Discuss about the Construction Enterprise Architecture Management.
In the current report, a client has approached to investigate Lufthansa Company with the help of PESTEL and Porter’s five forces framework. For this, a brief overview of the organisation has been carried out describing its mission, values, capabilities, locations and summary of stated performance. In addition, the strengths and weaknesses of Lufthansa have been dissected with the help of financial performance, product or service portfolio and core operations. Finally, the report sheds light on determining the attractiveness of the organisation along with suggesting whether to purchase or sell the shares of the organisation.
Lufthansa is an aviation group having global operations in above 400 subsidiaries and associated organisations in Australia, Europe, UK and Asia. The organisation is segregated into five business segments that include the airline and airfreight services, passenger transportation areas, MRO, logistics along with IT services and catering (Lufthansa.com 2017). These segments play leading roles in their sectors and in few cases; they are even the global market leader. It is the largest European airline in terms of fleet size and the second largest airline in terms of passengers carried in 2016.
In 2016, Lufthansa has an average of 124,306 members and the turnover of the organisation has been €31,660 million in the same year. As the organisation is involved in competing in the global airline industry, the business segments comprise of logistics, passenger business, overhaul and repair, information technology services and leisure travel. The core values of the organisation primarily include the following:
In order to evaluate the external environment of Lufthansa, PESTEL analysis has been carried out, which is depicted as follows:
There is deregulation in the global transport industries, which has helped the organisation in carrying out its business operations in an effective fashion (Albers et al. 2017). In addition, it obtains fuel subsidies from the German government and due to this, Lufthansa has managed to minimise its operating expenses in the home nation. However, it has failed to receive subsidies from the cross-border nations. As a result, the group has not succeeded in minimising its operational expenditures in those nations. However, the government is involved in fare range regulation along with apportioning usable routes for carriers to control the competition. For risk control, there is need for the governmental need to the tourists or immigrants. Moreover, there are few constraints in relation to adherence of the governmental policies. For instance, the UK government has passed a pledge to minimise carbon emissions by 60%, which is depicted in the “UK Climate Change Bill”. Furthermore, according to the EU Emission Trading Scheme, 1 kilogram of jet fuel is equivalent to 3.15 kilogram of carbon dioxide (Amir, Auzair and Amiruddin 2016). Thus, Lufthansa is compelled to reduce the utilisation of jet fuel in conducting its aviation-related operations.
The first economic factor affecting the business operations of Lufthansa is the gross domestic production (GDP). This is because poor economy results in lower business travel. Most of the organisations in the airline industry reduce the costs on non-essential travel (Bergh et al. 2017). Hence, Lufthansa might need to modify the meetings to conference calls. The second factor includes the risk of inflation rate in EMEA/US, in which the tendency of the individuals would be low at the time of high rate of inflation in the nation. Another factor influencing the business operations of Lufthansa is the bilateral trade agreements in EMEA, and US as they enhance the travelling frequency of the businesspersons around the world. Finally, the rise in global prices has increased the overall operating expenses of Lufthansa. The figure below depicts the figure in relation to change in source of economic growth (Asia) and currency power (Euro v USD).
The demographic change is one of the socio-cultural factors, in which the grey market development spends more on travelling and leisure. This is because of the changes in the preferences, lifestyles and fashions of the customers, since they need opportunities for visiting interesting, new and long haul destinations (Bromiley, Rau and McShane 2014). Along with this, the rising popularity of the holidays abroad has resulted in a boom for travelling demand. Moreover, there is a change in the perception of air travel in the minds of the consumers. This is because low cost revolution throughout Europe available to the greater public, There is rise in air travel, since the individuals not considering to travel by air now have the opportunity to travel. The growth of ageing population in Europe has considerable effect on the business income of Lufthansa, as these individuals have greater disposable income to spend. Finally, the greater number of commuters and the demand for lower cost carriers depict change in attitude about the tour operators and travel agencies. As a result, this leads to image problems for the organisations providing greater service cost.
With the rising advancements in technology, the direct customers in the global airline industry prefer worldwide access. The goal of Lufthansa is to regain the control of the customers. However, it is to be borne in mind that it is not possible for any organisation to own customers in the existing business environment (Carroll, Primo and Richter 2016). The airlines could leverage the same technology for gaining access to their wants and needs, the desired services and change based on willingness and paying ability despite the empowerment of the customers with the help of technology. The development of computer reservation systems has lead to competition in online travel agencies with improvement in site functionality and usability. In addition, there is flexibility in the booking process and the customers receive alerts or confirmations via SMS and e-mail. Finally, the convenient check-in on cell phone has helped the customers to look at the flight schedules and delays, if any.
As identified above, the global governments are laying greater stress on the emission rate of carbon dioxide, due to which Lufthansa has reduced fuel burn and level of noise. For instance, Lufthansa has changed for its green house share contribution on flights, which are back and forth Europe. It has adopted environment friendly measures like use of proper equipment and donations to charitable institutions to increase its social responsibility. In addition, as the airports in Europe are located in metropolitan areas, such strategic location could provide convenience to the customers (Certo et al. 2016).
The external environment of Lufthansa could be evaluated with the help of Porter’s five forces framework, which is represented briefly as follows:
In terms of global competition, Lufthansa is the biggest in terms of revenue followed by AF-KLM and IAG. On the other hand, Vueling, Turkish and Norwegian Airlines are growing at a faster pace, while in terms of profit, Ryanair is the most profitable in 2016 (Peppard and Ward 2016). Along with this, Turkish and Finnair Airlines have recorded the greatest improvements of percentage point in their margins, while Alitalia, IAG and SAS have experienced an operating loss and decline in operating margin. Air-France KLM and Airberlin have made loss at the operational level; however, they experienced a narrow down of their loss margins.
In addition, Lufthansa has entered into partnerships and equity investments by regions (Emirates). Furthermore, the Star Alliance Groups Lufthansa and Air China occupy the first two positions on routes between China and Europe. Thus, based on the above discussion, it could be stated that the threat of competition is medium in the global airline industry.
As there is high start-up cost for entering into the global aviation industry, the capital requirement is high. In addition, the capacity of distribution channels is limited, as the existing organisations in the industry are competing to find a space for their products. The new entrants might find it difficult to obtain landing slots and gates at the major hubs. As a result, it might pose difficulties for the new entrants to form flight schedules at attractive times in a day (Eden and Ackermann 2013). The deregulated environment in USA and liberalised environment in Europe might lead to high-risk nature of the industry, which acts as a major impediment to the new entrants. Finally, the load factor has impact on revenue and it is highly vulnerable to economic slowdown (Frynas and Mellahi 2015).
The main substitutes that might act as the competitors to the global aviation industry include high-speed train, boats and road. However, in case of long flights, there are no substitutes available in the global market. Despite this, the switching cost for the consumers to the substitute products is low, which might increase their propensity to substitute (Gamble and Thompson 2014). Finally, technologies like videoconferencing and telecommunications are substitutes to avoid visiting abroad nations through flights. However, the threat to substitutes is low.
With the growing popularity of internet, there is increase in bargaining power of the purchasers. This is because it has increased the availability for a purchaser of a flight ticket to look for the cheapest fare available between various airlines. As a result, the air travel prices have become transparent and the market liberalisations coupled with lower cost of switching for the purchasers in the market has enabled in pushing down the air travel prices. The income of the consumers, tastes of the consumers, service quality, seasonal fluctuations and the availability of substitutes influence the price elasticity of the global aviation industry. However, the business travellers would maintain their levels of demand even at the time of increase in the air travel prices (Goetsch and Davis 2014). The short distance flights have experienced a dramatic fall in demand when prices rise because of the availability of substitutes. Hence, it could be inferred that the bargaining power of the buyers in the global aviation industry is high.
The fuel prices of aviation turbine comprise of around 80% of the overall operational costs of the airline industry. Moreover, due to the limited number of oil companies, the airlines hardly find any alternative (Grant et al. 2014). The labour like cabin crew, pilots, gate agents and ground personnel has bargaining power due to the labour agreements during industrial regulation leaving them with lower flexibility. This force remains an important influential dynamic in the successful performance of the sector. Along with this, there are only two main manufacturers for big commercial aircraft like Boeing and Airbus. If the airlines place large orders, it might take several years to be delivered. Thus, the bargaining power of the suppliers is high in the industry.
Based on the above evaluation, the potential opportunities and challenges that would influence the business operations of Lufthansa include the following:
The new lower cost platforms of Lufthansa provide immense growth options, as it has decided to transfer point-to-point European routes, which do not touch its hubs at Munich and Frankfurt to Germanwings. This would move into the long haul market operated on the part of Sun Express, which is a joint venture and Turkish Airlines is a part of this venture (Harrison and John 2013). In addition, the cultural change of Lufthansa is slow; however, it offers enough potential for the organisation. Although the business model of the organisation denotes that it is not sufficiently concentrated on placing its own house in order; however, the formation of new lower cost vehicles has provided some options in fighting with competition.
The increasing competition from LCC poses a threat to the Lufthansa Group, since the rivals like Ryonair and Easy Jet are now involved in targeting the higher-level business travellers crucial to legacy airline profitability. Finally, the protectionist instincts of the airline group are the biggest threat to Lufthansa. In addition, the Gulf-based nations receive subsidy from the governments, which promote unfair competition. Such instinct poses a threat to Lufthansa, since it, since it denotes that the mindset is not yet right completely (Hill, Jones and Schilling 2014).
In the words of Drury (2013), profitability ratios are a group of financial metrics, which are used to evaluate the ability of a business in generating earnings in contrast to its expenditures and other pertinent costs spent during a specific timeframe. For most of these ratios, a higher value is always preferable, since it denotes better profitability position for the organisation. The following profitability ratios for Lufthansa have been taken into consideration for Lufthansa and they are depicted with the help of the following figure:
Based on the above figure, it could be stated that the gross margin of Lufthansa has increased from 42.41% in 2014 to 44.97% in 2015 and the trend is inherent further to 45.96% in 2016. The primary reason behind such increase in gross margin is the increasing revenue from EU and Asia, while the cost of sales has started to fall in Australia and the Gulf Nations. In this context, Hubbard, Rice and Galvin (2014) remarked that increasing gross margin denotes better profitability position of the organisation before operational expenditures. Hence, in terms of gross margin, Lufthansa is enjoying a better profitable position in the global market.
Along with this, another profitability ratio that has been taken into consideration is the net margin. As laid out by Jenkins and Williamson (2015), net margin is the percentage of profit that an organisation has earned after incurring operating expenses, financing costs and income tax expense. The higher the net margin, the better it is for the organisation. In case of Lufthansa, the net margin of the organisation has increased massively from 0.18% in 2014 to 5.30% in 2015 and it has increased further to 5.67% in 2016. The possible reason behind such increase is the massive increase in other income despite the operating loss suffered in 2015. Thus, in terms of net margin, Lufthansa is enjoying a better and profitable position in the global aviation industry.
Furthermore, another profitability ratio that has been taken into consideration for evaluating the profitability position of Lufthansa is the return on capital employed (ROCE). In the words of Gans and Ryall (2017), ROCE depicts the percentage of profit each dollar of employed capital generates. In case of Lufthansa, ROCE has been negative both in 2014 and 2015; however, it has shifted towards the positive trend in 2016. The reason behind the negative ROCE in two years is due to operating loss from increased sales, general and administrative expenses. However, with the fall in such expenses in 2016, it has resulted in positive ROCE for Lufthansa and hence, it has generated sufficient amount with its invested capital.
Thus, based on the above findings, it could be inferred that in terms of profitability position, Lufthansa is enjoying a better and favourable position in the global aviation industry.
The liquidity ratios gauge the ability of an organisation to incur debt obligations and safety margin through the computation of metrics like current ratio and quick ratio. Comparing the past timeframes to the current operations allows the analysts to identify changes in the business (Lumley and Gergely 2015). The following liquidity ratios for Lufthansa have been taken into consideration for Lufthansa and they are depicted with the help of the following figure:
According to the above figure, it could be observed that the current ratio of Lufthansa has increased from 0.75 in 2014 to 0.72 in 2015 and the increase is inherent further to 0.93 in 2016. However, the standard current ratio in the aviation industry is considered as 2 (Martin 2014). The possible reason behind such low ratio is the increase in account payables in contrast to cash availability of the organisation. As a result, the organisation has struggled to meet off its existing obligations with the available short-term asset base.
On the other hand, quick ratio is similar to current ratio; however, it excludes inventories from current assets. The standard quick ratio in the global aviation industry is considered as 1 (Morden 2016). In this case, the quick ratio of the organisation has fallen from 0.69 in 2014 to 0.66 in 2015; however, it has increased to 0.85 in 2016. This denotes that the ratio is near the industrial standard, which signifies average liquidity position of the organisation in the market.
The efficiency ratios are used typically to evaluate the way an organisation uses it assets and liabilities internally. These are used to gauge the short-term or current performance of the organisation (Potts and Ankrah 2014). The following efficiency ratios for Lufthansa have been taken into consideration for Lufthansa and they are depicted with the help of the following figure:
The above figure clearly signifies that the payables turnover of Lufthansa has increased from 48.94 days in 2014 to 98.10 days in 2015 and it has increased further to 101.72 days in 2016. The higher the payables turnover in terms of days, the better it is for the organisation in retaining higher cash in hand (Morschett, Schramm-Klein and Zentes 2015). The brand image of the airline group in the global market has resulted in winning the trust and beliefs of the creditors, due to which the organisation has managed to extend its credit terms. On the other hand, the inventory turnover of Lufthansa has increased from 14.16 days in 2014 to 15.12 days in 2015 and the increase is inherent further in 2016 to 16.82 days in 2016. This denotes that there is slight fall in demand in the global market due to the presence of increasing number of competitors in the global market. However, based on the above evaluation, it could be stated that the organisation has stable efficiency position in the global aviation industry.
In the words of Rothaermel (2015), the solvency ratios are a key metric used to gauge the ability of an organisation to meet debt and other obligations. The following solvency ratios for Lufthansa have been taken into consideration for Lufthansa and they are depicted with the help of the following figure:
In accordance with the above figure, it could be stated that Lufthansa has debt-to-equity ratio of 3.91 in 2014, which has fallen to 2.47 in 2015. The fall is inherent in 2016 to 2.36, which denotes that the airline group has focused massively on raising funds through debt instead of equity financing. On the other hand, the times interest earned ratio has increased massively in 2016, which signify that the organisation has adequate capability to meet its interest expense with the operating income. Thus, Lufthansa has increased debt burden questioning its solvency position; however, the operating income is greater.
The strengths and weaknesses of Lufthansa in terms of its service portfolio and operations are depicted briefly as follows:
Strengths:
Weaknesses:
Since the competition of LCC is for short haul, the competition in long haul sectors from the large three Gulf carriers like Qatar Airways, Emirates and Etihad and the star alliance power of Lufthansa, the Turkish Airlines would continue to stay. For instance, the Indian network of Lufthansa delivers significant feed through market via Frankfurt into the network of US however, the extensive India networks of Gulf-based airlines is obtaining an increasing share of this traffic via its own hubs. The national airlines within the organisation are operating as separate brands, each having its own fleet, labour structure and operations.
The fuel prices of aviation turbine comprise of around 80% of the overall operational costs of the airline industry. Moreover, due to the limited number of oil companies, the airlines hardly find any alternative (Grant et al. 2014). The labour like cabin crew, pilots, gate agents and ground personnel has bargaining power due to the labour agreements during industrial regulation leaving them with lower flexibility. This force remains an important influential dynamic in the successful performance of the sector. Along with this, there are only two main manufacturers for big commercial aircraft like Boeing and Airbus. If the airlines place large orders, it might take several years to be delivered. Thus, the bargaining power of the suppliers is high in the industry.
Conclusion:
Based on the above evaluation, it could be stated that there is deregulation in the global transport industries, which has helped the organisation in carrying out its business operations in an effective fashion. In addition, it obtains fuel subsidies from the German government and due to this, Lufthansa has managed to minimise its operating expenses in the home nation. However, it has failed to receive subsidies from the cross-border nations. The increasing competition from LCC poses a threat to the Lufthansa Group, since the rivals like Ryonair and Easy Jet are now involved in targeting the higher-level business travellers crucial to legacy airline profitability. Finally, the protectionist instincts of the airline group are the biggest threat to Lufthansa. In addition, the Gulf-based nations receive subsidy from the governments, which promote unfair competition.
In terms of profitability position, Lufthansa is enjoying a better and favourable position in the global aviation industry. However, there is slight fall in demand in the global market due to the presence of increasing number of competitors in the global market. Both the efficiency and solvency positions of the organisation are stable, which denote that the organisation is maintaining a competitive position in the global market. Lufthansa has increased debt burden questioning its solvency position; however, the operating income is greater. In addition, the opening of new fleets and partnerships with other aviation group has increased the operating efficacy of the organisation. Hence, based on the above evaluation, it is advisable to hold on to the shares of the organisation; however, purchase of the same is advisable after it minimises its debt burden.
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