SWOT Analysis

To further assess the competitive position of Lufthansa, a SWOT analysis is conducted, including a full value chain perspective of Lufthansa covering logistics, operations, marketing

& sales and services along with a range of financial, organizational and strategic perspectives.

A SWOT analysis addresses both internal and external factors influencing a company’s business environment by looking at the company’s strengths and weaknesses in their business operations, as well as opportunities and threats evolving from the market environment (Harrison, 2010).

3.3.1.1 Strengths

Lufthansa’s key strength is its position as a leading global network carrier, being the 3rd largest airline by revenue in 2017 (Euromonitor, 2017) and 8th largest airline by Revenue Seat Kilometers (RSK) in 2017 (Statista, n.d.). This is achieved by a global network coverage and a well-diversified route network, which is one of the largest worldwide. The strong market position (market share of 9% (Lufthansa, 2017)) in the European airline sector and leading domestic market position in Germany is supported by Lufthansa’s hubs in Frankfurt, Munich, Zurich, and Vienna (Listowska, 2017). This multi-hub strategy gives customers a broad range of travel options (Stäblein, 2016).

Additionally, even though Lufthansa’s main market is located in Germany, its geographical diversification reduces the dependency on developments of local economies. Downturns and recessions in one or more single markets can be offset by booming economies in other countries and regions. Spreading out their business activities across different geographical market also protects Lufthansa from localized event risk (Moody's, 2017).

Furthermore, Lufthansa is a co-founding member of the Star Alliance network, a co-operation of 28 member airlines (Lufthansa, n.d.). Customers benefit from a worldwide reach and a smooth travel experience. Member airlines often coordinate their schedules, resulting in shorter journey times for passengers, offer overall validity of frequent flyer programs as well as privileges with check-in and luggage. Additionally, member airlines, like Lufthansa, not only

benefit from a higher perceived service level by passengers, but can also exploit synergies and reduce costs when operating in a global network, as the airlines usually offer common check-in facilities check-in the same termcheck-inal and mutual access to their lounges. As a result, not every airlcheck-ine needs to offer each facility at each airport, but can make use of the other member’s facilities, and therefore reduce their costs (Lufthansa, n.d.).

Another important strength of Lufthansa lies in its business strategy. The company has a well-diversified business profile with leading market positions not only in the passenger and cargo business, but also in the MRO and airline catering segments. This reduces Lufthansa’s exposure to volatility and cyclicality in the passenger and cargo traffic and adds stability to the Lufthansa Group’s earnings (Moody's, 2017).

In the passenger business segment, Lufthansa benefits from its brand strength of the airlines Lufthansa German Airlines, Swiss, Austrian Airlines, and Brussels Airlines, as well as its multi-passenger branding. The airlines offer both luxury and economy cabins and operate on long haul and short haul flights, which balances across its route portfolio.

Also, Lufthansa caters different customer groups with different airlines. A high service level is important for premium brands like Lufthansa German Airlines and Swiss, leading to a high share of business travelers at those airlines. The complementary services at those airlines include in-flight drinks and meals, free check-in and seat selection and free checked luggage allowances (Stäblein, 2016). Eurowings, the low-cost airline in Lufthansa Group portfolio, however, addresses both price-sensitive and service-oriented customers with low-cost basic fares and additional service options by a point-to-point traffic strategy. In a point-to-point traffic system, customers travel nonstop from one city to another (from origin to destination), versus in a hub-and-spoke system (mainly used by network carriers), one or a few central hubs connect origins and destinations, as explained by Figure 14.

Figure 14 - Point-to-Point vs Hub-and-Spoke System, Based on (Schule für Touristik, 2017)

In a point-to-point system, the customers benefit from lower connection and travel times and no interdependency of flights. This is also an advantage for carriers such as Eurowings, as in this system flights are at a lower risk to be delayed, leading to lower costs for those airlines (StanfordPress, 2016). Eurowings transition to a point-to-point traffic system enables it to better compete with other successful low-cost airlines. However, network carriers like Lufthansa German Airline still make use of the hub-and-spoke system, as this allows them to cover a larger network of destinations (Cook & Goodwin, 2008).

3.3.1.2 Weaknesses

Lufthansa is operating as a premium carrier with a high customer service level, which leads to higher cost positions and therefore a competitive disadvantage for the company on a financial side (Listowska, 2017). Even within Europe, Lufthansa ranges amongst higher cost airlines (in terms of costc per available seat kilometer), leading to a lower Group profitability than its peers (Bhasin, 2017).

Also adding to costs for Lufthansa Group are significant and volatile pension obligations due to a fluctuating discount rate. As of December 31st, 2017 those obligations accounted for almost 50% of total adjusted debt (Lufthansa Annual Report, 2017) and a further increase would lead to a substantial change in Lufthansa’s financial leverage ratios. In an environment of low interest rates, having underfunded defined benefit plans can become a significant challenge for the company, as it raises the cost of funding retirement benefits. “The enormous pension burdens are putting considerable pressure on our equity” (Menne - Lufthansa CFO, 2015, p. 1).

However, Lufthansa implemented proactive measures to lower those pension obligations and exposure to interest rates. These measures include a permanent reduction of pension obligations due to a new defined-contribution pension plan for cabin crew staff (agreed in June 2016), and pilots (agreed in March 2017), as well as cash injections into the pension scheme (Listowska, 2017).

The aforementioned agreements followed years of strikes and debates about pensions, salaries and working hours by Vereinigung Cockpit union, which represents about 5,400 pilots of Lufthansa Group. The strikes made clear the poor labor relations, another weakness of Lufthansa Group (Bryan, 2017), and also occasionally affected Lufthansa’s operating performance, because the strikes and labor disputes led to several delays and cancellations of flights (Deutsche Presse Agentur, 2016).

However, Lufthansa’s somewhat low profitability, which will further be assessed in Section 6, is not only driven by pension liabilities, but also depends on external factors including uncertain oil and fuel prices as well as economic developments in Germany and Europe. Especially oil prices are very volatile and difficult to predict, but Lufthansa tries to hedge their exposure to oil price fluctuations continuously in order to reduce the associated risks (Lufthansa Annual Report, 2017).

On a strategic side, Lufthansa’s market position is challenged by Low Cost Carriers in the short-haul segment and Middle-Eastern airlines in the long-short-haul segment, as discussed in Section 3.2 (Listowska, 2017).

Furthermore, most airlines of Lufthansa Group operate a multi-hub strategy. The most important disadvantage of this strategy is the lower flexibility to adjust capacities without influencing the overall system, as in this system, travel schedules are timed and interconnected (Stäblein, 2016).

3.3.1.3 Opportunities

However, numerous opportunities exist for Lufthansa to pursue. Lufthansa German Airline’s business model is based on offering premium services. This is in line with the airline’s aim of becoming Europe’s only five star rated airline by Skytrax, which it achieved in December 2017.

“The award is a well-deserved recognition of our major efforts to make Lufthansa one of the world’s leading premium airlines again. […] The combination of premium offerings with the

quality and professionalism of our employees has earned Lufthansa the status of a five-star airline” (Spohr - Chairman of the Board, 2017, p. 1). However, further investments throughout all booking classes (first, business, and economy class) are planned and must be made in order to secure this competitive advantage in the future (Skytrax, 2017).

Another opportunity for Lufthansa derives from increased travel demand. In emerging economies, the number of travelers has grown, which leads to an increased need for airlines in those countries. In Lufthansa’s home markets, foreign travels as well as overseas vacations for families, couples, and singles are also on an increasing trend. Furthermore, those customers tend to demand a higher service level from airlines and are willing to pay more for privileged services (Bhasin, 2017).

On a strategic side, Lufthansa has a solid liquidity position, as further evaluated in Section 6.3.1, which allows the company to make acquisitions in the aviation industry. The acquisition of parts of airberlin, which will be further assessed in Section 10, will strengthen the airline’s competitive position in the German market. Furthermore, a potential takeover of bankrupt Italian airline Alitalia would allow Lufthansa to better utilize its capacities and achieve scale effects. The offer by Lufthansa is concentrated on parts of the global network traffic and European and domestic point-to-point business (Lufthansa, 2017).

3.3.1.4 Threats

A central threat Lufthansa is facing is coming from the intense competition in the aviation industry. This includes yielding pressure from Low Cost Carriers and other network airlines. In September 2017, capacities from most European airlines increased at a higher rate than Lufthansa (1.1%) compared with the previous year. The largest increases in capacity during 2017 were made by Aeroflot Russian Airlines (15.0%), KLM-Royal Dutch Airlines (10.6%), Ryanair (9.7%), and easyJet (8.0%) (Casey, 2017). Also, Asian-Pacific carriers as well as airlines from the Middle East demonstrate their competitiveness, as their revenues increased substantially over the past years, and they operate at a lower cost (IATA, 2017).

Another threat is coming from fuel prices. During the last years, oil and fuel prices were low.

However, fuel consumption remains one of the main cost items for the entire aviation industry, and increased oil and fuel prices will significantly increase the airlines costs in this segment (UKEssays, 2017). Crude oil prices tend to be volatile and difficult to forecast. However, most

experts expect increasing crude oil prices in the next years, resulting in higher costs for aviation companies (Knomea, 2017).

Other costs include the high pension obligations, as mentioned under “weaknesses”. A prolonged environment of low interest rates is a challenge for Lufthansa, as it makes funding of these defined pension liabilities difficult (Listowska, 2017).

Furthermore, the European aviation market is impacted by higher terrorist threats against air travel (European Commission, 2017). This leads to a risk of higher insurance costs for Lufthansa, as massive premiums are being charged for insuring the entire fleet against war and similar events (UKEssays, 2017).

On the business side, Lufthansa’s passenger airline and logistic segments depend on volatile passenger and cargo traffic and therefore face the risk of material fluctuations of operating profits in those segments (Stäblein, 2016). However, as can be seen in Section 6 and 8 past years showed continuous increases in both Passenger and Cargo Traffic, somehow mitigating this risk.

Lastly, like all internationally operating companies, Lufthansa is exposed to exchange rate and interest rate fluctuations in the international money, capital, and foreign exchange markets, as will be discussed further in Section 6.3.