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Lufthansa

Going Global, but How to Manage Complexity?

Adel

Donnych

Jason

Myat-HsuYusuke



Lufthansa 2

Company History 1926: Created by Weimar

government

1931: Had established mostcomprehensive air route network in

Europe 1935: Expanded to the USSR and

China

Early 1940’s: ed coup against !a"i

leadership 1954: #llies allowed the

recapitali"ation o$ %uetsche u$thansa



Lufthansa 3

History

1966: Resumed service behindthe &ron Curtain under partnercompany names

1990: 'he reuni(cation o$

)ermany 1991: u$thansa operates in the

red $or the (rst time since *+,-

Mid 1990’s: .ormed Star

#lliance Early 2000’s: /egan to sell o$

diversi(ed business components



Lufthansa 4

Relative Current Situations

0perates more than 122 aircra$t $rom hubs in.rank$urt3 4unich3 and 5urich

Services approximately 612 destinations #c7uired $ull ownership o$ SW&SS

#c7uiring signi(cant stakes in other airlines



Lufthansa 5

Lufthansa

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.

Key Strategic Issues



Lufthansa 6

Lufthansa

International Strategies

o Industry changes, deregulation and the economic pressures of

sustaining a profitable business, Lufthansa formed The Star Alliancewith 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.




Lufthansa 7

Lufthansa

International Strategies

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.




Lufthansa 8

Lufthansa

Cooperative Strategies

o The Star Alliance was a global strategy requiring efficient operations

across the network. Coordination and cooperation were vital to itssuccess.

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.




Lufthansa 9

Lufthansa

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.




Lufthansa 10

Lufthansa

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.




Lufthansa 11

Lufthansa




Lufthansa: External Analysis

Lufthansa competes in the international airline

industry

Its business segments include passenger business,

logistics, repair and overhaul, catering, leisure travel

and IT services.

Lufthansa 12

Industry Definition



Lufthansa 13

Lufthansa

Defining the Industry

Low Low Profit High Growth

Industry Price Movements

The elasticity of demand, the economy, IT, socio-cultural, political/legal, demographics, from thegeneral environment has claimed massive movements in this industry and Lufthansa corebusiness 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 riskmanagement practices.



Lufthansa 14

Lufthansa

General Environment

Global

Demographics

Sociocultural Economic

IT

Political/Legal



Lufthansa 15

Lufthansa

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.



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Lufthansa

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 theplatinum 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.



Lufthansa 17

Lufthansa

Global Outlook

Looking at the Airlines from a global standpoint

Lufthansa facilitates economic growth, world

trade, international investment and tourism; and istherefore central to the globalization taking place in

many other industries.



Lufthansa 18

Lufthansa

SocioCultural

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 andenvironmental projects from supporting children in need (via the help

alliance) to protecting endangered animals and recycling or introducing

fuel efficiency initiatives.



Lufthansa 19

Lufthansa

IT

Customer to Business interfacing

Got Rid of legacyThis Helped Lufthansa

Reduction in maintenance cost

Improved site usability and functionality

More flexible booking process

Customer Relationship Management



Lufthansa 20

Lufthansa

Mobile Business Model

Conformation-SMS with the flight information

Convenient check-in on cell phone Alerts you when Flight gets canceled



Lufthansa 21

Lufthansa

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



Lufthansa 22

Lufthansa

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



Lufthansa 23

Lufthansa

Risk Management

Terrorist attack Plane crash

Swine Flu Oil



Lufthansa 24

Lufthansa

Hedging

Airlines % of Hedged Oil Level of Savings

British Air 46% 5.3%

Southwest 80% 7.5%

Delta 0% (Paid Spot price)



Lufthansa 25

Lufthansa

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



Lufthansa 26

Lufthansa

Most Important Force is Economic

Market vicissitudes

Traveler’s psychologies Ongoing Airline expense



Lufthansa

Competitive Rivalry – Extremely Higho So many competitors

o Saturated marketo High exit barriers

o Difficult to differentiate

Threat of New Entrants – Low/Moderateo Economic barriers

o Brand recognition of existing companies

o Economies of scale

o Low cost carriers

Lufthansa 27

Porters Five Forces Model



Lufthansa

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 – Lowo Road, rail, and ship

o Internet

Lufthansa 28

Five Forces Analysis



Lufthansa

Competitive Rivalry – Extremely High

Buyer/Supplier Power – High Unattractive

Low profit potential

Lufthansa 29

Five Forces Analysis



Lufthansa

o American Airlines

o British Airways

o Cathay Pacific

o Finnair

o Iberia

o JAL

o LAN

o Malév

o Quantas

o Royal Jordanian

Lufthansa 30

Competitor Analysis

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



Lufthansa 31

Oneworld SWOT

Strengths:

Focus on quality

Complementary global network

None of its members declared

bankrupt

Opportunities:

Anti-trust immunity

JALs presence

!"pecting growt#

$e"icana %oining in &''(

Weaknesses:

)maller t#an t#e ot#er two

Cant compete in equal termsNort# America

Threats:

!conomy

$embers bankruptcy$ember may lea*e for ot#eralliances



Lufthansa 32

SkyTeam SWOT

Strengths:

&nd biggest alliance

$arket s#are in t#e Nort# America

Opportunities:

+ietnam Airlines %oining in &','

rowt# in Asia

Weaknesses:

.ceania and $iddle !ast

Lost /,(01 billion in ,' years

Threats:

!conomy

No Japanese Airlines

Loss of Continental Airlines



Lufthansa: Internal Analysis

Fleet - owns and operates about 350 aircrafts

Transportation to and from airports

Lounges at more than 60 airport destinations

Catering services

Tangible and Intangible Resources

Lufthansa 33



Lufthansa 34

Lufthansa

Core Competencies

Maintenance, Repair and Overhaul

(MRO)

Logistics

IT Services



Lufthansa 35

Lufthansa

Who is the Customer

Corporate

Individuals

Government

Travel Agencies



Economical Situational Analysis

0

10000

20000

30000

40000

50000

60000

2001 2002 2003 2004 2005 2006 2007 2008

Total AssetsLong-term Debt

Net Income

Revene

Lufthansa 36



Return on Assets

Lufthansa 37



Comparison Data

Lufthansa 38



Cash Vs. Capital Expenditure Ratio

0

0!2

0!4

0!6

0!8

11!2

1!4

1!6

1!8

"as# vs! "a$! %&$! Rat'o

Lufthansa 39



Research & Development

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.

Lufthansa 40



Lufthansa 41

SWOT Analysis: Lufthansa

Strengths

Opportunities

Weaknesses

Threats



Lufthansa 42

Strengths: Lufthansa

)lobal 0perations

argest Star #lliance 4ember

Re$ocusing o$ %iversi(cation andestablishment o$ 8%ivisions9

ease planes

&' %ivision

Strategic ability to predict $uture trends



Lufthansa 43

Weaknesses: Lufthansa

argest Star #lliance 4ember

%evelopment o$ low cost airline structure



Lufthansa 44

Opportunities: Lufthansa

Encourage )rowth o$ Star #lliance

&ncrease 0wnership Stakes in %ierentmarkets

Use &' %ivision to %evelop 0perationalStakeholder Relationships

Use Wet easing to &mprove Regional !etwork

Expand presence in growing market



Lufthansa 45

Threats: Lufthansa

0ther #lliances

ow Cost ;roviders

#lternative 'ravel0ptions $or Short%istances



Lufthansa 46

Strategic Alternative 1

Status 7uo keeping the cost saving3 leasingregional airlines and reducing intermediaries3

controlling air ticketing $eeso Cost leadership $ocus

o Help maintain debt rating and good (nancialinvestment standing

Low-End Investment / Responsiveness / Action



Lufthansa47


.ocus on customer segmentation using &' CR4implemented on a detailed levelo %ata mine CR4 in$ormation to get higher level o$

pro(tability

o #ccounts $or changing customer needs to maximi"e pro(tpotential

o %ierentiate customers by new market divides: purchasehistory3 pro(tability3 expected li$etime worth as opposed

to demographic3 geographic3 and economic means

o 'hrough implementation o$ new technologies3 like mobiledevice check<in3 they will be able to ad=ust service to awider audience

Moderate Investment / Responsiveness / Action



Lufthansa48


#ttempt to ac7uire stakes in other airlines within anti<trust government regulations in EU and other countries

o Will diversi$y their holdings and increase pro(t potential

o &ncreases the Star #lliances reach in servicing global airtravel

o #llows them to be prepared $or a changing market

o 4ust limit stakes in international ac7uisitions to not

encourage government interaction

o &mproves air route network and increases >ightavailability to loyal u$thansa customers

o #llows increased presence in new3 emerging3 andcurrent markets

High-End Investment / Responsiveness / Action



Lufthansa49

Recommended Actions

.ocus on customer segmentation throughnewly developed &' systems while attempting

to ac7uire legal stakes in either competitor orpartner airlines?

Hybrid Strategy of Alternative 2 and 3



Lufthansa50

Reasoning

Hedges company stability given global andcurrent economic situation

;repare to gain entrance to new markets giventhe possibility o$ relaxed antitrust laws

#llows $ocus on customers changing needs asthey continually become more demanding

Encourages the use o$ technology to increaseease o$ access and use o$ services

Why are they going to do it?



Lufthansa51

Reasoning

Continue to use their strong &' %ivision todevelop innovative technologies

Use their positive debt rating to encourage(nancial growth and the purchase o$ stakes incompeting@partner airlines

Use their in>uence as the largest member o$

the Star #lliance to encourage some troubledmembers to allow partial ownership orac7uisition

How are they going to do it?



Thank you!

Closing questions or comments?

52

Lufthansa Case analysis

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