Table of Contents
LIST OF FIGURES
LIST OF ABBREVIATIONS
1.1 PROBLEM DEFINITION
1.2 OBJECTIVES OF THE WORK
1.3 STRUCTURE OF THE WORK
2. THEORETICAL PART OF STRATEGIC MANAGEMENT TOOLS
2.1 PEST ANALYSIS
2.2 PORTER'S FIVE FORCES
3. INTRODUCTION OF LUFTHANSA AND EUROWINGS
3.1 ANALYSIS OF STRATEGIC DECISIONS BY LUFTHANSA
3.2 FEASIBILITY OF EUROWINGS WITH PEST ANALYSIS
3.3 FEASIBILITY OF EUROWINGS WITH PORTER’S FIVE FORCES
4. CONCLUSION AND RECOMMENDATIONS
LIST OF REFERENCES
List of Figures
Figure 1: PEST Analysis
Figure 2: Porter’s five forces
Figure 4: HUBs and PtP
Figure 5: Flight Network of Eurowings
Figure 6: LCC EU competitors
Figure 7: Passenger growth
Figure 8: Delivery demand of Boeing
Figure 9: Mega Bus Marketing "1 € destinations"
List of Abbreviations
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The aviation industry has changed in the recent years rapidly. Twenty to thirty years ago the aviation was too expensive for the most people and a network of international air connections often did not exist. Nowadays the aviation belongs almost to an everyday business, whether professionally or privately.
At the end of the 70s there was an air traffic revolution, the concept of the low cost carrier (LCC) started. The LCC is a provider of the basic products, such as low service on board, seat comfort and free baggage drop off.1 The first LCC was the southwest airlines from the USA. Up to the 90s Southwest offered LCC connection in US; without competitors in this business area. In 1990 the Irish airline Ryanair was founded and was the first LCC in the European (EU) area.2
The airlines are facing new challenges: more clientele, more fair flight prices in comparison to the competition and in addition high margins. For a long time such scheduled airlines like LH Group, KLM- Air France and British Airways-Iberia were the representative airlines in the EU. People have spent a lot of money for having a full service on Board (luggage, food, etc.) and were often dissatisfied about constantly rising prices for the flight tickets. With the origin of LCC, the market has changed enormously. Yearly scheduled airlines announce customer decline and decreasing profits. What is the reason for that? Are the LCC responsible for it? Do the scheduled airlines have to rethink their strategies to be still competitive in the market?
1.1 Problem definition
During the last years the LH has been constantly in profit turbulences. The customers decide to better or cheaper Airlines while service is still on demand. The Management Board of LH decides a new LCC Eurowings, based on long-haul flights. The aim of this concept is among others a strategic decision: winning new customers; fetching lost shares of the market back (by Germanwings) and more profit. However, the problem is in fact that already 3. LCC on the EU market exist and which also split this market. A launch and investment in Eurowings can lead in a profit or in a failure. The problem of this work is to examine why Lufthansa launches this new LCC strategic concept. Further how this LCC concept will persevere in competition and why this airline wants to use the Cologne Bonn airport as the head base for the long-haul flights.
1.2 Objectives of the work
To solve the already described problem, two strategic management tools are used for the industry analysis and external influence. The carried out analysis should indicate a result towards the competition, as well as other external influences like politics and economics. Another aim of this work is to analyse which risks are considered for Eurowings.
1.3 Structure of the work
In order to achieve the stated objective, this work is built up as follows. First chapter starts with introduction and problem definition. Second chapter begins with theoretical base and strategic management tools. In chapter three, which is also the main part of this work, the LH and Eurowings are introduced. The fourth chapter sets the featured strategic tools with a view to Eurowings. The work is concluded in chapter four with summary and recommendation. The ITM checklist is additional in the appendix.
2. Theoretical part of strategic management tools
The first chapter represents the theoretical part of this work; starting with introduction of PEST Analysis. The last subchapter of theoretical part ends with Porter’s five Forces.
2.1 PEST Analysis
The PEST Analysis (Political, Economic, Social, Technology) is one of the most important strategic management methods for analysing the microeconomics (external) infuses of company. In addition, the PEST Analysis is used for the new opportunities in the market with respect to the competitors in the same industry. Often the PEST Analysis is used for the evaluation of new market chances as well. The factors of Pest analysis are showed in the figure 1.
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Figure 1: PEST Analysis3
The political factor is one of the important points in the PEST Analysis. Political influence has a strong influence over the economical change.4 The politics defines the tax in each country, political stability, critical situations and wars. Changes and trends in political industry have a significant impact on an industry, for example, the sanctions against Russian Federation, bring companies to the critical economical situation.
Next factor of the PEST analysis from figure 1 is the economical part. The economic values such as the gross domestic product (GDP), interest rates, monetary & fiscal policy influence the demand and supply of one product(s) of companies.
The third part of PEST analysis is a social factor. In first step social aspect represents the customer and customer value influence the demand of the products. Another company’s influence depends on birth and death rate, culture and demographic changes. The last factor of PEST analysis is the technology. Technology has one of the most important influences on the environment. Technological changes such as new PCs, Internet, e- Commerce & e-Business push companies to make new changes in information & science technology.5 Following subchapter represents the theoretical part of Porter’s five Forces.
2.2 Porter's Five Forces
With respect to the PEST analysis from the last chapter, this subchapter represents another important strategic management tool: Porter’s five Forces. The porter’s five forces is one of the most famous strategic management models of industry analysis for identifying opportunities and threats. The framework of 5 P’s was developed by Harvard Professor M. Porter in 1979. The following figure shows the framework of Porter’s five forces.
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Figure 2: Porter’s five forces6
The first P in figure 2 describes the potential competitors in business. The companies are not competing at the moment, but they have resources to develop the same business and to compete in future. An example for is the Volkswagen Group. Currently VW group does not produce motorcycle; but in future they possibly will manufacture some and thereby will compete with BMW. The target of first P is to analyse competitor’s investment and to be ready for new strategic decisions.
Another P from figure 2 stands for intensity of rivalry. This point describes current competitors and their market shares. The target of second P is to analyse rivalry by different factors like: price (for one product), product design, marketing campaign, advertising, promotion and service.7
Power of buyers is the third point in figure 2. The buyers can be subdivided into two types: in individual end customers who consume industry products and in companies that distribute industry products to the end consumer. The purchasing power of consumer always influences the economical market. The target of third P is to analyse customer needs, in consideration on demand quality and product price.
The forth P represents power of suppliers. Power of suppliers provides companies (or industries) with different financial and material inputs such as material (oil, metal, gas, etc.), services and labour of organizations or companies. The power of suppliers infuses product costs and profits in the industry. The objective of fourth P is the market stability. High prices of suppliers are a threat for the most companies.
The final P of Porter’s five forces is a thread of substitute products. Substitute describes different business that can satisfy customer needs. The target of the last and final P is to analyse the different businesses in the same industry.8
After the introduction of the strategic management tools, the following chapter starts with the main part of this work.
3. Introduction of Lufthansa and Eurowings
The German Lufthansa (LH), which is the biggest European passengers transport airline, was founded in 1926. In the 21st century the LH had a lot of economical and environmental turbulences (Example 9/11 and world economical crisis 2008). The LH Group has more than 600 long- and short distance aircrafts, which are flying to the 5 continents all around the world. More than 118.000 employees and more than 100 millions passengers in year 2014 are responsible for a company’s financial success.9
1 cf. Gross (2007), p.12
2 cf. Malighetti (2008), p.195
3 cf. made by Author, after Gregory (2010), p. 52-53.
4 cf. Rugman (2006), p.373.
5 cf. Analoui (2003), p.75-77.
6 cf. Hill (2008), p.57.
7 cf. Hill (2008), p.55
8 cf. Hill (2008), p 63
9 cf. LH Group (2014), p. 3 f.