it does not provide an answer to the onslaught of
the low-cost carriers. Alongside some second-tier partnerships
outside the Star Alliance, Lufthansa created Lufthansa Regional
(refer to Exhibit 8 for the organizational structure), which
carries out approximately
50 percent of the companys German and European flights. Within
Lufthansa Regional, Eurowings and CityLine (partially) belong to
the Lufthansa Group.9 However, the planes from the other partners
are operated via wetleas-ing, whereby Lufthansa leases the aircraft
complete with crew and maintenance contracts. In this case the
planes are
Alliance Board (Airline Members)
CEO
Corporate Office
Legal
HR/Training
Finance and Strategy
CommercialProducts and
Services
Loyalty
Marketing
Information
Technology
Project Management Practice
18 A
irlin
e
Mem
bers
Fo
rmal
Org
an
izati
on
Source: Star Alliance, 2005. http://www.staralliance.com.
Exhibit 7 Organizational Structure of Star Alliance
BU
Catering
(2.22 billion)
BU
Leisure/Travel
(7.66 billion)
Lufthansa
Regional
Lufthansas
Core Fleet
Air Dolomiti
(100%)
CityLine
(100%)
Eurowings
(49%)
bmi
(30%)
(Partial) Ownership
SWISS
AIR
Contact AirAugsburg
Airways
Cooperation (wet-lease)
BU
Logistics
(2.75 billion)
BU
Passage
(12.05 billion)
BU
MRO
(3.12 billion)
BU
IT Services
(0.64 billion)
Note: Revenue figures refer to 2005.Note:
Source: Company information, 2006. http://www.lufthansa.com.
Exhibit 8 Structure of Lufthansa Holding and Lufthansa
Regional
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
ufth
an
sa: G
oin
g G
lob
al, b
ut H
ow
to M
an
ag
e C
om
ple
xity
?
239
integrated into Lufthansas scheduling and the company carries
the risk of the revenue side only.
Operating in a high-price competitive market, Lufthansa Regional
needs a lower-cost structure than Lufthansas core fleet. The cost
savings at Lufthansa Regional come partly from the slightly lower
wages, the smaller planes adjusted to the traffic density, a
reduced service level, an operating base in second-tier airports,
and point-to-point-service so that the time in the air is greater
than for network airplanes. On the revenue side, Lufthansa gains
through the feeder function to intercontinental flights (otherwise
passengers might go via other big hubs) and the density of the
connections: Only a few attractive routes can be developed by
low-cost carriers without facing competition from the outset
directly with Lufthansa (and its ability to cut prices when needed,
a source of continuous controversy with the antitrust
authorities).
However, as compelling as the business logic for Lufthansa
Regional may appear to financial and indus-try analysts, the
two-class society is a cause of friction
and ongoing tension among the employees, as well as sometimes
irritating to customers because of the differ-ent service
standards, which are not matched in price differences. Another
ongoing debate concerns in which category the newly acquired
SwissAir belongs. Is it a low-cost provider or an equal partner in
the Star Alliance? Often SWISS deliberately competes in its
marketing ef-forts with the no-frill sector; on other occasions it
refers to its tradition as a premium airline.
Can Organization Provide Stability?
Since 1996 Lufthansa has been organized as a holding with six
business lines (refer to Exhibit 9 for a brief de-scription),
dissolving the once integrated corporation. Although Passage is
dominant, with approximately two-thirds of the turnover, each
division is fully responsible for its own financial results and any
interactions with other group companies occur on market price
terms. However, as in every decentralized organization, the holding
com-pany needs to unite its businesses under one strategy
Passage
Monolithic
flag carrier
Logistics
Divisions
Integrated Functions
Result of the Transformation Process: Focused flag carrier
Strategic Business Areas
Active Portfolio Management
MRO*IT-
Services
Globe
GroundCatering Condor
Passage Logistics MRO*IT-
Services
Globe
GroundCatering Condor
Equant DHL Amadeus
Passage Logistics MRO*
1991
1994
1997
2000
2001
IT-
ServicesSale
Sky Chef
Acqu.
T. Cook
Acqu.
IPO IPO
Sale of
Sky Chef
Sale
Sale
SaleConv.
Bond
Sale of
T. Cook
* MRO: Maintenance, repair, and overhaul
Sources: Company information; authors illustration, 2006.
Exhibit 9 Evolution of the Organizational Structure of
Lufthansa
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
uft
han
sa: G
oin
g G
lob
al, b
ut
How
to
Man
ag
e C
om
ple
xit
y?
240
roof, avoiding silos and any duplication of functions. These
goals might have been the drivers at Lufthansa for a more focused
corporate strategy, the sale of Ground Globe (airport ground
service) and several financial di-vestments (e.g., the shareholding
in the reservation system Amadeus). Then, just at the very end of
2006, Lufthansa sold its 50 percent stake in Thomas Cook, the
tourism company into which Lufthansa integrated its charter
air-line Condor, for 800 million to KarstadtQuelle.10 And finally,
even more might be for sale with LSG Sky Chefs (catering) when its
turnaround is finalized (some parts of LSG Sky Chefs have been
sold).
The permanent attempt to remove intermediaries is representative
of the focus not only on cost cutting but also on streamlining the
business model. In 2005 Lufthansa abolished any discount on its
tickets for inde-pendent travel agencies (they now have to charge
their customers for issuing tickets) and promotes direct book-ing
via the Web or call centers or controlled distribution channels
(e.g., LH City Centers, a franchise travel agency chain with 540
offices in 49 countries as of 2006).
Above All: Maintaining Financial Discipline
Every business cycle challenges the precious investment-grade
rating that Lufthansa enjoys. In the crisis from 2001 to 2004, the
gearing increased from 36 percent in 2000 to 85.4 percent in 2005,
despite an increase in share-holder capital.dominant and Lufthansa
has learned to focus its cost cut-ting on the cash flow impact.
Depreciation of airplanes is higher than British Airways for
example (12 vs. 20 years) to ensure a rapid capital recovery and
reduce debt service as quickly as possible. Leasing part of the
fleet allows for quicker adjustment of capacity (after 2001
approximately 20 percent of plane capacity was taken out of
operation; now it is building up again).
Corporate Culture in Transition
Lufthansa was once known for its strong culture, based on pride
in being a Lufthanseat, the positive image of the company in
Germany and its reputation for en-gineering excellence, underpinned
by ongoing training and educational activities. Now approximately
one-third of the workforce is non-German, and it has become more
fragmented in its interests, perceptions, communication channels,
and expectations. The pilots strike in 2001,
which put the pilots in confrontation with the ground personnel
(who suffered the brunt of passenger anger), was not only about
money. It was also about the pilots feeling that they were no
longer sufficiently appreciated, a lack of integration into the
normal flow of communi-cation and consensus building.
Management has tried to improve the situation; ongoing town hall
meetings with members of the man-agement board and the CEO are
held, as well as an ex-tensive written communication flow about the
develop-ment of the company. Such initiatives are state-of-the-art
in the industry today and Lufthansa has included them in the
leadership values for its employees. As a result, every employee
has individual targets and managers of all levels are evaluated on
an annual basis (in a dialogue with his/her boss).
Continuous education and training is also high on the agenda,
not only for employees but also for manage-ment. Among German-based
companies, Lufthansa pio-neered a corporate university in 1998. The
Lufthansa School of Business is recognized worldwide as one of the
best in the industry.
To increase employees identification with the com-pany and to
help passengers feel valued (despite the high fuel consumption),
Lufthansa is embarking on a wide range of social and environmental
activitiesfrom supporting children in need (via the Help Alliance)
to protecting endangered animals and recycling or in-troducing fuel
efficiency initiatives (see
http://konzern.lufthansa.com/en/html/ueber_uns/balance/index
But Lufthansa management knows that past efforts are now being
challenged by an issue of a completely new dimensionglobal warming.
Although the airline in-dustry claims that only 3 percent of global
CO
2 emissions
come from air traffic, the whole impact on global warm-ing is
approximately twice that factor (e.g., through NOx emissions at
high altitude) and rapidly growing. Given current growth rates, the
share of CO
2 emissions from
air traffic might increase to approximately 20 percent by
2020.
Unlike many other energy sources in developed coun-tries, fuel
for airlines is not taxeda point constantly raised in public
criticism. So far the industry has avoided taxation because it
would require some sort of interna-tional agreement, but the
pressure is rapidly growing to price the externalities of air
transport into travel costs. The industry is considering a kind of
emission trading to avoid taxation, but even this approach would
increase fuel prices considerably and may end the era of cheap
flights.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Case
18
L
ufth
an
sa: G
oin
g G
lob
al, b
ut H
ow
to M
an
ag
e C
om
ple
xity
?
241
Notes
1. As of 2006, IATA (International Air Transport Association)
represents
261 airlines comprising 94 percent of international scheduled
air traffic.
2. IATA, 2006. The figure represents the sum of the net profits
between
2001 and 2005 for all IATA member companies. These are (in
US$
billion): 13.0 (2001), 11.3 (2002), 7.6 (2003), 5.6 (2004),
3.2
(2005). The estimated value for 2006 is US$ 1.7 billion.
3. Datamonitor, Airline Report, 2005; IATA Air Transport
Statistics, 2001,
2002, and 2003.
4. Lufthansas annual reports between 2000 and 2003. These
figures
represent the total passage revenue (including cargo and mail),
which
dropped from 12.55 billion for the year 2000 to 11.66 billion
for the
year 2003.
5. IATA, 2005, 2006. In the United States and Asia, the share of
labor
costs in operating costs is 38 percent and 20 percent,
respectively.
6. Furthermore, in Lufthansas case the chairman of the (Civil)
Service
and Transportation Union is the deputy chairman of the
supervisory
board due to the co-determination law.
7. Star Alliance; PATA, November 2006. PATA data are calculated
on the
basis of IACO data.
8. The formal bankruptcy procedure began on December 9, 2002,
and
closed on February 1, 2006.
9. The low-cost airline Germanwings is a 100% subsidiary of
Eurowings.
10. Before this deal, KarstadtQuelle held the other 50% of
Thomas Cook.
Further, the deal that was announced in December 2006 makes
Lufthansa a minority stakeholder in Condor.
11. Gearing is calculated as the ratio of a companys long-term
funds
with fixed interest to its total capital. A high gearing is
generally
considered speculative.
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.
Licensed to: [email protected]
-
Copyright 2009 Cengage Learning, Inc. All Rights Reserved. May
not be copied, scanned, or duplicated, in whole or in part.