Global Business And Management Field Study (EMBA6071) Project Topic: Pre-Trip Paper on Lufthansa Airlines Group 6 Arkin Chan, John Chong, Diana Chung, Ronald Yip, Jack Yu Submission Date: 21 May 2010 0 0 MACRO POLITICAL ENVIRONMENT OF GERMANY The political system of Germany is laid out in its 1949 constitution, the Basic Law (Grundgesetz), which remained in effect with minor amendments after 1990's German reunification. The constitution emphasizes the protection of individual liberty in an extensive catalogue of human rights and also divides powers both between the federal and state levels and between the legislative, executive, and judicial branches. In many ways, the 1949 Basic Law is a response to the perceived flaws of the 1919 Weimar Constitution, which did not prevent the rise of the Nazi party in 1933. The Federal Republic of Germany is a federal parliamentary republic, based on representative democracy. Representative democracy is a form of government founded on the principle of elected individuals representing the people. The Chancellor (Angela Merkel) of Germany is the head of government, while the President (Christian Wulff) of Germany is the head of state which holds a ceremonial role with limited reserve powers. In particular, the President can dissolve the Parliament if the Chancellor loses a motion of confidence and ask the President to do so. Executive power is vested in the Federal Cabinet (Bundesregierung), and is formed by the Chancellor and the various Federal Ministries. The Chancellor heads the Cabinet and thus the executive branch of the federal government. He or she is elected by and responsible to the Germany's Parliament (Bundestag). The Chancellor cannot be removed from office during a four year term unless the Parliament has agreed on a successor. Federal legislative power is vested in the Parliament of Germany and the representative body of the regional states (Bundesrat). The federal legislature has powers of exclusive jurisdiction and concurrent jurisdiction with the states in areas specifically enumerated by the constitution. The Parliament is considered to be more powerful as they only needs the regional states consent for proposed legislation related to revenue shared by the federal and state governments, and the imposition of responsibilities on the states. 1 By contrast, the duties of the President (Bundespräsident) are largely representative and ceremonial. The President is elected every five years by the Federal Assembly (Bundesversammlung), a special body convened only for this purpose, comprising the entire Parliament and an equal number of state delegates selected especially for this purpose. Since 1979, the Federal Assembly has traditionally met on 23 May, the anniversary of the founding of the Federal Republic of Germany and the coming-into-force of the Basic Law in 1949. This tradition ended with the unscheduled election of the new president in 2010 (Christian Wulff). In addition the German Basic Law requests the Federal President not to hold another office, practice a profession, or hold a membership in any corporation. In addition, every Federal President has by custom let his party membership lie dormant and assumed an acknowledged role of impartiality. Germany has a multi-party system that, since 1949, has been dominated by the Christian Democratic Union (CDU) and the Social Democratic Party of Germany (SPD). Other parties currently represented in the Bundestag includes: Christian Social Union (CSU), Free Democratic Party (FDP), The Left (LINKE), and Alliance ‘90/The Greens (GRÜNE), which are considered minor parties. The Christian Democratic Union (CDU) and Christian Social Union (CSU) are in the same parliamentary group, known as the Union. And the federal government of Germany usually consists of a coalition of a major and a minor party. Chancellor Angela Merkel belongs to the Christian Democratic Union (CDU) is the leading party currently in Germany with most number of seats in the Parliament (Bundestag). 2 Current Political news in Germany May 16, 2011—Bloomberg Greece today is pleading to IMF for a boost of its €110 billion bailout package but it’s clouded by the arrest of IMF managing director Strauss-Kahn. Europe’s donor countries, led by Germany, are demanding deeper budget cuts in exchange for granting Greece extra aid or giving it more time to pay back official loans, and are weighing whether to make bondholders share the costs. May 13, 2011—Financial Times The German government faces a growing revolt from its supporters in parliament against any move to provide extra financial assistance to Greece, the eurozone member state bailed out last year with at €110bn rescue program. However, the parliament has approved for a rescue program for Portugal, due to be agreed by European Union finance ministers next week. May 12, 2011—German Information Center http://www.german-info.com/press_shownews.php?pid=3621 A political reshuffle is underway in Germany. After months of uncertainty, a new leader of the Free Democratic Party (FDP), the junior coalition partner in Chancellor Angela Merkel’s government, has been chosen to replace Guido Westerwelle who’s held the post for 10 years. Phillipp Roesler is set to become vice chancellor is his new role as economy minister, and with it the third member of Merkel’s Cabinet under the age of 40. 3 INTRODUCTION OF INDUSTRY & COMPANY SELECTION Introduction of the Aviation Industry in Germany 1. Airlines In Germany, 70 airline companies are registered. They include passengers and cargoes, domestic and international, traditional and low cost. In 2006, the passenger volume was around 88 million and it generated US$ 15.8M revenue. For the distribution of international to domestic, it was around 75% to 25%. The 2 largest passenger airlines are Lufthansa and Air Berlin which dominate most of the market share in Germany. Lufthansa The flagship airline of Germany, the largest in Europe and the fifth largest airline in terms of passengers carried. However, she is the largest airline in the world in terms of fleet size. Air Berlin The Berlin based company is the second largest airline in Germany and the sixth largest of Europe in terms of passengers. It serves 163 destinations all over the world and the fleet size is 148 currently. On the other hand, low cost carriers (LCC) are also very popular in Germany airline industry. The key players are Germanwings, German company, and Ryan Air which is an Irish company. 2. Airports There are totally 90 airports in Germany. 58 of them are civil usage and 32 of them are military usage. Among from the 58 civil airports, there are two international hubs. One is Frankfurt Airport and the other is Munich Airport. In fact, these two airports are the top two busiest airports in Germany (Table 1). Table 1 : Top 10 busiest airports in Germany 4 Among the top 100 busiest airports in Europe, there are 11 airports located in Germany with position 4 among 26 countries. Refer to the number of passengers, the 11 airports in Germany contains 14% which is top 3 in Europe (Fig. 1). Figure 1 Fig 2. Main airports distribution in Germany (WikiMedia) 5 Introduction of Lufthansa Airlines The History of Lufthansa 1. January 6, 1926: “Deutsche Luft Hansa AG” was founded by Weimar government 2. 1930’s: Lufthansa had established a comprehensive air route network in Europe, and expanded to the USSR, Far East, and South America 3. Late 1930’s to 1945: The Reich’s government obligated Lufthansa by law to provide services, transport flights and technical operations. Despite the difficulties, it was business as usual 4. 1945: All services of Lufthansa were suspended following Germany's defeat 5. 1953: A new Lufthansa was formed 6. 1955: Lufthansa resumed scheduled service within Germany and international operations 7. 1955-1963: Two companies named Deutsche Lufthansa took to the skies – one on each side of the Iron Curtain. The East German Lufhansa ceased to exist and merged into Interflug in 1963 8. Early 1980’s: Lufthansa started to pursue the massive European and global expansion strategy 9. 1990: The reunification of East and West Germanies 10. 1991: Lufthansa operated in the red for the first time since 1973 11. 1992: Lufthansa, similar to many other airlines, was close to bankruptcy, due to the reduction of international air traffic caused by the first Iraq war 12. Since 1996, about 40% shares of Lufthansa were held by diverse foreign owners 13. 1997: Lufthansa formed Star Alliance together with airlines in other countries, such as Air Canada, Air New Zealand, ANA, Singapore Airlines, etc, and became the leading and pivotal member of this alliance 14. 2005: Lufthansa acquired SWISS 15. 2006-2008: Founded AeroLogic, a cargo airline, together with DHL Express. Further strengthened the Star Alliance, which including 21 members 6 Financial Performance of Lufthansa It can be seen that Lufthansa Group has become financially strong with a sharp increase of 2010 profit before tax to Euro 978m as compared to a 2009 deficit of EUR -139m as a result of the global economic crisis. The increase of 2010 profit is mainly due to the following: 1. increasing of revenue by 22.6% to EUR 27.3bn mainly due to greater volume (with an increase of 17.9% to 91.2m passengers), higher pricing, positive exchange rate and continuous network expansion via merger and acquisition (e.g. Swiss) 2. rising of operating expenses by 16.7%, which is much less than earnings increment. Achieved by use of alternative fuel, ongoing fleet restructuring, synergy and cooperation of group and newly acquired airlines (e.g. Austrian Airlines and bmi). In terms of revenue, it was largely made up by the Passenger Airline Group (approx. 74% and traffic revenue by geographical area was shown in Chart 1). While the rest were made up by services like logistics, maintenance/repair/overhaul (MRO), IT and catering.