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Lufthansa in its competitive environment

Term Paper (Advanced seminar) 2007 33 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

1 Introduction

2 Procedure

3 Analysis of Lufthansa’s Business Environment
3.1 External factor influencing the organisation
3.1.1 The demand for passenger air services
3.1.2 Liberalisation of European air transport
3.1.3 Competitive Environment and Globalisation
3.2 Internal factor influencing the organisation
3.2.1 Organisational structure
3.2.2 Human relation policies
3.2.3 Skills and performance of the employees

4 The learning organisation – organisation as brains
4.1 Definition of the term learning organisation
4.2 Define the term of creativity within an organisation

5 The impact of the learning organisation and the role of creativity on Lufthansa’s Policy and Decision Making Process
5.1 The learning organisation towards the external environment
5.2 Learning organisation towards innovation
5.3 Learning organisation towards customer expectations
5.4 Learning organisation towards personnel

6 Evaluation of the Effectiveness of Company’s response
6.1 Effectiveness of Lufthansa’s response

7 Areas for Improvement in the Company’s response
7.1 Staff Satisfaction Measurement
7.2 Future Markets
7.3 Reliability

8 Conclusion

B List of reference

C Appendix

A List of Figures

Figure 1: Accumulated profits/ losses of IATA-Carrier

Figure 2: Low Cost Carrier: Seats available per week

Figure 3: Marketshares on seat availabitlity

Figure 4: Star Alliance Passenger Traffic

Figure 5: Alliance world passenger share

Figure 6: Group Structure Lufthansa

Figure 7: Share and development of external revenue

Figure 8: Staff Lufthansa Group by business segments in %

Figure 9: Diversity at Lufthansa

Figure 10: Action Plan

Figure 11: Lufthansa group revenue Jan-June 2006/2007

Figure 12: Sold tickets from Europe to

1 Introduction

After five years of vast losses, especially for the IATA Carrier, which are all scheduled airlines, 2007 will be a successful year for the airline industry, with a forecasted profit of $8.5 billion

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Figure 1: Accumulated profits/ losses of IATA-Carrier , (IATA, et al. 2007)

The early 21st century marked the industry with high losses and consolidation. Due to the reason that the industry sector highly depends on the external environment: the terrorist attacks of September 11th 2001, magnified by the weak economic conditions in many major countries and more recently the Iraq War and SARS epidemic, have made the last five years unhappy ones, especially for most of the schedules airlines. In addition to that, the liberalisation of the European aviation market enabled low cost airlines to reshape the competitive environment and to make significant impacts in the world’s domestic passenger markets, which have previously been largely controlled by full service carriers.

The overall market situation is dominated by increasing pressure on cost and productiveness. The global market trend forces a high company concentration that strengthens market positions.

Lufthansa[1] - Germany’s national carrier was faced, like all other national carriers with the above-mentioned problems and had to find its way out of the crisis.

The central question of this report is: With which tools did Lufthansa solve these problems? And are these tools sufficient to be competitive for future developments?

2 Procedure

This report paper is dealing with the developments in airline business illustrated with the example of Germany’s national carrier, the Lufthansa AG, and the enormous company restructuring toward an ideal global player in a highly competitive environment.

By analysing the internal and external influences, pressuring the company to adapt, the need of change by Lufthansa will be made more comprehensible.

The learning organisation and the role of creativity have become more important during the last decades, especially in fast changing environments like the airline industry where Lufthansa operates. This will be a special regard in chapter four.

In the last section of the report a critical analysis will be made on the effectiveness of the organisation’s response, and some areas of improvement will be mentioned.

3 Analysis of Lufthansa’s Business Environment

In theory there are several different tools to assess the influence of the business environment. Worthington and Britton (2003) pointed out an approach to categorise the environment in external and internal factors. According to the above-mentioned theory the internal environment is influenced by the organisational structure and culture, its human relation policies and the skills and expertise of the employees.

The external environment has an affect on the business as a whole. The organisation is always subject to the external environment and is often influenced by certain factors which can be summarised as political, economical, socio-cultural and technological factors (PESTLE).

Johnson and Scholes (2002) stated, that the objective of PESTLE-analysis is to simplify the environmental influences and identify which influences these affect on future developments or future performances of the organisation.

PESTLE-analysis tries to make the future more comprehensible and predictable. But we have to take into account that future is something which can not be forecasted, as unpredictable events might occur.

A SWOT-analysis matches the strengths and weaknesses of the organisation (internal factors), which are set against an external appraisal of the strengths, weaknesses, opportunities and threats facing it. A common tool to examine the external and internal environment is Porter’s Five Forces (1980).

Due to the reason that Lufthansa is an international operating organisation it faces international challenges. These international challenges govern as well the internal organisation as the external environment.

3.1 External factor influencing the organisation

The external environment has huge impacts on the Lufthansa organisation. As Lufthansa is an organisation mainly operating in the service sector we need to take a closer look at the nature of the airline product. In this section we will also have a brief look on the liberalisation process of the European Airline Market, which enabled Low Cost Airlines like Ryanair to launch their new business model and therefore had a long-term impact especially for scheduled airlines, like Lufthansa. (See appendix page 35ff for SWOT-analysis and Porter’s Five Forces)

3.1.1 The demand for passenger air services

The air journey is a part of a variety of other products or services. The demand of passenger air services is a derivate demand. It is dependent on the demand for other products or other activities. The demand as well depends on external crisis, beginning with the terrorist attacks on September 11 in 2001, 2002 Bali, SARS and the second Iraq War. Lufthansa responded with cost reductions in operation, retrenchments, and the introduction of a new distribution channel, the new Lufthansa homepage.

Even when airlines wish to differentiate their products, competitive and economic forces and the fact that they are flying similar or identical aircrafts mean that they often end up offering very similar products. The consequences of the homogeneous nature of the airline are twofold. On the one hand it pushes airlines into making costly efforts to try to differentiate their services from those of their competitors. One the other hand it makes the emergence of entirely new airlines or the incursion of new airlines on existing routes relatively easy. The dichotomy between the heterogeneity of the various products and the homogeneity of the air service themselves is a constant challenge in airline planning. Lufthansa tried by launching the “Future European Operations“ programme in 2002 to solve this dichotomy. The airline reorganised its regional markets and offered their passengers greater comfort in a completely revamped Business Class with fast broadband Internet connectivity in the aircraft cabin to clearly differentiate itself from major competitors. In April 2006 Lufthansa launched its betterFly programme. Flights can be booked for as little as 99 euros – return fare, including taxes and charges. The offer applies to all Lufthansa non-stop flights from any German airport to destinations in EU countries. An import marketing tool is Lufthansa’s frequent flyer programme “Miles and More” which offers customers to accumulate miles on flights and other services which then can be spent for upgrades and free flights. Lufthansa has over 500 partners, including all Star Alliance members, hotels, car rentals, newspapers, banks and other relevant partners in the whole world. In conjunction with this marketing tool Lufthansa wants to create a long-term relationship with its customers and create customer loyalty.

3.1.2 Liberalisation of European air transport

In liberalised or free markets, the price is regulated without governmental intervention. The liberalisation process in Europe’s aviation market can be divided in to four stages of deregulation, whereby the first stage took place in 1987 by introducing deep discounts of 35% to 50%. The duty to obtain a permit for transport fares from the Minister of Transport was abolished by the European Parliament. The following years were characterised by a simplification of civil air law. The last step of the deregulation process in 1997 permitted airlines to perform a complete cabotage, which means, that an airline has the right to transport passengers, freight and post within a different country or between two or more different airports.

New entrants with innovative marketing concepts entered the aviation market and caused, with their low budget prices, tremendous competition. In Europe, 14% of available seats are now provided by low fare airlines, with the two largest players EasyJet and Ryanair accounting for nearly 9%. The demand for air service changed. The luxury product of air service transport changed into a bulk commodity.

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Figure 2: Low Cost Carrier: Seats available per week , 2005 (MC-Kinsey, et al. 2005)

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Figure 3: Marketshares on seat availabitlity , 2004 (Lufthansa, et al. 2005)

Lufthansa founded a low fare airline “Lufthansa Express” in 1994 to be more competitive against low fare airlines like EasyJet and Ryanair. Due to the fear of cannibalism (the effect that Lufthansa obtains a bad image) towards Lufthansa’s high quality carrier image, the low fare airline stopped operating. Lufthansa is engaged with 24.9% in Germanwings. Lufthansa indirectly participates in the low fare sector under the name of Germanwings and uses the airline as a defence mechanism against low fare airlines.

3.1.3 Competitive Environment and Globalisation

The above-mentioned circumstances have however created a business environment where more radical measures can be implemented. The major airlines have moved to strengthen their position in the marketplace by consolidating operations under one brand. Franchising, Joint-Ventures and code-share agreements are the most frequent methods for the major carriers to extend their brand presence without the commercial risk. International airline alliances have gained more importance during the last years. This increases the number of city pairs served, offers joint scheduling, cost savings in marketing and combined purchasing of services and infrastructure. The effect of reducing the number of carriers operating at an airport should diminish competition.

Lufthansa discovered this potential early on and soon investigated creating a global alliance network. In 1997, Lufthansa and other major carriers founded Star Alliance - the first global airline alliance worldwide. Today Star Alliance consists of 19 international carriers which are all characterised by having a leading position in their homemarket.

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Figure 4: Star Alliance Passenger Traffic , 2006 (IATA, et al. 2007)

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Figure 5: Alliance world passenger share , 2006 (IATA, et al. 2006)

In 2006 Star Alliance had a world passenger share of 20.9%. In total the three international airline alliances were accounting for 54.5% of the total passenger share.

Adding a special bonus for its customers and to offer a more seamless travel, Lufthansa and their Star Alliance partners continuously improve operations concerning minimum connecting time, acceptance of frequent flyer programmes of other partner airlines and adding special value for costumers. One example would be that Star Alliance is the first airline alliance to launch StarNet, a booking platform which offers clients a simplified booking procedure. A focus lies on business travel, with companies not having to negotiate with each airline, and Star Alliance symbolises the trade body for its members.

Up until now the airline industry is largely protected from cross national boundary merges based on the fact that the airlines symbolise national prestige for the country and often financial aid is donated to protect the airlines from merges.

Analysts’ forecasts preview that in Europe only three major airline groups will survive. These will be the airline groups around Air France/KLM, British Airways and Lufthansa.

The consolidation process started in 2003, KLM and Air France merged in 2005 and the merge of SWISS by Lufthansa followed.

3.2 Internal factor influencing the organisation

This section analyses the organisational structure, human relation policies and skills and expertise of the employees which are the core units of the internal factors.

3.2.1 Organisational structure

After the restructuring programme in the late nineties, Lufthansa spun off its MRO (Lufthansa Technik), cargo and IT businesses as independent companies.

Today Lufthansa consists of five (end of 2006 Leisure Travel was also spun) independent business units as you can see from the graph below.

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Figure 6: Group Structure Lufthansa , 2006, (Lufthansa, et al. 2007)

The Passenger Transportation Business segment is the Group's central business segment in terms of both core competencies and size.

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Figure 7: Share and development of external revenue , 2007 (Lufthansa, et al. 2007)

3.2.2 Human relation policies

As an international group Lufthansa feels itself obliged to contribute in a dialogue with social interest groups toward the realisation of sustainable development. In connection with this framework Lufthansa uses the dialogue with its stakeholders, directly takes part in social projects, sponsors environmental organisations and is actively involved in a number of scientific research and development projects. Particular areas of emphasis are climate and noise research as well as the issue of cosmic radiation. Furthermore Lufthansa is a member of numerous national and international organisations involved in issues of corporate responsibility.

3.2.3 Skills and performance of the employees

On 31st December 2006 the Lufthansa Group had 94,510 employees, 2.4 per cent more than the previous year. The demand for air traffic services led to an increase in the number of trainee service professionals to 1,600. In addition, 204 trainee pilots commenced training at the Bremen pilot school, while 343 students, as against 168 in the previous year, graduated and joined Lufthansa flight crews in 2006.

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Figure 8: Staff Lufthansa Group by business segments in %, 2007 (Lufthansa et al. 2007 )

[...]


[1] See annex page 33, Lufthansa a short overview

Details

Pages
33
Year
2007
ISBN (eBook)
9783638058353
ISBN (Book)
9783638948890
File size
554 KB
Language
English
Catalog Number
v91735
Institution / College
University of Sunderland – University of Sunderland
Grade
2,1
Tags
Lufthansa Contemporary Management

Author

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Title: Lufthansa in its competitive environment