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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways

Contents
INDUSTRY OVERVIEW ............................................................................................................................. 2

.......................................................................................................... 3 SWOT ANALYSIS ...................................................................................................................................... 4 EGSOP ANALYSIS ..................................................................................................................................... 4 ECONOMIC SEGMENT ......................................................................................................................... 4 ORGANISATION ................................................................................................................................... 5 POLITICAL/LEGAL SEGMENT ............................................................................................................... 5 PORTERS FIVE FORCES ............................................................................................................................ 6 VALUE CHAIN ANALYSIS .......................................................................................................................... 7 FINANCIAL ANALYSIS ............................................................................................................................. 10 OBSERVATIONS ..................................................................................................................................... 11

..................................................................................................... 12 COMPANY PROFILE ............................................................................................................................... 12 BUSINESS AND INVESTMENTS .............................................................................................................. 12 STRATEGY ANALYSIS ............................................................................................................................. 12 SWOT ANALYSIS .................................................................................................................................... 13 VALUE CHAIN ANALYSIS ........................................................................................................................ 15 FINANCIAL ANALYSIS ............................................................................................................................. 16 COMPETITORS ANALYSIS ...................................................................................................................... 16 OBSERVATIONS ..................................................................................................................................... 17

Appendix ............................................................................................................................................... 18 REFERENCES .......................................................................................................................................... 50

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways INDUSTRY OVERVIEW
Although my fascination for the aviation industry dates back to nine years ago, my awe and appreciation for what it has achieved has been there since before I can remember. My main aim, once I decided to pursue engineering, was to become an Aeronautical Engineer with specialisation in aircraft modelling. However, lack of technology in my country, forced me to change fields. Most of the researches, projects and reports, during my Postgraduate studies, have been based on various airlines. I hope to, one day, reach the upper tier of a successful airline company and stamp my mark on its policies, thereby getting world wide recognition for my contribution to this field. History of aviation dates back to two thousand years from the earliest attempts in kits and gliders. The earliest known record of kite flying is from around 200 BC China, when a general flew a kite over enemy territory to calculate the length of tunnel required to enter the region. Leonardo Da Vincis (15th century) dream of flight found expression in several designs, but he did not attempt to demonstrate his ideas by actually constructing them. Experiments with gliders provided the groundwork for heavier-than-air craft, possible due to theories such as fluid mechanics and Newtons Laws of motion. Since the birth of flight in 1903, air travel has emerged as a crucial means of transportation for people and products. In 1914 passengers paid $5.00 to take Americas first commercial plane flight, an eighteen-mile run of the St. Petersburg-Tamp Airboat Line. The industry grew, slowly and steadily, due to post master general granting route authority to airlines based on their bids to improve airmail service, in 1926. Over the years, government agencies, airline industry officials, and survey research firms have amassed data that represent the collective experience of the traveling pubic and the airline industry. Airlines and airports face challenging, dynamic market environments that in the short term are extremely sensitive to the world economic and political situation. Long-term growth of around 4.5 per cent per annum in air traffic has been forecast (Airports Council International, 2003), but events such as September 11, the recent SARS outbreak and poor economic conditions have seen an overall stagnation and reduction of traffic during the period 2001 to 2003 although some market sectors have performed better. Historically airlines have made very low margins, 8 per cent on average. The pressure from competition, deregulated market forces and, in certain regions the challenge from low cost airlines, has presented management with the problem of how to improve airline economic performance. Being one of the most competitive and cut throat industry, I have added some statistics for success factors and driving forces in the appendix.

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways

Deutsche Lufthansa AG is a global aviation group. The Group operates in five business segments, each dedicated to high quality standards. The five units the passenger airline business, logistics, MRO, catering and IT services all play a leading role in the industry in which they operate. The Lufthansa Group includes a total of more than 400 subsidiaries and associated companies. The flag carrier of Germany (German pronunciation: [dt lfthanza]) and the largest airline in Europe in terms of overall passengers carried and fleet size, comes under Deutsche Lufthansa AG. The German government had a 35.68% stake in Lufthansa until 1997, but the company is now owned, majorly, by private investors who have a stake of 88.52% in the company. (as of March 2007). They can trace their history back to 1926 when Deutsche Luft Hansa was formed in Berlin, an airline that served as flag carrier of the country until 1945 when all services were suspended following the defeat of Germany in World War II. The new Lufthansa was formed on January 6, 1953, a company for air traffic demand, and was renamed Deutsche Lufthansa and re-launched as an airline on August 6, 1954. It is the world's fourth-largest airline in terms of overall passengers carried, operating services to 18 domestic destinations and 203 international destinations in 78 countries across Africa, Americas, Asia and Europe. Together with its partners, Lufthansa services around 410 destinations. With over 710 aircraft it has the second-largest passenger airline fleet in the world when combined with its subsidiaries. Lufthansa's registered office and corporate headquarters is in Deutz, Cologne, Germany, with its main operations base (Lufthansa Aviation Centre (LAC) and primary traffic hub at Frankfurt Airport in Frankfurt. The majority of Lufthansa's pilots, ground staff, and flight attendants are based in Frankfurt. It is a founding member of Star Alliance, the world's largest airline alliance, formed in 1997. The Lufthansa Group employs 117,000 people worldwide of 146 nationalities. In 2010, over 90 million passengers flew with Lufthansa (excluding Germanwings and Brussels Airlines). On May 18, 1997, Lufthansa, Air Canada, Scandinavian Airlines, Thai Airways and United Airlines formed the Star Alliance, the world's first multilateral airline alliance. In 2000, Air One became a partner airline of Lufthansa and nearly all Air One flights were code-shared with Lufthansa until the purchase of Air One by Alitalia. In 1971, Lawrence Fellows of The New York Times described the then-new headquarters building that Lufthansa occupied in Cologne as "gleaming". In 1986, terrorists bombed the headquarters of Lufthansa. No people received injuries as a result of the bombing. By the end of 2007 Lufthansa planned to move 800 employees, including the company's finance department, to the new building, in Deutz, Cologne. In 2011, Lufthansa was the worlds first airline to test the use of biofuel in regular operations. As part of the burnFAIR research project, Lufthansa operated an Airbus between Hamburg and Frankfurt four times daily, with one of its engines running 50% on biofuel. The main objective of this long-term trial was to gather experience and to collect data. The trails were a success, and now further exploration is begin done to build engines which can run on 100% of biofuel.

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways SWOT ANALYSIS
Deutsche Lufthansa (or the group or Lufthansa) is an aviation group primarily engaged in passenger transportation. The group's other activities include logistics, maintenance and repair operations, catering and IT services. The company has established presence across several diverse business segments which not only facilitate diverse revenue streams but these segments complement each other. However, intense competition may pressurize the operating margins of the group. Strengths - Presence across integrated segments - Diversified geographical spread mitigates business risks - Strong alliances Opportunities - Positive trends in the global market for aircraft maintenance, repair and overhaul - Global tourism to rebound strongly in 2010 - Global air freight industry on road to recovery Weaknesses - Labour dispute - Declining cash from operations

Threats - Intense competition and price discounting - Price volatility in petroleum markets - New eco tax could strain Lufthansas passenger traffic

(Refer to the Appendix for an in-depth analysis)

EGSOP ANALYSIS
ECONOMIC SEGMENT The European Union has the largest economy in the world. The EU economy is expected to grow further over the next decade as more countries join the union - especially considering that the new States are usually poorer than the EU average, and hence the expected fast GDP growth will help achieve the dynamic of the united Europe. It is estimated that the Eurozone will grow around 2.6 per cent this year (2009), on a par with other industrialized nations such as the United States at 2.6% (Q2 2009) and 1.6 (Q3 2009). GDP: $12.82 trillion. (2010) GDP/capita: $18,056. Annual growth of per capita GDP: 2.8% (2006). Income of top 10%: 27.5%. Unemployment: 8.8% (2011). CORPORATE GOVERNANCE AT LUFTHANSA Corporate Governance at Lufthansa is reflected by responsible corporate leadership and control which target sustainable value creation in accordance with high International standards. Corporate Governance is of vital importance for guaranteeing enhanced transparency towards shareholders and helps developing continuous trust with our management. The German Companies Act (Aktiengesetz) and the DCGK are an essential legal base. STRATEGY Foremost at Lufthansa are such attributes as quality and innovation, safety and reliability. They are well positioned strategically, operationally and financially to negotiate ups-and-downs in the economy. Their corporate strategy is geared to sustainable value creation and is expressed

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


in their commitment to shareholder value. They attach priority to profitability over size. Their strategies for different segments of their operations can be summarised as follows: I. II. III. IV. V. Acquisition and Restructuring Strategies International Strategies Cooperative Strategies Organizational Structure and Control Miscellaneous ORGANISATION Deutsche Lufthansa AG acts as the parent company with an Executive Board consisting of four members. The Executive Board is responsible for managing the Group, determining its strategy and ensuring a sustainable increase in its value. The Supervisory Board appoints and advises the Executive Board and monitors its activities. The Lufthansa passenger airlines as well as the individual business segments are each accountable for their business results. They are monitored by their own supervisory boards, on which members of the Group Executive Board and top management are represented. The Lufthansa Group employed some 120,000 personnel at the end of 2011, and achieved total operating revenue of EUR 28.7 billion for the year. POLITICAL/LEGAL SEGMENT The European Union has evolved over time from a primarily economic union to an increasingly political one. This trend is highlighted by the increasing number of policy areas that fall within EU competence: political power has tended to shift upwards from the Member States to the EU. The European Free Trade Association (EFTA) was established on May 3, 1960 as an alternative for European states that did not wish to join the European Union, creating a trade block with fewer central powers. Today only Iceland, Norway, Switzerland and Liechtenstein remain members of EFTA, as the other members have gradually left to join the EU.

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways PORTERS FIVE FORCES
The Bargaining Power of Buyers: Low pressure o o o Business or regular travellers have little bargaining power with airlines. One traveller does not hurt the airline. Only a few airlines to choose from and even less at an individual airport. Threat of New Entrants: Low pressure o o o o Government regulations and licensing from the Federal Aviation Association. Brand loyalty and identification of major airlines. Contracts between airlines and airports are hard to develop. Substantial costs associated with forming as airline-airplane purchases, labour costs, fuel costs, maintenance.

Rivalry among Established Companies: High Pressure o o o Most competitors, competing directly, emphasize a low-cost strategy Many consumer look only to cost as a determining factor in a purchase creating an intense environment. Switching costs are generally low, even though companies have tried to increase switching costs with the use of frequent flyer programs.

Substitute Products: Low pressure o o o No other product competes directly with airlines in terms of cost and speed of travel. Charter planes are much more expensive than commercial airlines. Train service is generally much more expensive and time consuming.

Bargaining Power of Suppliers: High pressure o o o o All suppliers have tremendous bargaining power with the airline industry. There are few fuel providers and no reliable alternative to fuel. Pilots are in high demand. Airports are in limited supply.

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways VALUE CHAIN ANALYSIS Resource Analysis:
Tangible Resources Financial Resources Strengths The amount of assets easily covers debt Weaknesses Implications Controlling costs have It is important to have a improved, but not large amount of current enough assets, in case they choose to buy out another airline Over dependence on the alliance will ruin them

Organizational Resources Physical Resources

Alliances with other Dependence on sharing airlines through the Star resources with outside Alliance firms like United Airlines Size of their fleet of airplanes

High costs of maintaining Find the optimal amount of such a large fleet planes to keep in use given demand at the time. This will keep down maintenance costs Reservation systems are critical in keeping flights booked

Technological Resources

IT systems must be Leading the industry in IT continually updated to systems stay ahead of competition

Intangible Resources Human Resources

Strengths

Weaknesses

Implications

Strong and committed Controlling the internal The Company must fix the work force environment between internal culture between pilots pilots and grounds and grounds crew, to sustain crew growth

Innovation Resources Strong ability to redesign Not spending enough to Due to rising oil prices, they planes (larger seats, reduce fuel must spend more to learn how contemporary consumption to decrease fuel consumption furnishings) to save money Reputational Resources Known for quality, Best first class in the Their strengths outweigh innovation, industry; Reputation of their weakness of high prices. dependability, being pricey Their target market of competence and safety business passengers, require a 1st class experience

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Functional Areas Destinations Strengths Weaknesses Implications

Star Alliance provides them Star Alliance needs to sign Sky Team will become the with the largest amount of China East, or Lufthansa largest alliance if Star code sharing from other purchase them, to maintain Alliance is not able to sign airlines market share in the Chinese China East market Motivation Constant changing is hurting HR needs to continue to keep the morale of employees the employees satisfied with all of the change occurring Expensive to maintain and IT is critical to keep costs upgrade down, and increase revenues

Human Resources Information Technology Marketing

Lowers costs, increases revenues

Increasing brand awareness Not spending enough on Build brand image in through creative ads marketing efforts in South developing markets in order America to keep leading market share Ability to adapt to change through experiences Does not manufacture They will not be able to sustain profits without fixing the internal culture It would be out of the norm Saves money, and allows for an airline to them to focus on being manufacture their own service oriented planes May not have the ability to R&D is necessary to stay know what future ahead of the competition and customers demand gain market share Managing their internal culture

Management Manufacturing

R&D

The ability to predict consumer demand in the past

Design

Studying plane layouts to Tastes and preferences vary Requires lots of efforts to maximize space by region customize for each region

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways Primary Activities
Resource or Capability In-Bound Logistics Operations Is it Valuable? Is it Rare? Is it Costly Is it Competitive Performance to Imitate? substitutable? Consequence Implications Yes, Logistics Other firms Yes Yes Competitive Average Business have logistics Parity Returns Segment exists programs Yes, is known Yes, very Yes No Sustainable Above Average for its cost hard to Competitive efficiencies in replicate Advantage operations Yes, logistics No Yes Yes Competitive Average Business Parity Segment exists No all firms have can be Yes Competitive Below Average marketing imitated Disadvantag and sales w/o high e costs Yes Yes Yes, firms No Sustainable Above Average will spend Competitive top dollar Advantage to imitate No, not a value No No Yes Competitive Below Average driver Disadvantage Yes, drives Yes, Yes No Sustainable Above Average profits technological Competitive innovations Advantage are rare No, not a value No, all firms No Yes Competitive Below Average driver have H/R Disadvantage teams Yes, known for Yes, Yes No Sustainable Above Average infrastructure structure is Competitive rare Advantage

Outbound Logistics Marketing and Sales Service

Procurement Technological Development Human Resources Management Firm Infrastructure

Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways FINANCIAL ANALYSIS

Sales and market share: - It has been increasing while market share is up. Star Alliance has the leading market share when compared to Lufthansa's major competitors. Acquiring and retaining new customers: - It is the largest airline in Europe in terms of overall passengers carried. In 2007, 83.1 million passengers flew with Lufthansa including all subsidiaries. Gross profit margins: - Profit margins have been increasing. Operating Income and Net Income Available to Common Shareholders: - Operating Income and Net Income have both increased in recent years. ROIC and Shareholder Value (ROIC vs. WACC): - ROIC=7.4% while WACC=8.6; therefore, Lufthansa is not creating sufficient value for its shareholders. Overall financial strength: - Financially stable, but could be doing better in terms of shareholder value. Continuous improvement effectiveness: - Improvements are evident in increasing sales and fall through profit. Stock price appreciation and dividends: - EPS=3.6 up 106%. Board will be proposing a 55 cent higher dividend of 1.25 euros per share at the annual general meeting. Leadership roles: - Technology, quality, innovation, excellent leadership. Management restructuring successful. Organizational development: - Stable; Key role in Star Alliance. Separation of Independent subsidiaries. Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Key takeaway: - Sales are increasing while COGS are increasing. Net income is increasing along with operating income. ROIC is 7.4% which leaves room for improvement. Days in inventory are high compared to competitors. The strategy is working as improvements are evident. Lufthansa has still not reached its full potential as it is destroying shareholder value in terms of ROIC and WACC. Lufthansa has a good track record for posting profits, even in 2001, after 9/11, the airline suffered a significant loss in profits but still managed to stay 'in the black'. While many other airlines announced layoffs (typically 20% of their workforce), Lufthansa retained its current workforce.

OBSERVATIONS
Lufthansa has a good track record for posting profits, even in 2001, after 9/11, the airline suffered a significant loss in profits but still managed to stay 'in the black'. While many other airlines announced layoffs (typically 20% of their workforce), Lufthansa retained its current workforce. The recommendation here is that Lufthansa maintain its current approach and continue to search for new ways to control costs, form alliances, and maintain simplified customer service.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways

COMPANY PROFILE
Qantas with its success story and reputation amongst many other things is the worlds second oldest airline. The airline was founded in 1920, Queensland, Australia. Qantas lead services from Australia to North America and Europe, thereby standing as one of the worlds long distance carriers. Qantas presently employs about 32,500 people, while offering services across a network covering 182 destinations in 44 countries (including code share partners) in Australia, Asia, the Pacific, America, Europe, the Middle East, and Africa.

BUSINESS AND INVESTMENTS


Qantas Groups main business is the conveying of passengers using two complementary airline brands Qantas and Jet star. Qantas is segmented into three related groups: commercial, customer, Marketing, and Operations. The Commercial group comprises sales and distribution, commercial planning, Qantas Link and alliances. Customer and Marketing includes customer experience, cabin crew, in-flight services, and marketing. The Operations group comprises engineering, airports, catering, flight operations, operations planning, control, and Qantas Aviation Services. Jet star, the Groups low fares airline also manages the Jet star Asia operations based in Singapore. It also operates Qantas Frequent Flyer and Qantas Freight. Domestically, Qantas Link and Jet star operate around 5,600 flights a week serving 59 city and regional destinations in all states and mainland territories. Jet star also operates 160 domestic flights a week in New Zealand. Internationally, Qantas and Jet star operate more than 970 flights each week .The Groups network comprises 182 destinations in 44 countries, including Australia and those served by code share partner airlines. At 1 September 2010, the Qantas Group operated a fleet of 252 aircraft, comprising Boeing 747s, 767s, 737s and 717s, Airbus A380s, A330s and A320s, Bombardier Dash 8s and Bombardier Q400s.

STRATEGY ANALYSIS
Qantas has formed and launched various strategies time to time to be a prominent player in the industry. It maintains the corporate ethics and follows the concept of fair competition in the industry. A. 5 Year plan B. Dual-brand Strategy/Two-brand strategy C. Excessive surcharge Criticism D. Co-Branding E. Expanding fleet and shifting to fuel efficient planes

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways SWOT ANALYSIS
Strength - Strong Backing of Australian Government - Monopoly in Australian Market. - One of the top and largest airlines operating in Australia. - Has been one of the oldest airline operators in the world. - It has nearly 20 international as well as domestic destinations. - Good brand building exercises through advertising and sponsorship. Opportunity - Good economic condition in Australia - More international destinations, especially in Asia. - Tie-ups with international airlines for a combined service offering to customers. - Leases have been announced for new aircraft fleet to cater more passengers, employment opportunities, services efficiencies and extending flying business. - To promote easy access to businessmen, around the world, a club has been organized for uninterrupted and luxurious travel with priority check in and certain business related and personal facilities. Subscription can be made which range from one to several years (George, 1982). Threat - Increasing fuel prices affects operations. - Rising Labor Costs. - Increasing Competition in Australia Market from new start ups and SE airlines. Weakness - Too Much Concentration around Australasia. - Issues among employees caused an issue. - Weak performance in other geographic segments (Exhibit 4)

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways PORTERS FIVE FORCES

Threat of New Entrants: Low pressure o o o Virgin Australia Impulse Airlines Low Cost International Airlines

Bargaining Power of Suppliers: High Pressure o o o o o Boeing Fuel Companies IT Companies Airport Authorities Transportation

Competitive Rivalry: High Pressure o Singapore Airlines and their new budget airline; Scoot Air Thai Airways REX Star Alliance

Bargaining Power of Customers: High Pressure o o o o Air Travellers Travel Agencies Business Travellers Leisure Travellers

o o o

Threat of Substitutes: High Pressure o Railway Services o Bus Services o Shipping Services o Courier Services or Air Mail o Personal Transportation

(Kotler et al 2008)

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways VALUE CHAIN ANALYSIS
According to Kotler et al 2008, Qantas conducts its operations by dividing its total operations in two categories: A. Primary Activities: This includes services like Inbound and Outbound logistics, Operations, Marketing and Sales, Services, Route Selection, Passenger Service System and Yield Management. Following are the primary activities in brief: I. II. III. IV. V. VI. Inbound & Outbound Logistics Operations Marketing & Sales Services Yield Management Route Selection & Passenger Service Systems B. Supporting Activities: This includes Infrastructure of the firm, Human Resource management, Development of Technology, Procurement. Following are the supporting activities: I. II. III. IV. Infrastructure of the firm Human Resource Management Development of Technology Procurement

PEST ANALYSIS
The PEST analysis provides the viable picture of the industry or market in which the organization functions. Following are the factors affecting the functioning of Qantas Airlines: Political: The Australian aviation industry de-regulated in the year 1990 which gave birth to the competition among the airline companies. The liberal policy by the Australian Government has also welcomed the new entrants in the industry. The Australian Government also helped Qantas to merge with British Airways which in turn has reduced the wastage of resources, utilization and expansion of the network and earning revenues in European, Asia-Pacific and Transatlantic market (Narasimhan and Talluri, 2009). Economic: Economic factors relate to the earning as well as spending power of customers in any country, Australia was also affected by the Global Financial Crisis as the prices of fuel rose high and the spending power of the customers fell down. According to International Air Transportation Association the traffic of passengers in the business class and the first class reduced at 13.3%. The business class passengers fell by 24 per cent in Asia-Pacific operations and 22.2 per cent in the European operations in the global aviation industry (Graham 2009). Socio Cultural: The Australian society is very developed and the standard of living is high due to higher educational standards, developed technologies and industrialization. The aviation industry has played a distinct role in the life of Australians in several forms. The spending power and the

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


pattern of the people are also high. Qantas has served the different segments of the Australian markets with different programs like Qantas Frequent Flyer Program and Qantas Club. (Qantas annual report 1999) Technological: The technological development enables the organization to achieve the economies of scale and optimize the efficiency and effectiveness of its operations in the market place. Every organization is investing a handsome amount of its budget and profits in continuous innovation and development so be up to the mark. Qantas has adopted the latest possible technologies in all its related functional and operational areas time to time and achieved higher standards amongst other players in the industry.

FINANCIAL ANALYSIS
Following are the key findings of financial analysis of Qantas for the years 2007 to 2010. The revenues and net income has decreased in 2009 and 2010 (Exhibit 1 & 3). Prepaid and operating expenses have increased in 2009 and 2010 (Exhibit 1 & 2). Earnings from continuing operations have fallen down in 2009 and 2010 (Exhibit 1). Also short term, long term investments and current assets have reduced in 2009 and 2010 (Exhibit 2). Long term debt and interest have soared high in 2009 and 2010 (Exhibit 2 & 3). Although contradictory but goodwill has increased (Exhibit 2). In Summary, we can conclude that as compared to 2007 and 2008, the revenues and income is weak in 2009 and 2010. This may be true because of changing economic conditions which indirectly can be responsible for plummeted traffic in airline industry. It also conveys that interest and expenses and long term debt have risen which indicates that debt or loan repaid is low in 2009 and 2010. While earnings from operations, short term and long term investments and current assets have fallen down. This indicates the shortage of free cash flow with the company to invest in other financial assets. This can be due to pouring of money in buying new fleet, maintenance or operating in routes which are not reasonably profitable. But there is a scope of increasing their earnings as Qantas has established much more in these 2 years (2009 and 2010) which may be the reason of increase in their intangible assets like goodwill.

COMPETITORS ANALYSIS
Qantas has lot of competition both internationally and domestically. Domestically Qantas airlines main competitors are Virgin and Tiger airlines. Internationally, the competition has been reduced by the government regulations that control where and when an airline can fly. Virgin and British airlines are among the major competitors. The majority of the other airlines that fly into and out of Australia (Singapore, US Carriers, China etc.) they have routes and schedules that Qantas cannot possess for example the route from Sydney to LAX. Some of these regulations are brought into action by the Australian Government to protect Qantas (a partially government owned airline). The main danger for Qantas and Virgin blue is Singapore airlines. Singapore airline is very keen to fly on the Pacific route between Australia and the US west coast and has asked the Singapore government to persuade Australian government on the Pacific open skies agreement. 16 Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways OBSERVATIONS


Seeing and analyzing all the factors affecting Qantas as well as the environment and situations, following alternative options can be listed: Increase its operations in Asia, New Zealand and UK/Europe and other parts of the world. Remove some routes from network or decrease the frequency of the routes which are continuously showing extremely plummeted traffic. Co-branding is a good strategy and continuing would be beneficial for Qantas. Invest more on branding and marketing campaigns throughout the whole world. Must not be heavily dependent on Australia only for its business. There is a room for improvement in the areas like customer service and in-flight facilities.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways Appendix INDUSTRY OVERVIEW
Key Industry Success Factors Success Factor 1 Success Factor 2 Success Factor 3 Success Factor 4 The most significant key Attracting Managing its fleet Managing its Managing its success factors for competitive customers people finances success in the industry Why is this success factor so Service industry Important to Employee morale Cost management important based on utilize airplanes and productivity programs are key customers capacity; seats is important as industry should be filled competes over cost Driving Forces, causing the industry's competitive structure and business environment: Driving Force #3 Driving Force #4 Changes in societal Regulatory influence and concerns governmental policy changes Implication of DF #1 Implication of DF #2 Implication of DF #3 Implication of DF #4 Cost leaders can gain Customer service is Post 9/11-Consumers Post 9/11-New security market share significant to consumers anxieties with flying regulations KEY FACTS Head Office Deutsche Lufthansa AG Von-Gablenz-Str. 2 6 Koln 50679 DEU Phone 49 69 696 28008 Fax 49 69 696 90990 Web Address http://www.lufthansa.com Revenue / turnover 22,283.0 (EUR Million) Financial Year End December Employees 117,521 Frankfurt Ticker LHA Rivals: Air France, British Airways, SAS Group, and Ryanair Mission statement We are Europes Airline Powerhouse connecting Europe with the world and the world via Europe with our global services. The customer is the centre of our attention: we provide reliable services for passengers and air-cargo. Seamless cooperation with our partners strengthens us in a volatile environment. As the worlds leading aviation group, we are the global leader in selected aviation services. Our highly motivated and dedicated team stands for superlative quality. Our corporate culture and its value concepts are defined by entrepreneurship and collaboration, in an atmosphere of transparency, trust and diversity. Our target is to grow profitably and maintain a healthy financial structure, to enable investment in the development of our business, fleet, products and people. Driving Force #1 Changes in cost efficiency Driving Force #2 Service innovations

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


We are committed to sustainable development and assume our ecological, civic and social responsibilities. Vision Statement The Lufthansa Group aims to become the most attractive and most profitable European network carrier with a global offer. The company also wishes to remain a trusted airline. Our most important commercial motto is more profit. By this we mean sustained profitable growth that creates value. Values/Beliefs: Focus on customer benefits The customer is central to our business activities. We tailor our services to customers' needs and offer a wide range of products for different target groups. All our efforts are serviceoriented and synonymous with quality, innovation, competence and reliability. Accent on core skills Our core skills determine our activities. They enable us to manage our flight networks, nurture partnerships, streamline operative processes on the ground and in the air, and also provide and maintain infrastructure and production factors. System integration sets the pace Intensive system integration strengthens our competitiveness over other locations, other airlines and airline alliances. We cooperate closely with major partners, suppliers and infrastructure providers in integrating and optimizing our core processes. Attractive working environment Our staffs are integral to our success. We offer them good working conditions, commensurate incentives for personal development and an energizing, international corporate culture. That makes us an attractive employer for qualified, motivated and service-minded personnel. Long-term profitability In the interests of our investors, we strive for sustainable and pace-setting value creation in the aviation business. That goal is furthered by sound risk and financial management. Social responsibility We are committed to keeping a balance between business and social prerogatives. Environmental protection and sustainable development are the overriding objectives of corporate policy. Active engagement in social projects is ingrained in our corporate culture. Subsidiaries Lufthansa and an Air Canada aircraft at Munich Airport ATR 72500 of Air Dolomiti Embraer of Lufthansa Cityline in regional colours In addition to its main operation, Lufthansa has several subsidiaries, including: [22]

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Airline subsidiaries: Air Dolomiti, an airline headquartered in Villafranca di Verona, Italy, wholly owned by Lufthansa. Austrian Airlines, the national airline of Austria, based in Schwechat, Austria, wholly owned by Lufthansa. Brussels Airlines: On July 1, 2009, Lufthansa acquired a 45% stake in the Belgian airline with an option to acquire the remaining shares in 2011. Edelweiss Air, the charter arm of Swiss International. Eurowings a regional carrier, wholly owned by Lufthansa.[23] Germanwings, wholly owned by Lufthansa, Germanwings was previously the low-cost subsidiary of Eurowings. JetBlue Airways, an airline headquartered in New York City, 19% owned by Lufthansa.[24] Lufthansa Cargo, an air cargo company, wholly owned by Lufthansa. Lufthansa CityLine, a regional carrier, wholly owned by Lufthansa. Luxair Lufthansa holds a 13% stake. Sun Express, airline based in Antalya, Turkey; 50% owned by Lufthansa (The remainder is owned by Turkish Airlines). Swiss International Air Lines, an airline based at Basel Airport, wholly owned by Lufthansa. Other Operations: Two Airbus A380 and a Boeing 747 aircraft at Frankfurt Airport Delvag, an insurance company specialising in air transport. Global Load Control, a world leader in remote weight and balance services. LSG Sky Chefs, the world's largest airline caterer, which accounts for one third of the world's airline meals. Lufthansa Commercial Holding, in which Lufthansa holds a 19% stake. LCH contains over 400 service and finance companies of which Lufthansa holds shares. Lufthansa Consulting, an international aviation consultant for airlines, airports and related industries. Lufthansa Flight Training, a provider of flight crew training services to various airlines and the main training arm for the airlines own pilots. Lufthansa Regional, a brand operated by an alliance of several small regional airlines, including Lufthansa City Line. Lufthansa Systems, the largest European aviation IT provider. Lufthansa Technik, aircraft maintenance providers.

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STRENGTHS
Presence across integrated segments Lufthansa has an established presence across several segments in the aviation industry. The group provides passenger air services, logistics, maintenance, repair and overhaul services, catering services, and IT solutions. These several segments complement each other, provide services for internal customers (companies within the group), and derive income from third party customers. Presence across several segments ensures a diverse customer base and a diverse revenue stream. In addition, the segments offer each other reciprocal support. For instance, Lufthansa Technik, which undertakes maintenance, repair and overhaul services, has a decisive influence on the overall image in terms of quality, safety and reliability. Lufthansa's dependence on third

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


parties is minimal as it has presence in integrated segments that complement each other, thereby ensuring smooth operations and reduced business risk. The group has a diversified geographical spread. Lufthansa is a global aviation group which includes more than 400 subsidiaries and associated companies. The group provides services such as passenger transportation, logistics, and maintenance, repair, and overhaul services, catering and IT services. It operates across various regions such as Europe, Asia / Pacific, Middle East, Africa, North America, and Central and South America. During FY2009, the group carried a total of 83.7 million passengers and 1.7 million tones of freight and mail across its network. The group generates significant airline revenues across all the geographic regions it operates in. In the Financial Year 2009, Germany, the largest geographic segment of the group, accounted for 27.9% of the total revenues. The US accounted for 14.3%; Europe (excluding Germany) 34.4%; Asia / Pacific 14.1%; Middle East accounted for 3.5%; Africa 2.4%; North America (excluding the US) 2%; and Central and South America 1.4% of the total revenues of Lufthansa. The diversified revenue base ensures that the group does not rely on any one geographic market for a majority of its revenues, which substantially reduces the business risk for the group. Strong alliances The company has a strong alliance with various international airlines. It compliments its own strong network by other group airlines and additional partnerships. Lufthansa has been an active partner in establishing Star Alliance which is a large network of airlines with 28 members serving 1,167 destinations in 181 countries. In order to grow worldwide, Lufthansa collaborates with its Star Alliance partners and makes use of bilateral cooperation agreements. Lufthansa currently offers flights to 1,077 destinations in 175 countries via the Star Alliance network. The company aims at increasing these collaborations and alliances with Star Alliance being the centre of such expansion. In addition, Lufthansa has bilateral cooperation accords with a number of airlines, including Air India, Air Malta, Cirrus Airlines, Ethiopian Airlines, Luxair, Mexicana, Qatar Airways and TACA. Such alliances enable Lufthansa to offer increased flight frequencies and provide new standards of convenience and customer service thereby earning it a competitive advantage over other players in the market.

WEAKNESSES
Labour dispute Lufthansa has been involved in several conflicts over wage and labour issues and the company has been suffering low bargaining power due to existence of collective bargaining agreements and labour unions. In addition, these unions are fragmented for different staff profiles adding to increased demands from each union on regular basis. In February 2010, Lufthansa suffered disruption of operations due to pilot four-day strike. The pilots union, Vereinigung Cockpit, had been demanding for a one-year salary agreement with a 6.4% pay increase, in addition to guarantees against outsourcing of jobs to lower-paid subsidiaries. It is estimated that the strike resulted in $34 million per day loss to the group. Such labour issues disrupt operations affecting the reputation of Lufthansa and the company has to incur higher expenses to meet the expectations and demands of the workforce. Declining cash from operations Lufthansa has recorded decline in its cash from operations since FY2007. The group's cash from operations declined at a compound annual rate of change (CARC) of 17% during 2007-09.The cash from operations declined from E2, 862 million ($3,991.4 million) in FY2007 to E1, 991 million ($2,776.7 million) in FY2009. In Financial Year 2009, the net cash provided by operating activities declined by 19.5% compared to FY2008. This decline was largely due to lower profit from operating activities and a negative change in working capital compared with Financial

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Year 2008. The group's declining cash from operations implies inefficient cost management and poor decision making by the management. A continuation of this trend could reduce availability of resources to pursue growth plans.

OPPORTUNITIES
Positive trends in the global market for aircraft maintenance repair and overhaul Dramatic growth and change are forecasted for the worldwide aircraft maintenance repair and overhaul (MRO) market. The MRO market looks strong and is expected to grow in the coming years. As the market is poise to recover, strong demand will re-emerge to prop up growth. Resurgence of the aviation industry, reduced airfares, greater connectivity, increase in low cost airlines, technological innovations, and expansion in the overall capacity of air seat miles, will drive growth in the medium to long-term. Asian markets will emerge as the hub of activity. Expanding air traffic has already led to the establishment of numerous, low-cost MRO facilities in high growth potential Asian markets including Singapore, China, India and Malaysia. Dramatic proliferation in air traffic and increase in number of passengers has been and will continue to remain an important factor in attracting foreign investment and paving the way for future development. The growth in the domestic as well as international fleet movement has led to a heavy appreciation in the stocks of the aviation industry. This in turn leads to the requirement for an effective maintenance and overhaul system and service structure for aircrafts and their engines. Driven by the rising need for maintenance, especially among aging aircraft fleets, world market for Aircraft MRO is forecast to reach $55.2 billion by 2015. With over 30 subsidiaries and affiliated companies worldwide, Lufthansa Technik is one of the worlds leading independent providers of aircraft-related technical services. Therefore, the growing global MRO market will boost demand for the group's services and will enable it to further increase revenues from this segment. Global tourism to rebound strongly in 2010 Emerging countries are leading a return in tourist arrivals following more than a year of decline due to the global economic downturn. International tourist arrivals are estimated to have increased by 7% in the first two months of 2010 to 119 million, according to the April interim update of the United Nations World Tourism Organization (UNWTO). The results of recent months suggest that recovery is underway, and even somewhat earlier and at a stronger pace than initially expected. UNWTO predicts growth of between 3% and 4% in 2010. According to World Travel & Tourism Council (WTTC), the travel and tourism economy is expected to grow by 4.4% per annum in real terms between 2010 and 2020, supporting over 300 million jobs by 2020, which amounts to 9.2% of total employment and 9.6% of global GDP. By region, Asia is expected to continue showing the strongest rebound while Europe and the Americas are likely to recover at a more moderate pace. Africa achieved a positive growth in international tourist arrivals of 3%, to 46 million (5% of world total) in 2009. The region is forecasted to continue its positive trend following the 2010 FIFA World Cup. With the anticipated growth, business and consumer confidence has picked up. This growth in world tourism industry will enhance airline business. Lufthansa is well positioned to benefit from increasing global tourism industry. This in turn would help the company to generate additional revenues. Global air freight industry on road to recovery Air freight, a leading indicator of the health of world trade, has shown signs of recovery. According to International Air Transport Association (IATA), recovery in the air freight industry

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


worldwide continues at a good pace, with worldwide cargo demand up by 28.1% in March 2010 compared to the same month last year. IATA pointed out that the return of demand was far better than had been anticipated. The pace of improvement, based on an improving global economic situation is much faster. According to IATA, global air freight operations are now within 1% point of recovering to its previous high point of early 2008, restoring freight volumes which shrank by over one quarter during the second half of 2008. The strongest recoveries have been witnessed in Latin America and the Asia-Pacific region, which have respectively seen increase in demand of 47.9% and 34.1%. North America has also seen a strong improvement in demand, up 32.2%. Lufthansa Cargo is the logistics services provider in the Lufthansa group. It operates globally in the airport-to-airport business and serves around 300 destinations, worldwide. The activities of Lufthansa Cargo encompass all three airfreight product segments: General cargo with its td. Pro service, the express segment with td. Flash and the Specials segment with four competence centres handling the transport of temperature-sensitive shipments, live animals, airmail and valuable freight. Thus the group is well positioned to capitalize on the growing global air freight industry.

THREATS
Intense competition and price discounting The airline industry is highly competitive. The principal competitive factors in the airline industry include fares, customer service, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs. Airline profits are sensitive to even slight changes in average fare levels and passenger demand. Lufthansas main competitors include Air France-KLM and British Airways from Europe, US carriers such as American Airlines, Delta Airlines and Northwest Airlines, and also companies from the Middle East and Asia. In European traffic the group is facing increasing competition from no-frills carriers such as easy Jet and Air Berlin. Price competition between airlines occurs through price discounting, fare matching, increased capacity, targeted sale promotions and frequent flyer travel initiatives. A relatively small change in pricing or in passenger traffic could have a disproportionate effect on an airline's operating and financial results. Therefore, intense competition may pressurize the operating margins of the group. Price volatility in petroleum markets The demand for petroleum and related products has historically been cyclical and sensitive to the availability and prices of oil and related feedstock. Historically, international prices of crude oil and refined products have fluctuated widely due to many factors that are beyond the control of companies like Lufthansa. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues and supply and demand, which can neither be controlled nor accurately predicted. According to IATA, jet fuel price as of August 2010 was $92.4 per barrel, an increase of 12.6% over August 2009 jet fuel price. It is forecasted that the average jet fuel price in 2010 would be $88.3 per barrel. In the Financial Year 2009, fuel costs accounted for 14.7% of Lufthansas operating expenses. Significant changes in fuel prices can therefore have a considerable effect on the groups result. The volatility of global and regional oil prices exposes the group to extreme fluctuations in earnings, which is likely to have an adverse consequence on its growth initiatives. Any inability to obtain jet fuel at competitive prices would materially have an impact on Lufthansas results of operation and financial condition.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


New eco tax could strain Lufthansas passenger traffic Recent regulatory changes could be detrimental to the company's passenger traffic and revenue generation in the next term. In September 2010, the German government imposed an ecological air travel tax to be paid by all passengers departing from German airports. This regulation will come into effect on January 1, 2011. As per this regulation, passengers boarding flights in Germany would be charged E8 ($11.2) for short-haul flights and E45 ($62.8) for long-haul flights. A similar tax regulation introduced by the Dutch government in mid-2008 was withdrawn a year later. The withdrawal of the tax regulation came after it observed a steep decline in passenger traffic which eventually caused a loss of tax revenues. The governments ecological ticket tax could lead to a decline in passenger traffic for Lufthansa as it could drive passengers to use airports in other countries and could also reduce the groups operating income in 2011 by 18%.

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A. ECONOMIC SEGMENT Opportunities: 1. GDP is growing; opportunity to take advantage of that growth. 2. The European Union has made doing business across borders easier with standardized currency and regulation. 3. Inflation rates are steady along with currency rates; currency exchange risk will be lower. Threats: 1. The European economy is not growing as fast as developing nations such as China. 2. The EU has a lot of power over the economy in terms of currency rates and regulations. B. CORPORATE GOVERNANCE AT LUFTHANSA

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


C. STRATEGY Acquisition and Restructuring Strategies o Restructuring focused on corporate strategy to unite 6 business segments under one strategy that reinforced the core business- Passenger travel. o 5 current segments: Passage, Logistics, MRO, IT, Catering & Tourism and a services group offering Insurance, Flight training and Business Travel management. o Acquisition strategy focused on expansion in Europe and Globally. Geopolitical events made this strategy economically unviable. o Current strategy focuses on equity stakes in other companies. International Strategies o Industry changes deregulation and the economic pressures of sustaining a profitable business, Lufthansa formed The Star Alliance with other airlines to provide a seamless network of intercontinental connections. o Mergers and acquisitions were costly and ran into governmental regulations and limitations. The alliance would provide the needed expansion sought by Lufthansa with limited regulatory hurdles and reduced investments. o Emphasis is on maintaining a Global strategy that offers the customers a similar level of service throughout the network. o Formed Lufthansa Regional a regional airline to compete with the low cost carriers that sprung up as a result of deregulation. o Lufthansa Regional was a regionalized part of the International strategy adding to the economies of scale and to the Lufthansas market size. o Recently acquired 100% stake in Austrian Airlines. Cooperative Strategies o The Star Alliance was a global strategy requiring efficient operations across the network. Coordination and cooperation were vital to its success. o As a cross border strategic alliance the goal was to increase market share and profits. o Limitations in domestic growth and foreign government policies made the alliance an attractive strategy. Organizational Structure and Control o Organizational structure was accomplished by restructuring into 6 business segments. o Goal was to avoid duplication of functions among the business segments and resulted in a more focused corporate strategy. o Main controls: cost cutting, removal of intermediaries in tickets sales, wet leases for regional airline. o Maintain strong financial discipline, high credit rating, low debt service. Currently it owns 70% of the air fleet debt free. o Miscellaneous o Integration of personnel across globe, employee training programs, diversity, safe place to work. o Increased CRM strategy customer centric focused services and products. D. ORGANISATION E. POLITICAL/LEGAL SEGMENT Opportunities: o The European Union has standardized a lot of economic issues; the industry should be more stable. o The EU has also regulated the industry across borders making best practices easier to define.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


o Europe tends to be on the same page as the US in terms of airline regulations. Threats: o The EU has risen in political power; too much power could be a threat. o Tensions between the EU and the EFTA could have a negative impact on the airline industry. F. DEMOGRAPHIC SEGMENT: In 2005, the population of Europe was 728 million or 11% of the world population. It has been growing from 500 million after World War II, peaked in the early 2000s at more than 700 million and has since then begun a decline. Perhaps mirroring its declining population growth, European countries tend to have older populations overall. European countries had nine of the top ten highest median ages in national populations in 2005. Only Japan had an older population. The largest ethnic group in Europe is probably the Russians with some 90 million settling in the European parts of Russia, followed by the Germans (76 million), Italians (58 million), French (49 million), English (45 million), Spanish (42 million), Ukrainians (40 million) and the Poles (38 million). Opportunities: 1. Opportunity to take advantage of the aging population by offering senior discounts. 2. Ability to hit many different markets in Europe; reach many different customer segments. Threats: 1. Older and declining populations may have a negative affect on total sales. 2. Several different cultures are being targeted; this could cause problems with implementing business strategies and marketing strategies. 3. Need for a diverse workforce to accommodate diverse customer base. G. GLOBAL SEGMENT: Americas: The American economy as a whole is strong. However, the airline industry seems to be faltering especially since 9/11. With the troubles of Delta and United, Southwest has begun to play a key role. Airlines are competing on price with little differentiation. Cost of fuel makes it difficult to cut costs. Asia: The Asian market is experiencing significant economic growth. Asia is a very promising market, but one that faces significant challenges. The Asian airline industry, after fast becoming the glamour industry in the region, is facing some hard times. The fast growth in intra-regional business passenger travel, and freight and tourist business from both overseas and internationally, the very forces that predicated recent growth, is expected to be hard hit by recent economy slowdowns. Opportunities: 1. With the American airline industry in trouble, Lufthansa could look to take advantage of this market. 2. Global economies are growing; ability to take advantage of the growth. 3. China is especially promising since due to the growth in business travel to the area. Lufthansa focuses on business travel. Threats: 1. United Airlines is part of the Star Alliance along with Lufthansa. If United is faltering, this will have an adverse negative affect on Lufthansa. 2. The Chinese market is volatile. New growth is positive, but lack of regulations could be a problem. 3. Global affairs can always be threatening in terms of understanding the cultural differences of your customers.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Key Take-Away: In general, the environment in Europe is stable but does not offer excessive areas for growth. Lufthansas best strategy would be to concentrate on the growing global market in terms of increasing business flights to China and America. H. SOCIOCULTURAL SEGMENT The volume of weekly, annual and lifetime working hours have fallen substantially. Workingtime schedules have become more diverse in recent years. There has been a rise in the rate of part-time work, which has coincided with the growing presence of women in the workforce. Estimated female income is 56.7% of male income. One shift in emphasis in regulation has concentrated on the equal treatment of part-time workers. Opportunities: 1. More diverse working-time schedules offer the airline the ability to employ night and weekend workers more easily. 2. Ability to promote and hire women into more desirable positions. 3. Part-time work is increasing; these jobs usually cost the company less money. Threats: 1. People are not willing to work as much. 2. Lufthansas crisis control management is based around economizing; part-time work is regulated more strongly so downsizing these workers could have legal repercussions. 3. Women are making considerably less than men could cause discrimination suits. I. TECHNOLOGICAL SEGMENT Use technology to enhance customer relations. The industry can offer travelers a Web interface customized to a specific type of travel. Whether someone flies frequently, checks many pieces of luggage, or likes to enjoy certain amenities such as an airport club lounge, the Web interface can direct the customer to services that cost a little more, but offer desired benefits. Another opportunity lies in the automated check-in machines some airlines now operate. Instead of checking in with airport staff, travellers swipe a credit card through the machine as identification, and print out their tickets. Currently, each carrier manages its own machines, and travellers of ether airlines may not use them. However, just as one bank allows customers of other banks to use its ATMs--for a fee--the industry could profit from letting all travellers check in through a common automated interface. Opportunities: 1. Advancements in the internet make customer service more efficient. 2. Customers can purchase tickets online; cuts down on personnel costs. 3. Opportunity lies in the automated check-in machines some airlines now operate. Threats: 1. This technology is easily imitated. 2. Advanced technology will call for downsizing of personnel positions; lay-offs can be challenging. 3. Important company information can be lost or stolen by computer hackers; internet is not always secure

BUSINESS AND STRATEGY


[MORE INFORMATION FROM A DIFFERENT SOURCE] Leading airline group in Europe The Passenger Airline Group consists of the companies operating in the Lufthansa airline group, i.e. Lufthansa Passenger Airlines, SWISS, Austrian Airlines and Germanwings, together with its

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


equity investments such as Brussels Airlines and offers its customers important benefits. The increasing number of products and processes gives passengers added value by enabling seamless travelling within the Groups route network with 246 destinations. In addition, the multi-hub strategy offers them maximum travel flexibility at the hubs of the airline group, such as Frankfurt, Munich and Zurich. For Lufthansa the strategy represents additional cost synergies as well. With this strategy each home carrier can play to its strengths in its respective home market. At the same time, the airline group profits from the special know-how of individual members in niche markets with growth potential, such as Brussels Airlines in West Africa. The use of synergies within the Lufthansa airline group constitutes a major competitive advantage, especially in a challenging environment. Lufthansa Passenger Airlines and Germanwings are exploring new territory in combining their business models. The two companies have worked together closely since early 2011 and offer their customers additional travel advantages: combinable tickets, Miles & More mileage accrual on Germanwings flights and joint offers in corporate sales. In December the scope of cooperation was extended further by including a coordinated flight plan from Stuttgart. Synergies are not only created in the airline group, however, but also in collaboration with the service segments, such as MRO and Catering. Lufthansas aim is to expand its position as leading independent group of European quality carriers and to exploit market opportunities. At the same time, topics such as safety, punctuality, reliability and professional service remain a high priority. The companies in the airline group are united in their search for profitable growth. This enables them to make investments in modern aircraft, achieve financial stability in a volatile industry and create secure jobs with attractive development prospects. The companies also strive to assume their responsibility for conserving natural resources by their sustainable business practices. Efficiency gains and profitable growth are mutually reinforcing Lufthansa is the number one player in Europe in its industry today and intends to preserve this status in future. To do so, the Group will consolidate and build on its current position while taking a leading role in competitive markets worldwide. Lufthansas home market is Europe, while Germany is the core location and the Groups largest single market. Growth potential lies primarily in global long-haul routes, however. In order to optimise connections between them and the European network, the key is to safeguard and expand our position in the home market. A leading position in Europe makes the range of services attractive to customers for one thing, and also increases the Groups relevance as a partner for opening up growth markets outside Europe. Profitable growth is a cornerstone of this strategy. It is enabled by lower costs and efficiency increases to be achieved in the course of expanding route networks and strengthening the airline groups hubs. The multi-hub strategy offers a comprehensive route network for the hubs respective catchment areas. Feeder flights from Europe also improve the load factors for intercontinental flights and expand the range of destinations on offer to local customers. Unit costs are being lowered at the same time, by modernising the fleet and increasing its productivity for example. In this context Lufthansa particularly enjoys the benefits of its largely unencumbered fleet and the related flexibility in terms of capacity and cost management. The most celebrated example of the on-going fleet renewal was the successful introduction of the first eight Airbus A380s by the end of 2011. This made it possible to achieve cost-effective growth combined with a very high level of customer satisfaction. The Groups order list contains other ultra-modern aircraft, such as the Boeing 747-8i for long-haul routes, the Airbus A320neo for European routes and the C-Series from Bombardier for regional traffic.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Joint venture models gaining in importance Lufthansa and the group airlines follow a diversified network strategy in all global sales markets. In Europe it is based on multiple hubs and catchment areas. Frankfurt and Munich are the largest hubs and cover the full range of products. Since the new runway was opened in October 2011 the Frankfurt hub has used the growth opportunities to maximise transfer options for customers. Moreover, the hubs in Zurich, Vienna, Brussels and Dusseldorf mainly serve local demand in their respective catchment areas and offer very good connections to the main European cities, economic centres and niche destinations. The network is increasingly being extended to tourist destinations as well. In the important German catchment areas like Hamburg and Berlin, Lufthansa offers direct flights to an attractive range of short and mediumhaul destinations. In addition to the Groups own expanded production platforms, the scope of cooperation agreements and alliances was also extended further in 2011. Ethiopian Airlines joined the Star Alliance in December 2011 and bolsters Lufthansas market position in East Africa substantially. Star Alliance remains the worlds leading global alliance, currently flying to 1,290 destinations in 189 countries. Joint venture models are gaining in importance in the competition between the airlines alliances. Lufthansa positioned itself successfully for this trend at an early date. Based on the positive experience gained in the leading North Atlantic joint venture with United Airlines and Air Canada (Atlantic++), which SWISS and Austrian Airlines joined in mid-year, Lufthansa has established a strategic joint venture with the Star Alliance partner All Nippon Airways. The programme for Europe-Japan traffic is due to start operating in April 2012.

COMPETITOR ANALYSIS
High-Level Competitor Analysis Top 3 Best Positioned Competitors Area SAS Group Air France British Airways Corporate Office Stockholm, Sweden Paris, France England Location R & D Centre Locations Europe-Scandinavia Europe UK Targeted Markets Nordic Region and US Europe, US Europe and US Market Share 22.5% as part of Star 19.4%, as part of a 11% Alliance partnership Total Net Revenue 5,586 23,073 9,359 Net Revenue Growth 4.20% 7.60% 4.80% Net Income 68 817 189 Days of Inventory N/A 8 5 ROIC % 1.30% 3.10% 1.20% Debt to Equity % 184.40% 104.20% 219.30% Targeted Customers low-end, price differentiated consumerDifferentiated conscious consumer looking for innovation consumer-looking or innovation Distribution Channels passenger and cargo passenger and cargo passenger and cargo Key Take-Away: Based on the financials, Air France is in a good position to steal away market share. SAS Group seems to be struggling in terms of creating value for shareholders. Opportunities: 1. Look to expanding into Asia where the competition is not yet established. 29 Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


2. Star Alliance has a good chunk of market share. Lufthansa is a member of the Star Alliance. 3. British Airways and SAS Group both have low ROIC %, destroying shareholder value. Threats: 1. SAS Group is struggling. Being in the same alliance with them may be more of a burden than an aid. 2. Air France is performing well. They could choose to expand if Lufthansa waits. 3. Days of inventory are low for both British Airways and Air France. Controlling inventory is an issue for Lufthansa. CEO Interview - Lufthansa Looks to a Sustainable Future

Wolfgang Mayrhuber, Chairman of the Executive Board and CEO, Deutsche Lufthansa AG, details his thoughts on building a sustainable industry. How do you see 2010 shaping up? We have seen two positive signs. Cargo has come back quickly and strongly, which is an indicator of an upturn in the economy. And we are also seeing improvements in several markets. So I am cautiously optimistic. But we have also witnessed the impact on travelers and the supply chain during the closure of European airspace due to the eruption of the volcano in Iceland. This and the financial crisis has reinforced that there is a fundamental need for mobility, and that communications technology isnt a substitute for travel. In fact, the technology at our disposal nowfrom smartphones to video conferencingactually stimulates travel. It is an enhancer. Lufthansa has interests in a number of other airlines. How do you manage the overall strategy of the group? The basic principles for the group and for every single company are the same. All our decisions are based on what is right for the customer. What the customer demands is plenty of travel options, an extensive network and a price-worthy reliable service. Consolidation is simply a response to customer needs. Consolidation is also a way to achieve synergies and economies of scale. Its an opportunity to learn from your partners about best practices. Airlines share the same airspace, the same technical and operational requirements, and similar processes. So there is a lot we can standardize across the group. But we also have to balance standardization with sensitivity. Europe is made up of many different countries, each with their own language, culture, and history. We want to reflect that uniqueness in our business relationships. Every company has a home market that needs services tailored to the requirements of the customer. Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


The whole group of companies in which Lufthansa has a stake is set up as a modular system. We can learn from each other and each company is flexible, transparent, quick and individually responsible for the success and the services offered. Your interests have been primarily Europe-focused. Are you looking beyond Europe as well? Lufthansa was created by a merger of three small airlines in 1926. Not long after, we were major shareholders of a Russian joint venture and a Chinese airline. When Lufthansa was re-created after World War II in 1955, it was a purely German airline serving the German market. We are still based in Germany, but through liberalization and globalization Europe became our home market, and our growth market is the whole world. To be attractive we need to be strong in Europe but we could, on a long-term basis, envision worldwide opportunities. Many governments see airlines as a sovereign issue rather than a regular business. But it is a business tool that people can use to facilitate trade and which leads to greater economic prosperity. Air transport should be liberalized and, as part of the World Trade Organization, enjoy the same freedoms as other industries such as telecommunications and automobiles. Today, the rules on foreign ownership prohibit trans-Atlantic or trans-Pacific cross-ownership. One also has to consider the financials and timing. But that is not an excuse to deny airlines the eventual opportunity to become truly global businesses. Were you disappointed with the second stage EU-US talks? Yes, it was a missed opportunity to lead the way for other regions. If you try to live in a connected world but rule in isolation then you are bound to fail. It was a disappointing result. I was talking about the desire for mobility earlier. Europe was the cradle of mobility. The US has pushed it forward, leading in many ways. 15% of the worlds population on the two continents account for the vast majority of global aviation. From California to the eastern part of Europe, there is essentially the same economic jurisdiction, an open aviation area. We could have built a single, integrated, open market with foreign direct investments. It could act as a blueprint for other parts of the world. While travel density across the Atlantic is still very high, the centre of gravity is shifting to Asia. China in particular has developed at an enormous speed. Washington and Brussels must act now if others are to have a path to follow. What are your views on the environmental issue? Were you disappointed in the Copenhagen outcome? Yes and no. IATA did an excellent job in explaining our industry and the contribution we could deliver if the airlines, manufacturers, air navigation suppliers and others acted in concert. I take ecological issues and sustainability matters seriously and I am critical with the public and political process that is going on. As a global citizen, a father of three kids and as a CEO, I feel responsible. But as an engineer and tax payer I am puzzled. Governments seem to have difficulties to act as a guide and pacemaker. It would be logical to look for those priorities that deliver the fastest and greatest return on investment first, and then stimulate technologies and solutions that reach further out and could act as game changers. Aviation should not be exempted, but it contributes far less CO2 emissions compared to other sectors like households or ground transportation. Hence we did and are doing our homework. Big improvements have been achieved and more are on their way. Our four-pillar environmental strategy provides answers. In Europe, a single sky would reduce CO2 emissions 12%. No investment, no lead time, just reorganization could deliver it. We have Schengen on the ground but not in the air. On intercontinental routes, we still see many opportunities to reduce

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


flight time. Manufacturers should be stimulated to enhance the introduction of new technologies. They should get more support. Biofuels could be a breakthrough technology which should be pushed. Will the COP16 meeting in Mexico achieve anything? We can only hope so. Looking at the circumstances I have my doubts. The scientific analysis is being questioned, and the economic situation means there is a very limited ability to finance mitigation efforts. It is also in danger of becoming one-dimensional regarding emissions. We need some bigger thinking. Emissions per passenger mile is on everyones mind these days. Here, we are already competitive and optimistic about delivering an even better performance. There is a bigger picture that requires an understanding of the lifecycle of emissions. You must consider the carbon footprint of the infrastructure. An airport consumes relatively little surface areathree kilometres of runway take you around the world, a railroad carries you only three kilometres with the same space. Air corridors do not need maintenance, bridges, tunnels, or street lights. And the carbon footprint from manufacturing an aircraft is far less than that caused by the manufacture of any other vehicle when you consider the passenger miles delivered during its lifecycle. Only then will you start to have a true understanding of the relative carbon footprints. And this is a necessary tool to understand where the most beneficial investments can be made in mitigation. Interestingly, I should point out that environmental issues with automobiles are taken up with the producers. The manufacturers have been given emissions limits and they must ensure the final products stay within those limits. In our industry, such burdens as the European emissions trading scheme (ETS) are put on the consumers and operators. How important will India and China be to the industrys growth prospects? Both are already very important markets that will further gain in importance. Lufthansa is the leading European airline to Asiaincluding both India and China. There is a natural fit for us because a lot of German companies, particularly in the technology field, have taken advantage of direct investment opportunities. Germany also has a huge leisure market and a lot of German travellers want to go to those countries. There are also distinct differences between China and India though they are often lumped together. For example, India has completely different travel patterns. Indians living and working abroad and using Europe as a gateway are a big component of the market. Moreover, despite rapid growth, infrastructure issues in each market are very specific. In China, the pace of airport development is incredible; but air traffic control is lacking efficiency. Civil/military cooperation to allow more entry points into Chinese airspace still has some way to go. There is a big difference compared with a few years ago, but they still need to catch up. In the case of India, the biggest issue is airport infrastructure. There is a new terminal in Delhi coming soon. And airport developments in Hyderabad and elsewhere are helping to change the face of Indias aviation infrastructure. But again, growth outpaces airport capacity and charges remain an issue. I have high hopes that the Airport Economic Regulatory Authority, the new regulator, will be effective in bringing cost-effective solutions that will facilitate the industrys growth. Can we learn any lessons from the six-day shutdown of European airspace caused by the Icelandic volcano? Firstly the risk evaluation process failed. The mathematical model that was used turned out to be false. It was based on undifferentiated assumptions. There was no feedback loop to adjust or calibrate the simulation tool. The airspace management process was inconsistent. It became

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


evident that the fragmentation of air management control systems of the member states and Euro control hampered the whole crisis management process. In my opinion we need a global advisory and steering board to create detection tools, set contamination standards, and devise operating procedures for both instrument and visual flight rules. And we need better means to measure the development of ash cloudsboth theoretical models, and the ability to test actual atmospheric concentrations of ash. Now that this crisis is over, we should not forget about the threat of volcanoes. Continuous work to understand the phenomena is important. The six days of airspace closures also highlighted the need for the Single European Sky. The fragmented decision-making structure that exists today involved governments, air traffic control, airports and airlineswith nobody in charge on a Europe-wide basis. The situation in the air is completely different from that on the ground where the Schengen agreement took away the borders. What must the industry do to become financially sustainable? More discipline is needed. Profitable growth instead of market share is the name of the game. Capacity has to be managed. Revenue and costs must be managed. Dont produce more than you can sell. And dont spend more than you earn. With respect to the structural environment, we must have free, fair and open markets. Simply put, we must liberalize. Then we need a better balance between entry requirements and exit barriers. The market is distorted because this industry is easy to get into but hard to get out of. We also need a fresh look at the integrated value chain. Airlines must be supported by airports and air navigation service providers and not exploited by them. We should act as partners. How would you characterize your approach to managing Lufthansa? Safety and reliability are top priorities. Trust is our biggest asset and service is always most important. We are conservative with respect to financial exposures and we balance long-term decisions with staying clear of short-term obstacles. And finally, I want to ensure our employees continue to embrace our brand value, which is all about the customer. The industry is meeting in berlin at this years iata agm. What does the city mean to Lufthansa? A lot. After all, Berlin is Lufthansas birth place. The city has a vivid history and a bright future. I think it has a special flavour because of the historical mix of eastern and western Europe. It also symbolizes the strength of this industry. When we were allowed to return to Berlin 20 years ago, there was only a handful of Lufthansa staff. We now have 3,500 employees and a new airport is on its way. No other place demonstrates the need for mobility like Berlin. It used to be an island, and the famous air bridge nourished it. We were reminded when the Wall came down that the basic desire to travel and meet other people is a human issue and not only a commercial one. In fact, this desire was one of the driving factors in taking down the Wall. Lufthansa is pleased that IATA accepted our invitation to hold its AGM in Berlin. We look forward to serving this city and welcoming all of our colleagues to experience its unique charm and atmosphere.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways

Qantas Airways
Mission & Vision Qantas mission is to be a leading provider of air transport and related services in the Asiapacific region (Firth 2008) Our strategy is to create two airlines Qantas and Jetstar that are the best in their class, giving us the flexibility to ride economic cycles, leverage different sectors of the market, and maintain a robust operating cash flow. - Alan Joyce (CEO). (Qantas 2010) Qantass mission is to create the worlds best premium and low fares airlines in Qantas and Jetstar (Qantas 2010). For the achievement of its stated vision Qantas emphasizes most on the following aspects: Customer safety is their first priority Right aircrafts with the right routes Providing excellent customer service Efficiency in the operational activities Two complementary brands

STRATEGY ANALYSIS
Qantas has formed and launched various strategies time to time to be a prominent player in the industry. It maintains the corporate ethics and follows the concept of fair competition in the industry. 5 Year plan Qantas has announced the strategies of its 5 year strategic plan. These changes are expected to strip tens of millions of dollars of operating costs from Qantas. These include Cutting: 1000 jobs from its 36000 workforce (including pilots, engineers and cabin crew). Dual-brand Strategy/Two-brand strategy One of the biggest leap Qantas took was under the nurture of its former CEO Geoff Dixon who led the airline with its most fundamental transformation by shifting the role of Qantas from just being an Australian airline to a leading player in Asia-Pacific region, while launching a low-fare unit that operates short and long haul routes (Flottau 2008). Qantas has a company has successfully taken the advantage of the flexibility of moving services between Qantas and Jetstar in the times of plummeting demand (Pilling 2009). When the traffic at Qantas was down by 20% to 30% and also the airline was facing severe losses, Jetstar proved to be having one of the best years. Also Jetstar can prove to be a great opportunity for Qantas to increase its international market share, as by 2009 Qantas had only 24% and Jetstar just 6% (Pilling 2009). Many environmental and economic issues like H1N1 virus affected the business of Qantas, specially the Japanese services. But although passing through tough times, it can be clearly analyzed how Qantas is taking advantage of its two brand strategy. Qantas had shown a significant era of good financial performance during the times of Dixon, but as Alan Joyce is the frontrunner now critics in the airline industry look upon him for the future results. Excessive surcharge Criticism In industry like airline it is very difficult to satisfy all the stakeholders. To respond with the soaring fuel prices and the economic fluctuations Qantas seems to make some of its customers a bit unhappy. Qantas increased the surcharge from AU$25 to AU$30 for the passengers booking the tickets with credit, debit or charge cards. While other competitors like Air New Zealand Ltd., Tiger Airways Ltd. And Virgin Blue Ltd. are applying only AU$8, AU$10 and AU$12 respectively

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


on credit card bookings. The consumer group had criticized about such excessive surcharge raise by Qantas Airways Ltd (Chibber 2010). Customers are key stakeholders and this could bring a negative impact on business of the company although may be not much but still a significant one. Co-Branding Co-branding is gaining strong footholds in airline industry. Large players from different industry come together on one platform to complement each other. For example, Woolworths and Qantas jointly introduced Qantas frequent flyer membership as a part of Woolworths Everyday Rewards Card membership. Qantas also has co-branding with American Express on a global level. Seeking more strategic alliances, the ACCC has already given Qantas a provisional go-ahead for its joint business agreement with American Airlines. Qantas will also restructure the joint services agreement with British Airways and explore opportunities with Malaysian Airlines. Qantas is not the only one airline following this strategy, but there are various other airlines like Emirates, Indiana, and Kingfisher etc. who are reasonably doing well in co-branding. Qantas specially is realizing good results from its co-branding in Australia as compared to average results all over the world. Expanding fleet and shifting to fuel efficient planes Qantas is been in process of adding new fleet members to its group (Exhibit 4). Because of few delays in the arrival of new fleet, Qantas has to retain the aircraft for longer than expected which puts more burden of maintenance on the company. The burden augmented by engineers dispute in the past and also greatly because of an incident of an oxygen bottle on a 747-400 blasting in July. This led to a special audit by the Civil Aviation Safety Authority, which gave positive reports but still affected the reputation and claim of Qantas being a safe airline as focused and stated in their vision (Thomas 2009). They are also looking into acquiring lots of the fuel efficient Airbus A320's to support its growth which will increase its gearing. Opportunities Australia Market has been so far less tapped. So it can ensure that no other airline can ever get a chance by gaining a major market share.

PORTERS FIVE FORCES


Bargaining power of suppliers: For Qantas the suppliers are aircraft manufacturers like Boeing, Bombardier and others. Fuel supplying companies like Shell and BP. Also IT companies which handles the operations and automations like IBM and NCR. Hotels and catering provided to the crew members and staff in different destination of its operations. Qantas need to maintain a good communication with its suppliers to achieve the competitive edge. Bargaining power of buyers: For Qantas it consists of the customers, leisure travellers, business travellers, travel agents, holiday providers and many others. The expectations of the customer have grown over time as they demand value for every dollar spent. So providing maximum assistance to the customers must be the priority to grab the larger chunk of the flying customers. Threat of Substitutes: The other modes of transportation like railway, buses, ships, personal transportation are the direct substitutes for the person who is not concerned about travelling fast and reaching destination on time. Indirect substitutes like video conferencing, online chatting and VOIP also prove to be competing as it saves time and money of the customer who are flying. 35 Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Rivalry amongst the competitors: Qantas observes sever competition from Virgin Australia, Tiger airways, Rex and Air New Zealand. So Qantas must always revitalize its product offerings so as to be competitive and stable amongst other players. Threat of New Entrants: Qantas is also suffering the threats from new airline and courier companies which may target the Australian consumers as the market is lucrative. New airlines like Virgin Australia, Impulse airlines and other low cost airlines.

VALUE CHAIN ANALYSIS

(Kotler et al 2008). Qantas conducts its operations by dividing its total operations in two categories: a) Primary Activities includes services like Inbound and Outbound logistics, Operations, Marketing and Sales, Services, Route Selection, Passenger Service System and Yield Management. Following are the primary activities in brief: Inbound & Outbound Logistics: At Qantas inbound consist of acquisition of fuel, spare parts, catering of flights, reservation of tickets and scheduling of flights. The Outbound logistics involves services in manner of connecting flights, car rentals, hotel accommodations and baggage claims. These activities can be considered as one of the main competitive advantages of Qantas as they have truly realized there mission and vision in providing huge network coverage and facilities like Qantas Holidays.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Operations: At Qantas the operations includes the routine chores like the security checks, the operations at the gate and counter, boarding services and baggage handlings. Which is a mandatory area to perform well and Qantas cannot lose any edge at these functions. Marketing & Sales: At Qantas relates to the activities of promoting, advertising, informing the customer which provides assistance in their purchases. It is conducted through membership and loyalty programs. Qantas is very active and successful in its frequent flyer rewards program and also other rewards program globally. Services: It is the core concept followed at Qantas as they provide the maximum level of pre and post sales services to their customers. Qantas has improved to a great extent in this field and can be expected that it may outperform its other competitors in near future, but there is a long way to go still. Yield Management: Qantas follows this system as it helps them to allocate the seats as per their availability and its demand at different times and set the prices for different offers occasionally. Route Selection & Passenger Service Systems: Qantas schedules the flights and crew members to provide the maximum convenience to its customers. Passenger Service System software is also adopted by Qantas as it helps the organization in automatic ticket reservation, fares information, flight information and departure and arrival information online. b) Supporting Activities includes Infrastructure of the firm, Human Resource management, Development of Technology, Procurement. Following are the supporting activities: Infrastructure of the firm: At Qantas is consists and relates to functional departments like budgeting, accounting, public relations, legal affairs, government relations and planning, which is fairly good according to its needs. Human Resource Management: At Qantas relates to the functions of staff training, pilot training, safety training, in-flight training, yield analyst training. There is a very good scope of improvement. Development of Technology: At Qantas includes the computer reservation systems, baggage tracking systems, in flight systems, marketing researches, flight scheduling systems. Procurement: At Qantas relates to the acquisition and utilisation of the resources for the smooth functioning of the operational functions at different stages of the value chain.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways KEY SUCCESS FACTORS OF THE INDUSTRY
For measuring the success of Qantas the following key factors are highlighted: Tough Management: Management which is strong add to the growth and profitability of any organization, the management team at Qantas has faced and maintained stability in its operations from time to time in the form of cost cutting, new innovations and friendly work place, which in turn has increased the productivity. Competent Personnel: High qualified staff with good communication skills and appealing personality leaves a good brand image of the company on its customer. Qantas imparts training and coaching to its entire staff regularly so as provide the best customer service in its core and related businesses. No Halts in Flights: Time is money for the customers with busy schedule, so they prefer direct flights and to be competent the airline company who provides non-stop flights to different destinations take the cup. Qantas has achieved success in flying non-stop flight but not to a good extent, so it needs to improve on this and provide more direct flights which will help to attract customers, increase the credibility and the image. Route Classification: Route management for an airline company involves the selection of routes to fly and its frequency. The company which is able to serve its customers by flying on the popular routes gets dual benefit as the utilization of aircraft increases as well as the loyalty of the customers. Qantas has promoted its flights to popular destinations with special offers time to time and has served its loyal customers. Offer Promotions and On-Board Services: Promotions about different offers and special packages is very essential to retain the loyal customers as the switching rate is high and cost is low and the in flight services to the customers also counts to the success of the brand. Qantas has catered the finest level of services to its customer and met the industry standards and has promoted the brand as Spirit of Australia. Proficient Execution of Cost: The organization which efficiently maintains the cost of operations by cutting down unprofitable activities leads to faster growth. In airline industry this includes maintaining the cost of tickets, cost cutting in the operations, procurement of aviation fuel and others. Qantas has always prioritized on cost-cutting through Jet star and served its target audience and profitable segments over the time.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways FIANACIAL ANAYSIS
Exhibit 1 Income Statement

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Income Statement (Continued ..)

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways

Exhibit 2 Balance Sheet

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


BALANCE SHEET (Continued)

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Exhibit 3 Cash Flow Statement

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Cash Flow Statement (Continued..)

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways COMPETITION FROM THE LOWER COST CARRIERS (LCC)
The LCC Virgin Blue came in domestic market in 2000 and successfully grasped Qantas market share.as. Virgin Blue was able to compete with Qantas on grounds of its low cost which was 30 to 40 % less than the Qantas fare. In order to overcome this Qantas came up with a strategy to launch a low cost airline that would run alongside the main Qantas carrier. In 2004, Jetstar came into picture, initially it flew only domestic routes, but starting November 2006 Jetstar International started flying internationally to Asia and Hawaii. (Oxenbridge S. et al 2010) JETSTARS LOW COST MODEL Jetstars low cost model is based on reducing cost through operational efficiencies. These include (in Jetstars domestic operations): Flying point-to point sectors; using secondary airports Providing a single economy class with no frills inflight service and minimal amenities; High utilization of fleet, including 25-minute aircraft turnarounds between flights; Continuous improvement of processes to generate cost-savings; The use of the Internet for booking tickets. Around mid-2006, it had a 14% share of the Australian domestic market (Qantas 2006b; Murphy et al 2007, cited in Oxenbridge et al 2010). In early 2003, Qantas came up with a plan to use 25% casual, part-time and agency workers (Spiess 2005). Between 2001 and 2006, the airline workforce was highly reduced. This action of the airline received a lot of criticism and protest from the unions. (Oxenbridge et al 2010) The launch of Jetstar provided the Qantas Group, with a mean to fight the tough competition from the low cost carriers LCC (Virgin Blue). Qantas reacted to the competition from LCC with an expansionist strategy and it came up with its own LCC i.e. Jetstar. By doing so it was able to control the growing market share of virgin blue. VIRGIN BLUE REDESIGNED THE AIRCRAFTS The slow-moving economic landscape and the rising fuel price are some of the problems faced by the aviation industry right now. To make the things worse Virgin blue announced the launch of new product, Virgin Australia. The aircraft are designed to be more comfortable and spacious in both the economy and the business class, as they are trying to target the corporate traveller. (Knight 2011) It is not easy to harm the Qantas as they have the near monopoly in the airline business with well-established frequent flyer customers who are quite loyal to the airlines and even has more flights. TIGER AIRLINES Tiger airways were founded in 2004. Its major shareholder are Singapore Airlines, it is one of the Asias leading budget airlines. The company is one of the competitors of Qantas. The company has recently added a customer support and feedback portal on its website to help the passengers to submit heir query or complains (Knight 2011). The competition in airline industry is always been tried to be kept fair and healthy. This would be in favor of the passengers and beneficial to the companies as well. Recently the Australian Competition and Consumer Competition (ACCC) approved the British Airways-Qantas services agreement (JSA) on routes between Europe and Australia for another 5 years. Even this joint service is playing in the field with healthy competitions from other airways like Etihad, Emirates and Qatar who have introduced many Australian routes over the past few years (Business Traveller 2010).

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways RECOMMENDATIONS


1. Increase its operations in Asia, New Zealand and UK/Europe and other parts of the world To achieve its mission Qantas needs to focus more on its operations in other geographies like Asia, New Zealand and UK/Europe where it has much scope. But while doing so it also has to maintain its profit level in Australia as well. Globally the competition is becoming fierce, so to achieve place in there Qantas must develop good strategies for other parts of the world (Thomas 2009). 2. Remove some routes from network or decrease the frequency of the routes which are continuously showing extremely plummeted traffic Nurturing the areas where Qantas is facing loss since past years can be harmful in long run. Instead it should either remove the routes from its network or decrease the frequency so that it can maintain its presence there as well as do not face loss. 3. Co-branding is a good strategy and continuing would be beneficial for Qantas Co-branding with big brands like Woolworths and American Express have worked very well for Qantas and thus it can be assumed that it will continue working in its favor in future also. This is advantageous for the customers as well as both the brands. Customer loyalty is a very strong factor here which can likely be very profitable for the company in short term and long term. 4. There is a room for improvement in the areas like customer service and in-flight facilities Every day one or the other airline comes with new facilities and technologies which enhance the customer service and in-flight operations. To continue growing at a good pace Qantas have to keep itself and its services updated with technology and service quality. Qantas must keep in pace with the competitors movements otherwise airline industry may prove to be very dynamic and fatal and it could be difficult to cope up with others in the market.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


CEO Interview: Qantas - its important to keep the brands separate

Alan Joyce, CEO and Managing Director of the Qantas Group, says operating a major airline and a low-cost carrier makes life difficult for the competition. The Qantas share price dropped during the first six months of 2012. How has this affected the airlines financial position? The fall was an overreaction. If you look at the breakdown of figures from the Qantas Group, you would see that most of our markets are making money. The domestic marketQantas and Jetstar combinedmade more than $605 million (AUD600 million), for example. It is the international services that are suffering because of the high oil price, the state of the world economy and the appreciation of the Australian dollar. International services are expected to lose more than $452.8 million (AUD450 million) in 2011/12. We are spending about $4.54 billion (AUD4.5 billion) a year on fuel overall and the Australian dollar has appreciated 40% against the US dollar in the past few years. Our financial position is still strong, however. We have a cash balance of $3.02 billion (AUD3 billion) and continue to bring down capital expenditure. We have deferred some new aircraft, which has released $1.11 billion (AUD1.10 billion)far more than we could have raised through equity. So market speculation that we need to raise more cash is simply wrong. Its also important to realize that Qantas is one of the few airlines to have an investment-grade credit rating. Moodys has said that it is comfortable with our rating and Standard & Poors actually rates us slightly higher than Moodys, which is why we have been placed on its watch list. Is the buoyant Australian economy helping Qantas? The Australian economy is strong but its a patchwork economy and certain sectors are doing a lot better than others. Currently, the mining sector is doing very well and this is driving the economy forward. We have seven flights a day to a small mining town and were making good money on the route. But the Australian consumer isnt as confident as you would expect. A survey found that Australians are more worried about the future than Spaniards. I suppose this reflects the fact that we all live in a global environment. And, of course, a strong economy is attracting more domestic competitors, which means our domestic yields are under pressure. In addition, as I mentioned previously, the appreciation of the Australian dollar has badly affected our bottom line.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Can the airline industry ever return profit margins that at least cover the cost of capital? In this respect, we are a long way way from being a sustainable industry. Aviation is a cyclical industry and we tend to make money in the good times and we lose money in the bad times. The problem is we dont make enough in the good times. We dont get close to making the cost of capital, which is in the 7% to 10% range. In part, Qantass transformation program is an attempt to deliver value throughout the cycle and return a profit during good times and bad. And in the good times, we do get close to returning the cost of capital. On an industry level, I dont think we will see such positive results because there are still too many carriers out there that do not have a commercial focus. As long as they exist, the industry will struggle to post a healthy profit margin. Whats the secret in managing both a full-service and low-cost airline? Many have tried and most have failed. Theres no doubt that operating a low-cost carrier (LCC) when youre a major airline is like walking a tightrope. The possibility of failure is all around you. Some that have tried this have failed because they tried to integrate two very different types of airlines. Many years ago, Delta, for example, coordinated the IT systems and used the same pilots. Others failed because they were too independent. Look at British Airways (BA) and Go. The LCC basically cannibalized BA routes to Spain. Rod Eddington, who was BAs CEO at the time, only found out which routes Go were planning to launch when he heard it on the radio. At Jetstar, we knew we would have to have a separate brand. So from the beginning, we decided to have our own IT systems and processes. But we also created a Flying Committee, which coordinated the two airlines. The committee helped Qantas and Jetstar plan routes and new aircraft purchases together. The committee still exists, although it doesnt have such a major role to play any more as both airlines have become very experienced in the strategy and coordination has become very slick. To help maintain the ties, we also swap staff on a regular basis. The current Jetstar CEO, Jayne Hrdlicka, has a Qantas background and, of course, I was Jetstar CEO before taking over at Qantas. We will keep rotating staff because it helps them maintain an overall perspective and drives a holistic approach to their work. Its a successful recipe. In the Qantas Group, the short-haul Qantas premium product is our most profitable segment of the business and the Jetstar leisure product is the second most profitable. How do you manage the brands? Qantas and Jetstar are two different brands that are perceived differently by the market. They appeal to different segments and its important to keep the brands separate. When Jetstar was launched seven years ago, it didnt compete with Qantas at all and served completely different routes. But now there are 30 routes in common. Jetstar serves MelbourneSydney 11 times a day and Qantas has 32 daily flights between the cities. Maintaining the difference between the brands is essential now as it avoids the risk of cannibalization. It also helps the Qantas Group to battle its competitors. The competition gets squeezed in the middle because Qantas competes in the full-service, highend segment while Jetstar dominates the leisure sector. Both carriers go to Honolulu and weve seen competitors walk away because theres no space in the market for them.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


How do you rate infrastructure provision in Australia? Airspace is being modernized but there is no decision on Sydney airport expansion. Overall, aviation infrastructure in Australia is of a good standard. But with rapidly growing capacity and passenger numbers, its vital that investment and government policy settings support efficient operations. One of the first speeches I gave as Qantas CEO called for a collective effort to improve not just ground infrastructure but also the infrastructure of the skyour air traffic management (ATM)system. Good progress has been made on this since then and we need to keep the momentum going, not least with a carbon price increasing the pressure on airlines to reduce fuel burn. Qantas has invested heavily in new technology such as Required Navigation Performance and we want an ATM system that allows us to maximize it. On Sydneys aviation capacity, Qantas has clearly expressed its view that we need a second airport and should start planning now, while also pursuing improvements at Kingsford Smith Airport. We have been debating this issue for too longwe need to act because airport infrastructure goes to the heart of Sydneys economic productivity and international competitiveness. Its good to see progress being made following the release of a very comprehensive report on the options available and, again, we hope that momentum continues. What perspective will you bring to the table as Chairman of the IATA Board of Governors? It is the job of the Board to support the work of the Director General and CEO and I will make sure that we continue to do that. As a Board, and as an industry, I think we are very engaged in the major issues. Look at the work being done on climate change. No other industry has such a sound strategy in place even though the airline targets have been there for a few years now. On issues like this, I think we should shout more and I will try to do that too. Most of all, given my background at Jetstar, I am interested in seeing what more can be done to encourage LCCs to join IATA. They dont have much representation at the Association even though they are a large part of the aviation marketover 30% in some regions in fact. I want to convince them that IATA is an effective organization with policies that are applicable to the entire industry and not just the large legacy carriers. What would you say to an LCC to persuade them to join IATA? It is more a matter of communication than anything else. To be honest, I wasnt too aware of IATA until I became Qantas CEO about four years ago. These days, many LCCs offer a sophisticated product and occupy the same space as the major carriers. IATA membership should be acknowledging that. The value of IATA can clearly be seen in a program such as the IATA Operational Safety Audit (IOSA). There are far more airlines on the IOSA registry than there are IATA members because all airlines appreciate what IOSA is doing in terms of safety, cost and efficiency. Jetstar isnt an IATA member, for example, but it interlines with a number of other airlines and IOSA has made the interlining procedure a lot easier. And look at the work being done on Fatigue Risk Management Systems (FRMS). IATA plays a vital coordinating role for all airlines. It ties all the available experience together and presents a consistent industry view to the regulator. That is really important in terms of getting the regulators to listen to us and its work that benefits all carriers.

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


Will we see a positive end to the European Union (EU) Emissions Trading Scheme (ETS) saga? Airlines have never said they dont want an ETS. At Qantas, we deal with an Australian scheme and there is no problem with that. We get treated fairly by the Australian government and we recognize that the Australian government has the right to impose a domestic ETS. But it is just that: domestic. The Australian scheme would be a problem if they tried to apply it internationally. And that is what the EU is trying to do. Airlines have always promoted a global, sectoral approach and we have always said that the International Civil Aviation Organization (ICAO) would be the correct channel for an agreement. We have been very consistent and that makes me hopeful that a solution can be found. I dont buy the European argument that ICAO is too slow. Actually, if you look at their work in a broader context, ICAO is quite fast.

REFERENCES
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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


14. "How to get there"; Retrieved August 25, 2012 from, http://lac.lufthansa.com/en/html/besucher/anreise/index.php 15. "Lufthansa opens new office complex in Frankfurt". Europe Intelligence Wire. July 19, 2006. Retrieved August 22, 2012 from, www.accessmylibrary.com/coms2/summary_0286-16006545_ITM 16. "Lufthansa Flies to 50-Year Milestone". Deutsche Welle. January 4, 2005. Retrieved August 25, 2012. 17. Bamber, G.J., Gittell, J.H., Kochan, T.A. & von Nordenflytch, A. (2009). "Up in the Air: How Airlines Can Improve Performance by Engaging their Employees". Cornell University Press, Ithaca. Accessed on August 08, 2012 from, http://www.cornellpress.cornell.edu/book/?GCOI=80140100965480 18. Fellows, Lawrence. "Germans Setting Own Office Hours; Some German Workers Set Their Own Hours -Within Reason." The New York Times. Monday July 12, 1971. Page 1. Retrieved on August 14, 2012. "At Lufthansa's gleaming new office building here, and at many other offices and factories around West Germany, men and women now go to work when they want and stay as long as they want within reason." 19. "Terrorists Shoot Berlin Official, Bomb Airline". Los Angeles Times: p. Section 1, Late Final Desk. Start Page 2. October 28, 1986. Retrieved August 21, 2012. 20. "Around the World; Bomb Rips Offices Of Lufthansa in Cologne". Associated Press at The New York Times. October 29, 1986. Retrieved August 20, 2012. www.nytimes.com/1986/10/29/world/around-the-world-bomb-rips-offices-of-lufthansa-incologne.html 21. Ground breaking for Lufthansa headquarters in Cologne, Accessed on August 21, 2012. http://www.kfz.net/autonews/grundsteinlegung-fuer-lufthansa-hauptverwaltung-in-koeln/ 22. History of Lufthansa, Accessed on August 21, 2012 from, http://www.airreview.com/Lufthansa/History.htm 23. Deutsche Lufthansa AG Group Strategy, Viewed on August 21, 2012 from, http://investor-relations.lufthansa.com/en/fakten-zum-unternehmen/group-strategy.html 24. Friehe, T., and Curti, H. (n.d.) Overrated remedies, weak competition: An analysis of the Lufthansa/Austrian Airlines alliances in Germany-to-Austria air traffic market. Retrieved August 26, 2012 from, www2.jura.unihamburg.de/le/Overrated%20Remedies%20and%20Weak%20Competition.pdf 25. Lufthansa Annual Report. (2004). Retrieved August 25 2012 from http://www.lufthansa-financials.de/servlet/PB/menu/1016861_l2/index.html 26. Moodys Investors Service. Deutsche Lufthansa AG. Retrieved August 26 2012 from www.lufthansafinancials.de/servlet/PB/show/1019581/Moodys%20Analysis%20LH%20092005.pdf 27. Standard and Poor. (2006) Research update: Deutsche Lufthansa outlook to stable on improved trading prospects. Retrieved 25th August 2012 from, www.lufthansa-financials.de/servlet/PB/show/1019578/RatingStandardandPoors102006.pdf

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy

Benchmark Case Studies 2-1; Lufthansa and Qantas Airways


28. BA/Qantas joint services agreement to be extended, Business Traveller (UK/Europe Edition), panacea Publishing International Ltd., March 2010, pp. 19 (Online Ebscohost). 29. Chibber, A 2010, Consumer group upset over Qantas surcharge plan, Cardline, vol. 10, no. 50 (Online Ebscohost). 30. Flottau, J 2008, Qantas leap, Aviation Week and Space Technology, vol. 168, no. 5 (Online Ebscohost). 31. Graham, A 2009, How important are commercial revenues to todays airports? Journal of Air Transport Management, vol. 15, no. 3, pp.106-111 (Online Ebscohost). 32. Knight, E 2011 Virgin v Qantas: its flights and fights, Sydney Morning Herald, viewed on 24th August 2012, www.smh.com.au. 33. Kotler, P, Brown, L, Adam S, Burton S & Armstrong G 2008, Marketing Management, Pearson Education, New South Wales. 34. Oxenbridge, S, Wallace, J, White, L, Tiernan, S, Lansbury, R, 2010, A comparative analysis of restructuring employment relationships in Qantas and Aer Lingus: different routes, similar destinations, International Journal of Human Resource Management, vol. 21,no. 2, p180-196 (Online Ebscohost). 35. Pilling, M 2009, Dual-brand strategy profits Qantas, Airline Business, vol. 25, no. 7 (Online Ebscohost). 36. Qantas Annual Report 2007, Qantas Airways Ltd, viewed on 20th August 2012, 37. Qantas Annual Report 2008, Qantas Airways Ltd, viewed on 20th August 2012, 38. Qantas Annual Report 2009, Qantas Airways Ltd, viewed on 20th August 2012, 39. Qantas Annual Report 2010, Qantas Airways Ltd, viewed on 20th August 2012, 40. Qantas Company Profile, 2010, viewed on 20th August 2012 from, www.datamonitor.com 41. Singapore Tourism Report, Q2 2011, Issue 2, pp. 46-49 (Online Ebscohost). 42. Spiess, L 2005, Cost minimization at Qantas, in Industrial Relations: A Contemporary 43. Approach, eds. M. Bray, S. Deery, J. Walsh and P. Waring, Sydney: McGraw-Hill Irwin, pp. 177 180 44. Thomas, G 2009, Qantas rejoices Under its new CEO, the airline is trimming staff and aircraft in a bid to return to winning form, Air Transport World, vol. June, pp. 26-32 (Online Ebscohost).

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Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy