GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY?

Company History
 1926: Created by Weimar government
 1931: Had established most comprehensive air route network in Europe
 1935: Expanded to the USSR and China
 Early 1940’s: Led coup against Nazi leadership
 1954: Allies allowed the recapitalization of Duetsche Lufthansa
 1966: Resumed service behind the Iron Curtain under partner company names
 1990: The reunification of Germany
 1991: Lufthansa operates in the red for the first time since 1973
 Mid 1990’s: Formed Star Alliance
 Early 2000’s: Began to sell of diversified business components

Relative Current Situations

 Operates more than 500 aircraft from hubs in Frankfurt, Munich, and Zurich
 Services approximately 250 destinations
 Acquired full ownership of SWISS
 Acquiring significant stakes in other airlines

KEY STRATEGIC ISSUES

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 Lufthansa’s 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 accomplish 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, “wetleases” for regional
airline.
o Maintain strong financial discipline, high credit rating, low debt service. Currently it owns 70% of
the air fleet debt free.
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.

How is Lufthansa dealing with the challenge of sustainability?

o Airlines being scrutinized for CO2 and NOX emissions. More of an issue as air travel increases.
o Fuel currently not taxed.
o Present day testing by other airlines on Bio-Jet and synthetic fuel look very promising.
o Lufthansa initiatives:
» Technical progress
» Improved Infrastructure
» Operational Measures
» Economic Instruments

EXTERNAL ANALYSIS
Industry Definition
 Lufthansa competes in the international airline industry
 Its business segments include passenger business, logistics, repair and overhaul, catering, leisure
travel and IT services.

Defining the Industry

Low Low Profit High Growth
Industry Price Movements
The elasticity of demand, the economy, IT, socio-cultural, political/legal, demographics, from the general
environment has claimed massive movements in this industry and Lufthansa core business units.
• Passenger Transportation
• Maintenance Repair and Overhaul (MRO)
• IT
• Logistics (Cargo)
• Catering (Passenger Food Service)

Lufthansa will continue to do what it does best: focusing on the customers by providing the best customer
service, ramping up their IT, and reducing cost; in addition, conservative risk management practices.

General Environment
 Global
 Demographics
 Sociocultural
 Economic
 IT
 Political/Legal

Demographic
 Each of Lufthansa's customer segments has different profitability and different service level
requirements and expectations.
 Each service offerings are tailored differently to each of the segments.
 Differentiating customers by demographic factors but by more business related attributes such as
their purchase history or profitability.
The Good, The Bad and The Ugly
• Platinum customers: Most Profitable customer, who are typically heavy users of the product, who
are not overlay price sensitive and whose commitment to the enterprise is high.
• Gold Customers: The profitability level is lower and the commitment is not as high as the platinum
members, even though they are heavy users.
• Iron Customers: These customers provide the volume needed to utilize the firm’s capacity but
whose spending levels, loyalty and profitability are not so substantial enough.
• Lead Customers: Customers that cost the company Money. The company must minimize the
customer segment, either by trying to upgrade customers or by disassociating from them.

Global Outlook
 Looking at the Airlines from a global standpoint Lufthansa facilitates economic growth, world
trade, international investment and tourism; and is therefore central to the globalization taking
place in many other industries.

Socio Cultural
In the work Place
 Now approximately one-third of the workforce is non German.
 Continuous education and training is on Lufthansa top priority list not only for employees but also
for managers.
 “Lufthansa School of Business”

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

IT
 Customer to Business interfacing
 Got Rid of legacy

This Helped Lufthansa

 Reduction in maintenance cost
 Improved site usability and functionality
 More flexible booking process
 Customer Relationship Management

Mobile Business Model

 Conformation-SMS with the flight information
 Convenient check-in on cell phone
 Alerts you when Flight gets canceled

Political/Legal
In 1978 Deregulation
 Allowed foreigners to own 25% of an airline
 EU non-European ownership limited to 49%
 ASIA, it is not illegal to own an airline
 Government Taxes has imposed taxes heavily
 Government Fines
 Government Funding
Economic
 Economic forces can have an effect on Lufthansa daily business operations.

Lufthansa/Consumer Fear Index

• Wars Systemic
• Terrorist attack Systemic
• Plane crash Not Systemic
• Banking industry Systemic
• Swine Flu Not Systemic
• Unemployment Rate Systemic
• Oil Not Systemic

Risk Management
 Terrorist attack Plane crash
 Swine Flu
 Oil

Hedging
Airlines % of Hedged Oil Level of Savings
British Air 46% 5.3%
Southwest 80% 7.5%
Delta 0% (Paid Spot price)

How does hedging work?

 If an Airline does not hedge it can severely impact their profitability

June Spot Price 70/barrel of OIL (locked in)

August Spot Price Forecasted by Lufthansa85/Barrel

(actual 80)

Lufthansa Can buy Oil at 70 vs. 80

Most Important Force is Economic

 Market vicissitudes
 Traveler’s psychologies
 Ongoing Airline expense

Porters Five Forces Model

 Competitive Rivalry – Extremely High
o So many competitors
o Saturated market
o High exit barriers
o Difficult to differentiate
 Threat of New Entrants – Low/Moderate
o Economic barriers
o Brand recognition of existing companies
o Economies of scale
o Low cost carriers
 Supplier Power – High
o Mainly dominated by Boeing and Airbus
o Suppliers’ goods are critical to buyers’ success
 Buyer Power – High
o Low switching cost
 o Low differentiation
 Availability of Substitutes – Low
o Road, rail, and ship
o Internet

Five Forces Analysis

 Competitive Rivalry – Extremely High
 Buyer/Supplier Power – High
 Unattractive
 Low profit potential

Competitor Analysis

o American Airlines
o British Airways
o Cathay Pacific
o Finnair
o Iberia
o JAL
o LAN
o Malév
o Quantas
o Royal Jordanian

o Aeroflot
o AeroMexico
o Air France
o Alitalia
o China Southern
o Continental Airlines
o Czech Airlines
o Delta
o KLM
o Korean Air
o Northwest Airlines
Oneworld SWOT

Strengths: Opportunities:
Focus on quality Anti-trust immunity
Complementary global JAL’s presence
network Expecting growth
None of its members Mexicana joining in
declared bankrupt 2009
Weaknesses: Threats:
Smaller than the other Economy
two Member’s bankruptcy
Can’t compete in equal Member may leave for
terms other alliances
North America

Strengths: Opportunities:
2nd biggest alliance Vietnam Airlines joining
Market share in the in 2010
North America Growth in Asia

Weaknesses: Threats:
Oceania and Middle Economy
SkyTeam SWOT
East No Japanese Airlines
Lost $19.5 billion in 10 Loss of Continental
years Airlines

LUFTHANSA: INTERNAL ANALYSIS

Tangible and Intangible Resources
 Fleet - owns and operates about 350 aircrafts
 Transportation to and from airports
 Lounges at more than 60 airport destinations
 Catering services

Core Competencies
 Maintenance, Repair and Overhaul (MRO)
 Logistics
 IT Services
Who is the Customer
 Corporate
 Individuals
 Government
 Travel Agencies

ECONOMICAL SITUATIONAL ANALYSIS

60000

50000

40000
Total Assets

30000
Long-term
Debt
20000

10000

0
2001 2002 2003 2004 2005 2006 2007 2008

RETURN ON ASSETS

0.1

-0.1

COMPARISON DATA
CASH VS. CAPITAL EXPENDITURE RATIO
C as h vs . C ap. E xp. Ratio

1 .8
1 .6
1 .4
1 .2
1
0 .8
0 .6
0 .4
0 .2
0
01

02

03

04

05

06

07

08
20

20

20

20

20

20

20

RESEARCH & DEVELOPMENT 20

 MOZAIC - Measurement of ozone, water vapor, carbon monoxide and nitrogen oxides aboard
Airbus in-service aircraft
 CARABIC – Civil Aircraft for the regular Investigation of the Atmosphere
 IAGOS - aims to create a measuring infrastructure that records atmospheric trace substances.

SWOT ANALYSIS: LUFTHANSA

Strengt Weaknesse

Opportuniti Threat

Strengths: Lufthansa
 Global Operations
 Largest Star Alliance Member
 Refocusing of Diversification and establishment of “Divisions”
 Lease planes
 IT Division
 Strategic ability to predict future trends
Weaknesses: Lufthansa
 Largest Star Alliance Member
 Development of low cost airline structure

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

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

Strategic Alternative 1
Low-End Investment / Responsiveness / Action
 Status quo keeping the cost saving, leasing regional airlines and reducing intermediaries,
controlling air ticketing fees
o Cost leadership focus
o Help maintain debt rating and good financial investment standing
Strategic Alternative 2
Moderate Investment / Responsiveness / Action
 Focus on customer segmentation using IT CRM implemented on a detailed level
o Data mine CRM information to get higher level of profitability
o Accounts for changing customer needs to maximize profit potential
o Differentiate customers by new market divides: purchase history, profitability, expected
lifetime worth as opposed to demographic, geographic, and economic means
o Through implementation of new technologies, like mobile device check-in, they will be able
to adjust service to a wider audience
Strategic Alternative 3
High-End Investment / Responsiveness / Action
 Attempt to acquire stakes in other airlines within anti-trust government regulations in EU and other
countries
o Will diversify their holdings and increase profit potential
o Increases the Star Alliances reach in servicing global air travel
o Allows them to be prepared for a changing market
o Must limit stakes in international acquisitions to not encourage government interaction
o Improves air route network and increases flight availability to loyal Lufthansa customers
o Allows increased presence in new, emerging, and current markets

Recommended Actions
Hybrid Strategy of Alternative 2 and 3
 Focus on customer segmentation through newly developed IT systems while attempting to acquire
legal stakes in either competitor or partner airlines.
Reasoning
Why are they going to do it?
 Hedges company stability given global and current economic situation
 Prepare to gain entrance to new markets given the possibility of relaxed antitrust laws
  Allows focus on customers changing needs as they continually become more demanding
 Encourages the use of technology to increase ease of access and use of services
How are they going to do it?
 Continue to use their strong IT Division to develop innovative technologies
 Use their positive debt rating to encourage financial growth and the purchase of stakes in
competing/partner airlines
 Use their influence as the largest member of the Star Alliance to encourage some troubled
members to allow partial ownership or acquisition