Lufthansa: Going Global, But How to Manage Complexity

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Lufthansa: going Global, but How to Manage Complexity
Patrice Williams
Professor Smith
Business Administration Capstone-Bus 499
June 13, 2010

“The type of international strategy that Lufthansa has chosen is to form an alliance. Since 1996 Lufthansa has been organized as a holding whit six business lines dissolving the once integrated corporation. Although, Passage is dominant, with approximately two thirds of the turnover, each division is fully responsible for its own financial results and any interactions with other group companies occur on market price terms. However, as in every decentralized organization, the holding company need to unite its business under one strategy roof avoiding silos and any duplication for functions. These goals might have been the drivers at Lufthansa for a more focused corporate strategy, the sale of Ground Globe and several financial divestments. It became obvious that the massive European and global expansion strategy that Lufthansa had been pursuing since the early 1980s was not economically viable. The fixed costs were too high for a cyclical business. On the other hand, strong reasons supported the belief that the network and economies of scale were leading to a global airline industry, dominated by a handful of key players. However, the deregulation process had not gone far enough to allow for major mergers (in the United States, foreigners can own only 25 percent of an airline; in the EU non-European ownership is limited to 40 percent in most of Asia any acquisition of a major airline might not be illegal, but is practically impossible). But deregulation and the erosion of the IATA cartel went far enough to allow for scores of new competitors. No-frills cost airlines spread from the United States to Europe and then Asia, nurtured by the abundance of used aircraft and leasing opportunities. Lufthansa needed to ensure cash flow, especially after 2001, and it needed to reduce cost. Lufthansa transformed fixed costs into variable costs by outsourcing and rationalized every step in the value chain, especially via electronic processes which is very tricky when it comes to interfacing with the customers” (Hitt, Ireland, Hosskisson, 2009). “From the beginning, Lufthansa’s strategy was to drive the Star Alliance from the revenue side by keeping more passengers in the network. This idea of seamless travel is implemented through code sharing coordinated flight schedules, common lounges, baggage handling, and so forth, leading to a higher utilization of planes and infrastructure lower cost per unit and sometimes also to economies of scale in purchasing and sales. The means this company has used to expand internationally is alongside some second-tier partnerships outside the Star Alliance, Lufthansa created “Lufthansa Regional”, which carries out approximately 50 percent of the company’s German and European flights. Within Lufthansa Regional, Eurowings and CityLine belong to the Lufthansa Group. However, the planes from the other partners are operated via wetleasing, whereby Lufthansa leases the aircraft complete with crew and maintenance contracts. In this case the planes are integrated into Lufthansa’s scheduling and the company carries the risk of the revenue side only. Operating in a high price competitive market, Lufthansa Regional needs a lower cost structure than Lufthansa’s core fleet. The cost savings at Lufthansa Regional comes partly from the slightly lower wages, the smaller planes adjusted to the traffic density, a reduced service level, an operating base in second tier airports, and point to point service so that the time in the air is greater than for network airplanes. On the revenue side, Lufthansa gains through the feeder function to intercontinental flights otherwise passengers might go via other big hubs and the density of the connections. However, as compelling as the business logic for Lufthansa Regional may appear to financial and industry analysis, the...
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