GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY?

8/10/2019 GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY?

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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 1940s: Led coup against Nazi leadership

1954: Allies allowed the recapitalization of Duetsche Lufthansa

1966: Resumed service behind the Iron Curtain under partner company names

1990: The reunification of Germany

1991: Lufthansa operates in the red for the first time since 1973

Mid 1990s: Formed Star Alliance

Early 2000s: Began to sell of diversified business components

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 Strategieso 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 Strategieso 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 Controlo 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.


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Miscellaneouso 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 IndustryLow 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.


3/10


4/10

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

Travelers psychologies

Ongoing Airline expense

Porters Five Forces Model

Competitive RivalryExtremely High

o

So many competitors

o Saturated market

o High exit barriers

o Difficult to differentiate

Threat of New EntrantsLow/Moderate

o Economic barriers

o Brand recognition of existing companies

o Economies of scale

o Low cost carriers

Supplier PowerHigh

o Mainly dominated by Boeing and Airbus

o

Suppliers goods are critical to buyers success

Buyer PowerHigh

o Low switching cost


5/10

o Low differentiation

Availability of SubstitutesLow

o Road, rail, and ship

o Internet

Five Forces Analysis

Competitive RivalryExtremely High

Buyer/Supplier PowerHigh

Unattractive

Low profit potential

Competitor Analysis

o American Airlines

o British Airways

o Cathay Pacific

o Finnair

o Iberia

o JAL

o LAN

o Malv

o Quantas

o

Royal Jordanian

o Aeroflot

o AeroMexico

o Air France

o Alitalia

o

China Southerno Continental Airlines

o Czech Airlines

o Delta

o KLM

o Korean Air

o Northwest Airlines


6/10

Oneworld SWOT

SkyTeam SWOT

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

Strengths:

Focus on quality

Complementary global

networkNone of its members

declared bankrupt

Opportunities:

Anti-trust immunity

JALs presence

Expecting growthMexicana joining in

2009

Weaknesses:

Smaller than the other

two

Cant compete in equal

terms

North America

Threats:

Economy

Members bankruptcy

Member may leave for

other alliances

Strengths:

2ndbiggest alliance

Market share in the

North America

Opportunities:

Vietnam Airlines joining

in 2010

Growth in Asia

Weaknesses:

Oceania and Middle

East

Lost $19.5 billion in 10

years

Threats:

Economy

No Japanese Airlines

Loss of Continental

Airlines


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Who is the Customer

Corporate

Individuals

Government

Travel Agencies

ECONOMICAL SITUATIONAL ANALYSIS

RETURN ON ASSETS

COMPARISON DATA

0

10000

20000

30000

40000

50000

60000

20012002200320042005200620072008

Total Assets

Long-termDebt

-0.1

0

0.1


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CASH VS. CAPITAL EXPENDITURE RATIO

RESEARCH & DEVELOPMENT

MOZAIC - Measurement of ozone, water vapor, carbon monoxide and nitrogen oxides aboard

Airbus in-service aircraft

CARABICCivil Aircraft for the regular Investigation of the Atmosphere

IAGOS - aims to create a measuring infrastructure that records atmospheric trace substances.

SWOT ANALYSIS: LUFTHANSA

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

00.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2001

2002

2003

2004

2005

2006

2007

2008

Cash vs. Cap. Exp. Rat


9/10

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


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


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


10/10

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 troubledmembers to allow partial ownership or acquisition

Documents

GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY?