Lufthansa

GoingGlobal,butHowtoManageComplexity?
Adel
Donnych
Jason
MyatHsu
Yusuke

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

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

Lufthansa

RelativeCurrentSituations
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

Lufthansa

Lufthansa
KeyStrategicIssues
AcquisitionandRestructuringStrategies
o Restructuringfocusedoncorporatestrategytounite6business
segmentsunderonestrategythatreinforcedthecorebusiness
Passengertravel.
o 5currentsegments:Passage,Logistics,MRO,IT,Catering&
TourismandaservicesgroupofferingInsurance,Flighttrainingand
BusinessTravelmanagement.
o AcquisitionstrategyfocusedonexpansioninEuropeandGlobally.
Geopoliticaleventsmadethisstrategyeconomicallyunviable.
o Currentstrategyfocusesonequitystakesinothercompanies.

Lufthansa

Lufthansa
KeyStrategicIssues
InternationalStrategies
o Industrychanges,deregulationandtheeconomicpressuresof
sustainingaprofitablebusiness,LufthansaformedTheStarAlliance
withotherairlinestoprovideaseamlessnetworkofintercontinental
connections.
o Mergersandacquisitionswerecostlyandranintogovernmental
regulationsandlimitations.Thealliancewouldprovidetheneeded
expansionsoughtbyLufthansawithlimitedregulatoryhurdlesand
reducedinvestments.
o EmphasisisonmaintainingaGlobalstrategythatoffersthe
customersasimilarlevelofservicethroughoutthenetwork.

Lufthansa

Lufthansa
KeyStrategicIssues
InternationalStrategies
o FormedLufthansaRegionalaregionalairlinetocompetewiththe
lowcostcarriersthatsprungupasaresultofderegulation.
o LufthansaRegionalwasaregionalizedpartoftheInternational
strategyaddingtotheeconomiesofscaleandtotheLufthansas
marketsize.
o Recentlyacquired100%stakeinAustrianAirlines.

Lufthansa

Lufthansa
KeyStrategicIssues
CooperativeStrategies
o TheStarAlliancewasaglobalstrategyrequiringefficientoperations
acrossthenetwork.Coordinationandcooperationwerevitaltoits
success.
o Asacrossborderstrategicalliancethegoalwastoincreasemarket
shareandprofits.
o Limitationsindomesticgrowthandforeigngovernmentpolicies
madetheallianceanattractivestrategy.

Lufthansa

Lufthansa
KeyStrategicIssues
OrganizationalStructureandControl
o Organizationalstructurewasaccomplishbyrestructuringinto
6businesssegments.
o Goalwastoavoidduplicationoffunctionsamongthebusiness
segmentsandresultedinamorefocusedcorporatestrategy.
o Maincontrols:costcutting,removalofintermediariesintickets
sales,wetleasesforregionalairline.
o Maintainstrongfinancialdiscipline,highcreditrating,lowdebt
service.Currentlyitowns70%oftheairfleetdebtfree.

Lufthansa

Lufthansa
KeyStrategicIssues
Miscellaneous
o Integrationofpersonnelacrossglobe,employeetraining
programs,diversity,safeplacetowork.
o IncreasedCRMstrategycustomercentricfocusedservices
andproducts.

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Lufthansa
KeyStrategicIssues

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Lufthansa:ExternalAnalysis
IndustryDefinition
Lufthansacompetesintheinternationalairline
industry
Itsbusinesssegmentsincludepassengerbusiness,
logistics,repairandoverhaul,catering,leisuretravel
andITservices.

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Lufthansa
DefiningtheIndustry

LowLowProfitHighGrowth
IndustryPriceMovements
Theelasticityofdemand,theeconomy,IT,sociocultural,political/legal,demographics,fromthe
generalenvironmenthasclaimedmassivemovementsinthisindustryandLufthansacore
businessunits.

PassengerTransportation

MaintenanceRepairandOverhaul(MRO)

IT

Logistics(Cargo)

Catering(PassengerFoodService)
Lufthansawillcontinuetodowhatitdoesbest:focusingonthecustomersbyprovidingthebest
customerservice,rampinguptheirIT,andreducingcost;inaddition,conservativerisk
managementpractices.

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Lufthansa
GeneralEnvironment

Lufthansa

Global
Demographics
Sociocultural
Economic
IT
Political/Legal

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Lufthansa
Demographic
EachofLufthansa'scustomersegmentshasdifferentprofitability
anddifferentservicelevelrequirementsandexpectations.
Eachserviceofferingsaretailoreddifferentlytoeachofthe
segments.
Differentiatingcustomersbydemographicfactorsbutbymore
businessrelatedattributessuchastheirpurchasehistoryor
profitability.

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Lufthansa
TheGood,TheBadandTheUgly

Platinumcustomers:MostProfitablecustomer,whoaretypicallyheavyusersoftheproduct,
whoarenotoverlaypricesensitiveandwhosecommitmenttotheenterpriseishigh.

GoldCustomers:Theprofitabilitylevelislowerandthecommitmentisnotashighasthe
platinummembers,eventhoughtheyareheavyusers.

IronCustomers:Thesecustomersprovidethevolumeneededtoutilizethefirmscapacity
butwhosespendinglevels,loyaltyandprofitabilityarenotsosubstantialenough.

LeadCustomers:CustomersthatcostthecompanyMoney.Thecompanymustminimizethe
customersegment,eitherbytryingtoupgradecustomersorbydisassociatingfromthem.

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Lufthansa
GlobalOutlook
LookingattheAirlinesfromaglobalstandpoint

Lufthansafacilitateseconomicgrowth,world
trade,internationalinvestmentandtourism;and
is
thereforecentraltotheglobalizationtaking placein
manyotherindustries.

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Lufthansa
SocioCultural
IntheworkPlace
NowApproximatelyonethirdoftheworkforceisnonGerman.
ContinuouseducationandtrainingisonLufthansatopprioritylist
notonlyforemployeesbutalsoformanagers.
LufthansaSchoolofBusiness
CSR
Lufthansaenvironmentalactivitiesengageawiderangeofsocialand
environmentalprojectsfromsupportingchildreninneed(viathehelp
alliance)toprotectingendangeredanimalsandrecyclingorintroducing
fuelefficiencyinitiatives.

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Lufthansa
IT
CustomertoBusinessinterfacing
GotRidoflegacy
ThisHelpedLufthansa
Reductioninmaintenancecost
Improvedsiteusabilityandfunctionality
Moreflexiblebookingprocess
CustomerRelationshipManagement
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Lufthansa
MobileBusinessModel
ConformationSMSwiththeflightinformation
Convenientcheckinoncellphone
AlertsyouwhenFlightgetscanceled

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Lufthansa
Political/Legal
In1978Deregulation
Allowedforeignerstoown25%ofanairline
EUnonEuropeanownershiplimitedto49%
ASIA,itisnotillegaltoownanairline
GovernmentTaxeshasimposedtaxesheavily
GovernmentFines
GovernmentFunding
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Lufthansa
Economic
EconomicforcescanhaveaneffectonLufthansadaily
businessoperations.
Lufthansa/ConsumerFearIndex
WarsSystemic
TerroristattackSystemic
PlanecrashNotSystemic
BankingindustrySystemic
SwineFluNotSystemic
UnemploymentRateSystemic
OilNotSystemic
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Lufthansa
RiskManagement
TerroristattackPlanecrash
SwineFlu
Oil

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Lufthansa
Hedging
Airlines%ofHedgedOilLevelofSavings
BritishAir46%5.3%
Southwest80%7.5%
Delta0%(PaidSpotprice)

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Lufthansa
Howdoeshedgingwork?
IfanAirlinedoesnothedgeitcanseverelyimpact
theirprofitability
JuneSpotPrice70/barrelofOIL(lockedin)
AugustSpotPriceForecastedbyLufthansa85/Barrel
(actual80)
LufthansaCanbuyOilat70vs.80
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Lufthansa
MostImportantForceisEconomic

Marketvicissitudes

Travelerspsychologies
OngoingAirlineexpense

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Lufthansa
PortersFiveForcesModel
CompetitiveRivalryExtremelyHigh
o
o
o
o

Somanycompetitors
Saturatedmarket
Highexitbarriers
Difficulttodifferentiate

ThreatofNewEntrantsLow/Moderate
o
o
o
o
Lufthansa

Economicbarriers
Brandrecognitionofexistingcompanies
Economiesofscale
Lowcostcarriers
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Lufthansa
FiveForcesAnalysis
SupplierPowerHigh
o MainlydominatedbyBoeingandAirbus
o Suppliersgoodsarecriticaltobuyerssuccess

BuyerPowerHigh
o Lowswitchingcost
o Lowdifferentiation

AvailabilityofSubstitutesLow
o Road,rail,andship
o Internet
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Lufthansa
FiveForcesAnalysis

CompetitiveRivalryExtremelyHigh
Buyer/SupplierPowerHigh
Unattractive
Lowprofitpotential

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Lufthansa
CompetitorAnalysis

o
o
o
o
o
o
o
o
o
o
Lufthansa

AmericanAirlines
BritishAirways
CathayPacific
Finnair
Iberia
JAL
LAN
Malv
Quantas
RoyalJordanian

o
o
o
o
o
o
o
o
o
o
o

Aeroflot
AeroMexico
AirFrance
Alitalia
ChinaSouthern
ContinentalAirlines
CzechAirlines
Delta
KLM
KoreanAir
NorthwestAirlines
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OneworldSWOT
Strengths:
Focus on quality
Complementary global network
None of its members declared
bankrupt

Opportunities:
Anti-trust immunity
JALs presence
Expecting growth
Mexicana joining in 2009

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

Threats:
Economy
Members bankruptcy
Member may leave for other
alliances

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SkyTeamSWOT
Strengths:
2nd biggest alliance
Market share in the North
America

Opportunities:
Vietnam Airlines joining in 2010
Growth in Asia

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

Threats:
Economy
No Japanese Airlines
Loss of Continental Airlines

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Lufthansa:InternalAnalysis
TangibleandIntangibleResources

Fleetownsandoperatesabout350aircrafts
Transportationtoandfromairports
Loungesatmorethan60airportdestinations
Cateringservices

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Lufthansa
CoreCompetencies

Maintenance,RepairandOverhaul
(MRO)
Logistics
ITServices

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Lufthansa
WhoistheCustomer

Corporate
Individuals
Government
TravelAgencies

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EconomicalSituationalAnalysis
60000
50000
40000

Total Assets
Long-term Debt

30000

Net Income
Revenue

20000
10000
0
2001 2002 2003 2004 2005 2006 2007 2008

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ReturnonAssets

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ComparisonData

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CashVs.CapitalExpenditureRatio
Cash vs. Cap. Exp. Ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

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Research&Development
MOZAICMeasurementof
ozone,watervapor,carbon
monoxideandnitrogenoxides
aboardAirbusinserviceaircraft

CARABICCivilAircraft
fortheregularInvestigationof
the Atmosphere

IAGOSaimstocreatea
measuringinfrastructurethatrecords
atmospherictracesubstances.

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SWOTAnalysis:Lufthansa
Strengths

Opportunities

Lufthansa

Weaknesses

Threats

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

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

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

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

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StrategicAlternative1
LowEndInvestment/Responsiveness/Action
Status quo keeping the cost saving, leasing
regional airlines and reducing intermediaries,
controlling air ticketing fees
o Cost leadership focus
o Help maintain debt rating and good financial
investment standing

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StrategicAlternative2
ModerateInvestment/Responsiveness/Action
Focus on customer segmentation using IT CRM
implemented on a detailed level
o Data mine CRM information to get higher level of
profitability
o Accounts for changing customer needs to maximize profit
potential
o Differentiate customers by new market divides: purchase
history, profitability, expected lifetime worth as opposed
to demographic, geographic, and economic means
o Through implementation of new technologies, like mobile
device check-in, they will be able to adjust service to a
wider audience
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StrategicAlternative3
HighEndInvestment/Responsiveness/Action
Attempt to acquire stakes in other airlines within antitrust government regulations in EU and other countries
o Will diversify their holdings and increase profit potential
o Increases the Star Alliances reach in servicing global air
travel
o Allows them to be prepared for a changing market
o Must limit stakes in international acquisitions to not
encourage government interaction
o Improves air route network and increases flight
availability to loyal Lufthansa customers
o Allows increased presence in new, emerging, and
current markets
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RecommendedActions
HybridStrategyofAlternative2and3
Focus on customer segmentation through
newly developed IT systems while attempting
to acquire legal stakes in either competitor or
partner airlines.

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

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Reasoning
Howaretheygoingtodoit?
Continue to use their strong IT Division to
develop innovative technologies
Use their positive debt rating to encourage
financial growth and the purchase of stakes in
competing/partner airlines
Use their influence as the largest member of
the Star Alliance to encourage some troubled
members to allow partial ownership or
acquisition
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LufthansaCaseanalysis
Thankyou!
Closingquestionsorcomments?

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