Lufthansa 2000: Maintaining the Change Momentum

Prepared for:
Business 497a
Professor Don Fujitani
Section # 15663

Prepared by:
Amiel Traynum
Elin Ghadimian
Josh Sherriff
Ross Zalavsky
Ryan 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 |Aircrafts |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