Caso A Lufthansa

For the exclusive use of R. Garcia, 2018.
ESMT–315–0165–1
ES1651
November 19, 2015
ESMT Case Study
Dealing with low-cost competition in

the airline industry (A):
The case of Lufthansa
Urs Müller
Francis Bidault
Introduction
Early 2002 Germany’s Deutsche Lufthansa (DLH) was Europe’s most successful airline and a fully
privatized group with about 380,000 shareholders. In IATA rankings, Lufthansa achieved top spots in
both scheduled passenger and freight traffic. Lufthansa carried some 46 million passengers in 2001.
The summer 2002 route network covered 327 destinations in 89 countries. The Lufthansa fleet
totaled more than 300 jet aircrafts. With an average age of 7.8 years, it was one of the youngest and
most environmentally friendly airlines in the industry. The aircraft were kept in pristine condition by
Lufthansa Technik. With hubs in Frankfurt and Munich, the carrier was part of the Star Alliance global
airline network that included United Airlines, Air Canada, and All Nippon Airways. Lufthansa also had
interests in travel-related businesses, including ground services, IT services, catering, and leisure
travel services.
This case study was prepared by Urs Müller and Francis Bidault of ESMT European School of Management and
Technology. Sole responsibility for the content rests with the author(s). It is intended to be used as the basis for
class discussion rather than to illustrate either effective or ineffective handling of a management situation.
Copyright 2015 by ESMT European School of Management and Technology, Berlin, Germany, www.esmt.org.
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This document is authorized for use only by Rafael Roberto Garcia in Casos Integrados taught by Jorge Fantin, Universidad Empresarial Siglo 21 from Jun 2018 to Dec 2018.
ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Despite the successful turnaround in the 1990s Lufthansa was facing new threats: the burst of the
“New Economy” bubble, the 9/11 attacks, and as a consequence the rapid decline of business and
leisure travel. In addition to that the entry of low-fare airlines like Ryanair, easyJet, HLX, and Air
Berlin significantly increased the competition in a market that was currently shrinking. The new
competitors had embraced a radical new business model, the “no-frills” approach that cut costs
drastically. As 2002 got underway without any sign of a fast economic recovery, DLH’s top
management wondered how to respond to these new competitors.
The beginning
The Weimar government created Deutsche Lufthansa (DLH) in 1926 and managed to build Europe’s
most comprehensive air route network by 1931 – with operations that included services to the Soviet
Union and China on the basis of joint ventures.
After World War II, the Allies allowed the recapitalization of DLH in 1954. The airline started with
domestic routes, returned to London and Paris in 1955, and then re-entered South America (1956). In
1958 DLH made its first nonstop flight between Germany and New York and initiated service to Tokyo
and Cairo. The stable West German economy helped Lufthansa maintain profitability through most of
the 1970s.
Having been a nearly 100 percent state-owned company, the German government started to reduce
its ownership in 1962. In 1966 DLH stocks were traded publicly for the first time. However, the
German government still owned more than 50 percent of DLH at that time.
The crisis and the turnaround

In 1991 when Jürgen Weber was appointed CEO, Lufthansa was well known for its high reliability,
order, and technical excellence. But the sharp decline in air traffic during the first Gulf War
(1990/91) and the recession thereafter led to serious overcapacity in the airline industry worldwide.
In 1991 the seat load factor (SLF - proportion of available seats filled) sank to about 57 percent in
Europe. Lufthansa noticed the crisis later than most other airlines. In 1992 Lufthansa suddenly
realized it was left with only 14 days of operating cash in hand. Weber approached all the major
German banks and asked them for money to pay employee salaries. No private bank believed in
Lufthansa’s survival. Only a state-owned institution, the Kreditanstalt für Wiederaufbau, agreed to
fund the company.
Realizing the need for a major change initiative, Weber invited about 20 senior managers to the
training center at Seeheim for a “mental change” meeting – later called the “crisis management
Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

meeting” – to create an understanding of the urgency of the situation. The Seeheim workshop was
repeated three times with different groups, each consisting of 50 managers, to let them feel the
threat and urgency. The Seeheim experience persuaded most senior managers to commit to
extremely ambitious goals. There were 131 initiatives identified for reducing payroll and non-
personnel costs – including downsizing the fleet – and increasing revenues. These initiatives were
listed in the so-called “Programm 93.”
By and large, a high level of consensus between management and other stakeholders was achieved
and there were no strikes. In November 1993, 18 months after the initial crisis management meeting,
the first results became visible. However, Lufthansa realized that much more had to be done to
sustain long-term success. Even though the net result improved significantly it was still negative:
-€46.8 million in 1993 (up from -€200 million in 1992; see Exhibit 6).
Lufthansa began negotiating with the German government regarding its privatization—which was
achieved in 1997, after having come to an agreement with the German government on pension funds.
During the early 1990s Lufthansa had six departments (finance, personnel, maintenance, sales,
marketing, and flight operations) each led by a member of the executive board. Top management
was actively involved in operational matters leading to slow decision processes, low levels of
transparency, and a lack of accountability. Restructuring became necessary to reduce costs, respond
quickly to market needs, and speed up decision making. Lufthansa concluded that it would be more
successful as a federative group of small, independent units than as a functional, monolithic block.
Ultimately, six businesses were spun off as legally autonomous, strategically independent subsidiaries
(see Exhibit 1): Passenger business, LH Cargo AG (logistics), LH Technik AG (maintenance, repair and
overhaul service), LH Systems GmbH (IT services), Thomas Cook (leisure travel), and LSG Sky Chefs
(catering). Passenger business remained under the everyday influence of the top management, with
more than 30,000 employees in the cockpit and cabin, at ground stations, and worldwide sales.
In the mid 1990s after many of the “Programm 93” projects had been implemented, Weber decided
to take the transformation process further. “Programm 15” was designed to make Lufthansa more
competitive through cost management and cultural change, generating a cost-consciousness across
all levels. The number “15” stood for 15 German pfennigs per SKO (“seat kilometers offered,” the
cost target for transporting one aircraft seat one kilometer). Lufthansa indicated it would reduce
costs from 17.7 pfennigs in 1996 to 15 pfennigs in 2001, amounting to an overall cost reduction of 20
percent within five years. Line managers were made responsible for the cost reduction.
As Lufthansa restructured itself, a pilots’ strike in 2001 came as a major setback. During the
negotiations in the spring of 2001 the pilots’ labor union, Vereinigung Cockpit (VC), demanded an
increase in salary of 30 percent and underscored its demands during a warning strike by threatening
to take confrontational measures. Lufthansa’s management refused to make any voluntary

concessions whatsoever. A new wage agreement was finally concluded on June 8, 2001. However, the
pilots’ strike had far-reaching effects on Lufthansa. The two-and-a-half-day strike cost Lufthansa €75
million and the additional permanent annual staff cost totaled about €125 million. Aside from this,
the company’s culture, especially its community spirit, suffered great damage. The gap that had
already existed between the pilots and the ground crew widened. The discord came to a head on May
17, 2001, in the form of a counterdemonstration by the ground crew, who wanted to publicly
demonstrate that the pilots’ strike was causing unrest within Lufthansa.
D-Check
In April 2001 Lufthansa’s management decided to introduce “D-Check,” a sequel initiative to
“Programm 15” and the third major cost-oriented program in a decade. In an analogy to the regular
D-Check of airplanes, the DLH D-Check called for a systematic “organizational check-up” to ensure
the company’s competitiveness. The basic idea of the program was to take apart, test, and –
wherever they proved risky or defective – exchange every “part” in the company. D-Check was
designed to have a long-term impact and to focus on cash flows. The business units were asked to
identify various risks (i.e., price fluctuations, sudden drops in load capacity, or infrastructural
bottlenecks) to their business units in the next three years. By considering all these potential risks in
sum, they then determined a worst-case scenario in which Lufthansa would have to generate €1
billion over the long term in order to prepare the Group for future risks. So D-Check’s purpose
became to raise €1 billion over the medium term from June 2001 to May 2004.
Though the program did not initially elicit high commitment, the outlook changed radically with the
events of September 11. The consequences of 9/11 far exceeded the risks calculated. Lufthansa
cancelled 233 flights during the four-day national airspace shutdown over the US. As a result, 56,000
passengers were unable to travel as scheduled. The number of passengers who did not show up also
rose, sometimes even 50 percent more than on a normal business day. Additional costs were incurred
for security measures at airports and in the planes themselves. The insurance companies cancelled
the airlines’ coverage for war and war-like events within a few days after 9/11. The insurance
companies hiked the rates for full war coverage by more than 10 times. For Lufthansa, basic
coverage for the fleet alone was another financial burden of about €50 million.
In the first few months after the attacks Lufthansa transported about 30,000 passengers per day,
about 25 percent less than usual. Demand fell particularly for first and business class, resulting in
losses of €50 million per week. Other Lufthansa Group companies were hit hard, too. In particular,
Lufthansa Cargo suffered dramatic losses. To manage the crisis, Lufthansa once again deployed
several of the measures used during the turnaround in the early 1990s. Routes were reviewed for
profitability and the route network reduced. Even before 9/11, Lufthansa had decided to downsize

its original flight offering and to withdraw 12 short-range aircraft from its fleet. However, Lufthansa
chose to ground another four. The new policy put 20 of Lufthansa’s 236 aircrafts out of commission
and people expected more to follow.
As a reaction to the terrorist attacks and their economic consequences, DLH focused especially on
rapid results and immediate cost cuts with an additional project D-Check acute, primarily focusing on
systematic cost and multi-project management. In a short span of 17 days an action plan was
developed, presented to the labor unions, and approved by the executive board. Apart from capacity
reduction, the action plan included other drastic measures, such as a freeze on capital investment
and hiring. The greatest challenge was to cut down human resources costs in line with the law while
remaining flexible and being able to quickly return the crew to full capacity once the crisis started
wearing off. Unpaid vacation time and offering more part-time work were some of the measures
introduced. The labor unions agreed to an extension of the wage agreement for ground and cabin
crew and the postponement of the wage increase for cockpit personnel. The executive board waived
off 10 percent of its salary. Other members and the non-tariff employees were asked to contribute 5
to 10 percent of their salaries to the crisis management efforts. Three-fourths of them did so. They
were even encouraged to give up their Christmas bonuses temporarily and lend the same to the
company at zero interest until August of the following year.
Lufthansa was the only airline other than Air France not to dismiss some of its employees after
September 11. This was possible only because of the D-Check acute action plan. The security
surcharges on tickets and cargo goods generated a cash flow of €530 million within three-and-a-half
months. Despite the considerable efforts made to manage the crisis, Lufthansa reported a loss of
€633 million for 2001.
The European airline industry in 2001

The four largest airlines within Europe were Air France, British Airways, Lufthansa, and Royal Dutch
Airlines (KLM), all of which had been set up in the 1930s or earlier. They had all joined airline
alliances. Lufthansa was the founding member of Star Alliance, Air France had joined SkyTeam in
September 1999, British Airways had joined OneWorld in September 1998, and KLM was partnering
with Northwest Airline. All these airlines flew in the national, European, and global markets.
Till the late 1970s almost all governments pursued policies to control strategic sectors of the
economy. Airlines topped the list. However, during the late 1970s and early 1980s government
thinking changed. Market-oriented ideas such as deregulation, privatization and competition became
the flavor of the day. The US deregulated the airline industry in 1978. Slowly but surely, the European
airline industry evolved from being public utilities companies, run by government agencies, to
market-driven companies. Fares went down drastically as competition intensified. Low-cost

carriers (LCCs) introduced innovative business models. Yet deregulation in Europe, in terms of
increasing competition and privatization, did not go as far or as fast as in the US: government
influence on the operations of the airline industry remained strong. Landing rights, related time
slots, and other privileges were still awarded by government institutions. So established players like
British Airways or Lufthansa controlled 38 percent and 60 percent respectively of the total slots at
their hubs at London Heathrow and Frankfurt am Main. Airports in Europe were mostly state owned,
though privatized state and local governments played a major role in expanding capacity by building
new runways and providing the related infrastructure. Governments were also responsible for
negotiating “open sky agreements” which regulated air traffic between countries.
After September 11 the European airline industry faced a serious crisis. Sabena, the Belgian flag-
carrier had to close down its operations. Sabena’s main shareholder, Swissair, went through
restructuring and survived only with massive support from the Swiss government under the umbrella
of Crossair as a new, much smaller national airline. Most European Airlines laid off thousands of
people during 2002. British Airways (BA) cut 7,000 jobs, which represented approximately 12.5
percent of its total workforce.
United Kingdom
Alongside the 9/11 effect, the growth of low-cost carriers presented a major threat to the European
incumbents: in terms of penetration, the UK was the most affected. Although Ryanair was Irish,
London Stansted was its most important base. easyJet, established in 1996 out of London Luton,
became the leader in the LCC segment. In January 2002 the LCC share of international routes
involving a British airport was 25 percent, and only three percent on routes that did not involve a
British airport. As a result, BA was the company most immediately affected by the growth of the
LCCs. Domestic and European international operations accounted for 10.3 percent and 28.1 percent
of BA’s 2001 turnover respectively. Damage was most noticeable on the secondary routes (e.g.,
London to Genoa), where BA permanently lost 12 to 55 percent of its passengers.
The LCCs threatened incumbents in terms of both market share and yield. One example was the
London-Glasgow route. Before easyJet and Ryanair’s entry in 1995 and 1997, respectively, BA had
enjoyed a duopoly on the route with British Midland, garnering the vast majority of the market share.
By 2000 BA’s market share had fallen to 50 percent. In May 2001 BA’s share dropped to 39 percent
with Ryanair grabbing 20 percent, easyJet 15 percent, and Go six percent. Faced with intense price
pressure, in April 2002 it announced a significant price reduction, offering tickets up to 70 percent
cheaper – although Ryanair was still 50 percent cheaper than that (tax excluded). The entry of LCCs
substantially expanded the market. Route profitability usually recovered three years after the low-
cost entry, although average yield was permanently 20 percent lower than the original level.

In Europe, BA became the first incumbent to adopt the low-fare business model in May 1998. It
invested £25 million to set up its own low-fare subsidiary, Go, based in London Stansted. BA gave the
subsidiary full autonomy. Go sought to differentiate itself from its rivals with better customer
service. For example, passengers could buy better food and beverages on board. It was the first LCC
to launch full-scale television advertising in the UK.
easyJet reacted aggressively to the news, claiming that the move was anti-competitive and aimed at
eliminating LCCs. It filed a series of court cases against Go, alleging that BA was subsidizing its
insurance, advertising, aircraft leasing, and other services. easyJet even started a promotion
campaign that offered free flights to customers who correctly guessed Go’s first year losses. After
Go’s entry, Ryanair immediately lowered its fares from London Stansted. In September 1999 nine of
the 17 (53%) routes operated by Go were in head-on competition with either Ryanair (one route),
easyJet (four routes) or Debonair (five routes). In contrast, easyJet had only five of its 23 routes
(22%) in head-on competition with other LCCs and Ryanair only two of its 34 routes (6%).
Go sustained pre-tax losses of £20 million and £21.8 million in the financial years ending March 31,
1999, and March 31, 2000. But the situation improved rather swiftly and the company recorded its
first profitable quarter in September 1999, moving into profit in 2001. However, just as there were
indications of a turnaround, BA decided to sell it off. In 2002 easyJet acquired Go for a net price
(discounting cash within Go) of £257.6 million.
In January 2000 KLM converted its British regional subsidiary, KLM-UK, into Buzz, a low-cost airline
based at London Stansted. Despite strong growth in traffic, it never recorded a profit. Its fleet of BAe
146s put the airline at a cost disadvantage relative to those LCCs operating more efficient jets. In
January 2003 Buzz was sold to Ryanair for just €5 million net.
France
LCCs first arrived in France in 1996, when easyJet and Virgin Express launched new routes to Nice
from London Luton and Brussels respectively. Ryanair was the first to fly into Paris in 1997 from
Dublin using the Beauvais airport located 70km north of the city center. In subsequent years, new
routes to France steadily emerged. In March 2003 Ryanair operated 10 routes connecting London
Stansted mainly with small towns served by no other airlines, like Pau, Carcassonne, and Perpignan.
easyJet, on the other hand, was more focused on high-density routes, flying five routes into Paris. Its
applications to start a base at Paris’ Orly airport were regularly turned down by the French
government due to lack of slots.
In February 2002 Air Lib, a loss-making French regional airline, established a low-fare subsidiary,
AirLib Express. Based in Orly, it focused on domestic routes. Despite some promising early results, Air

Lib failed to overcome a financial crisis and filed for bankruptcy in February 2003. In April 2003 the
French government allocated the freed slots at Orly to several airlines including Virgin Express and,
finally, easyJet.
Air France’s reaction to low-cost entry seemed relatively moderate. Aggressive responses and cut-
throat price wars were not on its agenda. In September 2002 it launched several promotions and
rebate programs for frequent travelers on peak-hour flights and one-month advance bookings.
Since 2000 Air France had consistently outperformed its European counterparts financially,
particularly in the international arena. The Paris airport overtook London Heathrow to become the
busiest hub in Europe. Air France attributed its strong performance to a combination of factors
including the superior results and financial strength of Delta Air (its partner in SkyTeam) over United
Airlines and American Airlines. Air France had its eye on expansion, with plans to grow SkyTeam by
absorbing the KLM/Northwest/Continental group. In February 2002 the French and Italian
governments agreed on a two percent equity swap of their flag-carriers, prompting rumors of a
merger between Air France and Alitalia.
Business models
Low-cost carriers (LCCs)

LCCs emerged in the US after deregulation. The profitable growth of Southwest in the US led to
imitation in Europe. After visiting Southwest in 1991 Michael O’Leary, the CEO of Ryanair, adopted
Southwest’s business model. O’Leary turned around Ryanair from the brink of bankruptcy to
profitability by 1992 and within 10 years multiplied the revenues by 12. Ryanair’s success quickly
lured other LCCs, including easyJet (1995), Debonair (1995), Virgin Express (1996), Go (1997), Buzz
(2000), and others. The penetration of LCCs on all intra-EU capacity grew from 3.7 percent in July
1998 to six percent in July 2000 and 12 percent by the end of 2002.
LCCs were different from full-service airlines in various ways. The most significant cost saving related
to the higher seating density, achieved through the use of all-coach seats and less space between
rows. Faster aircraft turns, through simplified boarding, disembarking, and servicing processes
represented a major process innovation. Online sales also led to major cost savings. Catering costs
were reduced, as there were no in-flight meals. Snacks were offered in-flight, but the passengers had
to pay for them. Check-in was manual, there was no business lounge, and metal stairs were used for
boarding instead of air bridges. They generally did not provide refunds for delays or cancellations.

LCCs like easyJet often started as “virtual airlines” in terms of operations. Ground operations and
maintenance were outsourced, which increased flexibility and reduced the number of direct
employees to save costs. LCCs usually used only one aircraft type, typically the Boeing 737 or the
Airbus A320. With fleet standardization, LCCs could cut flight crew, maintenance, and training costs.
LCCs avoided the complexity of creating connections and hence saved on baggage handling costs. It
was not necessary for LCCs to cover against delays on incoming flights or to build time slack between
flights to allow for connections. With point-to-point operations, LCCs did not have to reposition
flights. They could operate on a tighter schedule and also experiment with new markets because of
the short flight lengths. LCCs typically managed with only one maintenance base and did not leave
aircraft outside their operation bases overnight. This further avoided costly duplication of facilities
and housing the crew when abroad.
LCCs generally flew from secondary airports close to large cities. These airports, despite being
remote and offering few interconnections, were acceptable to many price-sensitive passengers. LCCs
could obtain slots easily. Since these airports usually welcomed new business, LCCs were in a stronger
position to negotiate favorable deals.
Most LCCs were start-ups and unburdened by legacy costs and Labor costs were lower as crew wages
were linked to productivity. FSCs had high base-salary levels, generous pensions, and inflexible labor
conditions. LCCs were also not forced to fly on loss-making routes for political or prestige reasons.
LCCs enjoyed relative protection from business cycles, since in hard times demand for premium
service tended to decline as more passengers sought less expensive travel alternatives. However, the
low-cost business model faced various concerns like low passenger comfort and uncertain
consequences of future expansion. The service provided by LCCs was too basic for many travelers.
Business travelers in particular were often ready to pay a higher price for a better quality as these
were often company-paid trips. Also, they did not tend to accept the cancellation of flights due to
low load factors. The exclusive use of secondary airports was not always in the travelers’ best
interest. There was also suspicion about the safety of LCCs. The media had accused pilots of ignoring
instructions from the tower. Pilots also seemed prepared to do almost anything to save time. But
supporters of the LCCs dismissed these arguments, pointing out that the world’s biggest and oldest
LCC Southwest Airlines had not caused one death through accidents in its 32-year history.
Meanwhile, the way LCCs were aggressively adding new destinations might also lead to problems in
the long run. Both Ryanair and easyJet announced massive orders of planes in 2002. Ryanair intended
to increase the number of passengers from more than 10 to 40 million and ordered up to 150 new
Boeing 737-800 planes to be delivered by 2010. LCCs also pursued acquisitions to establish dominant
leadership positions in the European market. However, as LCCs became larger, there was a possibility
that airports might no longer grant them low landing fees.

Full-service carriers
Full-service carriers (FSC) offered a broad range of destinations including all distances, from short
haul to long haul, and usually followed a premium pricing policy based on high quality and service
standards. Examples were United Airlines, British Airways, Lufthansa or Japan Airlines. Such FSC
airlines typically used a hub-and-spoke system. Hub-and-spoke meant flying passengers from feeder
cities on the spokes of the system into a larger central hub, from where they were redirected onto a
flight to their final destination. Thus, multiplier effects in terms of the number of connected cities
and load factors on the long-haul routes were gained. In addition to that they created linkages to
other airlines through alliances. Typical features of such alliances included code sharing, that is,
sharing routes and slots among member airlines, the mutual acceptance of frequent flyer programs,
and common quality and service standards.
The major challenge for these airlines was to maintain high load factors. To improve the economics
of their flight operations, all major airlines were working with yield management systems, which
helped them to sell spare capacity at discounted fares. Hence, airlines created a large number of
booking categories, each with a specific price and conditions. Profitability depended to a large
extent on the load factor and the share of business class travelers. Thus, American Airlines, BA or
Lufthansa, for whom high-yield business travel historically constituted a major portion of business,
were particularly suffering from a weak rebound in business travel after 9/11. Apart from less
business people traveling, Lufthansa also observed that business travelers were increasingly switching
to LCCs. FSCs were fighting to restore profitability and pondered over how to react to low-cost
competition. Almost all carriers had initiated substantial cost-rationalization programs mainly in
terms of capacity and schedule reductions, however, it was not only Lufthansa that had already
picked the low-hanging fruit in the past by conducting three consequential cost-cutting programs.
The response of the full-service carriers to LCCs was rather mixed. BA and KLM entered this business
aggressively with their own low-cost subsidiaries GO and Buzz. But synergies were obviously difficult
to reach. Consequently, both airlines divested their low-cost operations. The major players raised
capacity on low-cost routes and offered deep discounts for unsold seats in off-peak times. BA and
Lufthansa radically simplified their fare structures to keep business travelers from defecting to low-
cost competitors and to steal market shares from alternative transportation solutions. In August 2002
BA offered tickets, priced almost 80 percent below comparable fares offered in June.
The German airline market

German domestic flights were 20 percent more expensive than the European average. But after
December 1992 any airline with a majority European shareholding was eligible to run an airline and
was free to fly on any route between two EU countries. By 1997 EU airlines were allowed to operate
10

domestic flights in any EU country. Both new start-ups and incumbent airlines geared up to compete
after deregulation. Eurowings charged $250 for its Nuremberg-Cologne route, compared to
Lufthansa’s $414 in 1997. In 2001 Eurowings recorded an annual passenger volume of 3.5 million. In
January 2001 Lufthansa acquired 24.9 percent of Eurowings and converted it into an operating
partner with an option to increase its stake further to 49 percent.
BA launched its German subsidiary Deutsche BA (DBA) in 1992 to counter Lufthansa on the main
domestic routes. This led to a fierce price war. For example, DBA offered the Hamburg-Munich
service at DM 650, over 30 percent lower than Lufthansa’s price of DM 950 (which was later reduced
to DM 840). By 1997 DBA had become Lufthansa’s biggest domestic competitor. DBA captured 15
percent of the market, while Lufthansa still held 80 percent market share. In reply, Lufthansa
teamed up with franchises like Augsburg Airway to lower its operating costs.
Germany’s specific circumstances also provided additional protection. In 2003 Germany had only 30
civil airports, France had 69, and the UK had 55. Most German cities had only one airport, which was
also usually congested. Entrants often found it difficult to obtain landing slots, which reduced
competition on certain routes. For instance, on the Frankfurt-Berlin route, which had no
competition, Lufthansa priced its tickets at about DM 900 per round trip. But on the competitive
Cologne-Berlin route, which was a little longer, the ticket was priced at about DM 700 in 1997.
The LCC challenge in Germany remained insignificant during the 1990s. Debonair was the first
entrant in 1996, a short-lived start-up airline based in London Luton. In 1999 Ryanair entered
Germany by flying to Hahn, 120km east of Frankfurt. easyJet flew to Germany once it inherited Go’s
only German route, Stansted-Munich, in the merger in 2002.
In 2001 Ryanair announced that it would upgrade its operation in Frankfurt Hahn into an operation
base in February 2002. Ryanair undercut competitors’ fares by more than 50 percent. Throughout
2002 Ryanair expanded its routes to and from Frankfurt to 14 and carried about 2 million passengers
on those routes during its very first year of operations.
On August 29, 2002, TUI launched Hapag-Lloyd Express (HLX) with the slogan “Flying for a price of a
taxi.” HLX started its operations in December 2002 with eight Boeing 737-700 aircraft chartered from
Germania (also a TUI subsidiary). Initially based in Cologne-Bonn, HLX quickly added a second base in
Hanover. By March 2003 HLX was operating 14 routes connecting to Cologne and 11 to Hanover.
Even other existing players were attracted by low-fare air travel in Germany. In October 2002 Air
Berlin launched a scheduled travel product: the “City Shuttle.” It connected 11 major European cities
and seven German airports using Boeing 737s. This airline did not follow a typical “no-frills”
operation model. It offered in-flight catering, seat reservations, distribution through travel agencies,
11

and a loyalty plan. But the airline was able to compete with other LCCs and maintain a competitive
ticket price because of lower labor costs.
Future outlook
In May 2002 Lufthansa started another experiment by offering 6-times-per-week dedicated business
flight services between Dusseldorf and Newark. The flights were operated by a charter company,
PrivatAir, which used Boeing 737 aircraft with only 48 seats. Lufthansa announced satisfying results
and planned to offer similar services on the Chicago-Dusseldorf and Newark-Munich routes. And for
the winter season 2002-03, Lufthansa announced cheap flights within Germany as low as €98
compared to the previous €143 (including airport taxes).
But despite these individual initiatives, Lufthansa realized that it had to make a decision to respond
to the emerging low-cost challenge.
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Exhibits
Exhibit 1: Deutsche Lufthansa: Business segments
Lufthansa was comprised of several business segments that covered its various markets and value
chain activities.
Passenger transportation
Passenger services constituted Lufthansa’s core business, generating more than 60 percent of
revenues.
Lufthansa’s aim was to expand into Europe and become a leading network carrier. Lufthansa hoped
its multi-hub strategy, centering on Frankfurt and Munich, would fuel growth through increased
frequencies.
Logistics
Lufthansa Cargo, in charge of airfreight and the marketing of air cargo capacities, was a leading
provider of logistics services in the airport-to-airport segment and was fueling its growth with
profitable premium and general cargo services. In the face of increasing competitive pressures, the
company had launched an “Excellence + Growth” program aimed at ensuring lasting and profitable
expansion. The program was designed to transform the company into a process-oriented organization
with leaner internal structures, including the shedding of 10 percent of existing jobs. Processes were
integrated and tightened in a bid to improve the procurement of services, network optimization,
sales, yield management, and pay settlements.
Maintenance, repair, and overhaul (MRO) business

Integral to the MRO group’s strategy was business expansion with airlines outside the Lufthansa
Group. A key element in that policy was the internationalization of production activities. By
broadening the geographic reach of its production facilities, Lufthansa Technik was getting closer to
customers, harnessing lower local cost structures to reduce unit costs, and lessening the effect of
currency movements on its results. The group was not only committed to the MRO business, it also
developed new products.
Catering
By 2001 DLH had fully integrated the former partner “Sky Chefs” into the “LSG” resulting in “LSG Sky
Chefs” as part of the Lufthansa Group. LSG Sky Chefs was the world’s biggest in-flight caterer. Since
9/11 the market had contracted by 30 percent and most of all in the Americas, where the business
volume had slumped by more than 40 percent. Whereas American carriers were offering in-flight food
on 7,700 intra-American flights in the year 2000, that number had dipped to just 900 flights, daily, in
13

2004. The LSG Sky Chefs group was consequently in the process of restructuring in the changed
industry environment.
Leisure travel
The Thomas Cook leisure travel group’s (owned half-and-half by Lufthansa and Karstadt Quelle)
major sales markets were Germany, the United Kingdom, France, and the Benelux countries. It was
active in new markets in Eastern Europe, Egypt, India, and Canada. The crisis in the leisure travel
business impacted the group in a difficult phase – immediately after its takeover of Havas Voyages in
France (2000) and Thomas Cook in the UK (2001). Fierce price pressures and weakening demand for
holiday travel since 2001/02 plunged the group into heavy losses.
IT services
Lufthansa Systems, together with its network of affiliates, managed to reinforce its global presence
in 2000. By the end of 2001, besides Germany, Lufthansa Systems was represented at 17 locations in
13 countries. Lufthansa Systems was focused on the airline and aviation market. In this field, the
company possessed proven process know-how and would further expand its position as a full-service
IT provider on an international scale. The systematic extension of its market orientation by
strengthening its service portfolio along the business segments and its internationalization through a
concept of distribution based on geographical areas would help to move this process forward.
Service and financial companies

The activities of the Lufthansa Group were supported by service and financial companies. These
included Lufthansa Commercial Holding GmbH (in Cologne), Lufthansa AirPlus Servicekarten GmbH (in
Neu-Isenburg), Lufthansa Flight Training GmbH (in Frankfurt), and diverse financial companies.
14

Exhibit 2: D-Check result up to December 2001
Notes: Figures in million euros.
In the year 2001 D-Check supported by D-Check acute has achieved an extra cash flow of €127.2
million.
Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/

fileadmin/downloads/en/financial-reports/annual-reports/LH-AR-2001-e.pdf (accessed June 26,
2015).
15

Exhibit 3: Lufthansa key data
2001 2000 Change in percent
Revenue €m 16,690 15,200 9.8
of which traffic
€m 12,253 12,549 –2.4
revenue
EBITDA €m 1,448 2,598 –44.3
EBIT €m –292 1,547 –118.9
Loss/profit from
€m –316 1,482 –121.3
operating activities
Net loss/profit for

€m – 633 689 –191.9
the period
Operating result €m 28 1,042 –97.3

1)
Capital expenditure €m 2,979 2,447 21.7
Operating cash flow €m 1,736 2,140 –18.9
Total assets €m 18,206 14,810 22.9
Shareholders’ equity €m 3,498 4,114 –15.0
Average number of
87,975 69,523 26.5
employees
Staff costs €m 4,481 3,625 23.6
Losses/earnings per
€ –1.6 1.81 –191.7
share
Dividend per share € 0.60 100.0
Creditable
€ 0.26 100.0
corporation tax
1)
Capital expenditure without results of joint ventures and associated companies accounted for
under the equity method.
Previous year’s figures not comparable due to changes in the group of consolidated companies.
Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/

fileadmin/downloads/en/financial-reports/annual-reports/LH-AR-2001-e.pdf (accessed June 26,
2015).
16
Exhibit 4: Geographic information for 2001 and 2000 in million Euros
Europe North Central and Asia/ Middle East Africa Other Segment
2001 incl. America South Pacific total
Germany America
Traffic revenue 8,345.3 1,524.4 361.3 1,619.8 162.3 237.5 2.4 12,253.0
Other operating 1,802.9 1,691.0 118.9 447.6 272.3 103.9 0.4 4,437.0
revenue
Other segment 1,070.5 332.9 8.9 33.4 16.6 10.5 25.9 1,498.7
income*
Income from 31.5 – 59.9 1.4 11.1 – – – – 15.9

investments
accounted for
under the equity
method
Segment assets 12,488.3 2,847.1 140.2 325.2 79.4 60.4 – 15,940.6
– of which from 954.0 226.5 17.7 77.5 0.2 – – 1,275.9

investments
accounted for
Dealing with low-cost competition in the airline industry (A):
under the equity

method
Capital expenditure 1,617.2 1,327 2.9 4.5 0.8 0.4 .– 2,952.8
– of which from 233.7 – – – – – – 233.7

investments
accounted for
under the equity
method
17
ESMT–315–0165–1
Exhibit 4: Geographic information for 2001 and 2000 in million Euros (cont.)
18
Europe North Central and Asia/ Middle East Africa Other Segment
2000 incl. America South Pacific total
Germany America
Traffic revenue 7,925.7 1,621.7 357.5 1,786.9 152.8 227.7 476.9 12,549.2
ESMT–315–0165–1
Other operating 1,357.6 566.4 56.4 329.9 226.7 113.9 0.3 2,651.2
revenue
Other segment 1,429.9 66.4 4.5 33.2 4.7 4.5 142.3 1,685.5
income*
Income from 66.6 –14.2 – 9.8 – 0.5 – 62.7

investments
accounted for
under the equity
method
Segment assets 12,436.1 1,098.9 55.5 327.6 65.6 78.6 0.0 14,062.3.6
– of which from 600.0 540.4 – 69.8 – – – 1,210.2

investments
accounted for
under the equity
method
Capital expenditure 2,154.8 26.6 0.6 3.5 0.9 1.5 .– 2,187.9
– of which from 261.3 0.1 – – – – – 261.4

investments
accounted for
under the equity
method
Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/fileadmin/downloads/en/financial-

reports/annual-reports/LH-AR-2001-e.pdf (accessed June 26, 2015)
Exhibit 5: Business segment information for 2001 in million Euros
Passenger Logistics MRO Catering Leisure IT Services Service and Segment
Business1) Lufthansa Lufthansa LSG Sky Travel Lufthansa Financial total
Lufthansa Cargo Technik Chefs group Thomas Systems companies2)
Passenger group Cook group group
Business
group
External revenue 10,182.9 2,421.6 1,540.9 2,066.6 – 126.0 352.0 16,690.0
– of which traffic 9,858.4 2,394.6 – – – – – 12,253.0

revenue
Inter-segment 449.6 16.0 1,293.9 448.8 – 352.1 7.9 2,568.3

revenue
Total revenue 10,632.5 2,437.6 2,834.8 2,515.4 – 478.1 359.9 19,258.3
Other segment 1,304.1 253.8 152.4 96.1 6.7 16.9 259.6 2,089.6
income
– of which reversal of – – – – – – – –
impairments
– of which from –3.4 0.5 9.2 – 11.0 6.7 – – 17.9 – 15.9

investments
accounted for under
the equity method
Segment expenses 11,787.9 2,625.9 2,832.7 3,480.7 – 467.3 471.8 21,666.3
Segment results 148.7 65.5 154.5 –869.2 6.7 27.7 147.7 –318.4
– of which from –3.4 0.5 9.2 –11.0 6.7 – –17.9 – 5.9

investments
accounted for under
19
the equity method
Segment assets 7,657.4 1,694.3 1,869.7 2,969.6 496.8 115.4 1,137.4 15,940.6
ESMT–315–0165–1
20
– of which from 211.6 – 98.2 96.2 496.8 – 373.1 1,275.9
investments
accounted for under
the equity method
Segment liabilities 6,985.7 515.3 1,230.7 1,139.6 – 177.0 484.7 10,533.0

ESMT–315–0165–1
– of which from – 0.2 – – – – – 0.2

investments
accounted for under
the equity method
Capital expenditure 1,166.6 128.7 64.8 1,380.0 – 34.6 178.1 2,952.8
– of which from 233.7 – – – – – – 233.7

investments
accounted for under
the equity method
Amortization and 794.9 116.8 78.5 651.5 – 35.4 61.3 1,738.4

depreciation
– of which – – – 495.4 – – – 495.4

impairments
Other significant non- 114.8 10.4 20.7 25.2 – 5.1 0.4 176.6
cash expenses
1) Reporting of Deutsche Lufthansa AG and Lufthansa CityLine GmbH as a consolidated subgroup; the preceding year has been accounted for
similarly. A comparison with the 2000 Annual Report is now impossible.
2) The segment “Other” shown in the preceding year has been renamed into “Service and Financial Companies”. As from January 1, 2001, it also
includes the START AMADEUS GmbH. It also includes the GlobeGround group until July 31 in a prorated way. As from August 1, the GlobeGround
GmbH is accounted for using the equity method.
For the purposes of comparing, prior year values are also shown under “Service and financial companies”.

reports/annual-reports/LH-AR-2001-e.pdf (accessed June 26, 2015).
Exhibit 6: Ten-year statistics
2001 2000 1999* 1998* 1997* 1996* 1995* 1994* 1993* 1992*
Operational ratios1)
Profit/loss-revenue ratio % – 4.5 8.0 7.8 10.8 8.1 3.3 3.8 3.9 0.4 – 4.3
(loss/profit from ordinary
activities4)/ revenue2))
Return on total capital % –1.4 10.7 10.3 13.0 10.9 4.9 5.7 6.3 3.4 –1.1
activities4) plus interest on
debt/total assets)
Return on equity (net % –18.1 16.7 17.1 22.1 20.5 10.4 12.1 7.4 –3.1 –13.0
loss/profit for the
period5)/ shareholders’
10)
equity6))
Return on equity % –21.3 29.5 27.2 38.4 33.2 12.8 15.3 17.9 2.6 –24.3
activities4) and
shareholders’ equity6)) 10)
Equity ratio (shareholders’ % 19.2 27.8 28.7 26.9 23.1 28.6 26.8 22.5 16.7 17.9
equity6)/total assets)10)
Gearing (net % 109.0 35.8 41.8 22.3 44.0 26.7 40.0 87.8 200.8 202.6
indebtedness/
shareholders’ equity6))10)
Net indebtedness total % 20.9 10.0 12.0 6.0 10.2 7.7 10.8 19.8 33.6 36.2
assets ratio
Revenue efficiency % 10.4 14.1 6.3 15.8 18.1 11.7 12.5 13.4 10.9 9.3
(cash flow9)
/revenue2))
21
ESMT–315–0165–1
22
Net working capital bn –1.5 –1.0 – 1.1 – 0.2 0.2 1.7 1.2 1.3 1.3 0.8
(current assets less short-
term debt)
Personnel ratios 87,975 69,523 66,207 54,867 55,520 57,999 57,586 58,044 60,514 63,645
Annualized average
ESMT–315–0165–1
employee total
Revenue2) € 189,713 218,638 193,253 213,910 199,008 183,916 176,691 165,918 149,809 138,489
/employee
Staff costs/ % 26.8 23.8 25.3 24.4 25.6 27.6 27.1 27.9 30.6 33.8
revenue2)
14)
Output data Lufthansa Group
Total available ton- m 23,941 23,562 21,838 20,133.6 19,324.6 20,697 19,983.2 18,209 17,123.4 16,369
kilometers
Total revenue ton- m 16,186 16,918 15,529 14,170 13,620 14,532 14,063 12,890 11,768 10,724
kilometers
Overall load factor % 67.6 71.8 71.1 70.4 70.5 70.2 70.4 70.8 68.7 65.5
Available seat- kilometers m 126,400 123,800 116,383 102,354 98,750 116,183 112,147 103,876 98,295 94,138
Revenue passenger- m 90,388 92,160 84,443. 74,668 70,581 81,716 79,085 72,750 67,017 61,273
kilometers
Passenger load factor % 71.5 74.4 72.6 73.0 71.5 70.3 70.5 70.0 68.2 65.1
Passengers carried m 45.7 47.0 43.8 40.5 37.2 41.4 40.7 37.7 35.6 33.7
Revenue passenger ton- m 9,105 9,251 8,458 7,474 7,071 8,084 7,828 7,202 6,636 5,882
kilometers
Cargo/mail t 1,655,870 1,801,817 1,745,306 1,702,733 1,703,657 1,684,729 1,576,210 1,435,636 1,263,698 1,197,87
0
Freight/mail ton- m 7,081.5 7,666.1 7,070.7 6,696.3 6,548.0 6,448.0 6,234.7 5,687.6 5,131.8 4,842
kilometers
Exhibit 6: Ten-year statistics (cont.)
16)
Number of flights 540,674 550,998 655,589 618,615 596,456 595,120 580,108 536,687 501,139 492,606
Flight kilometers m 687.9 678.0 668.7 636.4 614.6 720.5 659.0 620.9 561.1 598.7
Aircraft utilization (block 1,157,982 1,154,442 1,092,893 1,010,897 963,675 1,000,723 1,070,238 992,452 973,504 964,776
hours)
Aircraft in service 345 331 306 302 286 314 314 308 301 302
* Figures are converted from DM into euros 10) As from the 1995 financial year, the special items with an
1) As from the 1997 financial year the financial statements are prepared equity portion set up in individual company financial
according to the International Accounting Standards (IAS). Previous years’ statements for tax purposes are not included in the
figures are therefore not comparable consolidated financial statements according to the HGB. The
special items brought forward from the 1994 financial year
2) The figure for 1998 has been adjusted for the changed allocation of
were released in 1995 as extraordinary income amounting to
commission payments
€449m. This additional income was allocated to retained
3) Before 1997 operating results were not revealed earnings. As a result of this reclassification, earnings before
4) Up to 1995 before net changes in special items with an equity portion taxes, the net profit for the year, retained earnings and
equity (including the equity portion of special items) are all
5) Up to 1996 before withdrawal from/transfer to retained earnings and
shown with correspondingly higher totals
before minority interest
11) In 1996 the face value of the shares was diluted to €2.56;
6) Up to 1995 including the equity portion of special items and up to 1996
previous years’ figures were adjusted
including minority interest
12) €0.58 on preference shares
7) Up to 1995 including the debt portion of special items

13) Net profit less extraordinary result
8) Prior to 1997 liabilities were not shown separately as a sub-item of
overall debt 14) As from the 1997 financial year, Condor is no longer
included
9) Calculated as net cash from operating activities as per cash flow
statement, up to 1996 financial cash flow 15) Method of calculation changed
16) From 2000 number of flights includes only “real flights.”
The discontinuation of ground transports particularly by
Lufthansa Cargo has led to marked divergences compared to
previous years

reports/annual-reports/LH-AR-2001-e.pdf (accessed June 26, 2015).
23
ESMT–315–0165–1

Caso A Lufthansa

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ESMT Case Study

Dealing with low-cost competition in

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

The crisis and the turnaround

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

The European airline industry in 2001

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Low-cost carriers (LCCs)

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

The German airline market

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

Maintenance, repair, and overhaul (MRO) business

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Service and financial companies

Dealing with low-cost competition in the airline industry (A): ESMT–315–0165–1

Exhibit 2: D-Check result up to December 2001

Notes: Figures in million euros.

Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/

ESMT–315–0165–1 Dealing with low-cost competition in the airline industry (A):

Exhibit 3: Lufthansa key data

2001 2000 Change in percent

Revenue €m 16,690 15,200 9.8

EBITDA €m 1,448 2,598 –44.3

EBIT €m –292 1,547 –118.9

Net loss/profit for

Operating result €m 28 1,042 –97.3

Operating cash flow €m 1,736 2,140 –18.9

Total assets €m 18,206 14,810 22.9

Shareholders’ equity €m 3,498 4,114 –15.0

Staff costs €m 4,481 3,625 23.6

Dividend per share € 0.60 100.0

Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/

Income from 31.5 – 59.9 1.4 11.1 – – – – 15.9

Segment assets 12,488.3 2,847.1 140.2 325.2 79.4 60.4 – 15,940.6

– of which from 954.0 226.5 17.7 77.5 0.2 – – 1,275.9

under the equity

Capital expenditure 1,617.2 1,327 2.9 4.5 0.8 0.4 .– 2,952.8

– of which from 233.7 – – – – – – 233.7

Income from 66.6 –14.2 – 9.8 – 0.5 – 62.7

– of which from 600.0 540.4 – 69.8 – – – 1,210.2

Capital expenditure 2,154.8 26.6 0.6 3.5 0.9 1.5 .– 2,187.9

– of which from 261.3 0.1 – – – – – 261.4

Source: Lufthansa Group (2002). Annual report 2001. http://investor-relations.lufthansagroup.com/fileadmin/downloads/en/financial-

External revenue 10,182.9 2,421.6 1,540.9 2,066.6 – 126.0 352.0 16,690.0

– of which traffic 9,858.4 2,394.6 – – – – – 12,253.0

Inter-segment 449.6 16.0 1,293.9 448.8 – 352.1 7.9 2,568.3

Total revenue 10,632.5 2,437.6 2,834.8 2,515.4 – 478.1 359.9 19,258.3

– of which from –3.4 0.5 9.2 – 11.0 6.7 – – 17.9 – 15.9

Segment expenses 11,787.9 2,625.9 2,832.7 3,480.7 – 467.3 471.8 21,666.3

– of which from –3.4 0.5 9.2 –11.0 6.7 – –17.9 – 5.9

Segment liabilities 6,985.7 515.3 1,230.7 1,139.6 – 177.0 484.7 10,533.0

– of which from – 0.2 – – – – – 0.2

Capital expenditure 1,166.6 128.7 64.8 1,380.0 – 34.6 178.1 2,952.8

– of which from 233.7 – – – – – – 233.7

Amortization and 794.9 116.8 78.5 651.5 – 35.4 61.3 1,738.4