Lufthansa 2000: Maintaining the Change Momentum

Prepared for:Business 497a

Professor Don FujitaniSection # 15663

Prepared by:Amiel TraynumElin GhadimianJosh SherriffRoss ZalavskyRyan Neal

External Environment:

Global:

Worldwide events such as the Gulf War, followed by a recession, put a burden on the

airline industry and on Lufthansa as a company. These events caused a major decrease in

the amount of seats filled in the airline industry. In 1991 the Seat Factor decreased to

about 57 percent in Europe, compared to 65 percent worldwide.

Socio-Cultural/ Demographic:

You can infer from the case that the growing alliances in the airline industry have been

increasing due to globalization. In 1991, Lufthansa had an increase of passenger numbers

by 11% due to German re-unification.

Legal/Political:

The airline industry was strongly regulated by the government in the US and most of the

airline industry was owned by the government in Europe. This changed in the US when

deregulation of the industry began in 1978 as airlines gained more lenience in operating

their business. Before becoming privately owned and profitable in 1997, Lufthansa was a

state-owned, national airline carrier of Federal Republic of Germany and the government

had strict control over both routes and landing slots. Regulations for the rest of Europe

were not as strict.

Economic:

In the past, an economic recession contributed to the major problem of a reduced seat

load factor. Another economic recession in any of the countries in which Lufthansa

Group does business could have the same affect. The price of oil is a major economic

factor that affects Lufthansa and the rest of the Airline Industry. In particular, passenger

and freight transport. Flight and trade networks opening or closing between nations

would also affect the company since they would be able to either provide or stop

providing services to or from those countries.

Technological:

In general, technology available in the industry includes planes, navigation equipment,

aircraft engines, and onboard computers. Lufthansa developed IT systems which

integrated numerous business activities. These systems presented IT based products and

services for airlines and companies in transport, travel, and tourism industries. In 1999

this IT system was called “Lufthansa IT Services” and it became the core for all

Lufthansa related companies. LH Technik, a subsidiary company, was a global market

leader in aircraft maintenance and VIP cabin outfitting. This subsidiary provided services

to Lufthansa and also 47 percent of its revenues were earned from external companies.

Industry:

Threats and Barriers:

For most of the industries in which Lufthansa Group operates the threat of a new

competitor entering is low and the barriers are high. Huge amounts of capital and

marketing investment is required. The only exceptions are with C&N’s tourism and Sky

Chefs catering which would require less capital investment and therefore be easier to

enter.

Power of buyers:

Travelers are the major buyers. According to the case the number of passengers increased

from 33.7 million in 1992 to 40.5 million in 1998. Buyers have many choices when it

comes to an airline carrier. Because of the Internet, pricing information is not secret and

people can easily compare. Since there is no product differentiation and everyone arrives

to their destination, the threat of switching to low cost carrier is always present.

Power of Suppliers:

Two most important inputs for airline industry are airplanes and fuel. There is not any

substitute for either one of them. Suppliers such as aircraft manufacturers and fuel

companies are crucial for Lufthansa and other airlines to operate. Since there are not

many aircraft manufacturers and most fuels are the same, airlines do not have too many

options. However, even with high supplier power, the risk of suppliers forward

integrating to offer flight service to travelers is very low. Lufthansa attempts to backward

integrate by the creation of LH Technik. This would decrease the power of the aircraft

manufacturers because it decreases the tie between maintenance and reconditioning

services.

Product Substitutes:

Lufthansa has seven distinct companies in operation. Each has its own product

substitutes associated with it. For the Passage (passenger airline service), some product

substitutes are buses, trains, cars, and taxis. For the Lufthansa cargo AG, other options

include e-mail, telephone, and fax. C&N tourism does not have any viable substitutes.

LH Technik AG is responsible for aircraft maintenance and VIP cabin outfitting. There

are no real substitutes. Lufthansa LSG Sky Chefs catering could be leaves options such

as vending machines and restaurants. GlobeGround ground services can be spelled by

the same industries that would replace the cargo service. Lufthansa Systems GmbH

(information technology) can be substituted by in house IT development.

Competitive Environmental Analysis:

Lufthansa being member of Star Alliance faces three major competitive alliances such as

Oneworld, Qualiflyer, and Wings.

Alliances

Revenues in

billion

Aircraft

s

Destination/

Countries

Passengers

in million

Star

alliance DM49.9 1629 720/118 212

Oneworld 44.5 1783 680/143 206

Qualiflyer 27.1 1029 338/100 153

Wings 35 1200 680/100 182

According to data available, the most competitive alliance is Oneworld which besides

generating close revenue and offering a good service, they also shared a logo and a belief

that partnering up with other airlines will be beneficial.

Company:

Resources

Tangible Resources

Physical:

Lufthansa owns 326 aircrafts and has 271 destinations in which they can fly their aircrafts

to. The STAR ALLIANCE has a combined number of 720 destinations to fly to in 110

countries and 27 key airport faculty hubs.

Financial:

In the early 1990s, Lufthansa had a very hard time procuring loans from banks and was

only able to get a loan from one state owned bank. However, this loan kept the company

out of bankruptcy. By 1998 Lufthansa became financially more stable and revenue

reached DM22.8 billion. Moreover, Profit-Revenue ratio was raised to 11 percent

compared to -4.3 percent in 1992.

Organizational:

Lufthansa restructured their organization because they thought they would be more

successful as a federative group of independent small units than as a monolithic

functional block. The new structure that they decided to change to was a multi-

dimensional structure where each part of the organization worked as a separate business

with their own profit centers, where the corporate officers delegates responsibilities.

Lufthansa has an executive board and a supervisory board that is concentrated on

sustaining renewal at 3 levels; operational, structural, and strategic. Using Jurgen Weber

they create special meetings, they call “town meetings,” to manage crises as they come

up. They use intense planning and strategizing on every level. They implemented

Programm 93, which was a set of 131 projects or key actions to change the company

drastically when it was almost bankrupt. Programm 15 was initiated for cost savings and

internationalizing the cost structure of the company. It also integrated responsibility to

the line managers and made them responsible for cost reductions.

Intangible Resources

Human Resources:

Lufthansa has both an Executive Board, called Vorstand, and a Supervisory Board, called

Aufsichstrat, that oversee their operations with Jurgen Weber as their CEO. They also

have an Operation team that takes care of creating and implementing their "Programms".

This team consists of; Angelica Jakob, head of cabin Services, Wolfgang Mayrhuber,

technical director of Lufthansa Maintenance, Matthias Molleney, senior manager of

personnel, Dieter Heinen, chief of sales in Germany, Dr. Christoph Frank, an internal

consultant with experience in various change projects, and an external consultant.

Lufthansa also has implemented a business school for its employees called “the

Lufthansa School for business.” This teaches each student the Lufthansa “mental cultural

core.” It also teaches effective and efficient support key strategic issues to employees. It

builds and ties intellectual capital to the company, Linking academic expertise and

experiences of partner companies to Lufthansa business practice and its needs.

Additionally, learning partnerships offers masters degrees to non-degree top management

programs. Their Explorers 21 and Climb programs also get people to become “change

leaders” early in their careers or create transformational platforms for developed

employees.

Innovation:

Lufthansa has created many innovative programs. For instance, Programm 83 is a

strategic cost saving program that created more efficiency in the workforce by changing

the layout off employees. Of the 131 projects of Programm 93, 70 percent have already

been successfully implemented, and the remaining 30 percent are planned to be put into

action later. Programm 15 is a strategic cost savings program, which consisted of

internationalizing the cost structure of the company. Innovation is so deeply engraved in

the company that the main culture of the company is considered to be “openness to

change.”

Lufthansa also created an innovative alliance, STAR ALLIANCE. This alliance now

includes 8 members that operate in 720 destinations in 110 countries. This created the

idea of companies banding together to compete against other companies, creating a

competition based on groups of companies competing against other groups of companies.

Then, with all the new areas their alliance created, the company created regional

workshops for major regions in order to take into account synergies between the different

business areas.

Perhaps one of their most innovative ideas was that of keeping a sense of urgency with

the employees, that way the company never falls back into a slump. To do this they used

the Lufthansa School of Business to foster and develop a corporate leadership and

performance culture.

Reputation:

Lufthansa has a very good reputation for quality and excellence. According to Dr. Peter

Franke, Lufthansa stands for German values such as preciseness, technical reliability,

high quality, and expertise which are important positive indicators of their business. The

“Germanness” of Lufthansa is of direct use for the company’s image while this can be the

other way around for customer services which demands more “non-German” traits, such

as friendliness or modesty. The name Lufthansa opens doors. The company logo

symbolizes independence, permanence, and sovereign dignity.

Technological Resources:

Lufthansa has its own IT producing and aircraft maintenance subsidiaries. The IT

Company, Lufthansa Systems GmbH, produces IT-based products for airlines and other

transport companies, as well as travel and tourism industries. The aircraft maintenance

subsidiary, LH Technik AG, performs routine maintenance on aircraft inside and out of

the company.

Value Chain Analysis:

Primary

Operations:

Lufthansa was a member of the STAR alliance and this alliance created a way for

members to share resources such as airport facilities and services. One member is

responsible for a specific location and in charge of all of the employees that work at that

location. This centralizes employees and operations and makes them easier to manage.

Marketing and Sales:

No information provided in case about marketing or sales techniques, but the airline

industry mostly focuses on cost competition when it comes to passenger service and

tourism. Lufthansa describes itself as a reliable company with technical excellence, and

this could be used with other areas of its business such as logistics, technical services,

catering, ground services, and information technology.

Service:

In 1999 Lufthansa Passenger Service was by far the strongest business area within the

Lufthansa Group; consisting of Lufthansa German Airlines and Lufthansa City-Line.

Passenger service contributed 60 percent of revenues of the Lufthansa Group. Certain

airports serve as hubs and are collection or transfer points for travelers. This network is

called “Hub and Spoke” and was developed by airlines to avoid bad utilization of a Point-

to-point service. That way it is possible to offer a global network with destinations all

over the world. So it would only be feasible that Lufthansa would join the Strategic

alliances to widen the hub and spoke network which make it also more difficult for

competitors to entry into hub markets and creates economies of scale for the involved

airlines. Seating configuration on an aircraft is to be taken serious as well. The strategic

goal is Long term-growth linked to strategic firms.

Lufthansa’s is trying to reduce their main working fields by outsourcing them or hiring

other companies in that field to work for them. Sharing work responsibilities, quality and

safety recruitments and cost pressure allows the aircraft companies to work more

productive in their own territory. In fields like logistics, catering, IT service and ground

service Lufthansa now has the capabilities to include them as segments to their own

firms. In return they are able to use and offer high-developed service, which is the best

way to increase capability.

The passenger services offered by the main business of Lufthansa that create the most

added value to consumers are flight attendants, pilots, booking clerks, and complaints

department personnel. Lufthansa subsidiary LH Technik provides maintenance services

for the company’s equipment as well as outside firms. Lufthansa shipping services also

offer door-to-door shipping.

Support

Human Resource Management:

In order to complete the turnaround of the company after deregulation, Lufthansa

management, and Jurgen Weber in particular, needed the cooperation of key management

and unions. In 1992, the executive board waived 10 percent of their annual salaries.

Weber was also able to convince the union to accept a plan that included lay offs and no

pay raise. In addition, Weber organized “town meetings” which were held to get

employees and management on the same track of thinking towards drastic corporate

change. The STAR alliance brought in the idea of a common training and development

of staff, so that employees from different organizations within the alliance could work

together.

Procurement:

Procurement is defined as the acquisition of goods and/or services at the best possible

total cost of ownership generally via a contract. The product that Lufthansa has is a task

to transport their customers or certain freight from A to B for a price; however, this price

is set by a market price. In terms of procurement for Lufthansa it is difficult to define.

Technological Development:

Lufthansa Systems GmbH offers innovative IT-based products and services for airlines

and companies in the transport industry. One of their focuses is on the development of

integrated IT activities. Another 100 percent subsidiary of Lufthansa, LH Technik AG,

develops aircraft maintenance ideas and VIP cabin outfitting. Since Lufthansa consists of

several companies and subsidiaries, each of the individual companies have their own

research and development teams, as well as a team that oversees operations research and

development for all companies overall.

Core competencies:

Lufthansa’s major core competencies are: growing financial performance of individual

segments, favorable cost structure since reorganization, innovative services, their

strategic alliance, Lufthansa’s training program particularly relating to the Lufthansa

school of Business, entrepreneurial leadership, and breakthrough problem solving.

Business Level Strategies:

Lufthansa uses an integrated cost leadership/differentiation strategy to sell their products

and services. While they focus on cutting costs and working as efficiently as possible,

they try to maintain and grow their brand image. They do this by instilling in their

employees a sense of urgency and care that guides employees to maintain cost

effectiveness while producing the best services they can. With these lower costs they give

lower prices to customers and increase profits at the same time.

Lufthansa aimed to profit through the formation of Star Alliance. This alliance would

give Lufthansa the opportunity to become an aviation group rather than an airline

company. By providing more services for its consumers Lufthansa’s broadened the full

capacity of the company. This strategy gave Lufthansa the competitive advantage since it

now provided services such as The Passenger Service, Logistics, Tourism, Technical

Services, Catering, Ground Services, and Information Technology.

SWOT Analysis:

Strengths:

The strengths of the company are its management, especially Jurgen Weber. He was able

to turn a downward spiraling company around and create a profitable and competitive

firm. Dramatic changes were necessary for this transformation. Costs needed to be

reduced, but also mindsets had to be adjusted. This was achieved through very flexible

and adaptive management and employees. There is a company-wide culture that

encourages change and innovation. Thomas Sattelberger is credited with creating the

Lufthansa School of Business to further these strategies and pass on the culture. In

charge of the school of business is Dr. Michael Heuser. Another key strength for

Lufthansa is the STAR alliance. In 1998 Lufthansa attributed DM 450 million to the

STAR alliance. The alliance has also brought with it huge market expanding

opportunities. The alliance members operate in 720 destinations in 120 countries.

Lufthansa also has the ability to service its own planes and create its own IT through its

subsidiaries LH Technik AG and Lufthansa Systems GmbH, respectively. The Internal

Financing Ratio is 91.2 percent, which means that Lufthansa could secure its own

investments without having to secure a loan in most circumstances.

Weaknesses:

Reduced staff numbers force the company to rely upon efficiency of the workforce. The

workforce is unionized. Also, the company’s standards force Lufthansa to have a

consensus with its employees before changing anything, and they will bring a program

into effect unless there are no “open cards” that need to be reconciled. The past layoffs

cause some “high potential employees” to not want to work for the company because of

their career aspirations. The company’s strict programs ask for personal sacrifice from

the employees, which give employees more power over the company. Also, the current

alliances that Lufthansa have are not being used to their full potential.

Opportunities:

One big opportunity includes increasing the Star Alliance to include more than eight

members. Opportunities exist in every facet of service that Lufthansa currently has.

Some key opportunities are: Lufthansa Cargo AG can expand to provide complex global

logistics requirements along with development of new sales channels (ex. Internet/virtual

mall). C&N- Tourisms can establish a high performance travel group. Technical Service

can continue to hedge maintenance and reconditioning service by expanding trade service

centre for spare parts. LSG sky Chefs can get into non-airline catering business such as

services for petrol stations and service areas, and going public.

Threats:

Many negative circumstances can influence the financial standpoint of an aviation group

such as Lufthansa. These threats may rise from the external environment. Occurrences in

the global sector such as terror attacks, wars, or worldwide epidemics can decrease

revenues for the airline industry due to the decline in customers that are willing to travel.

Fluctuating economies have a strong impact on the airline industry also. For instance a

recession might put a strain on a lot of consumers, and can prevent them from spending

money on things that aren’t necessities

Competitive Advantage:

At this point in time, Lufthansa’s strongest resource is the strategic alliances that it has

formed using STAR ALLIANCE. The first motion that Lufthansa should go through is

that of strengthening the alliances. If parts of Lufthansa were to merge with parts of other

companies under the STAR ALLIANCE name, costs would decrease significantly and

they would not only be more profitable but more competitive. Merging tasks that each

company repeats so that all companies would only pay a small share would be preferable.

Tasks such as research and development into what consumers would want. At this time

each company pays for research into customer wants, this is wasted work. If companies

within STAR ALLIANCE could eliminate all repetitive tasks their alliance would

become much stronger than those of other companies.

Since the businesses within Lufthansa have such a variety of goods and services each

area has a different way of providing those goods. Therefore, when looking into the

individual aspects of each part of Lufthansa, separate advantages must be taken into

consideration.

Lufthansa Cargo AG

Lufthansa Cargo AG should continue to expand its services to provide complex global

logistics requirements as indicated before. It could do this by working with the

Lufthansa’s IT to create a better system of cargo transport. Also, it was indicated that

they did not yet have ways of ordering the services online. If they expand their services to

be able to track cargo online, order online, and get confirmation through their email it

would not only increase customer satisfaction but end up costing less in the long run due

to elimination of paper mail and customer relation calls.

C&N Tourism

This part of the company focuses mainly on tourist travel. C&N should use the strategic

alliances that it now has access through STAR ALLIANCES to perhaps increase area

coverage and lower pricing perhaps through special deals that C&N makes with the

different companies within STAR ALLIANCE.

LH Technik AG

STAR ALLIANCE could prove to be a valuable asset to this part of the company. If they

were to secure contracts through STAR ALLIANCE they would end up with strong ties

with their customers and build a loyalty base among them. They should try to position

themselves within STAR ALLIANCE as the leading aircraft maintenance company, and

work on their strong ties to increase profitability.

Lufthansa LSG SkyChefs

Much like LH Technik, they could use STAR ALLIANCE to increase their customer

base, but if they want to expand into the non-airline catering business they should create a

2nd subsidiary that has its own name so that it is not considered to be “airline food.” Even

though SkyChefs may provide the best airline food, the overall consumer idea of airline

food is negative. If they want to expand into ground catering, then they should take on a

name that does not affiliate them with Lufthansa. This company could use its contacts

with Lufthansa to advertise on planes and around airports to businessmen that during

their next big corporate meetings, they should get SkyChefs to cater.

GlobalGround

Currently, GlobalGround is the number one worldwide ground carrier. They should

concentrate on expanding their locations through procurement, the fastest and most

efficient way to secure new locations and clientele.

Lufthansa Systems GmbH

In the past, only 20 percent of the revenues came from customers that were outside of

Lufthansa. To increase profitability of this sector, the sales force should expand and start

to focus on outside customers. This sales force can expand outside of Germany and begin

to sell Lufthansa’s IT services globally, perhaps through partnerships.

In All Areas

In all of these areas Lufthansa could look into combining resources from different

departments to achieve the same goals. As mentioned before with STAR ALLIANCE,

Lufthansa could internally merge with its subsidiaries in certain areas that are too often

reproduced. Such as market research and development. The advertising of all of the

companies could also be merged into one central area that controls the Lufthansa brand

image so that there are no contradictory advertisements and other bonuses. If all the

money from these areas were combined into one department the increase in productivity

would directly correlate with an increase in brand awareness and recognition with

consumers.

Epilogue:

The past nine years since this case took place, Lufthansa has sustained its renewal as

planned. Lufthansa has expanded their alliances to more than one, with its recent

expansion with AiRUnion in Russia and the successful integration of SWISS, Lufthansa

now has more than 192 destinations worldwide. They have also entered into several other

partnerships within Europe and the surrounding areas, including a strategic cooperation

with Egypt Air. The Lufthansa Group now employs over 100,000 people worldwide in

165 different nations. 2007 has been a particularly good year for Lufthansa. With

operating profits increasing by 57 percent, they are now expecting 1.3 billion euros in

revenue for the full year, which would set a new record for the Lufthansa Group.

Recently their CEO Mayrhuber commented that “We definitely won’t be resting on our

laurels as we are aware that if we are not moving forwards then we are moving

backwards,” which shows that they still maintain their same sense of urgency in their

company. Lufthansa has also expanded their flight services to include Private Jets, while

investing in a leisure travel group called Thomas Cook AG. In 2006, due to Lufthansa’s

growth, they decided to purchase several new planes, and at the same time replaced many

of their existing aircrafts in the fleet.

In the other industries, LSG Sky Chefs grew into the ground catering industry, and has

since expanded to the point that they received the “Caterer of the Year” award in 2006

from Catering Inside magazine. Lufthansa Technik has been expanding its technical

services to outside of the Lufthansa Group to include both organizations inside and

outside of their strategic alliances. Lufthansa Cargo AG has been entering into several

strategic partnerships to expand their growth, and is currently helping to develop

Frankfurt Airport as Europe’s most attractive and competitive air cargo hub. Lufthansa

Systems has become one of the leading IT service providers in the aviation industry

worldwide. In all, most of the industries that Lufthansa operates in have been increasing

in profitability, mainly due to their strategic alliances. However, there is a downfall to

these alliances. In 2006, an investigation into the airline industry began based on possible

antitrust law violations. Currently there is not any more information on this subject, but

Lufthansa has been cooperating with these investigations fully.

All information for the epilogue taken from Lufthansa Investor Relations.Retrieved from http://www.lufthansa-financials.de/servlet/PB/menu/-1_l2/index.html, on October 30, 2007. Copywrite Deutsche Lufthansa AG, Corporate Communications, http://media.lufthansa.com