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Contents
INDUSTRY OVERVIEW ............................................................................................................................. 2
.......................................................................................................... 3 SWOT ANALYSIS ...................................................................................................................................... 4 EGSOP ANALYSIS ..................................................................................................................................... 4 ECONOMIC SEGMENT ......................................................................................................................... 4 ORGANISATION ................................................................................................................................... 5 POLITICAL/LEGAL SEGMENT ............................................................................................................... 5 PORTERS FIVE FORCES ............................................................................................................................ 6 VALUE CHAIN ANALYSIS .......................................................................................................................... 7 FINANCIAL ANALYSIS ............................................................................................................................. 10 OBSERVATIONS ..................................................................................................................................... 11
..................................................................................................... 12 COMPANY PROFILE ............................................................................................................................... 12 BUSINESS AND INVESTMENTS .............................................................................................................. 12 STRATEGY ANALYSIS ............................................................................................................................. 12 SWOT ANALYSIS .................................................................................................................................... 13 VALUE CHAIN ANALYSIS ........................................................................................................................ 15 FINANCIAL ANALYSIS ............................................................................................................................. 16 COMPETITORS ANALYSIS ...................................................................................................................... 16 OBSERVATIONS ..................................................................................................................................... 17
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways INDUSTRY OVERVIEW
Although my fascination for the aviation industry dates back to nine years ago, my awe and appreciation for what it has achieved has been there since before I can remember. My main aim, once I decided to pursue engineering, was to become an Aeronautical Engineer with specialisation in aircraft modelling. However, lack of technology in my country, forced me to change fields. Most of the researches, projects and reports, during my Postgraduate studies, have been based on various airlines. I hope to, one day, reach the upper tier of a successful airline company and stamp my mark on its policies, thereby getting world wide recognition for my contribution to this field. History of aviation dates back to two thousand years from the earliest attempts in kits and gliders. The earliest known record of kite flying is from around 200 BC China, when a general flew a kite over enemy territory to calculate the length of tunnel required to enter the region. Leonardo Da Vincis (15th century) dream of flight found expression in several designs, but he did not attempt to demonstrate his ideas by actually constructing them. Experiments with gliders provided the groundwork for heavier-than-air craft, possible due to theories such as fluid mechanics and Newtons Laws of motion. Since the birth of flight in 1903, air travel has emerged as a crucial means of transportation for people and products. In 1914 passengers paid $5.00 to take Americas first commercial plane flight, an eighteen-mile run of the St. Petersburg-Tamp Airboat Line. The industry grew, slowly and steadily, due to post master general granting route authority to airlines based on their bids to improve airmail service, in 1926. Over the years, government agencies, airline industry officials, and survey research firms have amassed data that represent the collective experience of the traveling pubic and the airline industry. Airlines and airports face challenging, dynamic market environments that in the short term are extremely sensitive to the world economic and political situation. Long-term growth of around 4.5 per cent per annum in air traffic has been forecast (Airports Council International, 2003), but events such as September 11, the recent SARS outbreak and poor economic conditions have seen an overall stagnation and reduction of traffic during the period 2001 to 2003 although some market sectors have performed better. Historically airlines have made very low margins, 8 per cent on average. The pressure from competition, deregulated market forces and, in certain regions the challenge from low cost airlines, has presented management with the problem of how to improve airline economic performance. Being one of the most competitive and cut throat industry, I have added some statistics for success factors and driving forces in the appendix.
Deutsche Lufthansa AG is a global aviation group. The Group operates in five business segments, each dedicated to high quality standards. The five units the passenger airline business, logistics, MRO, catering and IT services all play a leading role in the industry in which they operate. The Lufthansa Group includes a total of more than 400 subsidiaries and associated companies. The flag carrier of Germany (German pronunciation: [dt lfthanza]) and the largest airline in Europe in terms of overall passengers carried and fleet size, comes under Deutsche Lufthansa AG. The German government had a 35.68% stake in Lufthansa until 1997, but the company is now owned, majorly, by private investors who have a stake of 88.52% in the company. (as of March 2007). They can trace their history back to 1926 when Deutsche Luft Hansa was formed in Berlin, an airline that served as flag carrier of the country until 1945 when all services were suspended following the defeat of Germany in World War II. The new Lufthansa was formed on January 6, 1953, a company for air traffic demand, and was renamed Deutsche Lufthansa and re-launched as an airline on August 6, 1954. It is the world's fourth-largest airline in terms of overall passengers carried, operating services to 18 domestic destinations and 203 international destinations in 78 countries across Africa, Americas, Asia and Europe. Together with its partners, Lufthansa services around 410 destinations. With over 710 aircraft it has the second-largest passenger airline fleet in the world when combined with its subsidiaries. Lufthansa's registered office and corporate headquarters is in Deutz, Cologne, Germany, with its main operations base (Lufthansa Aviation Centre (LAC) and primary traffic hub at Frankfurt Airport in Frankfurt. The majority of Lufthansa's pilots, ground staff, and flight attendants are based in Frankfurt. It is a founding member of Star Alliance, the world's largest airline alliance, formed in 1997. The Lufthansa Group employs 117,000 people worldwide of 146 nationalities. In 2010, over 90 million passengers flew with Lufthansa (excluding Germanwings and Brussels Airlines). On May 18, 1997, Lufthansa, Air Canada, Scandinavian Airlines, Thai Airways and United Airlines formed the Star Alliance, the world's first multilateral airline alliance. In 2000, Air One became a partner airline of Lufthansa and nearly all Air One flights were code-shared with Lufthansa until the purchase of Air One by Alitalia. In 1971, Lawrence Fellows of The New York Times described the then-new headquarters building that Lufthansa occupied in Cologne as "gleaming". In 1986, terrorists bombed the headquarters of Lufthansa. No people received injuries as a result of the bombing. By the end of 2007 Lufthansa planned to move 800 employees, including the company's finance department, to the new building, in Deutz, Cologne. In 2011, Lufthansa was the worlds first airline to test the use of biofuel in regular operations. As part of the burnFAIR research project, Lufthansa operated an Airbus between Hamburg and Frankfurt four times daily, with one of its engines running 50% on biofuel. The main objective of this long-term trial was to gather experience and to collect data. The trails were a success, and now further exploration is begin done to build engines which can run on 100% of biofuel.
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways SWOT ANALYSIS
Deutsche Lufthansa (or the group or Lufthansa) is an aviation group primarily engaged in passenger transportation. The group's other activities include logistics, maintenance and repair operations, catering and IT services. The company has established presence across several diverse business segments which not only facilitate diverse revenue streams but these segments complement each other. However, intense competition may pressurize the operating margins of the group. Strengths - Presence across integrated segments - Diversified geographical spread mitigates business risks - Strong alliances Opportunities - Positive trends in the global market for aircraft maintenance, repair and overhaul - Global tourism to rebound strongly in 2010 - Global air freight industry on road to recovery Weaknesses - Labour dispute - Declining cash from operations
Threats - Intense competition and price discounting - Price volatility in petroleum markets - New eco tax could strain Lufthansas passenger traffic
EGSOP ANALYSIS
ECONOMIC SEGMENT The European Union has the largest economy in the world. The EU economy is expected to grow further over the next decade as more countries join the union - especially considering that the new States are usually poorer than the EU average, and hence the expected fast GDP growth will help achieve the dynamic of the united Europe. It is estimated that the Eurozone will grow around 2.6 per cent this year (2009), on a par with other industrialized nations such as the United States at 2.6% (Q2 2009) and 1.6 (Q3 2009). GDP: $12.82 trillion. (2010) GDP/capita: $18,056. Annual growth of per capita GDP: 2.8% (2006). Income of top 10%: 27.5%. Unemployment: 8.8% (2011). CORPORATE GOVERNANCE AT LUFTHANSA Corporate Governance at Lufthansa is reflected by responsible corporate leadership and control which target sustainable value creation in accordance with high International standards. Corporate Governance is of vital importance for guaranteeing enhanced transparency towards shareholders and helps developing continuous trust with our management. The German Companies Act (Aktiengesetz) and the DCGK are an essential legal base. STRATEGY Foremost at Lufthansa are such attributes as quality and innovation, safety and reliability. They are well positioned strategically, operationally and financially to negotiate ups-and-downs in the economy. Their corporate strategy is geared to sustainable value creation and is expressed
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways PORTERS FIVE FORCES
The Bargaining Power of Buyers: Low pressure o o o Business or regular travellers have little bargaining power with airlines. One traveller does not hurt the airline. Only a few airlines to choose from and even less at an individual airport. Threat of New Entrants: Low pressure o o o o Government regulations and licensing from the Federal Aviation Association. Brand loyalty and identification of major airlines. Contracts between airlines and airports are hard to develop. Substantial costs associated with forming as airline-airplane purchases, labour costs, fuel costs, maintenance.
Rivalry among Established Companies: High Pressure o o o Most competitors, competing directly, emphasize a low-cost strategy Many consumer look only to cost as a determining factor in a purchase creating an intense environment. Switching costs are generally low, even though companies have tried to increase switching costs with the use of frequent flyer programs.
Substitute Products: Low pressure o o o No other product competes directly with airlines in terms of cost and speed of travel. Charter planes are much more expensive than commercial airlines. Train service is generally much more expensive and time consuming.
Bargaining Power of Suppliers: High pressure o o o o All suppliers have tremendous bargaining power with the airline industry. There are few fuel providers and no reliable alternative to fuel. Pilots are in high demand. Airports are in limited supply.
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways VALUE CHAIN ANALYSIS Resource Analysis:
Tangible Resources Financial Resources Strengths The amount of assets easily covers debt Weaknesses Implications Controlling costs have It is important to have a improved, but not large amount of current enough assets, in case they choose to buy out another airline Over dependence on the alliance will ruin them
Alliances with other Dependence on sharing airlines through the Star resources with outside Alliance firms like United Airlines Size of their fleet of airplanes
High costs of maintaining Find the optimal amount of such a large fleet planes to keep in use given demand at the time. This will keep down maintenance costs Reservation systems are critical in keeping flights booked
Technological Resources
IT systems must be Leading the industry in IT continually updated to systems stay ahead of competition
Strengths
Weaknesses
Implications
Strong and committed Controlling the internal The Company must fix the work force environment between internal culture between pilots pilots and grounds and grounds crew, to sustain crew growth
Innovation Resources Strong ability to redesign Not spending enough to Due to rising oil prices, they planes (larger seats, reduce fuel must spend more to learn how contemporary consumption to decrease fuel consumption furnishings) to save money Reputational Resources Known for quality, Best first class in the Their strengths outweigh innovation, industry; Reputation of their weakness of high prices. dependability, being pricey Their target market of competence and safety business passengers, require a 1st class experience
Star Alliance provides them Star Alliance needs to sign Sky Team will become the with the largest amount of China East, or Lufthansa largest alliance if Star code sharing from other purchase them, to maintain Alliance is not able to sign airlines market share in the Chinese China East market Motivation Constant changing is hurting HR needs to continue to keep the morale of employees the employees satisfied with all of the change occurring Expensive to maintain and IT is critical to keep costs upgrade down, and increase revenues
Increasing brand awareness Not spending enough on Build brand image in through creative ads marketing efforts in South developing markets in order America to keep leading market share Ability to adapt to change through experiences Does not manufacture They will not be able to sustain profits without fixing the internal culture It would be out of the norm Saves money, and allows for an airline to them to focus on being manufacture their own service oriented planes May not have the ability to R&D is necessary to stay know what future ahead of the competition and customers demand gain market share Managing their internal culture
Management Manufacturing
R&D
Design
Studying plane layouts to Tastes and preferences vary Requires lots of efforts to maximize space by region customize for each region
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways Primary Activities
Resource or Capability In-Bound Logistics Operations Is it Valuable? Is it Rare? Is it Costly Is it Competitive Performance to Imitate? substitutable? Consequence Implications Yes, Logistics Other firms Yes Yes Competitive Average Business have logistics Parity Returns Segment exists programs Yes, is known Yes, very Yes No Sustainable Above Average for its cost hard to Competitive efficiencies in replicate Advantage operations Yes, logistics No Yes Yes Competitive Average Business Parity Segment exists No all firms have can be Yes Competitive Below Average marketing imitated Disadvantag and sales w/o high e costs Yes Yes Yes, firms No Sustainable Above Average will spend Competitive top dollar Advantage to imitate No, not a value No No Yes Competitive Below Average driver Disadvantage Yes, drives Yes, Yes No Sustainable Above Average profits technological Competitive innovations Advantage are rare No, not a value No, all firms No Yes Competitive Below Average driver have H/R Disadvantage teams Yes, known for Yes, Yes No Sustainable Above Average infrastructure structure is Competitive rare Advantage
Benchmark Case Studies 2-1; Lufthansa and Qantas Airways FINANCIAL ANALYSIS
Sales and market share: - It has been increasing while market share is up. Star Alliance has the leading market share when compared to Lufthansa's major competitors. Acquiring and retaining new customers: - It is the largest airline in Europe in terms of overall passengers carried. In 2007, 83.1 million passengers flew with Lufthansa including all subsidiaries. Gross profit margins: - Profit margins have been increasing. Operating Income and Net Income Available to Common Shareholders: - Operating Income and Net Income have both increased in recent years. ROIC and Shareholder Value (ROIC vs. WACC): - ROIC=7.4% while WACC=8.6; therefore, Lufthansa is not creating sufficient value for its shareholders. Overall financial strength: - Financially stable, but could be doing better in terms of shareholder value. Continuous improvement effectiveness: - Improvements are evident in increasing sales and fall through profit. Stock price appreciation and dividends: - EPS=3.6 up 106%. Board will be proposing a 55 cent higher dividend of 1.25 euros per share at the annual general meeting. Leadership roles: - Technology, quality, innovation, excellent leadership. Management restructuring successful. Organizational development: - Stable; Key role in Star Alliance. Separation of Independent subsidiaries. Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy
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OBSERVATIONS
Lufthansa has a good track record for posting profits, even in 2001, after 9/11, the airline suffered a significant loss in profits but still managed to stay 'in the black'. While many other airlines announced layoffs (typically 20% of their workforce), Lufthansa retained its current workforce. The recommendation here is that Lufthansa maintain its current approach and continue to search for new ways to control costs, form alliances, and maintain simplified customer service.
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COMPANY PROFILE
Qantas with its success story and reputation amongst many other things is the worlds second oldest airline. The airline was founded in 1920, Queensland, Australia. Qantas lead services from Australia to North America and Europe, thereby standing as one of the worlds long distance carriers. Qantas presently employs about 32,500 people, while offering services across a network covering 182 destinations in 44 countries (including code share partners) in Australia, Asia, the Pacific, America, Europe, the Middle East, and Africa.
STRATEGY ANALYSIS
Qantas has formed and launched various strategies time to time to be a prominent player in the industry. It maintains the corporate ethics and follows the concept of fair competition in the industry. A. 5 Year plan B. Dual-brand Strategy/Two-brand strategy C. Excessive surcharge Criticism D. Co-Branding E. Expanding fleet and shifting to fuel efficient planes
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways SWOT ANALYSIS
Strength - Strong Backing of Australian Government - Monopoly in Australian Market. - One of the top and largest airlines operating in Australia. - Has been one of the oldest airline operators in the world. - It has nearly 20 international as well as domestic destinations. - Good brand building exercises through advertising and sponsorship. Opportunity - Good economic condition in Australia - More international destinations, especially in Asia. - Tie-ups with international airlines for a combined service offering to customers. - Leases have been announced for new aircraft fleet to cater more passengers, employment opportunities, services efficiencies and extending flying business. - To promote easy access to businessmen, around the world, a club has been organized for uninterrupted and luxurious travel with priority check in and certain business related and personal facilities. Subscription can be made which range from one to several years (George, 1982). Threat - Increasing fuel prices affects operations. - Rising Labor Costs. - Increasing Competition in Australia Market from new start ups and SE airlines. Weakness - Too Much Concentration around Australasia. - Issues among employees caused an issue. - Weak performance in other geographic segments (Exhibit 4)
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways PORTERS FIVE FORCES
Threat of New Entrants: Low pressure o o o Virgin Australia Impulse Airlines Low Cost International Airlines
Bargaining Power of Suppliers: High Pressure o o o o o Boeing Fuel Companies IT Companies Airport Authorities Transportation
Competitive Rivalry: High Pressure o Singapore Airlines and their new budget airline; Scoot Air Thai Airways REX Star Alliance
Bargaining Power of Customers: High Pressure o o o o Air Travellers Travel Agencies Business Travellers Leisure Travellers
o o o
Threat of Substitutes: High Pressure o Railway Services o Bus Services o Shipping Services o Courier Services or Air Mail o Personal Transportation
(Kotler et al 2008)
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways VALUE CHAIN ANALYSIS
According to Kotler et al 2008, Qantas conducts its operations by dividing its total operations in two categories: A. Primary Activities: This includes services like Inbound and Outbound logistics, Operations, Marketing and Sales, Services, Route Selection, Passenger Service System and Yield Management. Following are the primary activities in brief: I. II. III. IV. V. VI. Inbound & Outbound Logistics Operations Marketing & Sales Services Yield Management Route Selection & Passenger Service Systems B. Supporting Activities: This includes Infrastructure of the firm, Human Resource management, Development of Technology, Procurement. Following are the supporting activities: I. II. III. IV. Infrastructure of the firm Human Resource Management Development of Technology Procurement
PEST ANALYSIS
The PEST analysis provides the viable picture of the industry or market in which the organization functions. Following are the factors affecting the functioning of Qantas Airlines: Political: The Australian aviation industry de-regulated in the year 1990 which gave birth to the competition among the airline companies. The liberal policy by the Australian Government has also welcomed the new entrants in the industry. The Australian Government also helped Qantas to merge with British Airways which in turn has reduced the wastage of resources, utilization and expansion of the network and earning revenues in European, Asia-Pacific and Transatlantic market (Narasimhan and Talluri, 2009). Economic: Economic factors relate to the earning as well as spending power of customers in any country, Australia was also affected by the Global Financial Crisis as the prices of fuel rose high and the spending power of the customers fell down. According to International Air Transportation Association the traffic of passengers in the business class and the first class reduced at 13.3%. The business class passengers fell by 24 per cent in Asia-Pacific operations and 22.2 per cent in the European operations in the global aviation industry (Graham 2009). Socio Cultural: The Australian society is very developed and the standard of living is high due to higher educational standards, developed technologies and industrialization. The aviation industry has played a distinct role in the life of Australians in several forms. The spending power and the
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FINANCIAL ANALYSIS
Following are the key findings of financial analysis of Qantas for the years 2007 to 2010. The revenues and net income has decreased in 2009 and 2010 (Exhibit 1 & 3). Prepaid and operating expenses have increased in 2009 and 2010 (Exhibit 1 & 2). Earnings from continuing operations have fallen down in 2009 and 2010 (Exhibit 1). Also short term, long term investments and current assets have reduced in 2009 and 2010 (Exhibit 2). Long term debt and interest have soared high in 2009 and 2010 (Exhibit 2 & 3). Although contradictory but goodwill has increased (Exhibit 2). In Summary, we can conclude that as compared to 2007 and 2008, the revenues and income is weak in 2009 and 2010. This may be true because of changing economic conditions which indirectly can be responsible for plummeted traffic in airline industry. It also conveys that interest and expenses and long term debt have risen which indicates that debt or loan repaid is low in 2009 and 2010. While earnings from operations, short term and long term investments and current assets have fallen down. This indicates the shortage of free cash flow with the company to invest in other financial assets. This can be due to pouring of money in buying new fleet, maintenance or operating in routes which are not reasonably profitable. But there is a scope of increasing their earnings as Qantas has established much more in these 2 years (2009 and 2010) which may be the reason of increase in their intangible assets like goodwill.
COMPETITORS ANALYSIS
Qantas has lot of competition both internationally and domestically. Domestically Qantas airlines main competitors are Virgin and Tiger airlines. Internationally, the competition has been reduced by the government regulations that control where and when an airline can fly. Virgin and British airlines are among the major competitors. The majority of the other airlines that fly into and out of Australia (Singapore, US Carriers, China etc.) they have routes and schedules that Qantas cannot possess for example the route from Sydney to LAX. Some of these regulations are brought into action by the Australian Government to protect Qantas (a partially government owned airline). The main danger for Qantas and Virgin blue is Singapore airlines. Singapore airline is very keen to fly on the Pacific route between Australia and the US west coast and has asked the Singapore government to persuade Australian government on the Pacific open skies agreement. 16 Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways Appendix INDUSTRY OVERVIEW
Key Industry Success Factors Success Factor 1 Success Factor 2 Success Factor 3 Success Factor 4 The most significant key Attracting Managing its fleet Managing its Managing its success factors for competitive customers people finances success in the industry Why is this success factor so Service industry Important to Employee morale Cost management important based on utilize airplanes and productivity programs are key customers capacity; seats is important as industry should be filled competes over cost Driving Forces, causing the industry's competitive structure and business environment: Driving Force #3 Driving Force #4 Changes in societal Regulatory influence and concerns governmental policy changes Implication of DF #1 Implication of DF #2 Implication of DF #3 Implication of DF #4 Cost leaders can gain Customer service is Post 9/11-Consumers Post 9/11-New security market share significant to consumers anxieties with flying regulations KEY FACTS Head Office Deutsche Lufthansa AG Von-Gablenz-Str. 2 6 Koln 50679 DEU Phone 49 69 696 28008 Fax 49 69 696 90990 Web Address http://www.lufthansa.com Revenue / turnover 22,283.0 (EUR Million) Financial Year End December Employees 117,521 Frankfurt Ticker LHA Rivals: Air France, British Airways, SAS Group, and Ryanair Mission statement We are Europes Airline Powerhouse connecting Europe with the world and the world via Europe with our global services. The customer is the centre of our attention: we provide reliable services for passengers and air-cargo. Seamless cooperation with our partners strengthens us in a volatile environment. As the worlds leading aviation group, we are the global leader in selected aviation services. Our highly motivated and dedicated team stands for superlative quality. Our corporate culture and its value concepts are defined by entrepreneurship and collaboration, in an atmosphere of transparency, trust and diversity. Our target is to grow profitably and maintain a healthy financial structure, to enable investment in the development of our business, fleet, products and people. Driving Force #1 Changes in cost efficiency Driving Force #2 Service innovations
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WEAKNESSES
Labour dispute Lufthansa has been involved in several conflicts over wage and labour issues and the company has been suffering low bargaining power due to existence of collective bargaining agreements and labour unions. In addition, these unions are fragmented for different staff profiles adding to increased demands from each union on regular basis. In February 2010, Lufthansa suffered disruption of operations due to pilot four-day strike. The pilots union, Vereinigung Cockpit, had been demanding for a one-year salary agreement with a 6.4% pay increase, in addition to guarantees against outsourcing of jobs to lower-paid subsidiaries. It is estimated that the strike resulted in $34 million per day loss to the group. Such labour issues disrupt operations affecting the reputation of Lufthansa and the company has to incur higher expenses to meet the expectations and demands of the workforce. Declining cash from operations Lufthansa has recorded decline in its cash from operations since FY2007. The group's cash from operations declined at a compound annual rate of change (CARC) of 17% during 2007-09.The cash from operations declined from E2, 862 million ($3,991.4 million) in FY2007 to E1, 991 million ($2,776.7 million) in FY2009. In Financial Year 2009, the net cash provided by operating activities declined by 19.5% compared to FY2008. This decline was largely due to lower profit from operating activities and a negative change in working capital compared with Financial
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OPPORTUNITIES
Positive trends in the global market for aircraft maintenance repair and overhaul Dramatic growth and change are forecasted for the worldwide aircraft maintenance repair and overhaul (MRO) market. The MRO market looks strong and is expected to grow in the coming years. As the market is poise to recover, strong demand will re-emerge to prop up growth. Resurgence of the aviation industry, reduced airfares, greater connectivity, increase in low cost airlines, technological innovations, and expansion in the overall capacity of air seat miles, will drive growth in the medium to long-term. Asian markets will emerge as the hub of activity. Expanding air traffic has already led to the establishment of numerous, low-cost MRO facilities in high growth potential Asian markets including Singapore, China, India and Malaysia. Dramatic proliferation in air traffic and increase in number of passengers has been and will continue to remain an important factor in attracting foreign investment and paving the way for future development. The growth in the domestic as well as international fleet movement has led to a heavy appreciation in the stocks of the aviation industry. This in turn leads to the requirement for an effective maintenance and overhaul system and service structure for aircrafts and their engines. Driven by the rising need for maintenance, especially among aging aircraft fleets, world market for Aircraft MRO is forecast to reach $55.2 billion by 2015. With over 30 subsidiaries and affiliated companies worldwide, Lufthansa Technik is one of the worlds leading independent providers of aircraft-related technical services. Therefore, the growing global MRO market will boost demand for the group's services and will enable it to further increase revenues from this segment. Global tourism to rebound strongly in 2010 Emerging countries are leading a return in tourist arrivals following more than a year of decline due to the global economic downturn. International tourist arrivals are estimated to have increased by 7% in the first two months of 2010 to 119 million, according to the April interim update of the United Nations World Tourism Organization (UNWTO). The results of recent months suggest that recovery is underway, and even somewhat earlier and at a stronger pace than initially expected. UNWTO predicts growth of between 3% and 4% in 2010. According to World Travel & Tourism Council (WTTC), the travel and tourism economy is expected to grow by 4.4% per annum in real terms between 2010 and 2020, supporting over 300 million jobs by 2020, which amounts to 9.2% of total employment and 9.6% of global GDP. By region, Asia is expected to continue showing the strongest rebound while Europe and the Americas are likely to recover at a more moderate pace. Africa achieved a positive growth in international tourist arrivals of 3%, to 46 million (5% of world total) in 2009. The region is forecasted to continue its positive trend following the 2010 FIFA World Cup. With the anticipated growth, business and consumer confidence has picked up. This growth in world tourism industry will enhance airline business. Lufthansa is well positioned to benefit from increasing global tourism industry. This in turn would help the company to generate additional revenues. Global air freight industry on road to recovery Air freight, a leading indicator of the health of world trade, has shown signs of recovery. According to International Air Transport Association (IATA), recovery in the air freight industry
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THREATS
Intense competition and price discounting The airline industry is highly competitive. The principal competitive factors in the airline industry include fares, customer service, routes served, flight schedules, types of aircraft, safety record and reputation, code-sharing relationships, capacity, in-flight entertainment systems and frequent flyer programs. Airline profits are sensitive to even slight changes in average fare levels and passenger demand. Lufthansas main competitors include Air France-KLM and British Airways from Europe, US carriers such as American Airlines, Delta Airlines and Northwest Airlines, and also companies from the Middle East and Asia. In European traffic the group is facing increasing competition from no-frills carriers such as easy Jet and Air Berlin. Price competition between airlines occurs through price discounting, fare matching, increased capacity, targeted sale promotions and frequent flyer travel initiatives. A relatively small change in pricing or in passenger traffic could have a disproportionate effect on an airline's operating and financial results. Therefore, intense competition may pressurize the operating margins of the group. Price volatility in petroleum markets The demand for petroleum and related products has historically been cyclical and sensitive to the availability and prices of oil and related feedstock. Historically, international prices of crude oil and refined products have fluctuated widely due to many factors that are beyond the control of companies like Lufthansa. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues and supply and demand, which can neither be controlled nor accurately predicted. According to IATA, jet fuel price as of August 2010 was $92.4 per barrel, an increase of 12.6% over August 2009 jet fuel price. It is forecasted that the average jet fuel price in 2010 would be $88.3 per barrel. In the Financial Year 2009, fuel costs accounted for 14.7% of Lufthansas operating expenses. Significant changes in fuel prices can therefore have a considerable effect on the groups result. The volatility of global and regional oil prices exposes the group to extreme fluctuations in earnings, which is likely to have an adverse consequence on its growth initiatives. Any inability to obtain jet fuel at competitive prices would materially have an impact on Lufthansas results of operation and financial condition.
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COMPETITOR ANALYSIS
High-Level Competitor Analysis Top 3 Best Positioned Competitors Area SAS Group Air France British Airways Corporate Office Stockholm, Sweden Paris, France England Location R & D Centre Locations Europe-Scandinavia Europe UK Targeted Markets Nordic Region and US Europe, US Europe and US Market Share 22.5% as part of Star 19.4%, as part of a 11% Alliance partnership Total Net Revenue 5,586 23,073 9,359 Net Revenue Growth 4.20% 7.60% 4.80% Net Income 68 817 189 Days of Inventory N/A 8 5 ROIC % 1.30% 3.10% 1.20% Debt to Equity % 184.40% 104.20% 219.30% Targeted Customers low-end, price differentiated consumerDifferentiated conscious consumer looking for innovation consumer-looking or innovation Distribution Channels passenger and cargo passenger and cargo passenger and cargo Key Take-Away: Based on the financials, Air France is in a good position to steal away market share. SAS Group seems to be struggling in terms of creating value for shareholders. Opportunities: 1. Look to expanding into Asia where the competition is not yet established. 29 Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy
Wolfgang Mayrhuber, Chairman of the Executive Board and CEO, Deutsche Lufthansa AG, details his thoughts on building a sustainable industry. How do you see 2010 shaping up? We have seen two positive signs. Cargo has come back quickly and strongly, which is an indicator of an upturn in the economy. And we are also seeing improvements in several markets. So I am cautiously optimistic. But we have also witnessed the impact on travelers and the supply chain during the closure of European airspace due to the eruption of the volcano in Iceland. This and the financial crisis has reinforced that there is a fundamental need for mobility, and that communications technology isnt a substitute for travel. In fact, the technology at our disposal nowfrom smartphones to video conferencingactually stimulates travel. It is an enhancer. Lufthansa has interests in a number of other airlines. How do you manage the overall strategy of the group? The basic principles for the group and for every single company are the same. All our decisions are based on what is right for the customer. What the customer demands is plenty of travel options, an extensive network and a price-worthy reliable service. Consolidation is simply a response to customer needs. Consolidation is also a way to achieve synergies and economies of scale. Its an opportunity to learn from your partners about best practices. Airlines share the same airspace, the same technical and operational requirements, and similar processes. So there is a lot we can standardize across the group. But we also have to balance standardization with sensitivity. Europe is made up of many different countries, each with their own language, culture, and history. We want to reflect that uniqueness in our business relationships. Every company has a home market that needs services tailored to the requirements of the customer. Muhammad Babur Farrukh 7441932 HBS580 - Business Strategy
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Qantas Airways
Mission & Vision Qantas mission is to be a leading provider of air transport and related services in the Asiapacific region (Firth 2008) Our strategy is to create two airlines Qantas and Jetstar that are the best in their class, giving us the flexibility to ride economic cycles, leverage different sectors of the market, and maintain a robust operating cash flow. - Alan Joyce (CEO). (Qantas 2010) Qantass mission is to create the worlds best premium and low fares airlines in Qantas and Jetstar (Qantas 2010). For the achievement of its stated vision Qantas emphasizes most on the following aspects: Customer safety is their first priority Right aircrafts with the right routes Providing excellent customer service Efficiency in the operational activities Two complementary brands
STRATEGY ANALYSIS
Qantas has formed and launched various strategies time to time to be a prominent player in the industry. It maintains the corporate ethics and follows the concept of fair competition in the industry. 5 Year plan Qantas has announced the strategies of its 5 year strategic plan. These changes are expected to strip tens of millions of dollars of operating costs from Qantas. These include Cutting: 1000 jobs from its 36000 workforce (including pilots, engineers and cabin crew). Dual-brand Strategy/Two-brand strategy One of the biggest leap Qantas took was under the nurture of its former CEO Geoff Dixon who led the airline with its most fundamental transformation by shifting the role of Qantas from just being an Australian airline to a leading player in Asia-Pacific region, while launching a low-fare unit that operates short and long haul routes (Flottau 2008). Qantas has a company has successfully taken the advantage of the flexibility of moving services between Qantas and Jetstar in the times of plummeting demand (Pilling 2009). When the traffic at Qantas was down by 20% to 30% and also the airline was facing severe losses, Jetstar proved to be having one of the best years. Also Jetstar can prove to be a great opportunity for Qantas to increase its international market share, as by 2009 Qantas had only 24% and Jetstar just 6% (Pilling 2009). Many environmental and economic issues like H1N1 virus affected the business of Qantas, specially the Japanese services. But although passing through tough times, it can be clearly analyzed how Qantas is taking advantage of its two brand strategy. Qantas had shown a significant era of good financial performance during the times of Dixon, but as Alan Joyce is the frontrunner now critics in the airline industry look upon him for the future results. Excessive surcharge Criticism In industry like airline it is very difficult to satisfy all the stakeholders. To respond with the soaring fuel prices and the economic fluctuations Qantas seems to make some of its customers a bit unhappy. Qantas increased the surcharge from AU$25 to AU$30 for the passengers booking the tickets with credit, debit or charge cards. While other competitors like Air New Zealand Ltd., Tiger Airways Ltd. And Virgin Blue Ltd. are applying only AU$8, AU$10 and AU$12 respectively
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(Kotler et al 2008). Qantas conducts its operations by dividing its total operations in two categories: a) Primary Activities includes services like Inbound and Outbound logistics, Operations, Marketing and Sales, Services, Route Selection, Passenger Service System and Yield Management. Following are the primary activities in brief: Inbound & Outbound Logistics: At Qantas inbound consist of acquisition of fuel, spare parts, catering of flights, reservation of tickets and scheduling of flights. The Outbound logistics involves services in manner of connecting flights, car rentals, hotel accommodations and baggage claims. These activities can be considered as one of the main competitive advantages of Qantas as they have truly realized there mission and vision in providing huge network coverage and facilities like Qantas Holidays.
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways KEY SUCCESS FACTORS OF THE INDUSTRY
For measuring the success of Qantas the following key factors are highlighted: Tough Management: Management which is strong add to the growth and profitability of any organization, the management team at Qantas has faced and maintained stability in its operations from time to time in the form of cost cutting, new innovations and friendly work place, which in turn has increased the productivity. Competent Personnel: High qualified staff with good communication skills and appealing personality leaves a good brand image of the company on its customer. Qantas imparts training and coaching to its entire staff regularly so as provide the best customer service in its core and related businesses. No Halts in Flights: Time is money for the customers with busy schedule, so they prefer direct flights and to be competent the airline company who provides non-stop flights to different destinations take the cup. Qantas has achieved success in flying non-stop flight but not to a good extent, so it needs to improve on this and provide more direct flights which will help to attract customers, increase the credibility and the image. Route Classification: Route management for an airline company involves the selection of routes to fly and its frequency. The company which is able to serve its customers by flying on the popular routes gets dual benefit as the utilization of aircraft increases as well as the loyalty of the customers. Qantas has promoted its flights to popular destinations with special offers time to time and has served its loyal customers. Offer Promotions and On-Board Services: Promotions about different offers and special packages is very essential to retain the loyal customers as the switching rate is high and cost is low and the in flight services to the customers also counts to the success of the brand. Qantas has catered the finest level of services to its customer and met the industry standards and has promoted the brand as Spirit of Australia. Proficient Execution of Cost: The organization which efficiently maintains the cost of operations by cutting down unprofitable activities leads to faster growth. In airline industry this includes maintaining the cost of tickets, cost cutting in the operations, procurement of aviation fuel and others. Qantas has always prioritized on cost-cutting through Jet star and served its target audience and profitable segments over the time.
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways FIANACIAL ANAYSIS
Exhibit 1 Income Statement
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Benchmark Case Studies 2-1; Lufthansa and Qantas Airways COMPETITION FROM THE LOWER COST CARRIERS (LCC)
The LCC Virgin Blue came in domestic market in 2000 and successfully grasped Qantas market share.as. Virgin Blue was able to compete with Qantas on grounds of its low cost which was 30 to 40 % less than the Qantas fare. In order to overcome this Qantas came up with a strategy to launch a low cost airline that would run alongside the main Qantas carrier. In 2004, Jetstar came into picture, initially it flew only domestic routes, but starting November 2006 Jetstar International started flying internationally to Asia and Hawaii. (Oxenbridge S. et al 2010) JETSTARS LOW COST MODEL Jetstars low cost model is based on reducing cost through operational efficiencies. These include (in Jetstars domestic operations): Flying point-to point sectors; using secondary airports Providing a single economy class with no frills inflight service and minimal amenities; High utilization of fleet, including 25-minute aircraft turnarounds between flights; Continuous improvement of processes to generate cost-savings; The use of the Internet for booking tickets. Around mid-2006, it had a 14% share of the Australian domestic market (Qantas 2006b; Murphy et al 2007, cited in Oxenbridge et al 2010). In early 2003, Qantas came up with a plan to use 25% casual, part-time and agency workers (Spiess 2005). Between 2001 and 2006, the airline workforce was highly reduced. This action of the airline received a lot of criticism and protest from the unions. (Oxenbridge et al 2010) The launch of Jetstar provided the Qantas Group, with a mean to fight the tough competition from the low cost carriers LCC (Virgin Blue). Qantas reacted to the competition from LCC with an expansionist strategy and it came up with its own LCC i.e. Jetstar. By doing so it was able to control the growing market share of virgin blue. VIRGIN BLUE REDESIGNED THE AIRCRAFTS The slow-moving economic landscape and the rising fuel price are some of the problems faced by the aviation industry right now. To make the things worse Virgin blue announced the launch of new product, Virgin Australia. The aircraft are designed to be more comfortable and spacious in both the economy and the business class, as they are trying to target the corporate traveller. (Knight 2011) It is not easy to harm the Qantas as they have the near monopoly in the airline business with well-established frequent flyer customers who are quite loyal to the airlines and even has more flights. TIGER AIRLINES Tiger airways were founded in 2004. Its major shareholder are Singapore Airlines, it is one of the Asias leading budget airlines. The company is one of the competitors of Qantas. The company has recently added a customer support and feedback portal on its website to help the passengers to submit heir query or complains (Knight 2011). The competition in airline industry is always been tried to be kept fair and healthy. This would be in favor of the passengers and beneficial to the companies as well. Recently the Australian Competition and Consumer Competition (ACCC) approved the British Airways-Qantas services agreement (JSA) on routes between Europe and Australia for another 5 years. Even this joint service is playing in the field with healthy competitions from other airways like Etihad, Emirates and Qatar who have introduced many Australian routes over the past few years (Business Traveller 2010).
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Alan Joyce, CEO and Managing Director of the Qantas Group, says operating a major airline and a low-cost carrier makes life difficult for the competition. The Qantas share price dropped during the first six months of 2012. How has this affected the airlines financial position? The fall was an overreaction. If you look at the breakdown of figures from the Qantas Group, you would see that most of our markets are making money. The domestic marketQantas and Jetstar combinedmade more than $605 million (AUD600 million), for example. It is the international services that are suffering because of the high oil price, the state of the world economy and the appreciation of the Australian dollar. International services are expected to lose more than $452.8 million (AUD450 million) in 2011/12. We are spending about $4.54 billion (AUD4.5 billion) a year on fuel overall and the Australian dollar has appreciated 40% against the US dollar in the past few years. Our financial position is still strong, however. We have a cash balance of $3.02 billion (AUD3 billion) and continue to bring down capital expenditure. We have deferred some new aircraft, which has released $1.11 billion (AUD1.10 billion)far more than we could have raised through equity. So market speculation that we need to raise more cash is simply wrong. Its also important to realize that Qantas is one of the few airlines to have an investment-grade credit rating. Moodys has said that it is comfortable with our rating and Standard & Poors actually rates us slightly higher than Moodys, which is why we have been placed on its watch list. Is the buoyant Australian economy helping Qantas? The Australian economy is strong but its a patchwork economy and certain sectors are doing a lot better than others. Currently, the mining sector is doing very well and this is driving the economy forward. We have seven flights a day to a small mining town and were making good money on the route. But the Australian consumer isnt as confident as you would expect. A survey found that Australians are more worried about the future than Spaniards. I suppose this reflects the fact that we all live in a global environment. And, of course, a strong economy is attracting more domestic competitors, which means our domestic yields are under pressure. In addition, as I mentioned previously, the appreciation of the Australian dollar has badly affected our bottom line.
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REFERENCES
1. Deutsche Lufthansa AG first airline to complete full flight on biofuel, Accessed on September 1, 2012 2. Lufthansa going green. Viewed on September 1, 2012 http://konzern.lufthansa.com/en/themen/biofuel.html http://www.lufthansa.com/cn/en/EnvironmentalCare 3. Brown, Brian (1922), Chinese Nights Entertainments, Brentano's http://www.worldcat.org/oclc/843525 4. Deutsche Lufthansa AG. "Annual Report 2011" (in German) Accessed on August 11, 2012 5. Deutsche Lufthansa AG, Business and Strategy; Viewed on August 22, 2012 from, http://reports.lufthansa.com/2011/ar/combinedmanagementreport/businesssegmentperform ance/passengerairlinegroup/businessandstrategy.html?cat=m 6. Deutsche Lufthansa AGs Corporate Governance structure, Viewed on August 10, 2012 from, http://investor-relations.lufthansa.com/en/corporate-governance.html 7. Jackie. F, Graham Francis et al 2005, Benchmarking in civil aviation: some empirical evidence, Vol.12, No. 2, pp125-137; Accessed on August 21, 2012 from, http://edweb.sdsu.edu/bober/Jan2006ISPI/2006_ISPI_Benchmarking/BenchmarkAirlines.pdf 8. Hungary Tourism Report; Q1 2012, Issue 1, p20-29, Database: Business Source Complete 9. "Eurowings". wer-zu-wem.de. Retrieved August 11, 2012, http://www.wer-zu-wem.de/firma/Eurowings.html 10. Lufthansa History airreview.com. Retrieved on August 18, 2012 11. "Directory: World Airlines". Flight International: p. 107. April 3, 2007. 12. "Lufthansa Fleet". Viewed on August 13, 2012 http://investor-relations.lufthansa.com/en/fakten-zum-unternehmen/flotte.html 13. 51st Annual General Meeting; Retrieved August 25, 2012 from, http://investor-relations.lufthansa.com/fileadmin/downloads/en/annual%20meeting/LHAGM-2004-agenda.pdf
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