Harvard Case - Dealing with low-cost competition in the airline industry (A): The case of Lufthansa
"Dealing with low-cost competition in the airline industry (A): The case of Lufthansa" Harvard business case study is written by Urs Mueller, Francis Bidault. It deals with the challenges in the field of Strategy. The case study is 24 page(s) long and it was first published on : Nov 19, 2015
At Fern Fort University, we recommend Lufthansa pursue a multi-pronged strategy to address the challenge of low-cost competition while leveraging its existing strengths and adapting to the changing industry landscape. This strategy involves a combination of cost optimization, product differentiation, strategic alliances, and digital transformation.
2. Background
Lufthansa, a leading European airline, faced growing pressure from low-cost carriers (LCCs) like Ryanair and easyJet. These LCCs were capturing market share by offering significantly lower fares, primarily through operational efficiency and a lean business model. Lufthansa's traditional full-service model, with its emphasis on premium amenities and extensive route network, was becoming increasingly unsustainable.
The case study focuses on Lufthansa's CEO, Wolfgang Mayrhuber, who needed to develop a strategy to counter this threat. The case highlights the crucial decisions Lufthansa had to make regarding its competitive strategy, business model innovation, and organizational structure.
3. Analysis of the Case Study
Porter's Five Forces analysis reveals the intense competitive rivalry in the airline industry, driven by low barriers to entry, high buyer power, and the threat of substitutes. The emergence of LCCs further intensified this competition, forcing established airlines like Lufthansa to adapt.
SWOT Analysis of Lufthansa:
Strengths:
- Strong brand reputation and customer loyalty
- Extensive route network and global reach
- Experienced workforce and established infrastructure
- Strong financial position
Weaknesses:
- High operating costs compared to LCCs
- Complex organizational structure and bureaucracy
- Limited focus on digital innovation
Opportunities:
- Growing demand for air travel in emerging markets
- Potential for strategic alliances and partnerships
- Advancements in technology and analytics
Threats:
- Increasing competition from LCCs
- Economic downturns and fuel price volatility
- Environmental regulations and sustainability concerns
Value Chain Analysis highlights Lufthansa's strengths in areas like network management, customer service, and brand building. However, its cost structure and operational efficiency were lagging behind LCCs, creating a significant competitive disadvantage.
Business Model Innovation: Lufthansa needed to explore new business models to address the changing market dynamics. This could involve:
- Hybrid model: Offering both low-cost and premium services within a single brand.
- Focus on niche markets: Targeting specific customer segments with specialized services.
- Digitalization: Leveraging technology for cost reduction, personalized customer experiences, and new revenue streams.
4. Recommendations
1. Cost Optimization:
- Streamline operations: Implement lean management principles, optimize route networks, and reduce administrative overhead.
- Negotiate better deals with suppliers: Secure favorable fuel contracts and negotiate lower costs for aircraft maintenance and catering.
- Explore outsourcing: Outsource non-core functions like ground handling and IT services to reduce costs and enhance efficiency.
2. Product Differentiation:
- Enhance premium services: Offer exclusive amenities, personalized experiences, and enhanced loyalty programs to attract high-value customers.
- Develop new product offerings: Introduce specialized services like business class on short-haul flights or premium economy options.
- Focus on customer experience: Invest in technology and training to improve customer service and create a differentiated brand experience.
3. Strategic Alliances:
- Partnerships with LCCs: Explore joint ventures or code-sharing agreements to leverage their cost-efficient operations and expand reach.
- Strategic acquisitions: Consider acquiring smaller airlines or regional carriers to gain access to new markets and expand their network.
- Collaborations with travel agencies and technology companies: Develop partnerships to enhance distribution channels and offer integrated travel solutions.
4. Digital Transformation:
- Invest in technology and analytics: Implement advanced data analytics to optimize operations, personalize customer experiences, and identify new revenue opportunities.
- Develop a robust online platform: Enhance their website and mobile app to offer seamless booking, check-in, and travel management services.
- Embrace digital marketing: Utilize social media and targeted online advertising to reach new customer segments and build brand awareness.
5. Basis of Recommendations
These recommendations are based on a thorough analysis of Lufthansa's competitive landscape, internal strengths and weaknesses, and industry trends. They are aligned with Lufthansa's core competencies in brand management, customer service, and network management while addressing the challenge of cost competitiveness.
The recommendations consider the needs of both external customers and internal clients, aiming to enhance customer satisfaction while improving employee engagement and operational efficiency. They also take into account the competitive forces in the industry, including the threat of LCCs, and aim to create a sustainable competitive advantage for Lufthansa.
6. Conclusion
Lufthansa needs to embrace a multi-pronged strategy that combines cost optimization, product differentiation, strategic alliances, and digital transformation to thrive in the face of intense low-cost competition. By leveraging its existing strengths and adapting to the changing industry landscape, Lufthansa can maintain its position as a leading global airline and continue to deliver value to its customers and stakeholders.
7. Discussion
Other alternatives not selected include:
- Complete cost leadership: This approach would require significant changes to Lufthansa's business model and brand identity, potentially alienating its loyal customer base.
- Merger with another major airline: This option could create a dominant player in the industry but may face regulatory hurdles and require significant integration efforts.
Key assumptions of our recommendations include:
- Continued growth in air travel demand: This assumption is essential for the success of Lufthansa's growth strategy.
- Ability to effectively implement cost optimization measures: This requires a commitment to change management and a willingness to make tough decisions.
- Success of strategic alliances and partnerships: This depends on finding the right partners and effectively managing the collaborations.
- Continued advancements in technology and analytics: This is crucial for Lufthansa to remain competitive in the digital age.
8. Next Steps
- Develop a detailed implementation plan: Outline specific actions, timelines, and resource allocation for each recommendation.
- Establish a dedicated team: Form a cross-functional team to oversee the implementation of the strategy and monitor progress.
- Communicate the strategy to stakeholders: Ensure transparency and alignment with employees, investors, and other stakeholders.
- Continuously monitor and adapt: Regularly evaluate the effectiveness of the strategy and make adjustments as needed based on market conditions and competitive dynamics.
By taking these steps, Lufthansa can effectively navigate the challenges of low-cost competition and position itself for sustainable growth and success in the evolving airline industry.
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Case Description
In 2002 the management team of Deutsche Lufthansa AG was considering the upcoming threat from low-cost airlines in the context of an increasingly complex and competitive strategic environment. Finally the decision was taken to respond to the innovation by opening an own low-cost carrier, Germanwings in late 2002. But over time the business model of Germanwings was modified repeatedly. The case series covers * Lufthansa's considerations regarding various options to respond to the competitive challenges brought up by the emerging low-cost airlines such as easyJet or Ryanair in 2002 (Case A), * the foundation of Germanwings in late 2002 and some early successes until 2005 (Case B), and * some more recent changes in the Germanwings business model in the following five years until end of 2010 (Case C).
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