Lufthansa 2003 Analyze the Case

Lufthansa 2003

Analyze the case you have just studied by answering the following questions:

Evaluate the general environment of Lufthansa using the framework in Chapter 2.

The Lufthansa company competes in a fast growing industry of aviation which is due to specific constraints nevertheless was a growth industry in the recent past and is likely to remain fast growing and attractive for entrance and competition environment in the short to middle future due to globalization trends and increasing communications of different types between all the regions. Furthermore, though the matured economies are experiencing stagnation currently, the developing markets are boosting airline development there thus providing new markets for the airline companies able of in timely manner win these markets and strengthen their position there. The global GDP is rising and the overall economic development is rather stable. After two years of increasing oil prices which triggered the operating costs of the airline companies, currently the supply of oil stabilizes and the prices are decreasing which puts downward pressure on the costs for airline companies.

2. What are the key opportunities and threats facing Lufthansa?

According to Lufthansa professional management, the major risks for the company are industry specific as the management strives to reduce company specific risks and predict the possible industry specific risks.

The main risks include "capacity and utilization, strategy-related risks, political, procurement, wage policy related risks and others." Lufthansa offers diversified mix of services and thus each of them is prone to influence by different factors. Passenger segment is likely to boost and the most attractive directions are the Asian and other developing countries. Air freight is likely to be growing also, while the competition arises and the company targets that the synergies from merger with SWISS company will improve the strengths of Lufthansa and create a large competitive monster in all the segments of the airline business.

2. Use Porter's Five Forces Model to analyze the global airline industry. Given this analysis, is the industry attractive or unattractive?

Following the global economic growth, the IATA organization predicts that though the air traffic growth was not as significant in the year of 2005 compared to the previous rates, but will speed up from 5% in 2005 to 5.5% in 2007. Due to air traffic deregulation, Asia/Pacific and the Middle East should be the most attractive markets promising the fastest growth rates.

As for local specific factors due to Lufthansa being based in Germany, the economy of this country is expected to out perform previous predictions which will positively influence the Lufthansa group.

3. Who are the main competitors of Lufthansa and how does Lufthansa measure up against these competitors?

In terms of global airline industry, Lufthansa is not within the first five airline services companies by market capitalization or growth, but Lufthansa shares have outperformed the total DAX index in Germany where the company shares are traded.

On the global arena, the biggest companies are British Airways, AMR Corporation, TAM SA and others.

4. Evaluate Lufthansa's tangible and intangible resources. Which are more important as a source of competitive advantage? Why?

As Lufthansa is a company within airline industry, for this company the tangible resources are a big part of the total company resources and are to some point even more important than intangible resources. Out of company total fixed assets estimated at €10,002 billion, €3,273 billion is in aircraft and €63 mln.

A more in other tangible assets. The company has extensive fleet and is currently devoted to improving it in all the business segments, including passenger and freight services.

5. Apply the value chain model to Lufthansa. Based on this model, in which activities does Lufthansa have its main competencies?

In 2005, the biggest company generated Value Added was within the logistics and MRO (Maintenance, Repairment and Overhaul) business segments. Also, it services attributed a considerable share to the total company generated and added income.

6. Does Lufthansa have a sustainable competitive advantage in the global airline industry?

Lufthansa currently does not have a very sustainable competitive position within the global airline industry, but the current strategy plan of the company is very competitive and wise and accounts for all the company strengths within each business segment the company plays in, and within each region where the company exists and needs to strengthen the position, or whether the company is planning to enter. The strategy included Long Haul growth which shall enable to carry more passengers and develop partnerships with more airlines, improve the quality which shall lead to overall perfection of the company perception among passengers of all types, employ economies of scale from multi-hubbing, and achieve unit cost advantage from economies of scale after SWISS merger.

7. What is Lufthansa's business-level strategy? Is the strategy appropriate to offset the forces in the industry? Do you recommend any changes?

The current goal of the group is to become the largest group in Europe offering global wide services. In the short-term, the company management is devoted to growing the profitability of the passenger segment of the business through growing passenger flows through such hubs as Munich and Frankfurt, while decreasing the servicing costs, and strengthening passenger flights in Chine and India, big growing markets. Revenue and costs synergies from SWISS merger are expected to be experienced the most in 2006-2007 with further improvement of overall company performance.