Lufthansa Airlines - Overview of the Company - Case Study Example

Lufthansa Airline’s Case Analysis

Overview of the Company Context

Lufthansa is a German Airline whose origin traces back to 1926 when the Nazi were defeated. By the year 1945, the need for national carrier gave birth to what we call today as Lufthansa. The airline has several subsidiaries that make it the largest in Europe. According to the latest reports, Lufthansa operates flight services to 18 locations across Europe, 197 international destinations and about 78 destinations in Africa. The airline is one of the founding partners of Star Alliance, which is still the largest airline alliance in the world. The Star Airlines include Austrian Airlines, Germanwings, Eurowings, and Swiss International Airlines as its subsidiaries and independent groups. The Airline is headquartered in Cologne, Germany while its operational point for cargos and passenger services is in Frankfurt. The Airline has about 93,000 employees worldwide with reported revenue of about 16 billion Euros.

The airline has a broad base of customers. It targets consist of the first class, business class, and the economy classes. The company flights offer different products based on the need and economic class of the customer. The company operates on the shared vision of achieving global efficiency as well as a superior effort to become domestically responsive.

The strategic alliance is one of the strengths of the transnational strategy adopted to achieve excellent growth and development in the expansion of the airline's products and services to other places. With the efficiency of strategic alliances, the Airline provides low-cost carriers that suits majority of the passengers. Even though Lufthansa is competitive doing well in the Airline business, it faces stiff competition from other airlines. Some of these airlines include British Airways, Thai Airways, Air France, American Airlines, and Cathay Pacific amongst many other airlines across the globe. However, its competitive advantage has been the ability to expand in the different business segments across the world. The success is in the industry depends on quality, innovation, safety, and reliability (Mintzberg 527).

Key Issues and Problems

• Economic Recession

The Airline industry appears to be a lucrative industry, but it is suffering from economic cycles. According to this case, the participants of the Airline industry are not able to make adequate profits that can cover the high costs of operating the business (Mintzberg 526). The industry is highly cyclical with relatively lower returns on the invested capital. However, Lufthansa is one of the lucky participants in this industry to be positioned at its debt rated as investment grade.

Despite the determination and the vision of Lufthansa to remain the leading airline across the globe, the airline faces cyclical risks. Some general economic fluctuations, political shifts, and cultural changes affect the performance, growth, and development of the airline. A good example is the 1998 economic depression that affected the financial activities of the Lufthansa group. The capital markets risk also influence Lufthansa Airline performance in the industry. The airline is businesses if funded by investors who the international trade activities are affected by the exchange rates as well as shifts in the in the interest rates of the foreign capitals markets.

Subsequently, the airline experience fuels price challenges. About 10% of Lufthansa's total expenses are fuel related. The fuel prices keep fluctuating having significant impacts on the operation results of the Airline. Combined with the high cost of insurance cover of flights eat into the airlines revenues thereby reducing its profit margins (Mintzberg 528).

• Threats to existing Airlines

Another significant challenge to the airlines is the high competitive rivalry in the industry. The Lufthansa formation of strategic alliance is one of the biggest threat that came to the age of the other existing Airline in the industry. According to the case, after Lufthansa had formed the Star Strategic Alliance others including the Italian Air followed suit (Mintzberg 532). However, still the operating costs remained high thereby forcing the organizations to run at losses. Lufthansa provides low-cost carriers as well as provide affordable prices to the customers. The raised level of competition ensures it tough for other airlines to expand their market share.

The industry is also exposed to some infrastructure risks. It has plans for a runway system extension at Frankfurt Airport to ensure the Airlines long-term competitiveness. Even though the project is for the benefit of the airline, but it may be associated with infrastructural limitations on the profitability of the carrier in short-term. Also, there are some bottlenecks in most of the European air traffic control systems that may cause flight delays (Mintzberg 533).

• Industry Trends

The airline industry trends consist of the formation of strategic alliances which is viewed as a way to deal with the stiff competition and costs reduction. According to the case study, the other Airlines were keen to follow suit of Lufthansa’s strategy of creating a strategic alliance. It is seen as a good way to expand in the other parts of the globe in an economically sustainable way. Lufthansa in its attempt endeavored to expand its lines businesses through the creation of the world’s largest air alliance. However, management of alliances are quite complex and has seen some of the Airlines that followed suit blindly into huge losses.

The use of technological support and quality insurance is another vital development in this industry. The expectations of the global customers are quite high, and commitment towards service improvement is key. Operations in this industry require low-cost frameworks that ensure the company standards matches the customer expectations. Despite the soundness of the business logic applied by Lufthansa, the different business models applied by the airline leads to tension in its operations. The costs of IT and insurance premiums are high while the Airline endeavors to improve profit margins.

Porter’s Five Forces

Essentially, structural analysis of any industry is quite vital for its long-term profitability as well as achievement of its objectives. To analyze Lufthansa situation, Michael Porter provides a five forces framework that enables managements to understand structures in any industry.

• Threat of new entrants

It determines the ease with which the new entrants finds it to make entry into the industry. In reality, this is pegged on factors such as capital requirement, access to distribution channels, economies of scale, product differentiation and switching costs.

Evaluating the airline industry, it seems technical for any new company to make an entry in this area of business based on the fact that the world economy is also facing recession. On the other hand, product differentiation in the industry makes entry barrier relatively high with several key players including charter airlines, flag carriers and the several low-fare airlines across the globe. Also, capital, labor, fuel and IT-intensive nature of the industry that pose challenges to start-up and survival of businesses and have it survive.

• Bargaining Power of Buyers

The decision of consumers directly impacts business. They significantly have powers either to push down prices and also to bargain for the value of their money. The purchaser's power is dependent on the relative switching costs, the elasticity of demand, brand identity as well as the volume of purchase. The bargaining power of buyers in the airline industry is relatively low. They do not buy the tickets in larger numbers which limit their bargaining power. Ideally, a single purchase of an airline ticket is a small fraction that cannot either push or determine prices in the industry.

• Bargaining power of suppliers

The main suppliers in the airline industry include the fuel suppliers such as Shell, aircraft manufacturers such Boeing, technical support and IT service providers. Even though the suppliers are many in the industry, but their bargaining power remains relatively high. Their concentration in the industry makes it difficult for the Airlines to leverage or negotiate for lower services (Mintzberg531). Nevertheless, the fuel suppliers possess excellent bargaining power since they can increase their fuel prices and costs without regarding airlines as key customers.

• Threats of substitutes

Despite being a unique industry, the airline companies are threatened by several substitutes. In fact, the replacement threat is quite jeopardized in Europe. Most European countries in which Lufthansa operates has established railway systems with high-speed trains that are a competitive substitute to the airline services. The trains are almost as faster as the domestic flights and also convenient to most of the consumers (Mintzberg532). Their prices are also low making them an alternative means to the flights. Besides, the airlines can be substituted by the vehicles. Most travelers use their personal cars due flexibility and advantage of costs. However, airlines lack real alternative regarding the oversea destination.

• Competitive rivalry

There is intense competition in the aviation industry with moderate market growth as every airline stiffly competes to take away the largest market share. The barriers to exit the air travel industry remain very high. The process of disposing of the planes is complicated, and those that are grounded do not earn any return to the airlines. Reinforced by law, it is challenging to dissolve the companies even under bankruptcy and as such they can remain major competitors for quite long.

Alternative Cause of Action

• The Four Questions Organizational Design

To deal with the divergent challenges in the organization, Lufthansa needs to adopt the Four Questions Organizational Design to enable the company to gain a competitive advantage in the airline industry. The Airline needs to concentrate on the key parts of the organization that involves its management, product lines, and key strategies. Next, it should consider the primary coordinating mechanism within its organizational structures. Considers the decentralization of leadership to be implemented and restructure the vision and objectives of the organization. This may help the Airline expand further not only in Europe but across the globe.

• Diversification of Markets

The company needed to create different businesses to compete with the various products being brought forward by other carriers to compete the company. Product diversification and differentiation should be the primary corporate level strategy applied to encounter the other upcoming airlines that keep shifting from their original business models to imitate the products of Lufthansa group. The approach can generate revenues and enable the airline to grow in different business segments.

• Innovative and Strategic Leadership

Strategic leadership is one of the most pivotal tools used to transform organizations. It is the ability to envision, anticipate, and maintain flexibility and creation of strategic changes in the organization. Application of this tool ensures the top leadership or management formulates effective strategies to turnaround the organization at a point in need.

• Corporate restructuring

The cost pressure in the airline industry is one undisputed factor that affects the performance of airlines. The company needs to restructure its process and integrate its strategic alliance to save further costs. It is essential for the organization to reduce the overall unit costs to enable it to enhance its competitive advantage in the airline industry. The Airline has an excellent opportunity to cut some of its costs through synergy effects achievable by efficiency improvements in its programs.

Table 1: Action Plan

Proposed Action

Milestone Tasks

Responsible person

Partners

Target Date

Success Indicator

Quality Customer Service

Improvements in customer satisfaction levels

Customer Service Officer

Quality and Assurance Department

2017

Excellent feedbacks from the clients

New product innovation

Launch of new product line

Innovations Department

Product Management Department

2017

Promotion of the new product to the customers

Change management

Strategic leadership

Top management

Chief Executive Officer

2016

Top leadership filled with visionary and talented leaders

Work Cited

Mintzberg, Henry. The strategy process: concepts, contexts, cases. Upper Saddle River: Pearson Education, 2003. Print.