Executive Overview:
Lufthansa is the largest airline in Europe in terms of passengers carried. By 2002,
Lufthansa had become of the strongest airlines and top aviations groups in the world.
Lufthansa had undergone a decade of fundamental change. Lufthansa was transformed
from a state-owned, unprofitable national airline into one of the most profitable, privately
owned aviation groups in the industry. The group turned a record loss of *350 million in
1992 into a pre-tax profit of *952 million in 2002. This financial result reflected
Lufthansas major competitive advantage-its ability to respond rapidly, act flexibly, and
withstand crises. Lufthansa proved its unique change management competence when it
coped with September 11th, the most serious crisis in the airline industry since World War
II. The aviation group pulled ahead of its competitors and reversed a loss of *744 million
in 2001 into an operating profit of *718 million in 2002. In 2003, the war in Iraq and the
SARS disease demanded that, more than ever before, Lufthansa draw on its ability to cope
with crises. Overcoming change-tiredness and continuous re-energizing were seen as the
key management challenges in 2003.
Strategic Issues:
How to maintain sustainable success and secure its future as the leader in the airline
industry while:
1) Restructuring the organization to increase cost and revenue transparency and to reduce
fragmentation
in decision processes.
2) Focusing on continuing strategic cost savings in terms of creating Asian alliances.
3) Combating exhaustion, change-tiredness, or even organizational burnout in an industry
that requires
maintaining constant change momentum.
Potential Business Impact:
From autumn 2003, Lufthansa planned to offer its passengers new business class
accommodations; it intended to invest around *30million in a program that was to be
implemented. The new CEO also calls for a high level of company innovation which will
cost additional resources. Assuming a conservative average increase in sales of 20% and a
fall through profit rate of 6%, the company looks to lose *5,876 million if the business
strategic issues are not resolved.
Assume 20% increase in NSR Y-O-Y
2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 3 Years
% Change in Net Sales Revenue Year Over Year -7.3% 5.8% -3.5% 9.9% 13.0% 20.0%
20.0% 20.0%
Net Sales Revenue 19,073 17,685 18,718 18,065 19,849 22,420 26,904 32,285 38,742
Percent of Net Income that Becomes Fall-Through Profit 118.7% 139.9% -9.7% 17.1%
29.1% 6.0% 1,614 1,937 2,325 5,876
General Environment: Europe (Lufthansa is the largest airline.) (See global segment for
international impact.
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.
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 (2006), on a par with
other industrialized nations such as the United States at 2.6% (Q2 2006) and 1.6 (Q3
2006).
GDP: $12.82 trillion. (2006) GDP/capita: $18,056. Annual growth of per capita GDP:
2.8% (2006). Income of top 10%: 27.5%. Unemployment 8.8% (2006).
Opportunities:
1. GDP is growing; opportunity to take advantage of that growth.
2. The EU 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.
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.
Opportunities:
1. The European Union has standardized a lot of economic issues; the industry should be
more stable.
2. The EU has also regulated the industry across borders making best practices easier to
define.
3. Europe tends to be on the same page as the US in terms of airline regulations.
Threats:
1. The EU has risen in political power; too much power could be a threat.
2. Tensions between the EU and the EFTA could have a negative impact on the airline
industry.
Sociocultural Segment
The volume of weekly, annual and lifetime working hours have fallen substantially.
Working-time 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.
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, travelers swipe a credit card
through the machine as identification, and print out their tickets. Currently, each carrier
manages its own machines, and travelers 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 travelers 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.
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
