LUFTHANSA

Lufthansa: Going Global, but How to Manage Complexity

Lufthansa: Going Global, but How to Manage Complexity

Lufthansa (derived from Luft, the German word for air, and Hansa, the powerful medieval trading group) is the world's fifth largest airline in terms of overall passengers carried (62 900 in 2007), operating services to 209 destinations (842 destinations in 157 countries, with the partners in Star Alliance). Apart from the main activity, Passengers transport (71.2 % revenue), the other divisions include Logistics (11.7%), Maintenance (9%), Catering (7%), and IT services (1.1%).

Lufthansa - Key Milestones

• 1926: Foundation

• 1936: Lufthansa opens the first trans-oceanic, scheduled airmail service across the South Atlantic

• 1960: Lufthansa enters the jet age, initially on long-haul routes, with the arrival in the fleet of the Boeing 707

• 1997: Star alliance created

• 2006: Lufthansa Cargo founds the cargo airline AeroLogic with DHL Express.

Key Financial data for first half of 2008 (compared with first half of 2007)

| |Jan-Jun '08 |Jan-Jun'07 |Change (%) |

|Revenue (€M ) |12,056 |10,089 |19.4 |

|EBITDA(€M ) |1317 |1381 |-4.6 |

|Net Liquidity(€M ) |916 |703 |30 |

|EPS(€) |0.88 |2.17 |-59.4 |

2. Airline industry

The main objective of an airline industry is to provide air transport services both for passengers and freight. Airlines own or lease their aircrafts to provide those services. In the early days the industry was highly state-regulated. Since the partial and progressive deregulation of airline companies (beginning in the USA in 1978, and in EU in the early 1990s), the industry became highly competitive, driving to the bankruptcy some of the biggest airlines (PanAm, Swissair and Varag). These developments changed the structure of the industry, which is nowadays characterized as “high-growth-low-profit”. The emergence of no-frills low-cost airlines produces the reaction of big airline companies, which started to regroup in Alliances in the end of the 1990s. This grouping helped to decrease the costs, but in same time increased managing complexity.

Key features of the main Airline Alliances

|Key features |Star Alliance |One World |Sky Team |

|Leader |Lufthansa |British Airways |Air France |

|Formation year |1997 |1999 |2000 |

|Members (2006) |21 |10 |11 |

|Passengers (mil) |425 |258 |373 |

|Destinations |842 |605 |728 |

|Fleet size |2800 |2161 |2151 |

|Market share |28.4 % |15.8% |23.9% |

3. Impact factors

Recent (last 15 years) political and economic developments had mostly negative effect on the airline industry. The sequence of events: first Gulf war, Asian financial crisis, the terrorist attack on September 11 and SARS epidemic brought many airlines to the edge of bankruptcy. Once the demand began to recover in 2005, the high oil prices hit the industry again.

As for all airlines companies, terrorism has a major impact, especially concerning the new procedures to maintain a high level of security and consequently of trust. New longer boarding procedures added the traffic jams on the airports. In this environment high speed trains offer alternative to the shorter flights, this additionally hurts airline industry.

In addition, due to an inhomogeneous traffic flow with several arrival and departure banks throughout the day, demand often exceeds infrastructure ...