3rd Lufthansa Case Challenge                2012        rd  3 LUFTHANSA     CASE   CHALLENGETeam Name: FADED FLAMECampus: ...
3rd Lufthansa Case Challenge                        2012    Table of Contents    Introduction                             ...
3rd Lufthansa Case Challenge                                                  2012                                        ...
3rd Lufthansa Case Challenge                                             2012    INVITE ONLY NETWORK MILES PROGRAM    Elig...
3rd Lufthansa Case Challenge                                                 2012    Tie up required: With ESPN Fantasy Fo...
3rd Lufthansa Case Challenge                                                   2012             Mobile check-in and board...
3rd Lufthansa Case Challenge                                                     2012         direct airline ticket sales....
3rd Lufthansa Case Challenge                                                   2012             Shared ramp management—Mo...
3rd Lufthansa Case Challenge                                                 2012    2. Additional Miles for booking early...
3rd Lufthansa Case Challenge                                                  2012    Adding value to the Miles & More cus...
3rd Lufthansa Case Challenge                                                 2012     Potential/Benefits to Lufthansa     ...
3rd Lufthansa Case Challenge                                                     2012                       PREMIUM TRAFFI...
3rd Lufthansa Case Challenge                                                2012                     % of                 ...
3rd Lufthansa Case Challenge                           2012       estimated revenue generated by                   In thes...
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  1. 1. 3rd Lufthansa Case Challenge 2012 rd 3 LUFTHANSA CASE CHALLENGETeam Name: FADED FLAMECampus: Indian Institute of Management, KozhikodeMembers: Arnab Guha Mallik (8943994677)| a.g.m.xaverian@gmail.com Anshul Kumar (8086087963) | anshulk15@iimk.ac.in Abhisek Paul (8943707444) | abhisekp15@iimk.ac.in 0 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  2. 2. 3rd Lufthansa Case Challenge 2012 Table of Contents Introduction 2 Social Media Strategy 2 What are we suggesting 2 Network Miles Program 2 Some other social media strategies 3 Airline Mobility Evolution 4 Mobility Advance 5 Mobility Advance Architecture 6 Mobility Advance Roadmap 6 Additions to Miles and More Program 7 Launching kids’ rewards program 7 Additional miles for booking early 8 Gifting miles 8 Flexi-miles 8 “Stand-out” miles 8 E-gift card drive 9 Giving virtual cash as part of Miles and More program 10 Why are we focusing on premium customers 10 Financial analysis 111 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  3. 3. 3rd Lufthansa Case Challenge 2012 INTRODUCTION The idea of innovation is setting out a new path for delivering the company’s core business value; something which retains the existing and pulls the new. For the same reason it becomes imperative for Lufthansa as a company to carve out new strategies and policies to differentiate itself in a highly competitive environment for a sustainable future growth. The job here is to deliver what’s missing in the current value chain and fill that gap than to diversify territories and attend new markets in which you don’t stand expertise. We found out that customer aspirations for more and improper touch points could just be some of those missing links. Brand engagement and loyalty are some of the few facets to facilitate Lufthansa in achieving its goal of differentiation and customer value delivery. At times doing things differently makes more sense than doing different things. Our ideas based on Social Media Marketing, pumping up the “Miles & More” program and advance mobility innovation helps Lufthansa rightly to achieve what it aspires for. SOCIAL MEDIA STRATEGY LH Social Media Fundamentals: Customer-involvement drives the brand relationship as part of customer‘s daily life – beyond the flight Social Media Marketing Mission: “To help our customers to become better connected travelers – offline & online.” Lufthansa aims at being the most linked brand which enhances the depth and breadth of the Brand through as many relevant brand engagements. Social Media provides that. Shareability, value, hits, visibility, word of mouth only leads to more engagements, bigger digital footprint and greater brand Equity. WHAT WE ARE SUGGESTING?? No major revamp, mere tweaking of the social media strategy especially for Facebook and Twitter. We are suggesting that Lufthansa have a goal driven Social Media Campaign:  LISTEN to build LOYALTY  By interacting with the customers on their terms  IDENTIFY THE PASSION POINTS to drive ENGAGEMENT  By getting inside the fickle mind of the customer  EARN REVENUE According to Forrester Research 55% of consumers want ongoing conversations with companies and brands. 89% said they would feel more loyal to a brand if they were invited to take part in a feedback group. We as a team suggest some SOCIAL MEDIA STRATEGIES AND EVENTS TO DRIVE LOYALTY, ENGAGEMENT and REVENUE NETWORK MILES PROGRAM Platform: Facebook and Twitter This initiative will be a social loyalty program that will enable customers and fans to get rewards for promotional actions such as sharing a review of the airline or tweeting a deal. The rewards in the FLYPOINTS program consist of points and levels. By carrying out specific tasks, like participating in a poll, members can earn points. Members also receive 100 points when joining the FLYPOINTS program, another 100 when a Facebook friend becomes an ambassador, and 50 points when they like a post, share content or complete a poll. Points are also awarded when members book a flight ticket via the Lufthansa website or post their flight itinerary on the Facebook and Twitter application. Members can then redeem their points for flight discounts, goodies and e gift cards or vouchers. By collecting more points they also unlock new levels, which entitle them to better rewards.2 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  4. 4. 3rd Lufthansa Case Challenge 2012 INVITE ONLY NETWORK MILES PROGRAM Eligibility:  Members: “Miles and More”  Invite only: Members who have flown in the past 2 weeks New topics will be introduced each week, with members receiving an email inviting them to take part in the specified discussion and/or survey. All of those taking part in the discussion or survey will receive a mile point for every relevant comment and survey they fill. At the end of the month, all the members who take part in the various discussions and polls will be entered into a monthly prize draw with the chance to win a free pair of return flights to any LUFTHANSA destination of their choice. WHY THE ABOVE PROGRAM The platform can be used to introduce early-stage concepts and the ability to interact directly with the customers provides the opportunity to develop, scope and co-create these ideas. In short, the program will be a free market research program, giving consumer insights, likes, dislikes and provide findings more quickly than traditional approaches. We can information about: Concept Testing and Development: 1. Inflight catering 2. Inflight entertainment Customer Experience and Service Delivery: - 1. Punctuality, 2. Airport security Network Development: 1. Schedule 2. Destinations Website development and Competitor website assessment GOALS that will fulfilled: LOYALTY and ENGAGEMENT SOME OTHER SOCIAL MEDIA STRATEGIES Lufthansa should have a single and dedicated Twitter and Facebook channels to listen and respond to customers. Another major breakthrough can be usage of GOOGLE + Hangout where customers can provide live feedback by either video chatting or voice chatting. All Lufthansa will need is a a dedicated team of about 10 people handling customer requests who are not even afraid to apologize! GOALS DRIVEN: CUSTOMER SERVICE Some other Strategies involve, infusing social media in the booking path such that a customer can share travel details through social media. Such an application is available through the miles and more mobile app but should be extended to all You Tube can also be by converting YouTube lookers to bookers by providing a link to landing page on the videos that customers/viewers generally watch Win A Plane Contest Create a team; Invite your Friends….Win a chance to support your favorite club with 30 mates Germany is predominantly a football crazy nation. It has one of the best Football teams in the world and one of the strongest leagues in the form of the BundesLiga, with Bayern Munich, Borussia Dortmund, Bayer Leverkusen as the major footballing heavy weights. Details Duration: 1 month Eligibility: All above 18 years, German national and signing up for the WIN A PLANE CONTEST3 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  5. 5. 3rd Lufthansa Case Challenge 2012 Tie up required: With ESPN Fantasy Football and to create a customized league for Lufthansa How to Play: 1. All those who have signed up, have to sign up on ESPN fantasy football. 2. They have to enter the previously created Bundesliga and create a football team with players from the around the world. 3. Now all the players who have joined up have to invite 30 friends to this league, who will then be the supporters of their friend’s team 4. As in Fantasy football, the participants enter as managers and can manage everything about their club. 5. Every match-day, the players of the teams get points on the basis of their actual performance on the field 6. At the end of the month, only those team will be considered which have a minimum of 30 supporters. 7. From all these teams, the team that wins with the maximum no of points will be declared the winner 8. The owner of the team can then go to see the away match of his favorite football club along with 30 of his friends free by flying on a Lufthansa flight or a German Wings flight 9. The match can be in other countries only if at the start of the league/ win a plane contest, the participant chooses a particular match which his favorite team will play in a different country other than Germany, say Champions league away match of Bayern Munich in ENGLAND Reason for such a Game: Promotional Strategy and Increasing Brand Awareness To engage with even more hearts and minds of the domestic travel market of Germany? With a competitive domestic German market and threats from high speed rail, a campaign is necessary to boost revenue for both Lufthansa as well as Germanwings; a campaign that can create a big buzz. And what better way than FOOTBALL? Moreover the 2012–13 Fußball-Bundesliga will be the 50th season of the Fußball-Bundesliga and hence a proud moment for the German football federation as well as the clubs and their supporters. Hence having the contest based on Football is justified as it will capture the Imagination of thousands of football lovers in Germany. The reach of the campaign and hence the reach for the brand will be staggering, enough to easily offset the cost of tie up with ESPN and giving a ride free to 30 people. Just imagine, 1 participant= 30 followers, hence 5000 participants== 150000 followers and that too at the cost of nothing AIRLINE MOBILITY EVOLUTION  Lufthansa Airlines needs to modify its business models to exploit the growth of mobility, and mobility-enabled personalized services.  Based on the survey, SITA forecasts that by the end of 2013, mobility optimization for websites will grow from 65 percent currently to 80 percent. Mobile phone-based boarding will increase from 31 percent today to more than 50 percent, and other paper- and card-based applications such as baggage receipts, card access to premium lounges, and cash and credit card payments are also expected to be replaced by mobile applications. A closer look at how mobile capabilities for Lufthansa can be evolved. Mobility Basic Among the many Mobility Evolution applications, the following solutions are commonly used via mobile phones:  Booking—flight booking and rebooking; onboard food selection prior to boarding4 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  6. 6. 3rd Lufthansa Case Challenge 2012  Mobile check-in and boarding passes—boarding pass sent to mobile phone as bar code; passenger holds phone up to bar-code reader upon boarding plane  Website optimization—websites designed to accommodate various mobile device footprints (smaller displays, different font sizes)  Messaging—targeted messages and advertisements sent to passengers’ mobile phones based on their unique profiles  But in order to differentiate itself from the rest of the airlines, Lufthansa has to move beyond mainstream applications such as electronic ticketing and online check-in.  Lufthansa has to take advantage of modern technology e.g. Near Field Communication (NFC) technology for boarding passes that enables short-range wireless interaction with consumer electronics, mobile devices, & PCs.  Lufthansa also has to leverage its state-of-the-art IT services to embrace the 2D bar-code technology, which permits passengers to clear security lines quickly, speeding up the boarding process using secure data that is transmitted to their mobile devices. Since more and more of the airlines have embraced upon these aspects of airlines mobility, Lufthansa in order to stay ahead of the competition has to go to the next level of mobility evolution which will deliver far superior experiences with the context awareness becoming part of the overall experience. Mobility Advance Mobility Advance will ultimately empower Lufthansa to combine Basic capabilities with context-aware applications to transform its business model, enhance its relevance to customers, and provide passengers with greater control over every aspect of their travel—anytime, anywhere, through any device. Personal travel assistant—for travel-related interactions such as alerts pertaining to all aspects of the journey, including drive time to the airport, flight times, and security line status  Mobile marketing—dynamic packaging of personalized offerings and discounts  Mobile concierge service—with the push of a button, access a virtual concierge whose familiarity with the user’s profile (likes, dislikes, etc.) enables delivery of a highly personalized experience  Mobile payment—smartphone as a secure e-wallet, taking advantage of context-aware security capability  Augmented reality—context- and location-aware applications enable an immersive, context-rich environment for the passenger  Real-time business intelligence for airlines—rather than conduct analytical yield management on a batch basis, airlines can perform optimized real-time yield management based on passengers’ location, what they are doing, and what they might want Offering smart, mobility-enabled, personalized services and products can generate new revenues. Such new revenues may include the sale of perishable products (for example, empty seats) through real-time auctions for aisle or window seats, or sales of overhead storage as space becomes available; commissionable products such as food, drinks, music or movies, premium airport parking and car services; or use of frequent flyer points. As Lufthansa starts targeting Asian and African countries, Lufthansa expects to increase the proportion of tickets sold through online channels and through their own websites. Smart mobile devices are a key driver of this development. This is especially true in emerging countries, where low penetration of fixed Internet access hampers5 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  7. 7. 3rd Lufthansa Case Challenge 2012 direct airline ticket sales. Here, mobile phones can play a critical role in delivering new services and enabling airlines to interact with customers. Mobility Advance promises to transform how airlines interact with passengers beyond the domains of airplanes and airports. Using a range of services and smart solutions, airlines can maintain contact with passengers at various touch points along their journey, delivering real-time, relevant, and value-added information, offers, discounts, and personalized services that help build a trusted relationship. Figure: Mobile touch-points along the passenger journeyFigure: Mobile Architecture Figure: Mobile Advanced roadmap Source: Cisco IBSG, 2010 Mobility Advance Architecture Mobility Advance requires a new approach and a fundamentally different business and technology architecture. While not prescriptive or exhaustive, the architecture offers airline executives a useful construct from which to begin thinking about reorienting their airline visions, strategies, and investments. Mobility Advance Roadmap The global rise in mobility and smartphone adoption presents a unique transformational opportunity for airlines to push the innovation envelope in regard to passenger experience and employee empowerment. Companies that recognize subtle market transitions before others and are willing act, invest, and execute have a rare opportunity to gain a breakout competitive advantage that will be difficult for the latecomer to match. Mobility Advance is the quantum shift that will create winners and losers New Process Innovations possible from Mobility Advance Any Airlines traditionally operate in a highly siloed fashion where specific processes necessary to support extremely efficient operations are departmentally isolated. Using Mobility advance, Lufthansa can benefit in the following ways 6 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  8. 8. 3rd Lufthansa Case Challenge 2012  Shared ramp management—Mobility advanced solutions can enable employees to collaborate based on real- time information such as gate changes, leading to a reduction in aircraft turnaround times.  Innovative asset management—Smartphone solutions can provide ramp workers with up-to-date information required for their specific task. For e.g. finding lost luggage as mobility advanced will lead to faster problem resolution and asset identification, and improved passenger satisfaction.  Workforce management- The massive Lufthansa crews (both on the ground and in the air) are dispersed around the world. Using smartphones, employees working on the ground, for example, can access real-time information from flight crews to handle passenger requests (such as flight delays) more efficiently.  Airport footprint—Smartphone capabilities will also allow Lufthansa to reduce its airport footprints (personnel, counters, kiosks, real estate, and more) thereby saving on money Additions to the Miles & More Program: “It really is with creating greater customer intimacy.” Clear benefits, achievable rewards, consistency, sustainability and a feeling of appreciation--these are the characteristics of a good customer loyalty program. Loyalty isn’t everything; offering a loyalty program whose rewards are achievable, whose terms remain consistent across time, and that makes the customer feel appreciated is only part of the battle. Even the best loyalty program is useless if the companys customer service reputation is lacking. Companies that focus on both of these major points of interaction with the consumer, along with fundamentals like providing products that consumer wants at prices they want to pay, increase their chances of long-term success. The Premium customers make up the major chunk of the frequent flier program and bring in substantial revenue and hence should be focused upon 1. Launching Kids Rewards Program: “Child’s Delight”  The concept emerged from our knowledge that parents main interest is their children and that their attention usually revolves around pleasing them in the most educational and fun way  Kids Rewards is a new communication tool targeting both parents and children: parents are pleased to bank with an Airline which is contributing to enrich their offspring, and children recognize Lufthansa as an airline which brings them gifts and fun. Salient features  Cardholders can redeem their miles on an online catalogue consisting of educational games (downloadable), encyclopedias and gifts to choose from for their off springs Terms  Redemption of the points executed may not be cancelled or exchanged by the Cardholder and they cannot be converted back into the Cardholder’s account.  Lufthansa would reserve the right to suspend all awarded points, where the account exceeds the agreed limit. Once the account is restored to order, the points will be fully reinstated.  Rewards can only be redeemed in accordance with the current rewards catalogue of Lufthansa. With the help of the above program, Lufthansa will make its existing customers all the more loyal. This is a perfect communication strategy aimed towards both parents and children which captures the emotional attachment to one’s offspring. This program is a direct contributor as an aid to the development of the child7 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  9. 9. 3rd Lufthansa Case Challenge 2012 2. Additional Miles for booking early Extra miles to be awarded to the customers booking their tickets early as compared to others (an incentive to book with Lufthansa) Many customers buy months in advance to take advantage of the lower price of the ticket. In order to influence the fliers to buy Lufthansa tickets and not others, the “Additional Miles” concept serves a proper stimulant. Lufthansa will benefit by getting new customers who can then be converted to loyal consumers The program leads to more 1. Awareness 2. Revenues 3. Gifting miles  A special option where the Miles & More members can actually gift their miles or share the points with their special ones/relatives on special occasions such as Birthdays/anniversary present or when on a trip.  The points then will be redeemed by the others as per their requirement and used as discount vouchers and coupons to purchase the gift of their liking from selected retails as per the Lufthansa contract Benefits to Lufthansa and its partners  Indirect marketing to a new potential customer  Retail will also get a new potential customer The above program is not present with Lufthansa but with proper research we found out that a big problem with redeeming miles is that individuals rarely travel alone. They often like to travel with a friend or family member, and trying to get that person on the same flight or in the same hotel at an advantageous rate can be a challenge. Such a change will only create loyal customers and brings in more revenues. 4.Flexi-Miles  This will give customers the chance to use their “miles” with a combination of cash (from their Master card Credit Card) to buy products from the Lufthansa Web store consisting of different products to give power to the miles & more customer to choose from a different array of products The ability to mix and match award travel can help make it easier and more flexible for members to obtain award seats. 5. “Stand out” Miles The Miles & More cardholders can use their miles to book tickets for the top sporting events such as the Bundesliga or booking tickets for the top music shows/ events such as the “Rock am Ring” where almost 150,000 people turn up every year giving Lufthansa a big opportunity to drive their loyalty program and may even tap new potential customers To increase the exclusivity associated with the premium customers of the Miles and More Program, Lufthansa should provide its most esteemed customers with invite only exclusive fashion house openings, premiers etc.8 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  10. 10. 3rd Lufthansa Case Challenge 2012 Adding value to the Miles & More customers Consumers value openness. They want a service or program that works with other programs. The more open your program is, the more beneficial and attractive it will be to customers. As you gain customer insight, your program can mature into a more and more open proposition without endangering customer loyalty, because the barrier to a customers switching will no longer be purely economic 6. E Gift Card Drive: New opportunities for Lufthansa short haul/medium haul customers Reasons to be hyperactive in the e-space  As Lufthansa is already active in the physical gift card space, a potential lies in the e-space. According to a research from loyalty provider Affinion Loyalty Group (ALG), more than six out of 10 (61 percent) consumers chose a virtual gift card over its physical equivalent when given the choice between the two. Tapping the targeted customer segment using smart phones: Ease to access on the move Recent Smartphone surge in Europe  comScore put combined smartphone ownership for France, Germany, Italy, Spain and the UK at 44% of mobile users as of December 2011 (104 million users).  According to Bitkom, 11.8 million smartphones were sold in 2011 in Germany, an increase of 31% over 2010. This represents 43% of the total number of mobile phones sold that year. Launching Lufthansa’s E Gift Card Programme named “e-Tributes”  Creating an online Facebook campaign promoting the salient features of “e-Tributes”, and how it benefits the new flyers of Lufthansa and incentives as compared to the other Airlines Benefits to the non-frequent flyer customers/new Lufthansa flyers st 1 time: flyers to be given small gift vouchers/coupons to be redeemed at coffee outlets/fast food chains such as Starbucks nd rd 2 -3 time: flyers to be provided discount coupons to be redeemed at retails and life style showrooms th 4 time till joining of Frequent Flyer Program (FFP): heavy discount coupons with an additional option of adding some of it as miles as soon as you become a Miles & More member *All this with an option to gift your e-cards to close ones on special occasions such as Birthdays, anniversaries and also the option to redeem the benefits online without being required to visit the retails or stores physically9 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  11. 11. 3rd Lufthansa Case Challenge 2012 Potential/Benefits to Lufthansa  Quick conversion into loyal customers  According to First Data, nearly 20 percent of consumers purchased or received an e-gift card in 2011 - a 50 percent increase from the previous year. Cost to Lufthansa  Least investment as the major promotion will be done through the social network on the Facebook page  Other minimal investments for TV adverts and billboard advertising 7. Giving Virtual Cash as a part of Miles and More Program To make the loyalty program more flexible and suited to the needs of the customer, Lufthansa can let customers redeem their miles points in the form of virtual currency for games like Zynga Inc’s FarmVille. Such a move can attract people in their 20’s. As Zynga has a lot of players who are highly engaged in their games, Lufthansa can connect that online engagement with offline behavior thereby turning one more touch point to engagement with the brand WHY we are focusing on the PREMIUM CUSTOMERS The Miles and More program though designed for the frequent fliers is essentially beneficial more to Lufthansa’s premium customers than the economy class customers. These premium customers who are also corporate customers pay a lot to get the best services and are not at all price sensitive. So they may switch if they do not get the desired benefits. The Loyalty program is hence such a program that binds these same customers. As you will subsequently see, premium customers contribute 50.40% of Lufthansa’s total revenues by passenger carrying, though being 1/3 the total passengers flown by the Airline. In short more satisfied these customers are, they will remain loyal to LUFTHANSA in this extremely competitive and volatile airline market. More the no of premium customers, greater is the amount of revenue generated. The different strategies suggested under the MILES and MORE program are suggested keeping in mind this very fact about premium customers. In the next part we analyze the premium traffic by growth of MAY 2012 along with the travel demand elasticity to suggest some routes for Lufthansa to increase their flights in. They are also backed by other factors such growth in mobility and increase in people using loyalty programs. Here again the focus is on Premium customers and opening or plying more flights in these route will mean increase in revenues for LUFTHANSA by a substantial margin from 2011. All calculations are shown below. All the strategies followed, be it Social Media Strategies/ innovations, MOBILITY ADVANCE and new process innovations under it and finally new innovations within the existing MILES and MORE Program is bound to increase the revenues for LUFTHANSA either by increasing customer loyalty or bringing in new customers by increasing awareness or by reducing price pressures in operations and processes10 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  12. 12. 3rd Lufthansa Case Challenge 2012 PREMIUM TRAFFIC GROWTH BY ROUTE Region Rout Mar Nati Natio Supra Supra- Routes Traffic Share Premium Traffic Economy Traffic e/M ket onal nal - national of Growth Growth arke level natio Total t nal Premiu level level m: Shor Long Shor Long- Short- Long- Revenu May 12 YTD ‘12 May 12 YTD ‘12 t- - t- haul haul haul es vs.May vs.YTD vsMay vs. YTD haul haul haul 11 ‘11 11. ‘011 Intra N -1.5 -1.4 -0.9 -0.8 -0.7 -0.6 Africa - 1.40% 0.90% 17.00% 24.80% 24.40% 28.70% America Middle East Intra -2.0 -2.0 -1.2 -1.1 -0.9 -0.8 Europe Africa - 0.00% 0.00% -33.30% 2.90% -31.6% -4.80% SW Pacific Intra- -1.5 -1.3 -0.8 -0.8 -0.6 -0.6 Asia c- 0.30% 0.20% 24.90% 23.80% 35.90% 40.40% America- Intra -0.9 -0.8 -0.5 -0.5 -0.4 -0.4 s.america Sub- Saharan Europe - 9.30% 14.70% 2.40% 6.30% 7.60% 8.50% Africa Far East Europe - 5.10% 5.50% 5.20% 9.30% 10.20% 11.80% Intra S -1.9 -1.8 -1.1 -1.0 -0.8 -0.8 Middle America East Trans- -1.9 -1.7 -1.1 -1.0 -0.8 -0.7 Europe - 0.10% 0.20% -12.00% -17.3% 11.50% - Atlantic SW Pacific 10.00% Within N- 1.10% 0.30% 18.40% 11.40% 6.80% 3.60% Trans- -0.9 -0.8 -0.5 -0.5 -0.4 -0.4 America Pacific Within 0.20% 0.10% -10.10% -8.60% 3.60% 1.50% Europe- -1.4 -1.3 -0.8 -0.7 -0.6 -0.5 SW Pacific Asia North 17.70% 27.70% -3.80% 0.60% -0.80% 1.40% Atlantic Table 2: Traffic demand report 2009 N 5.30% 1.80% 1.50% 0.20% -1.40% -1.30% America-C published by IATA America N America 2.80% 3.50% 4.80% 6.80% 8.50% 8.10% -S America Far east – 1.70% 2.30% 1.00% 3.80% 2.00% 6.80% SW pacific North and 6.30% 13.20% 8.60% 9.50% 7.40% 7.60% Mid Table 1: It is just a snapshot of the Pacific Within 21.90% 6.00% -4.60% -0.40% 2.90% 5.80% premium traffic growth for the month of Europe May 2012 published by IATA. The entire Total 100.00 100.00 1.70% 4.90% 5.40% 7.10% Internatio % % table is in the excel sheet attached nal It is clear that the majority of the premium customers of Lufthansa Airlines are from North America, Asia/Pacific and Europe. The routes highlighted in Table 1 should be targeted for increasing the number of flights because of 2 reasons: 1) The premium traffic growth rate is the highest on those routes as compared to the other routes. 2) The price elasticity of demand is also less than or equal to 0.6 as shown in Table 2. So, they are less sensitive to ticket prices, as a result in case of price competition by the major competitors, Lufthansa will still be able to hold on to the premium customers on these routes . Phase 1 : In phase 1 of roll-out of the introduction of more number of flights, the targeted routes should be the routes (obtained from Table 1) and the corresponding levels (obtained from Table 2) where the price elasticity is low (less than 0.6). Phase 2 : In phase 2, the targeted routes with price elasticity levels between 0.6 and 0.9 should be considered for roll- out. Routes like intra-Asia, intra-Europe and intra-Africa should not be considered for the first 2 phases of roll out because they form only a small chunk of the premium customers (although in Africa, the price sensitivity is quite low). African routes can be considered in Phase 3 because, although a small target market as of now, there is enormous growth potential in future as shown in Table 1 besides having very low price elasticity.11 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  13. 13. 3rd Lufthansa Case Challenge 2012 % of If we look at the revenue earned per flight trip, we find Destination revenue Freuencies Ratio that the ratio is highest for Middle East and Asia Pacific, Europe 46.1 9819 0.00469 primarily because of the longer distances to these North destinations. Atlantic 20.5 3442 0.00596 Considering the fact that the fixed costs for introducing a South new route is approximately the same (without the fuel America 4.8 359 0.01337 costs and other operating costs for flying on that route Asia/Pacific 19.8 786 0.02519 which will increase with increase in distances), we suggest Africa 4.3 253 0.01700 that during the phase 1 of roll out, we must target Asia Middle East 4.5 165 0.02727 Pacific and Middle East destinations, because for the same number of new routes designed for each destination, the percentage increase in revenue is higher for Asia Pacific and Middle East destinations. Estimating favourable market Normal revenue projections revenue potential total traffic revenues for year 2011 (EUR millions) 20534 europe 46.1% conservative estimate of growth in revenues (includes north america 20.5% growth of volume, price mix currency effects) 10% asia/pacific 19.8% estimated revenues for year 2012 (EUR millions) 22587.4 total percentage share of targeted routes 86.4% considering availability/suitability of these routes for our implementation 75.0% Revenue share of favorable route for implementation (as a % of total revenues) 64.8% increasing the number of airlines on this targeted route 10% total estimated revenues for year 2012 (EUR millions) 24051.0612 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
  14. 14. 3rd Lufthansa Case Challenge 2012 estimated revenue generated by In these financial analysis, we are trying to analyse the premium segment relative importance of different routes in terms of Premium share of intercontinental revenues earned and also tried to map it with the price traffic revenue for Lufthansa 50.40% elasticity of the premium customers in different parts of Estimated Revenue generated by the world, so as to give an idea of the most profitable premium segment customers target routes for Lufthansa for introduction of more plying favourable route for number of flights. implementation (EUR million) 12121.74 The three most important routes for Lufthansa are Europe, North America and Asia/Pacific, which together constitute 86.4% of the total revenue. Here we have taken a conservative estimate of growth in revenues (includes growth of volume, price mix currency effects) of 10%. Then we have analysed the impact of increasing the number of flights plying on these routes by 10%. Again taking a further conservative estimate of 75% availability/suitability of these routes for our implementation, we get total estimated revenues of 12.122 EUR billions, considering the premium share of 50.4% of the total intercontinental traffic. According to a report published by AITE, the number of smart phonatics consumers as well as other consumers using mobile phones for making payments or booking tickets as well as other purposes are going to increase tremendously over the next three years. Similarly, the percentage of smart phonatics consumers as well as other consumers who value loyalty programs also would grow at a very high rate over the next three years. This is particularly more noticeable in case of smart-phonatics users. As a result, Lufthansa needs to leverage this opportunity by developing "Mobility Advance" applications.13 Team Faded Flame INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE