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Running Head: LUFSTANSA INNOVATION SAVES THE DAY

Reyte on Publishing 2009

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Considering that airlines compete based on routes, flight times, and price; will the Investment

Lufstansa is making in its airport lounges, will the Return on that Investment be positive,

negative, or neutral?

CEO of Lufstansa Wolfgang Mayrhuber commented during a speech to his organization, “I

personally prefer the view of Max Frisch, who once said: “A crisis is a productive time. It just

has to be cleansed of the taint of a catastrophe” (Mayrhuber, 2008).

The global airliner received billions from the government, which served to bailout the industry

during the financial crisis in 2008. Mayrhuber even admits that the airlines are not pulling their

weight and are losing large margins in the market. It is well remembered that fuel prices in 2008

topped at over $100 a barrel and for jet fuel this price was even higher. This contributed greatly

to the increase in fares and the decision by many travelers to make other transportation

arrangements. Whole fleets were immobile on the ground due to the crippling costs of fuel and

millions in revenue disappeared. Several of Lufstansa’s local competition had to close their

doors after the major economic downturns for the industry became evident. However Lufstansa

has kept its nose up and the top management considered this an opportunity rather than a

catastrophe (Mayrhuber, 2008). They have decided to focus on the airport instead of the airplane

as the source for producing revenue. There are other elements to consider besides seats filled on

the airplanes. Lufstansa has turned their attention to making adjustments in their human resource

departments, renovating airline terminals around the world, reviewing contracts with suppliers

and their ability to devise sound investments that work (Mayrhuber, 2008).
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In looking at the first through third quarter of 2008. Profit from operations was 984 million EU

and net profit after expenditures was 551 million EU. The amount of capital being spent was 1.7

billion EU.

In calculation the ROI for 2008

ROI = 984 million/1.7 billion = 1.727642276*100=172.76 (Mayrhuber, 2008).

Turnover showed sales of 71.3%. Here are the major business components of Lufstansa Group

there was an overall growth of 10.9 percent mostly attributable to passenger transportation,

which was up by a profit margin of 2.8% over the previous year. All other business segments

dropped, 11.6 % for logistics down–0.5 percentage points,, 8.9 % for MRO, down –0.8 , 1.1 %

for IT down –0.2 % and 7.1 % of Catering down–1.2 % (Reports. Lufstansa.com, 2009).

Lufstansa has decided to focus on expanding its level of comfort and convenience services to the

best paying customers. This will be done by targeting an entire new area of the market. Flight

service lounge facilities are being redesigned with luxury and upscale features such as spa

services and chauffeur services with high-end luxury vehicles to shuttle passengers. This

decision to invest 1.7 billion in airport lounge services has resulted in what appears to be a

positive return on investment.

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For the human resource component, there has been a hiring freeze instituted for overhead

administrative offices as well as employee services, this is expected to save $200 million Euro

the first year. Lufstansa has merged with SWISS Air services in order to consolidate the assets to

expand the marketability with more destinations in the U.S. Cost cutting measures have been put

in place and will be part of an ongoing cost measurement study.

Mayrhuber also reports that they have over 100 projects in place to trim costs and expand

revenue opportunities in the lounge and amenity arena. The main thrust will be modernizing the

lounge facilities at airports all around the world. Through acquisition they have additional

aircraft services.

It appears the investments are paying off. The first first-class terminal brought in a quarter more

new business for the frequent flyer customer says, Mr. Oliver Wagner, a Vice President at

Lufstansa in airport services (Michaels, 2009).

Furthermore the First Class lounges and terminals have been a big hit around the globe, sparking

competitors to upgrade their terminals as well. Quantas has recently moved to upgrade its

lounges in the Asian market to improve conveniences to frequent flyers (Michaels, 2009). They

are followed by American Airlines whose lounge operations president, Nancy Knipp has said

that the Airline has plans to renovate 75% of their terminals over the next year. More proof that

the customers are willing to pay for better amenities like the Heathrow Clubhouse in Chicago is

the use of the Admiral Lounge. It has received 50% more business even though there is a charge

to gain access to these additional comforts (Michaels, 2009).

Lufstansa is a company known for it innovative abilities in areas of engineering, aviation, and

technological advances to improve customer service. Recognized for the removal of paper from

the ticket transaction process, frequent customers now fly without having to stop to purchase
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tickets as everything is handled by credit card and the Internet or other wireless

telecommunication devices such as PDAs and Smart Phone transactions. Lufstansa also has

made changes relating to an Internet portal at site mobile.Lufstansa.com to allow customers to

view reservations, make reservations and payments without leaving their home. This has sped up

the process for check in and allows customers more convenience and faster service.

Mayrhuber predicted a modest growth rate for passenger transportation of 5.2 for 2008. In

actuality the company achieved only 2.8 for 2008, however they remain optimistic that the new

airport investments will draw more business (Reports.Lufstansa.com, 2009). The decision to

expand lounge amenities and renovate the terminals is most likely the source of the only growth

that was gained throughout the global holdings of Lufstansa for 2008. Supporting this move of

innovation definitely increased ROI in a positive way, since all other business segments showed

a decline for 2008.

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References

Mayrhuber, W. (2008). Lufstansa Annual Press and Analysts Conference. Retrieved October 9,

2009 from http://investor-relations.lufthansa.com/fileadmin/downloads/en/charts-

speeches/LH-QR-2008-3-speech-Mayrhuber.pdf

Reports.Lufthansa.com. (2009). Lufstansa Sales Revenue. Retrieved October 9, 2009 from

http://reports.lufthansa.com/2008/ar/groupmanagementreport/earningsposition/revenueandincom

e/salesrevenue.html

Michaels, D. (2009). Lufstansa The Situation. Dow Jones & Company, Inc. Frankfurt.