FINAL CAPSTONE PROJECT (1)

Running head: LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS
Assignment #3: Capstone Project
Lufthansa Group’s Acquisition
of Brussels Airlines and Future Strategy
Travis Cook
Benson Giang
Celia Glowka
Melinda Jackson
Jennifer McRae
Kevin Schultz
Santa Clara University
Fall 2016

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS i
Table of Contents
I. Executive Summary ...............................................................................................................1
A. Introduction........................................................................................................................1
B. Strategic Move..................................................................................................................1
C. Major Issues......................................................................................................................1
D. Motivation for Final Recommendation. .........................................................................2
II. External Analysis...................................................................................................................3
A. Industry Definition.............................................................................................................3
B. Six Forces Industry Analysis ..........................................................................................3
i. Level 1 Analysis............................................................................................................3
ii. Level 2 Analysis............................................................................................................3
iii. Level 3 Analysis/Overall Attractiveness of the Industry .........................................5
C. Macro Environmental Analysis.......................................................................................6
i. Global Climate ..............................................................................................................6
ii. Technological Trends ..................................................................................................6
iii. Social Climate...............................................................................................................7
iv. Government/Political Climate .....................................................................................7
v. Economic Climate ........................................................................................................8
vi. Demographic Trends ...................................................................................................8
vii. Ethics and Social Responsibility..............................................................................9
viii. Summary of Macro Environmental Effects.............................................................9
D. Competitor Analysis.......................................................................................................10
i. Top Competitors .........................................................................................................10
ii. Primary Competitors ..................................................................................................10
iii. Competitors’ Strategic Positions ..............................................................................13
iv. V - C Analysis .............................................................................................................17
v. Comparative Financial Analysis...............................................................................18
vi. Section Summary.......................................................................................................20
E. Industry Dynamics..........................................................................................................21
i. Industry Evolution and Lufthansa’s Position ..........................................................21
ii. Competitive Dynamics...............................................................................................21
F. External Analysis Conclusions .....................................................................................22
III. (A) INTERNAL ANALYSIS - Lufthansa..........................................................................22

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS ii
A. Organizational Analysis.................................................................................................22
i. Goals & Objectives.....................................................................................................22
ii. Organizational Policies, Values, Culture, and Innovation....................................23
iii. Ethical & Social Responsibility .................................................................................25
iv. Organizational Structure ...........................................................................................25
B. Strategic Position ...........................................................................................................25
i. Corporate Level ..........................................................................................................25
ii. Business Level............................................................................................................26
iii. Partnerships, Alliances, Joint Ventures and Acquisitions ....................................26
iv. VRIO, Value Chain & BCG Matrix Analysis ...........................................................28
III. (B) INTERNAL ANALYSIS - Brussels Airlines.............................................................28
A. Organizational Analysis.................................................................................................28
i. Goals & Objectives.....................................................................................................28
ii. Organizational Policies, Values, and Culture.........................................................29
iii. Ethical & Social Responsibility .................................................................................30
iv. Organizational Structure ...........................................................................................30
B. Strategic Position ...........................................................................................................31
i. Corporate Level ..........................................................................................................31
ii. Partnerships, Alliances, Joint Ventures and Acquisitions ....................................31
iii. Business Level............................................................................................................32
iv. VRIO & Value Chain Analysis: .................................................................................32
IV. ACQUISITION ANALYSIS .................................................................................................33
A. Ally or Acquire?...............................................................................................................33
B. Porter’s Tests..................................................................................................................33
i. Industry Attractiveness Test .....................................................................................33
ii. Better-off Test .............................................................................................................33
iii. Cost-of-Entry Test ......................................................................................................33
C. Combined Resources & Capabilities, V-C, and Industry Conditions .....................34
D. Linking Corporate to Business-Level - Part C and D (Scenario analysis, NPV
calculations) ....................................................................................................................35
i. Discounted Cash Flow Analysis...............................................................................35
ii. “Worst, Better, Best Case” Scenarios .....................................................................36
V. RECOMMENDATIONS........................................................................................................37
A. Short-Term Recommendations....................................................................................37
i. Revise Eurowings’ Product Mix to Learn From and Mimic Brussels .................37

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS iii
ii. Standardize Eurowings Fleet to Improve LCC ......................................................38
iii. Revise Offerings to Support FSC Operations........................................................39
B. Long-Term Recommendations.....................................................................................39
i. Convert Eurowings to Hybrid Model & Merge with Brussels ...............................39
ii. Fold Brussels into Eurowings to Expand LCC Model...........................................40
iii. Fold Brussels into Lufthansa to Expand FSC Model............................................40
C. Strategy Implementation ...............................................................................................41
i. Short-Term Implementation......................................................................................41
ii. Long-Term Implementation.......................................................................................43
D. Corporate Social Responsibility and Ethical Decision-Making ...............................44
VI. CONCLUSIONS...................................................................................................................45
VII. BIBLIOGRAPHY.................................................................................................................46
VIII. MAIN APPENDIX...............................................................................................................52
Exhibit A – Industry Diagram............................................................................................52
Exhibit B – Six Forces Analysis (Levels 1 and 2)..........................................................52
Exhibit C – Six Forces Analysis (Level 3).......................................................................63
Exhibit D – Distribution of FSC versus LCC Market Share in 2013 ...........................63
Exhibit E – Market Share of European Based Airlines.................................................64
Exhibit F – Key Characteristics of Full and Low Cost Air Carriers .............................65
Exhibit G – Lufthansa’s Primary Competitors ................................................................66
Exhibit H – Porter’s Generic Business Level Strategies: Competitors ......................67
Exhibit I – VRIO Analysis: Competitors*.........................................................................68
Exhibit J – Comparative Financial Metrics .....................................................................75
Exhibit K – Lufthansa Business Unit Financial Analysis ..............................................79
Exhibit L – V-C Analysis: Competitors ............................................................................80
Exhibit M – Lufthansa BCG Matrix Analysis ..................................................................82
Exhibit N – Lufthansa Eurowings V-C Analysis (Supplemental Information) ...........82
Exhibit O – Lufthansa Value Chain Analysis .................................................................83
Exhibit P – Brussels Airlines Value Chain Analysis ......................................................84
Exhibit Q – Ally or Acquire Framework ...........................................................................85
Exhibit R – Synergy Analysis ...........................................................................................86
Exhibit S – VRIO Post Merger Analysis..........................................................................88
Exhibit T – Cost of Entry Test...........................................................................................89
Exhibit U – Post Merger V-C Analysis ............................................................................90

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS iv
Exhibit V – Lufthansa's Revenue Growth Rate .............................................................90
Exhibit W – Lufthansa Weighted Average Cost of Capital Analysis ..........................90
Exhibit X – Lufthansa’s Free Cash Flow Derivation .....................................................90
Exhibit Y – Lufthansa Discounted Cash Flow Analysis................................................91
Exhibit Z – Brussels Airlines Revenue Growth Rate ....................................................92
Exhibit AA – Brussels Airlines Free Cash Flow Derivation..........................................92
Exhibit BB – Brussels Airlines Discounted Cash Flow Analysis .................................93
Exhibit CC – Combined Firm Valuation (Worst Case) .................................................94
Exhibit DD – Combined Firm Valuation (Better Case) .................................................95
Exhibit EE – Combined Firm Valuation (Best Case) ....................................................96
Exhibit A – Timeline for Short-Term Recommendation................................................97
Exhibit B – Timeline for Long-Term Recommendation ................................................97
IX. FINANCIAL APPENDIX .....................................................................................................98

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS v
(Wall, 2016)

LUFTHANSA GROUP’S ACQUISITION OF BRUSSELS 1
I. Executive Summary
A. Introduction
Tourism. Business Trips. Family Visits. They all contribute to Europe’s bustling
airline industry. This industry has changed immensely since the first commercial flights
started just over a hundred years ago. Wild inventions, technical advancements, and
modern machinery have built a system that millions of people rely on to travel every
day. With the European airline industry growing increasingly mature, recent history has
found success in new strategies as well. This paper’s scope will be limited to Europe’s
passenger airline industry and will analyze an acquisition currently taking place.
Lufthansa Group owns a small handful of passenger airlines, and is sizably
invested in a couple others. Among them are Lufthansa, a large full-service European
airline, Eurowings, a low-cost airline, and most recently, Brussels Airlines, a hybrid
between the two. Brussels Airlines is a customer-focused, low-cost airline operating out
of its hub at the Brussels Airport in Belgium since 2002. A number of other competing
European airlines ensure a low concentration in the industry along with intense
competition. The market appears to be growing steadily as global air travel becomes
increasingly more popular.
B. Strategic Move
Lufthansa recently announced its plans to acquire the remaining 55% of Brussels
Airlines (Wall, 2016). This purchase will cost up to €250 million, and will add twelve
more destinations to Lufthansa’s network. The acquisition of Brussels’ 49 aircraft (Fleet,
n.d.) brings the number of passenger airplanes in Lufthansa Group’s aggregate fleet to
630 (The Fleet, 2015). While Lufthansa has not yet disclosed details of what it plans to
do with the new additions, they have hinted at the possibility of adding some of
Brussels’ airplanes to the Eurowings fleet. However, the public will have to wait to see
exactly what Lufthansa does with Brussels Airlines after the acquisition is complete. As
a parent company owning multiple separate airlines, there are numerous ways to
handle the acquisition.
C. Major Issues

A major issue with this acquisition is the state of one of Lufthansa’s subsidiary
airlines, Eurowings. The low-cost carrier has greater costs than Brussels, which
provides drastically more value to customers, for less (Error! Reference source not
found.). Although low-cost, no frill flights are what Eurowings specializes in, they don’t
do it well. This makes brand management an issue as Lufthansa expands its fleet and
has the opportunity to expand Eurowings. Brussels Airlines is viewed more favorably by
customers and provides higher value with its customer-centric strategy. Managing
consumers’ perception of Eurowings will prove critical if Lufthansa wants to commit
some of the new assets to the sub-par brand. Regardless of the decision Lufthansa
makes, it is clear that the value and brand loyalty Brussels Airlines currently has should
be preserved and not diminished in this transaction. The transition strategy must be
managed to minimize disruptions or inconsistent experiences for customers while
promoting customer education and retention.
D. Motivation for Final Recommendation.
With such strong competition in the European airline industry, turning a profit is
important and can be difficult. We recognize that addressing Eurowings’ poor
performance must be a high priority. Hybrid airlines, those that combine quality service
and low cost, appear to be on the rise. With this growing market that provides high
value to the customer while maintaining a low price, Lufthansa could benefit by
prioritizing this strategy. We recommend Eurowings try to learn from Brussels and use
their operations as an inspiration to revamp their business model. This means
Eurowings will overhaul their operations and emerge a hybrid airline. This change would
be implemented in stages with campaigns to educate the public. The end goal for our
recommendation looks like a successful, strong hybrid airline made up of Eurowings
and Brussels Airlines. This merged company would be modeled on the success of
Brussels and would increase Lufthansa Group’s market share in the hybrid market.

II. External Analysis
A. Industry Definition
We are defining our industry of focus as Scheduled Air Passenger
Transportation, similarly modeled after the North American Industry Classification
System (NAICS) 2016 Code 48111. This industry definition is derived from the overall
Air Transportation industry classification (481111 Scheduled Passenger Air
Transportation, 2016), and concentrates on passenger travel via commercial airlines in
Europe. Since our firm of study is the Lufthansa Group (hereinafter, Lufthansa), industry
points of perspective manifest as commercial airlines, further categorized as full-service
carriers (FSCs) and/or low-cost carriers (LCCs) where appropriate. As most recently
reported, the industry is worth €110 billion (Air: Internal Market, n.d.) with a growth rate
in Europe of 2.7% (Air Passenger Forecast Shows Dip in Long-Term Demand, 2015).
(See Error! Reference source not found. for a diagram of the industry)
B. Six Forces Industry Analysis
i. Level 1 Analysis
A detailed Level 1 analysis of the Six Forces is presented in Error! Reference
source not found..
ii. Level 2 Analysis
Level 2 of the industry analysis considers the weight of each of the Six Forces:
Barriers to Entry/Threat of Entry, Threat of Rivalry, Buyer Power, Supplier Power,
Threat of Substitutes, and Threat of Complements. The following sections describe
critical factors influencing the strength of each force. A detailed Level 2 analysis is
provided in Error! Reference source not found..
Barriers to Entry/Threat of Entry
Industry profits are encouraged by several favorable factors deterring entry
threats, but dampened by factors that detract from other profit opportunities. Of
particular note are industry-favorable high capital costs, dedicated assets, and the

importance of achieving supply-side economies of scale as well as industry-unfavorable
customer switching costs and low differentiation among airlines.
Capital costs for airlines are high, involving the purchase/leasing of aircraft,
equipment, facilities, services, and other expenses related to airport access. For
example, the cost of an Airbus A320 aircraft, a popular aircraft for short-haul flights,
runs approximately €92.5 million; and the Airbus A380, geared towards business and
leisure, is to the tune of €408 million (Airbus, 2016). With these price tags, it is not
unreasonable to infer that economies of scale are necessary for airlines to make a
profit. Additionally, threat of entry is further discouraged by the current capacity of
central airports, with consistently filled airport “slots” and scarcely available gates for
airlines.
Threat of Rivalry
The concentration for commercial airlines is low, with CR5=47% including
Lufthansa, Air France-KLM (AFK), International Airlines Group (IAG), easyJet, and
Ryanair (Lufthansa Group, 2016, p. 22). This is likely fueled by low product/service
differentiation among airlines servicing respective segments of the industry (business,
leisure, low-cost), as well as regulations prohibiting monopolies. At the same time, ticket
pricing is becoming a more pronounced differentiator, as low-cost carrier market shares
are increasing while maintaining comparable performance (Israel, 2015). Exit barriers
also pose an unfavorable factor for the industry as it is difficult for an airline to exit the
industry, considering large sunk costs, service agreements with airports, and cost of
layoffs.
Buyer Power
The primary buyer group for the Scheduled Air Passenger Industry is air
passengers. Buyer power is particularly boosted by low switching costs between airlines
as travel is paid for on a per flight basis. Low differentiation between airlines also
contributes to buyer power, thus consumer decisions are dominated by cost and
schedule preferences (Shankman, 2014). And with a CR5=47% (Lufthansa Group,
2016, p. 22) as mentioned earlier, travelers have a wide selection of airlines from which
to choose.

Supplier Power
Within the industry, there are numerous suppliers for commercial airlines, but
supplier groups with the heaviest influence are airports, aircraft manufacturers, and fuel-
related suppliers. Supplier power for these groups tends to be heightened by large
demand distributed to few suppliers. For example, aircraft manufacturers, Airbus and
Boeing, make up a duopoly in the market (C., 2014). Airports are essential to airline
operations and the desirability of certain airports and limited gates add to the group’s
power as a supplier. Fuel suppliers, with hedging contracts providing benefits or
disadvantages depending on the market, are a force to be reckoned with due to
fluctuating oil prices and the fact that fuel can make up more than 30% of an airline’s
operating expenses (Commercial Fuel Policy, n.d.).
Threat of Substitutes
The main substitutes for air travel are other modes of transportation (such as
train and automobile) or internet methods (for web-conferencing or virtual exploration).
Air travel provides unique value at comparable costs for most modes of transportation,
further detailed in Error! Reference source not found.. While the option of web-
conferencing for business could pose a threat to the industry, it is not a viable substitute
in all cases of air travel.
Threat of Complements
Threat of complements is generally a weak force in the industry because
complements do not greatly influence pull-through of demand, except in the case of
tourist attractions (Error! Reference source not found.). Additionally, complements do
not embody credible asymmetric integration threats at this time.
iii. Level 3 Analysis/Overall Attractiveness of the Industry
Considering the effect of the six forces on the present-day industry, overall the
Scheduled Air Passenger Industry is moderately unattractive (Error! Reference source
not found.). The strongest forces skewing industry unattractiveness were Threat of
Rivalry, Buyer Power, and Supplier Power, mostly due to the saturation of nominally
differentiated firms, consumer choice, and dependence on a few suppliers. However, it

should be noted that air passenger growth is expected to increase significantly in the
next 20 years with slow expansion of airports (Airport Capacity & Airport Slots, n.d.), a
combined phenomenon that could impact the attractiveness of the industry at a later
time.
C. Macro Environmental Analysis
i. Global Climate
Terrorism in Aviation
Although terrorism targeting the aviation industry has been apparent since the
1960s, it was not until the September 11, 2001 attacks that airline terrorism was brought
to the forefront on an international scale (Azani, Lvovsky, & Haberfeld, 2016). In 2016
alone, Europe experienced two tragic aviation-related attacks: one at the Brussels
Airport in Belgium and another at Ataturk International Airport in Turkey. The advent of
internet connectivity spurs knowledge-sharing among terrorist organizations and as a
result the industry continues to heighten security measures, driving up costs. The
events that have occurred and the potential for them to occur are deterring forces for air
travelers (Alderman, 2016), slowing industry demand with each occurrence.
The “Hybrid” Carrier
While FSCs and LCCs are now common in the industry, a new breed of airline is
being born: the “hybrid” carrier. The hybrid provides the purposeful option to re-bundle
many of the amenities and services that LCCs stripped. A hybrid carrier may also cater
to different customer segments by offering premium services on one flight, but function
as an LCC for another. This new designation further blurs the line between FSCs and
LCCs, as it is starting to change the landscape once dominated by mature airline
business models (Ros, 2016). This presents even more challenges for differentiation
and will increase competition (and corporate strategy) in the industry.
ii. Technological Trends
Air Traffic Management
Europe sees 27,000 flights with a total traffic of 2.27 million passengers daily
(European Aviation Environmental Report, 2016). Technology has fostered

interconnectivity so that aviation operations can be optimized. The air traffic
management system is currently being improved and will provide benefits towards
accommodating more air traffic while increasing overall aviation network performance
(EASA, et al., 2016). The industry will benefit from streamlined operations and
increased capacity to serve demand, which will result in more favorable experiences for
travelers.
Aircraft Sustainability
Aircraft inputs and outputs, including part materials, fuels, and technological
systems, continue to be innovated, producing faster, safer, more fuel-efficient, and more
environmentally-friendly airplanes. Such technological advancements reduce costs,
lessen environmental and human health impacts, and improve operations (EASA et. al,
2016) -- ultimately escalating profits for the industry.
iii. Social Climate
Labor Strikes
The industry is no stranger to compensation-based labor strikes from numerous
labor groups (such as air traffic control, pilots, and flight attendants), each time severely
impacting airport and airline operations. From the start of the year through September
15, 2016, air traffic controller strikes in Europe alone resulted in an aggregate delay of
one million minutes (almost 23 months) and over 3,000 flight cancellations in Europe
(Economic Performance of the Airline Industry, 2016). In addition to major operational
losses and human resource implications from labor strikes, the EU mandates that
airlines are required to refund unused tickets as well as cover lodging expenses until a
replacement flight can be provided (Trend, 2016) -- further impacting the industry’s
profitability.
iv. Government/Political Climate
Single European Sky
The Single European Sky (SES) initiative began in 1999 in an effort to better
integrate the European airspace by way of legislation for improvements to air traffic
management and air navigation services (Thomas, Air Transport: Single European Sky,

2016). In 2011, the impacts without SES were seen in €13.49 billion lost as a result of
flight delays, inefficiencies, wasted costs, emissions, and more (McNamara, 2013).
While progress has been made under SES, if all goals are achieved by 2035, benefits to
the industry could be on the order of 1 million new jobs and €245 billion added annually
to Europe’s GDP (News Brief: European Air Traffic, 2016).
The United Kingdom Exiting the European Union (Brexit)
On June 23, 2016, the UK voted to leave the EU; an event coined as “Brexit.”
While it is not entirely clear how Brexit will affect the airline industry as a whole, from a
regulatory standpoint, the UK relinquishes much influence over aviation regulations. As
a non-Member State of the EU, the UK would need to negotiate agreements to operate
in the EU aviation market, possibly impacting the operations of known carriers with
home stakes in the UK such as IAG and easyJet. Converse agreements would also
need to be made as the UK could develop their own regulations and policies for the UK
market, affecting the rest of Europe. While, there are many non-Member State airlines
that operate successfully, the UK’s airspace is particularly critical for Europe (Erkelens,
Briggs, Phippard, Boström, & Bell, 2016). The industry faces some complexity in the
future; with increased regulation, and possibly negatively affected industry profits.
v. Economic Climate
Oil Prices and Exchange Rates
Although crude oil, and in turn jet fuel prices have been increasing since the
beginning of 2016, the industry still enjoys low fuel prices (around €50 per barrel in
November 2016, in contrast to almost €100 four years ago). Also, playing a part in
economic factors are currency exchange rates, where the Euro has depreciated by 20%
against the US Dollar since the beginning of 2014 (Macquarie, 2016). This has
diminished the fall in oil prices for Europe over the years, but also reduces foreign
currency deficit obligations for international airline operations (Buecking & Oxley, 2015).
The current state of oil prices and exchange rates are favorable for European airlines,
resulting in opportunities for high profitability. Airlines may choose to pass cost benefits
along to the consumer in the form of reduced fare pricing and/or more flight offerings,

however, the companies must remain conscious of long-term implications given the
unpredictable economy.
vi. Demographic Trends
Internet Savvy Levels the Playing Field
The multitude of travel websites bringing side-by-side comparisons of flights
makes scheduling and flight selection much easier for the internet-savvy consumers.
Instead of enlisting the help of a travel agency, travelers can now perform a quick web
search of accommodations catered to their exact preferences. Loyalty might be harder
to gain from an informed consumer who can assess all available flights, service,
reviews, and pricing differences on one computer screen.
vii. Ethics and Social Responsibility
Flight Safety
Safety is a top concern in the airline industry, spanning from operational abilities
of aircraft (encompassing performance of materials, weathering, and proper
maintenance) to the abilities of pilots. The Germanwings Flight 9525 crash in March
2015 spurred discussion of mental health screening for pilots and spotlighted a new
safety concern in the industry (McHugh, 2016). Safety issues also surround labor shifts
for pilots and flight attendants, especially concerning long-haul flights.
Environmental Obligations
In an effort to batten down environmental emissions, the EU has integrated
aviation emission regulations into the EU Emissions Trading System (ETS). The EU
ETS mandates a 20% greenhouse gas emission reduction between 2008 and 2020. Air
travel accounts for over 3% of emissions produced in Europe (EASA et al., 2016).
Market-based mechanisms also play into this goal with airports charging airlines for
noise and greenhouse gas pollution. This requires airlines to update their fleets with
more environmentally-friendly aircraft, as well as scrutinize operations and flight
schedules, which effectively increases costs and decreases industry profits.
viii. Summary of Macro Environmental Effects

There are numerous macro environmental factors that can affect the air
passenger industry and the challenge is that they are often unpredictable. Global,
economic, social, and government/political factors are the most unpredictable and can
result in significant detrimental impacts (loss of profitability). However, the industry can
also derive great benefit (more profit) from other factors, as is currently the case with oil
prices and foreign exchange rates.
D. Competitor Analysis
i. Top Competitors
The European passenger airline market is fragmented. As discussed, the five
largest European airlines: Lufthansa Group, IAG, AFK, Ryanair, and easyJet - make up
47% of the total market in terms of revenue (Lufthansa Group, 2016, p. 22), and 54%
(List of Largest Airlines in Europe, n.d.) in terms of market share by passengers flown
(see Error! Reference source not found.). The next 10 largest companies by
passengers flown are comprised of: Turkish Airlines, Aeroflot, Air Berlin, SAS,
Norwegian, Alitalia, Pegasus, Wizz, TAP and Aegean Airlines. As per the
aforementioned exhibit, more than half of competing companies have 1% market share
or less (List of Largest Airlines in Europe, n.d.).
ii. Primary Competitors
As noted above, the European airline industry is composed of FSCs and LCCs,
with firms adhering to either platform, or a hybrid of the two (see Error! Reference
source not found.). Important to note is that LCCs generally offer only point-to-point
flight segments, without transfer capabilities, to reduce cost. Thus, they generally focus
on short-haul flights. However, short-haul is not limited to LCCs, as FSCs also offer
short-haul segments.
Since Lufthansa competes in the full service category, as well as in low cost
through its subsidiaries, the company has several primary competitors: AFK and IAG
(traditional FSCs, which also own low cost subsidiaries), Ryanair and easyJet (low
cost), and Air Berlin (hybrid). As per Error! Reference source not found., Lufthansa
has defined their primary competitors in their 2015 annual report.

International Airlines Group
IAG is comprised of the airlines Aer Lingus, British Airways, Iberia, and Vueling.
Headquartered in London, IAG offers the 95 million customers it flew in 2015 a total of
274 destinations. The group’s major cities are London, Madrid, Barcelona, Rome, and
Dublin, and European destinations make up 20% of its available seat kilometers (About
Us, 2016). British Airways offers customers a global, full-service experience (including
full business and first class), focusing largely on long haul routes.
Vueling offers short haul low-cost flights, focusing strongly on the Spanish
market, with some focus on the rest of Europe (and a few North African cities). While it
is an LCC with unit costs close to that of easyJet, it offers access to VIP lounges and a
rewards program (which is not compatible with those of other IAG subsidiaries). Aer
Lingus strives to provide the “best product in the Irish airline market at a competitive
price,” making it an LCC with focus on some extras (Aer Lingus: Company Profile,
2016). It flies almost exclusively in Europe, with a strong UK presence, but has recently
added long haul flights to ten North American locations.
Iberia focuses on full service flights (albeit stripped down) between Europe and
Latin America. Further, IAG also provides cargo services and, through its Avios
program, offers customers a global “currency” rewards program which includes partners
such as hotel chain Marriott and Avis rental cars (International Airlines Group, n.d., p.
26).
Air Berlin
Based in Berlin, the company offered its 30.3 million passengers a choice of 138
destinations in 2015 (Air Berlin, n.d., p. 16). It is the second largest airline in Germany,
following Lufthansa, and its main routes after German-speaking countries include
Europe, parts of North Africa and the Middle East, and the U.S. In the past, Air Berlin
has positioned itself as an LCC flying to primary hub airports, but is now taking a hybrid
approach, expanding long haul and business class offerings, as well as its Topbonus
loyalty program (Lucky, 2016). It is also part of the Oneworld frequent flyer codeshare
program which includes a host of other international carriers. Moving into 2017, Air
Berlin also plans to create a new business unit for leisure, non-business short haul

flights, and drastically reduce destinations served by 77%, including consolidating hubs
(The New Airberlin | Analyst Presentation, 2016).
Air France - KLM
Headquartered at Charles de Gaulle Airport in France, AFK carried 89.8 million
passengers in 2015 to 320 destinations (in 114 countries), of which 183 are in Europe.
79% of revenue comes from its passenger network, with the remaining derived mostly
from cargo (Martinair subsidiary) and maintenance. It offers loyal customers rewards
through its “Flying Blue” program. Air France and KLM act as traditional FSCs, and Air
France especially has increased exclusive offerings in business and first class (Air
France-KLM, 2016). The group also owns two low-cost, short haul carriers, Hop! and
Transavia. Hop! includes some extras: a snack, seat choice and miles earnings. It
focuses on intra-France travel, with only 10 flight legs dedicated to other European
destinations (Network, 2016). In contrast, Dutch-based Transavia’s destination list is
similar to that of other LCCs focused on Europe, but with a greater focus on Portugal
and Spain. It also offers “Flying Blue” miles, but provides few “frills” (Transavia, 2015).
Ryanair
Based in Dublin, short-haul Ryanair carried 90.6 million passengers to over 200
destinations in 33 countries (exclusively European, in addition to Morocco and Israel) in
2015 (Facts and Figures, 2016), making it the largest short haul carrier in Europe.
Ryanair flies almost completely to secondary, remote airports, and this, along with a
host of other cost-cutting measures and lack of “frills” (point-to-point flight segments,
snacks and beverages for purchase, bag fees, low overhead, and high aircraft
utilization), makes it a leader in offering incredibly cheap airfare. Often shocking the
public, Ryanair’s proposed cost-cutting measures have included such ideas like
charging passengers for bathroom use, though the company has recently announced a
shift to improve customer service (“Always Getting Better”), and initiated a sparse
business class program (McGreevy, 2009). Ryanair was the most profitable European
airline in 2014 by operating margin (Who has the Right Model for European Aviation?,
2015), and it plans to expand aggressively in Germany (Reuters, 2016).

easyJet
Headquartered at London’s Luton Airport, easyJet is the second largest short
haul air carrier in Europe, having flown over 70 million passengers to 136 destinations in
31 countries in 2015. Routes are European, with the addition of Egypt, Israel, and
Morocco (easyJet, n.d.). easyJet is an LCC with several cost cutting features similar to
Ryanair. Unlike Ryanair, however, easyJet flies to primary and secondary airports, has
a strong focus on customer service, and offers business class and has a frequent flier
program.
Lufthansa
Lufthansa is Europe’s largest airline and is headquartered in Cologne, Germany.
In 2015, the Lufthansa Group flew 107 million passengers to 297 destinations, through
its subsidiaries Eurowings, Swiss, and Austrian Airlines, as well as the Lufthansa brand.
Lufthansa also has equity agreements in SunExpress and Brussels Airlines, and 44% of
passenger revenue is derived from European ticket sales. Additionally, the company
operates catering and maintenance business units, as well as cargo operations
(Lufthansa Group, 2016). Lufthansa, Austrian and Swiss Airlines are FSCs, with a focus
on hub airports. The two latter carriers have a strong hold in each of their respective
markets. Brussels Airlines also offers customers a full service experience, with several
routes to Africa from its Brussels hub. Eurowings and Sun Express are LCCs, operating
more point-to-point routes, with some growing focus on long haul (Lufthansa SWOT,
2015). Lufthansa offers a “Miles and More” loyalty program, including a credit card, and
is part of Star Alliance. For more information, see section “Lufthansa Internal
Analysis.”
iii. Competitors’ Strategic Positions
Business Level
As per Error! Reference source not found., and as described in the profiles
above, competitors have various business level strategies. Ryanair offers an extreme
cost leadership strategy, based on keeping input costs extremely low. The resulting low
fares create broad appeal. easyJet also focuses on cost leadership. However, in
providing more included services, and by flying to some primary airports and offering

business class, the company starts to move towards slightly higher cost and somewhat
more of a niche market. Air Berlin has recently announced a shift in direction away
from a more low-cost, broad focus, and will prioritize business travelers, while reducing
destinations. The resulting transition puts Air Berlin between cost leadership and broad
differentiation, leaning slightly more towards broad differentiation. AFK, Lufthansa, and
IAG offer a hybrid strategy, due to the fact that the three groups are traditional FSCs,
but all have ownership of LCC subsidiaries. For example, Air France focuses in
between broad and focused differentiation, due to its higher costs as a legacy carrier
with full service, and a focus on expanding the premium market (for example, an
improved business class with luxurious amenities). However, the company also owns
the subsidiary Hop!, which, as an LCC focusing almost completely on France, practices
a focused low cost strategy.
Corporate Level
According to Rumelt’s corporate strategy classifications, Air Berlin and easyJet
are both single businesses, since their annual revenue is derived at greater than 95%
from passenger traffic (Air Berlin at over 90%, easyJet at 98%). Ryanair, with 25% of
revenue derived from ancillary services such as booking of ground transport to/from
Ryanair’s remote airport locations, and the remaining 75% from airfare, can be
classified as a dominant business. Within the category of dominant, Ryanair can be
further classified as dominant-constrained: “Any dominant firm which diversified by
building on a single strength or resource associated with the original business”
(Christensen, p. 15). In this case, Ryanair is leveraging their air passenger booking
platform to drive further revenue. AFK, IAG, and Lufthansa can also be classified as
dominant-constrained. Each has greater than 70% of revenue from passenger air travel:
Air-France at 79%, IAG at 89% and Lufthansa at 74%. Further, each company has used
their strength in the passenger airline industry to leverage revenue from similar but not
necessarily vertically related sources, in cargo, maintenance, and catering (Annual
Reports, 2015).
Achieving a Strategic Position

The following summarizes the main findings from the VRIO Analysis (see Error!
Reference source not found. for the complete listing of advantageous resources and
capabilities).
Ryanair
Ryanair achieves a sustained strategic position through two means, the most
important of which is its cost-reduction know-how. As the first carrier in Europe to take a
low-cost approach, and modeled after Southwest, Ryanair has cut unit costs to the bone
(Ryanair SWOT, 2014). Due to its first-mover advantage, strong network of only
secondary airports, and continued extreme low-cost innovations, the synergies
achieved are difficult to imitate. Further, Ryanair’s unique leader, Michael O’Leary,
provides strong and extremely focused leadership to carry out this strategy (Facts and
Figures, 2016). Low overhead and salaries, hard for full service but not low cost carriers
to imitate, provides a temporary advantage.
Air France - KLM (AFK)
As an intangible resource, AFK’s brand strength is difficult to imitate, acting as a
source of competitive advantage. The AFK brand ranks highly, and has for decades (the
company was established in 1934); thus, it has high value. Further, through the merger
of two flagship carriers, Air France and KLM (based in The Netherlands), not only was
the brand strengthened, but large economies of scale have been achieved. The group is
now one of the largest in Europe, and maintains control of two of the top five hubs in the
region (Air France-KLM, 2016). AFK also has a well-balanced presence around the
globe, helping insulate it from downturns in any one market.
International Airlines Group
Like AFK, IAG’s British Airways brand is very strong, and having been ranked the
UK’s leading brand in 2015, will continue to provide a source of sustained competitive
advantage (Macalister, 2016). Other sources of sustained advantage include IAG’s
internal shared platform, through which back-office, IT and finance functions,
procurement, and digital synergies are shared among subsidiaries. This leads to large
reductions in redundancies, and better economies of scale, while being difficult to
imitate in terms of size, scale, and specialization. Furthermore, IAG has an extremely

global network, serving most continents, which is incredibly difficult for all but the largest
carriers to maintain (International Airlines Group, n.d.).
easyJet
One of easyJet’s main sources of sustained competitive advantage is its better-
than-average employee relations. Not only are easyJet employees happier than
average, but customer service is improved (Cox, 2014). Since it is not easy to create
good employee relations, especially in the case of an LCC, this can be seen as a
sustained advantage. Additionally, easyJet maintains a highly-specialized and -
integrated web, mobile and CRM system. This system is both internal and customer-
facing, and results in a better understanding of customer needs and added cost
reductions. While the company has several advantages such as low overhead, strong
low cost strategies, good airport contracts and a new fleet, these provide easyJet with
temporary, but not sustained, advantages.
Air Berlin
Air Berlin exploits its control of two main hubs in Germany to maintain a strong
presence in the country. It hopes to use this control to further build out its business
class network. Air Berlin has also developed an internal digital revenue management
system, which has increased revenue, and is difficult to imitate in its specific forecasting
abilities. The company recently fired 80% of top management; next steps are widely
being watched in the European market (The New Airberlin | Analyst Presentation,
2016).
Lufthansa
Lufthansa has been Germany’s flagship carrier since its founding in 1953 and
has used its strong brand reputation and this historical context to create a sustained
competitive advantage. In 2016 Lufthansa was awarded first place as Europe’s ‘Best
Airline Transatlantic’ and ‘Best Airline in Western Europe’ based on 18 million user &
passenger survey responses, demonstrating continued positive public opinion (K,
2016). Lufthansa also maintains its sustained competitive advantage through a
dominant presence at the Frankfurt and Munich hubs, Europe’s fourth and seventh
busiest airports respectively. Lufthansa’s acquisition of Brussels Airlines will further this

dominant presence, adding Brussels Airport to the list. Lufthansa solidifies its strong
positioning with a large and continuing investment in its human capital through the
Lufthansa Business School (Graduate Programs, n.d.).
Brussels Airlines
Brussels Airlines’ strong brand and market-dominating position at its Brussels
hub help the company achieve a sustained competitive advantage. Because of its deep
ties with Brussels Airport, Brussels Airlines has also been able to develop an extensive
network in Africa, a key differentiator from other European airlines and a driving factor in
Lufthansa’s acquisition decision (Brussels Airlines Reinforces Presence in West Africa,
2015). Additionally, Brussels Airlines has been able to secure a unique partnership with
Tomorrowland, the world’s largest Electronic Dance Music festival in Belgium (Boni,
2015). In order to boost customer retention, Brussels Airlines launched its LOOP loyalty
program which already has over 50,000 registered members (Sciot, Daenen, &
Lemmes, 2016).
iv. V - C Analysis
Methodology
The eight value drivers used in our Competitor V-C Analysis, and subsequent
descriptions, can be found in Error! Reference source not found.. These include
categories such as in-flight comfort, customer service, perceived value for money, and
premium services. Value drivers were given weights of importance, then multiplied by
how well airlines perform in each category, producing a weighted score. Each score
was then multiplied by 100. This comparison between airlines is based on one flight
segment. As it was not possible to find one route flown by all airlines, the two routes
chosen were Paris-London and Frankfurt-London (except for Brussels, where neither of
the two chosen routes were available), and an average of the kilometers traveled was
taken, then multiplied by each airline’s cost per available seat kilometer (CASK) to
calculate cost. CASK is defined as operating costs divided by available seat per
kilometer. Price was the price paid by each passenger for the route in question.
Selected Results

According to our analysis, Brussels Airlines has the highest perceived value to
buyers. All references for this section can be found in Exhibit N. This can be attributed
to the fact that the airline is positioned more as an FSC, with a solid standing across the
board in most all value driver categories, while showing similarities to an LCC by
maintaining a high perceived value for money. As such, we consider this to be a hybrid
carrier as well. However, the value the company receives, is the second lowest, for
most likely the same reasons: higher costs due to more full service expenditures,
offered at lower prices.
easyJet has the highest value among Brussels’ competitors. This is due to strong
customer service, a good brand reputation, and a high perceived value for money. P-C
is relatively low. This is similar with Ryanair - it creates a large amount of buyer value in
relation to its cost. The surplus it receives from price - cost is extremely small due to
Ryanair’s extremely low fares, yet Ryanair likely compensates this with high volume.
The company sells a large volume of tickets, carrying about 90 million passengers last
year. AFK’s Transavia subsidiary is able to generate more value than IAG’s Vueling due
to its codeshare agreements (codeshare agreements can be defined as partner airlines
offering flight segments to final destinations, and the ability to earn miles on several
airlines). Customers can earn AFK’s “Flying Blue” miles while flying with Transavia
(which may be used on any AFK brand flight), but Vueling does not offer miles which
are redeemable beyond Vueling. Costs are similar, both likely benefit from scale
economies through their global parent companies, though Vueling is able to grab a bit
more value than Transavia. While Air Berlin creates a high total value, the buyer value
is the smallest of the group, and customers’ perception of value as compared to price is
much lower than that of other competitors. Air Berlin is squeezing customers on price,
and while it looks like the company is gaining a large surplus on P-C, prices on other
routes may not be as high. Lufthansa’s Eurowings also offers buyers a lower perceived
value than that of the other LCCs and Brussels Airlines. Its CASK is one of the highest
in the industry, and as such, it will need to better determine its place in the industry
(Eurowings Develops Innovative Partnership, 2016).
v. Comparative Financial Analysis

Profitability Metrics
A summary of all comparative financial metrics can be found in Error! Reference
source not found.. Profitability from operations was assessed using two metrics: gross
margin and profit margin. Contrary to general trends, a healthy gross margin is not
necessarily indicative of a margin for profit in this industry. Gross margins varied
between 21% and 54% with IAG leading the industry, Air Berlin lagging behind all
competitors, and Lufthansa performing strongly with margins greater than 40%. A
comparison of profit margins reveals that remaining consistently profitable has been a
challenge in the airline industry. Air Berlin, IAG, and AFK have suffered losses in recent
years. Lufthansa has performed relatively well by at least breaking even in each of the
past five years and easyJet and Ryanair have performed very well by capturing the
largest profit margins. Only easyJet and Ryanair managed to surpass the industry
average for global airlines.
Return Metrics
Two return metrics were chosen to compare performance relative to resources
available to each firm: return on assets and return on equity. As seen in Error!
Reference source not found., and similar to the comparison of profit margins, Air
Berlin and AFK perform relatively poorly. Lufthansa and IAG remain slightly positive
overall. easyJet performs the best according to this metric despite Ryanair having a
higher profit margin, informing us that easyJet is putting their assets to use most
efficiently. In terms of return on equity, AFK’s losses cause them to perform very poorly,
Air Berlin is not assessed in four out of the five years due to a negative or near zero
equity balance. easyJet and Ryanair remain the top two consistent performers, but
Lufthansa holds the top spot for return on equity in two out of the last five years.
Liquidity and Leverage Metrics
Three relevant metrics were utilized to determine the relative liquidity position of
each firm: current ratio, quick ratio, and debt to equity ratio (Exhibit L). A comparison of
the firms’ current ratios shows that Ryanair is best able to meet its current obligations,
Lufthansa’s ability to meet current obligations is relatively similar to that of its average
competitor, and no firm is in a substantially poor position. The quick ratio analysis

reveals that Ryanair is most capable to fulfill its measured ability to meet current
obligations due to the liquidity available within its current assets and Lufthansa is slightly
above average. The debt-to-equity ratio shows that Air Berlin and AFK are operating
with the most leverage relative to their competitors. A large amount of leverage is able
to multiply a firm’s profits and losses, which could partially explain why these two firms
have presented such volatile financial metrics. Air Berlin and AFK are not assessed in
three of the five years and two of the five years, respectively, as they presented
negative or near zero equity account balances. Lufthansa and IAG operate with similar
leverage and easyJet and Ryanair operate with the least leverage. It appears less
leverage is correlated with higher returns on a percent basis.
Industry Operating Metrics
Five industry operating metrics common to each competitor were identified and
analyzed to determine the relative efficiency of various operating aspects of each firm:
passenger load factor, passenger revenue per available seat kilometer (RASK),
passenger cost per available seat kilometer (CASK), revenue generated per employee,
and compensation per employee (Exhibit L).
Lufthansa’s passenger load factor of 80.4% (Exhibit L) is weak relative to its
competitors, while easyJet leads the market with levels above 90%. This means that
easyJet is the most efficient at filling all seats on a flight.
Lufthansa is the leading firm in terms of the RASK and CASK metrics, indicating
that they can generate the most revenue per available seat; possibly because they
provide a lot of perceived value to customers and have slightly higher ticket prices, but
either way their profits are average due to higher costs. Ryanair and easyJet perform
relatively lower in terms of RASK and CASK which is indicative of them being LCCs. For
revenue per employee, Lufthansa operates below the €310,000 industry average, at
€268,000, while easyJet and Ryanair lead the market with €590,000 and €478,000
respectively (Exhibit L).
Lufthansa pays employees an average of €67,539, which is above the industry
average of about €53,000 (Lufthansa Group, 2016). AFK pays the most in this market at
€84,148 average salary (CITE AFK Annual Report), while the highly profitable Ryanair

and easyJet pay around the industry average. This indicates Ryanair and easyJet may
be benefitting from a “Southwest” effect, because they can generate the most revenue
per employee while paying their employees the least.
vi. Section Summary
Lufthansa faces continuing threats from LCCs. Ryanair has a hold on extremely
low unit costs, and easyJet has a strong low-cost position with good customer service.
Companies like AFK and IAG are also moving into the LCC market through airline
purchases of their own. The airline market remains fragmented, with the opportunity for
further consolidation. It remains to be seen how many LCCs can profitably compete in
broad, low-cost markets while maintaining some sort of competitive advantage
(geographic, or a strength like customer service, etc.). While most profits in recent years
have come from the LCC market, some carriers, such as Air Berlin - which has been
struggling with a hybrid approach - are moving upstream towards more premium,
business-focused differentiation. Meanwhile, FSCs are expanding their premium and
loyalty offerings. Lufthansa will have to find its place as a group, and for each of its
brands, in an increasingly polarized and diverse market.
E. Industry Dynamics
i. Industry Evolution and Lufthansa’s Position
The air passenger industry has evolved to maturity. At this stage, there is low
differentiation among airline service segments and innovation is sustaining. The mix of
FSCs, LCCs, and hybrid carriers effectively cater to the spectrum of business, leisure,
and cost-conscious traveler needs. Innovation at this time is incremental, focusing on
aspects valued by prevailing customer segments, signaling a rise in buyer experience.
Airlines thus evaluate their strategies and re-position to best compete. This suggests
that although in the mature stage of industry evolution, this industry is not necessarily
stable. Additionally, market growth is largely a function of the buyers’ ability and
willingness to pay, which is greatly affected by macro environmental conditions (such as
economic health or a rise in terrorism).
Following the trend of the industry of modifying service offerings in order to serve
more customers and/or customer segments, Lufthansa, an FSC with an LCC subsidiary,

has chosen to add to its low-cost portfolio by fully acquiring Brussels Airlines.
Considering the stage of the industry, Lufthansa could choose to hone its FSC
capabilities to appeal to more business and comfort-minded customers. However,
because FSC market share has been diminishing as a result of LCC popularity (Error!
Reference source not found.) (Israel, 2015), Lufthansa has decided to strengthen its
stance in multipoint competition by expanding its low-cost flight offerings.
ii. Competitive Dynamics
While regulatory requirements are strict, mainly advocating for the protection of
passengers, operating licenses, financial health, and safety regulations, Europe’s Single
Aviation Market bars monopolistic endeavors, enabling new entrants into the industry
(Thomas, Air Transport: Market Rules, 2016). Evidence of this can be seen in the low
industry concentration of CR5=47% (Lufthansa Group, 2016) and multitude of airlines
operating in Europe. As described in Competitor Analysis, many large competitors are
shifting to strengthen their positions in multipoint competition (FSC and LCC segments)
while some airlines continue to focus solely on one segment. Accordingly, airlines
provide different degrees of value to the customer (Error! Reference source not
found.). In the late 1980s through the 1990s, the airline industry experienced disruption,
first by deregulation (Single Aviation Market) and then by LCC business models.
However, competitive dynamics today focus on service strategies that face little threat
of disruption in the foreseeable future.
F. External Analysis Conclusions
After an analysis of the environment surrounding Lufthansa, it may be a good
strategic move to strengthen its position in the LCC market with Brussels Airlines. The
industry is moderately unattractive in a stage of maturity, which works to Lufthansa’s
advantage as the largest airline in Europe. Macro environmental factors add complexity
to the airline industry, as do the fact that maintaining consistent profit margins is
challenging, but for now European airlines derive substantial benefit from low fuel prices
and low foreign currency deficits. Additionally, Lufthansa currently operates in both FSC
and LCC segments, making it an incumbent in both markets with solid financial
performance. Although Lufthansa’s position in the industry is diluted by the number of

competitors providing various levels of customer value, as an airline with one of the
largest market shares, it has options to diversify and/or add to its offerings.
III. (A) INTERNAL ANALYSIS - Lufthansa
A. Organizational Analysis
i. Goals & Objectives
According to Lufthansa’s 2015 Annual Report, the company’s main goal is to be
the “first choice in aviation for customers, employees, shareholders, and partners”
(Group Strategy, n.d.). In 2014 the company launched a long-term initiative to more
clearly define this overall goal and break it down into main objectives. The initiative is
called “7 to 1 - our way forward” and identifies seven fields of action that have been
applied to every individual business segment across the group. The Lufthansa Group
aims to be customer-centric and quality-focused, explore new concepts for growth, and
intentionally focus on innovation and digitalization. The group and all of its segments
should be effective and lean, and consistently work toward improving efficiency. Finally,
the group aims for strong culture, leadership and “value-based steering” (Lufthansa
Group, 2016, p. 15). Lufthansa’s overall strategy is to remain flexible and rely on their
ability to adjust capacity and resources to maintain a strong position as market
conditions change. The company aims to maintain a solid financial position and efficient
cost structure. Lufthansa expects faster than average growth in the low cost airlines and
service markets and are betting on these spaces for future growth (Lufthansa Group,
2016, p. 88).
Lufthansa sees the success of this initiative and strategy relying on three strong
pillars: their hub airlines, the Eurowings Group, and aviation services. The hub airlines
aim to provide marginal improvement based on their renewed cabin layouts, service
upgrades, optimized route network, fleet and strategic partnerships, and new
personalized offerings for customers. These actions are increasing value for customers
in the FSC market. The Eurowings Group and aviation services aim to provide profitable
growth moving forward. Eurowings has been positioned as a point-to-point offering in a
target market focused on price-sensitive customers. Lufthansa has structured

Eurowings to be scalable such that they have the flexibility to easily integrate new
partners into the group with the goal of becoming the third largest provider of point-to-
point flights in Europe, perfectly aligning with their acquisition of Brussels Airlines. The
company’s aviation services are actively exploring growth in cargo, MRO (maintenance,
repairs & overhaul services), catering and the financial services market. Lufthansa
believes that these business segments provide strong synergies with the rest of the
group and help buffer the cyclical nature of the airline business (Lufthansa Group, 2016,
pp. 8-9).
ii. Organizational Policies, Values, Culture, and Innovation
Lufthansa has 120,000 employees and uses a value-based approach to support
this workforce in continually increasing the company’s value across business cycles.
This value-based management system is seen as an integral part of the company’s
management, planning and controlling processes. Managers are given performance-
related pay that is directly linked to the company’s performance. The company’s human
resource department boasts: “Think the future. Dare to be different. Assume
responsibility” (Lufthansa Group, 2016, p. 62). Pilots, flight attendants and staffers are
all members of employee unions and the company aims to make long-term agreements
with these unions to support predictability and security for both the company and its
employees. However, since 2014 there have been thirteen union strikes by the pilot
union alone over a desire for higher pay, maintaining retirement benefits and a hope to
prevent low-cost expansion. The focus on preventing the expansion of Lufthansa into
the low-cost market was outside of the unions’ right to strike and the courts ruled them
illegal in September 2015 (Maushagen, 2015), but this clearly demonstrates a
misalignment over perceived value creation between employees and management.
Overall, employees on GlassDoor.com rate Lufthansa 3.4 out of 5, based on its culture
and values, work-life balance, senior management, compensation and benefits, and
career opportunities (Lufthansa Reviews, n.d.).
An intentional focus on innovation is identified as one of Lufthansa’s core
objectives; thus, research and development is supported at each individual business
segment (Lufthansa Group, 2016, p. 19) and also in a group-wide unit called the

Innovation Hub. However, it is unclear how much actual innovation results. According to
individual employee feedback, the decision making process is extremely lengthy and
bureaucratic, which greatly limits the ability to innovate. The company’s large size and a
lack of communication and cooperation between different airline groups and levels of
management also creates a traditional environment of “managing the status quo” and
prevents localized problem-solving (Lufthansa Reviews, n.d.). On a group-wide level,
the Innovation Hub is driven by the Strategy and Controlling departments who identify
opportunities during their regular strategy and planning processes. The hub uses
detailed strategy analysis and return on investment calculations, paired with a formal
risk management system, to assess opportunities (Lufthansa Group, 2016, p. 70). This
hub may lead to successful innovation, but the extensive and systematic risk
management process makes is unclear if the true space will truly support repeatedly
trying and failing. From the information publically available, it does not seem as though
Lufthansa’s policies and structure truly support the innovation it desires to achieve.
iii. Ethical & Social Responsibility
Lufthansa has a comprehensive corporate social responsibility (CSR) plan,
including community engagement, economic sustainability, corporate governance and
compliance, and climate, environmental, social and product responsibility. Further,
Lufthansa has committed to a United Nations Global Compact to support collectively
responsible company management. The group has a strategic environmental program
that aims to reduce emissions and have been involved in alternative fuel source and
climate change research for over twenty years. Lufthansa focuses on social and
humanitarian projects, providing relief in times of crisis and using their cargo business
unit to partner with emergency aid alliances, including Aktion Deutschland Hilft and
World Vision Deutschland (Lufthansa Group, 2016, p. 67). Finally, the group has
purchasing guidelines that require suppliers to fulfill various standards and make the
comfort and safety of their customers, crew and staff the utmost priority. These policies
tightly align with Lufthansa’s objective of using “value-based steering” and may help
lead to the development of alternative fuel sources and a competitive advantage in the
future.

iv. Organizational Structure
B. Strategic Position
i. Corporate Level
Lufthansa’s business portfolio consists of Passenger Airline Groups, Logistics,
MRO, and Catering. The Passenger Airline Groups consist of both hub and point-to-
point airlines. Lufthansa Cargo is Europe’s leading freight airline and is focused on
increasing simplification and digitalization of the logistics space (Lufthansa Group, 2016,
p. 50). MRO focuses on civilian commercial aircraft and is working on organic growth
and strategic partnerships (Lufthansa Group, 2016, p. 54). Catering covers the catering
of food in addition to in-flight sales and entertainment, in-flight service equipment,
consultancy services and the operation of lounges. The company is increasingly
focusing on adjacent markets (Lufthansa Group, 2016, p. 57).
A five-member executive board is responsible for managing the entire company,
and uses integrated financial management. Using a dominant-constrained corporate
strategy, the company is diversified around its dominant strength in the passenger
airline sector (See Competitors Business Level Strategies and Error! Reference
source not found. for more details). The diversification of Lufthansa’s business
portfolio results from using a strategy-driven approach, as the units share numerous
links and synergies. Lufthansa uses its hub airlines as a cash cow, aviation services
(including MRO, catering and logistics) as star performers with a high market share in a
high-growth market, and hopes to shift Eurowings from a question mark into a star
performer (Error! Reference source not found.). Financially, all of the company’s cash
flows are collected, centrally managed, and optimized for the company as a whole,
ensuring that they always have sufficient liquidity. The “7 to 1” initiative is implemented
in all business units and they are each managed accordingly.
ii. Business Level
Refer to Competitors Business Level Strategies for more information.
The Passenger Airline Groups are central to Lufthansa’s value creation and
consist of Lufthansa’s passenger airlines, Eurowings and now Brussels Airlines, Swiss

Airlines, and Austrian Airlines (Lufthansa Group, 2016, pp. 48-49). The business unit
has a shared goal of meeting the customer demands of safety, quality, punctuality,
reliability and professionalism. There are extensive synergies amongst the group, with
standardized and synchronized core processes, a uniform network and fleet
management system for all hub airlines, and joint decisions on capital-intensive
products. The Eurowings brand was established in August 2015 and is positioned to
target the price-sensitive, point-to-point leisure travel market in Germany, Austria,
Switzerland and Belgium (Lufthansa Group, 2016). Lufthansa has the goal of growing
Eurowings into the third largest point-to-point carrier in Europe (Lufthansa Group, 2016).
The overall business unit offers a lot of flexibility to customers (Lufthansa Group, 2016).
iii. Partnerships, Alliances, Joint Ventures and Acquisitions
As exhibited by their extensive reach and multi-faceted business portfolio,
Lufthansa has engaged in many partnerships, alliances and acquisitions in its 63-year
history (As Time Flies By, n.d.). For the purpose of this analysis, we will focus in on one
recent acquisition and their current alliances, joint ventures, and internal alliances within
the passenger airline group as a broader context for their acquisition of Brussels
Airlines.
Lufthansa has largely focused on building alliances, joint ventures and
partnerships as a means of expanding its network to improve customer experiences,
flexibility and incentives. Lufthansa founded the Star Alliance in 1997 to reduce costs
and utilize synergies. The alliance enables customers to make connections from one
airline to another for ease of travel, as well as having shared lounges, shared check-in
stations in the same terminals, and increased collective bargaining power (Star Alliance,
n.d.). Today there are 28 member airlines in the Star Alliance, including Brussels
Airlines.
Lufthansa has also developed Joint Ventures in other regions of the world to
expand its reach, including in North America, Japan, China and Southeast
Asia/Southwest Pacific. These entail such close coordination that Lufthansa must get
antitrust immunity from local competition authorities to proceed. The group works
together on capacity and price planning, joint marketing of flights, and revenue

management. These joint ventures allow Lufthansa to utilize the strength that their
partners already have in their respective markets (Lufthansa Reviews, n.d.). Finally,
Lufthansa has developed partner airlines that engage in codesharing agreements and
the honoring of each other’s frequent flyer programs, including Air Astana, Air Malta,
BMI Regional, Jet Airways und LATAM (Partner Airlines of Lufthansa, n.d.). These
partnerships expand Lufthansa’s reach into the Middle East, Northern Africa, India and
South America. Through the use of partnerships, joint ventures and alliances Lufthansa
has created a global flight network and positioned itself as the leading choice for air
travel in Europe (Excellent - Awards Won, 2016).
Under the Passenger Airlines Groups, Lufthansa acquired the majority ownership
of Germanwings in 2009 (Deutsche Welle Staff, 2008), similar to its recent move with
Brussels Airlines. In 2013 they began to transfer all of their non-hub traffic to
Germanwings, and Germanwings reported a positive EBIT for the first time in 2015,
seen as a great success by the Lufthansa Group (Lufthansa Group, 2016). Lufthansa
allowed the airline to continue functioning as an LCC in the market until they decided to
incorporate Germanwings into Eurowings in October 2015 (Airline Route, 2015). By
early 2016 the Germanwings airline was fully operating under the Eurowings name and
branding. The Brussels Airlines acquisition may be modeled after this experience,
increasing fleet size and flexible services to customers, while possibly being folded into
the Eurowings brand and operations. Brussels Airlines will also enjoy the benefit of
Lufthansa’s Joint Ventures and Partnerships that it did not previously have access to as
an independent airline company.
iv. VRIO, Value Chain & BCG Matrix Analysis
For Lufthansa’s VRIO analysis, refer back to Section II.
Lufthansa has created a sustained competitive advantage through its tightly
integrated complementary business units, strong brand reputation, dominant hub
presence at Frankfurt and Munich Airports, and investment in human capital. Through a
strong firm infrastructure (Error! Reference source not found.) and domain expertise
in the passenger airline industry Lufthansa has expanded into the high-growth market of
complementary aviation services (Error! Reference source not found.). The company

has used extensive partnerships, alliances and joint ventures to develop their hub
airlines into a cash cow, while being able to support new investment in Eurowings and
the rapidly expanding LCC market (Error! Reference source not found.). Within this
space Lufthansa is working hard to standardize its fleet and take full advantage of the
economic efficiency opportunities and economies of scale that this enables, reducing
their overall costs. Lufthansa believes that Eurowings has the potential to become a star
performer and seems to be focusing current investments within this space.
III. (B) INTERNAL ANALYSIS - Brussels Airlines
A. Organizational Analysis
i. Goals & Objectives
Brussels Airlines looks to position itself as Europe’s hybrid carrier, offering low-
cost services with superior customer service through tailored product offerings.
Operating out of Brussels Airport (BRU), Brussels Airlines flies primarily in Europe,
Africa, and North America with its fleet of 49 aircraft (Fleet, n.d.). Staffed with over 3,500
employees, Brussels Airlines runs approximately 300 daily flights (Pressroom, n.d.) and
leads in its home hub in BRU with over 33% seat market share (Brussels Airport:
Ryanair Tests Itself, 2015). In 2014, Bernard Gustin, CEO of Brussels Airlines,
announced the airline’s strategy to compete through flexible, modular product offerings
and thus allow the customer to choose for themselves, thereby “differentiating,
segmenting and putting the customer at the heart of everything” they did (Brussels
Airlines Responds to Consumer, 2014). As cited in a presentation by Gustin, the four
pillars of Brussels’ commercial strategy can be described as products, loyalty, web
environment, and competitiveness, all supported by an emphasis on quality service
(Gustin, 2014). The company’s position as a low-cost, high-value airline helped the
company turn a profit in 2015, marking success to their hybrid strategy (Sciot, Daenen,
& Lemmes, 2016).
ii. Organizational Policies, Values, and Culture
Brussels Airlines reiterates its customer-focus culture in its mission statement
that reads: “We want to be the most personal airline, bringing people together and

making travel a pleasure” (Our Mission and Values, n.d.). This is supported by four
values: human, enabling, pleasure, and agile. Gustin highlights these values in the
organization by pushing on the “spirit of an SME” (small and medium-sized enterprise)
and their motto to “be number one, behave as number two” (Borstlap, 2014). Citing their
continuous and transparent communication through tools like Yammer, b.meeting,
b.gazette, and asktheceo, Brussels Airlines’ culture looks to resemble a smaller, more
decentralized organization. Through what Gustin calls their “credible leadership style”,
the company encourages fair feedback and no-blame policies, team empowerment, and
work floor managers. Such decentralization and transparency looks to support
innovation by enabling feedback from the bottom. From its Glass Door profile, all 18
reviews approve of the CEO, and the overall company score sits at a 3.8. These ratings
coincide with Gustin’s claims that many employees enjoy the work but cite it as “hectic”
and “hard work”. One comment states: “Most of the colleagues are giving 200% of
themselves, doing everything to give the passengers a great time.” Another review
comments that “innovation and creativity skills can be used” while another mentions the
company’s “great cost consciousness” (Brussels Airlines Reviews, n.d.). These
responses support directives that service is at the heart of Brussels Airlines’ strategy
and culture—the high-value side of the strategy. On the other hand, employees’ cost
awareness supports the company’s low-cost strategy. Together, employee activities
jointly support the direction set out by Brussels management.
iii. Ethical & Social Responsibility
In addition to their tight-knit culture, Brussels Airlines’ corporate social
responsibility programs include and encourage customers and employees to support
the African population and environment through its b.foundation, Bike For Africa, and
b.green programs. In 2009, Brussels Airlines was awarded the Environmental Award
from Brussels Airport for the airline’s leading role in creating a collaborative decision
making process at the airport, reducing air traffic nuisance (b.green, n.d.). Through its
Bike For Africa program, employees and volunteers raise funds on a mountain bike
excursion throughout parts of Africa (Bike for Africa, n.d.). These funds have been used
towards humanitarian projects that have assisted with maternity and childbearing units
in Muriel Africa and across the Gambia. Additionally, through the b.foundation,

employee charity initiatives are bundled with those of the company, allowing employees
a platform to support their causes. Customers are also able to contribute funds through
designated donation envelopes on long-haul flights (Creating Value for the African
Society, n.d.).
iv. Organizational Structure
The organizational structure at Brussels Airlines appears to be a traditional,
functional structure with a CEO, CIO, CCO and other C-level positions. Based on
employee reviews and Gustin’s presentation, Brussels Airlines’ autonomous culture has
helped create a dynamic and open environment, enabling it to respond quickly to
customer demands. As Gustin has strongly emphasized a need to adapt to customer
demands, this autonomous structure allows the company to adapt to changing trends
and closely embraces the SME spirit (Brussels Airlines Responds, 2014). The downside
to this organizational structure is that it may make it difficult to coordinate new
objectives or discover issues in the field, though this is countered with the company’s
communications tools and culture of transparency.
B. Strategic Position
i. Corporate Level
Brussels Airlines operates as a single business serving the European passenger
airline market and is owned by SN Airholding, a holding company for top-level
companies in the air transport sector. Prior to Lufthansa’s acquisition, SN Airholding
was 45% owned by Lufthansa AG, which the latter purchased in 1999. As part of this
transaction, Brussels Airlines gained access to the Star Alliance group, allowing its
customers to benefit from shared frequent flyer points and an improved destination
network (Star Alliance, n.d.). Similarly, the partnership with Lufthansa helped provide
Brussels Airlines “profit from additional customers for the connections” out of the
Brussels hub. With Lufthansa’s expansive network, the destinations offered to “Brussels
Airlines customers will rise by 133” after the acquisition (Organisation, n.d.). These
offerings help boost Brussels Airlines’ perceived value to customers, a major
component of Brussels’ service strategy.
ii. Partnerships, Alliances, Joint Ventures and Acquisitions

Through other partnerships, Brussels Airlines has been able to create added
value for customers. In one notable case, Brussels Airlines partnered with ID&T (a
Dutch entertainment company) to provide service to Tomorrowland, the world’s largest
electronic music dance festival located in Belgium. From this partnership, six A330
Airbus planes were branded with the Tomorrowland logo, outfitted with an external
sound system, and staffed with a live DJ. Over 17,000 flight packages were sold
targeting young, high-income passengers and helped Brussels Airlines garner over 266
million YouTube views from event videos (Boni, 2015). This partnership helped the
airline gain global brand exposure and attract a new customer segment.
Additionally, Brussels Airlines has teamed up with Microsoft in developing “The
Loft” at Brussels Airport, a premium, digital business lounge featuring a suite of
Microsoft’s latest products (Brussels Airlines Launches, 2014). With the introduction of
the new lounge, revenues for the facility increased by 65% and helped draw in 6,500
more guests per month. As part of the company’s desire to reposition its brand as high
quality without compromise, Brussels has made big strides using its partnerships.
iii. Business Level
Brussels Airlines focuses on a high-value, low-cost position by offering a broad
suite of flight packages and a growing network of destinations, differentiating itself as a
hybrid carrier. Flying primarily in Europe and Africa, Brussels Airlines also flies to North
America and India. On its European routes, Brussels Airlines offers four products:
check&go, light&relax, flex&fast, bizz&class (Brussels Airlines Unveils, 2014).
Check&go targets price-sensitive customers by providing flights as low as €69 but does
not include checked baggage or modifiable tickets. Light&relax targets the next tier with
reserved seating and checked baggage. Flex&fast, the next tier up, includes priority
check-in and seating along with onboard food and refreshments. Bizz&class, the
highest tier, gives passengers access to the Brussels Airlines lounge along with a fine
dining experience and a free middle seat. This range of products allows Brussels
Airlines to compete as a low-cost carrier in the European market but also differentiate it
through its broad line, customization, and quality value drivers.

Similarly, on its long-haul flights, Brussels Airlines has three products targeted
toward different customer preferences: Economy Privilege, Economy, and Business
(Economy, n.d.). In order to provide further value, Brussels Airlines want to broaden its
market scope by adding new destinations (a key part of its growth strategy). In 2015, 14
new routes were launched and another 9 were added in the summer of 2016.
iv. VRIO & Value Chain Analysis:
For Brussels Airlines’ VRIO analysis, refer back to Section II.
Customer service and increased value drivers are at the core of Brussels
Airlines’ value chain (Error! Reference source not found.). Brussels Airlines continues
to add additional destinations year after year, constantly improving the travel
convenience it provides to customers. In its efforts to offer high-value service at the
same price, Brussels Airlines taps into its Belgian partnerships to fortify its position as
the country’s flagship airline, offering healthy local food and Belgian beer on its flights
(Brussels Airlines Teams Up, 2016).
IV. ACQUISITION ANALYSIS
A. Ally or Acquire?
As demonstrated in Error! Reference source not found., this analytical
framework recommends acquisition.
B. Porter’s Tests
i. Industry Attractiveness Test
Brussels and Lufthansa are already functioning within the same industry. Based
on our industry analysis (Error! Reference source not found.), the scheduled air
passenger industry is moderately unattractive. However, because Lufthansa is already
a major player in the still-growing industry, it is justifiable for Lufthansa to further expand
in it. Consolidation for Lufthansa increases its overall market share, which is critical in
the highly-competitive LCC market. The additional 49 aircraft from Brussels Airlines will
increase market scope for Eurowings and allow it to offer extensive service across
Western Europe, making it the third largest point-to-point carrier in the region (Weiss,

2016). Brussels Airlines’ prime access to Brussels Airport adds an additional
competitive advantage as airlines compete for gate space at the main European hubs.
The acquisition of Brussels Airlines also expands Lufthansa’s flight offerings with
access to the African market.
ii. Better-off Test
Based on our analysis of the most likely synergies (Error! Reference source
not found.) and the post-acquisition VRIO analysis (Error! Reference source not
found.), we believe that both Lufthansa and Brussels airlines will be better off after the
acquisition.
iii. Cost-of-Entry Test
The acquisition price of Brussels Airlines is linked to performance-related factors,
but the price ceiling for the acquisition is set at 250 million Euros (Lufthansa Takes a
Strategic, 2008). Assuming Lufthansa pays the maximum possible amount for the
remaining 55% of Brussels Airlines, 250 million Euros, our calculations show that this
acquisition will still pass Porter’s cost of entry test (Error! Reference source not
found.). Based on a 250 million Euro acquisition price, the derived fair value of Brussels
would be 454 million Euros (Exhibit V) while the total fair value of Brussels’ equity
based on a discounted cash flow analysis is 565 million Euros (Exhibit DD). Based on
discounted cash flow analysis, the fair value of 55% of Brussels’ equity is €310 million
(Exhibit V). This analysis was performed before factoring in any synergies. Further, the
fair value of equity represents a conservative valuation measure relative to enterprise
value, because debt borrowings are subtracted in order to calculate value available to
shareholders. Since 310 million Euros is greater than the maximum acquisition price of
250 million Euros, this acquisition passes the cost of entry test.
C. Combined Resources & Capabilities, V-C, and Industry Conditions
Through a combined VRIO analysis, Lufthansa will be able to leverage its
existing market presence and fleet size to expand its scope into Africa, a gap in its
current network. Brussels Airlines offers a strong position at the Brussels hub in which
its existing partnership with the airport has secured it the largest airport market share
and gate access.

Based on the BCG Matrix analysis (Error! Reference source not found.),
Lufthansa may use the acquisition of Brussels Airlines to move Eurowings from a
question mark to a star performer. The missing piece for this move is Eurowings gaining
a large market share and the combination of their two fleets enables Eurowings to meet
its desired goal and move into the star performer category. This is based on the
assumption that Lufthansa decides to fold the majority of Brussels’ fleet into Eurowings
and that the low-cost, point-to-point market continues to grow at a high rate. However, if
Brussels Airlines is entirely folded into Lufthansa’s offerings, Lufthansa risks losing the
added brand recognition and positive public opinion that Brussels Airlines brings to the
acquisition (Error! Reference source not found.). Eurowings is not perceived very
favorably in the market, rating 4 out of 10 for overall reputation based on customer
reviews (Eurowings Customer Reviews, n.d.). On the other hand, Brussels Airlines has
a rating of 6 out of 10 and also has won several awards for best short-haul airline
(Brussels Airlines Customer Reviews, n.d.). This tradeoff is something that Lufthansa
should critically think about when deciding their short- and long-term strategies for the
acquisition.
Based on our V-C Analysis of Lufthansa after the acquisition of Brussels Airlines
(Error! Reference source not found.), the overall value that Eurowings brings to
customers increases. The acquisition of Brussels will provide greater travel convenience
by adding flight destinations in Africa and increased offerings throughout Western
Europe. The acquisition may also increase Eurowings’ premium service offerings
because of Brussels’ more flexible product packages, including business class services.
Overall, the post-acquisition analysis shows Lufthansa’s Eurowings (with the acquisition
of Brussels Airlines) as offering greater value to customers at the same price. In our
analysis we assumed that price would remain unchanged for Eurowings as a worst case
scenario. However, due to expected synergies, the acquisition would likely lead to
decreased costs, enabling Eurowings to drop its price and make its positioning even
more competitive.
D. Linking Corporate to Business-Level - Part C and D (Scenario analysis, NPV
calculations)
i. Discounted Cash Flow Analysis

In order to assess the value of Lufthansa’s acquisition of Brussels Airlines, a discounted
cash flow analysis was used to calculate both standalone valuations for Lufthansa (

Exhibit AA) and Brussels (Exhibit DD), and a combined firm valuation (Exhibit EE
- EE). The combined firm valuation is presented in three different scenarios. First, the
combined firm valuation is calculated under a “worst case”, “better case”, and “best
case” scenario. Furthermore, each case scenario is assessed over a variation of five
different discount rates (Exhibit EE - EE). The base discount rate, weighted average
cost of capital (WACC), is assumed to be equal to Lufthansa’s WACC of 5.12%
because Brussels represents a relatively small acquisition in comparison to the size of
Lufthansa. The first step in determining the WACC was to calculate Lufthansa’s capital
structure, which was found to be 55.38% debt and 44.62% equity (Lufthansa Group,
2016). Next, Lufthansa’s cost of equity was found to be 8.32% using the capital asset
pricing model (CAPM). Lufthansa’s annual report provided the rate of debt as 3.4% and
tax rate as 25%, which allowed us to fill in the remainder of the WACC equation and
arrive at 5.12% (Lufthansa Group, 2016). For Lufthansa, the forecasted revenue growth
rate was determined using the average of the historical compound annual revenue
growth rate, professional analyst estimates, and the projected economic growth rate for
the European region. For Brussels, no analyst reports were available since Brussels is
privately held, so only the firm’s historical compound average revenue growth rate and
the projected economic growth rate for the European region were used to determine the
forecasted revenue growth rate. Other line items were projected as a percentage of
revenue.
There are multiple equations that exist which estimate a firm’s free cash flow. To
determine the method of arriving at an estimated free cash flow for each firm in this
case, the limited information available for Brussels had to be considered to select an
equation which could be derived from published data. To estimate free cash flow, we
started with earnings before taxes, added back net interest, taxes, depreciation,
amortization, change in working capital, and net capital expenditure.
Once Brussels is acquired, four likely synergies were identified which would
benefit the combined firm (Error! Reference source not found.). We expect up to a
0.75% reduction in combined firm operating costs due to fleet standardization and
reduced selling, general, and administrative expenses due to Brussels sharing costs
with Lufthansa. Access to new markets is expected to provide a base increase of up to

1.5% and route optimization will provide revenue synergies of up to 0.5% of combined
firm revenue.
ii. “Worst, Better, Best Case” Scenarios
In the “worst case” scenario, it is assumed that a combined firm will operate at a
level equivalent to that of Lufthansa and Brussels operating separately. A WACC of
5.12% is assumed, but none of the identified synergies are expected to be realized.
This represents a bare minimum of what Lufthansa can expect to extract from this
transaction, in terms of firm value. This scenario provides a combined firm enterprise
value of 19.888 billion Euros and a total fair value of equity equal to 13.447 billion Euros
(Error! Reference source not found.). We estimate the likelihood of this outcome as
15%.
Our estimates indicate that the most likely scenario will be what we define as the
“better case” scenario. The “better case” scenario assumes a WACC of 5.12% and that
50% of the identified synergies will be realized. This imputes a 0.375% reduction in
combined firm operating expenses, a 0.75% base increase, and a 0.25% increase in
combined firm revenue. This leads to an estimated combined firm enterprise value of
27.163 billion Euros and a total fair value of equity equal to 20.722 billion Euros (Error!
Reference source not found.). We estimate the likelihood of this outcome as 75%.
The “best case” scenario represents what we foresee as the best possible
outcome, which is within reason, based on current estimates. This scenario assumes a
WACC of 5.12% and 100% of the identified synergies are realized. If 100% of identified
synergies are realized, the combined firm’s operating costs decrease by 0.75%,
revenues increase by 0.5%, and there is a base increase of 1.5%. This is representative
of the most aggressive estimates that would be justifiable by Lufthansa’s management
team. The combined firm grows to an enterprise value of 34.439 billion Euros and the
total fair value of equity is equal to 27.998 billion Euros (Error! Reference source not
found.). We estimate the likelihood of this outcome as 10%.
V. RECOMMENDATIONS

The acquisition of Brussels Airlines and its assets gives Lufthansa a variety of
strategic opportunities. The following analysis summarizes Lufthansa’s most suitable
short- and long-term options, and explains which strategy we recommend and why.
A. Short-Term Recommendations
As Lufthansa operates in both the LCC and FSC spaces already, the soon-to-be
acquired airplanes, labor, and other resources can be used in very different ways. Our
short-term recommendations align with the different strategies Lufthansa could pursue,
and are as follows.
i. Revise Eurowings’ Product Mix to Learn From and Mimic Brussels
This recommendation addresses Eurowings’ poor performance by having the
company mimic Brussels Airlines’ best practices. Brussels has significantly lower
operating costs, all around, and we expect Eurowings to be able to save a lot of money
by learning from them. In the short-term, Eurowings would formally change its company
values and operations to focus on providing more value for the price. In actions, this
would mean great customer service and a seamless booking and flight experience. This
would also mean synchronizing certain offerings between Brussels Airlines and
Eurowings to increase consistency and variety for consumers. Brussels employees can
host training sessions for Eurowings staff during this time of product mix revision, and
managers from both organizations can meet and learn from one another.
The recommendation to assimilate Eurowings’ products and services to match
Brussels Airlines is aimed at having two high-performing low-cost airlines instead of
one. This recommendation could help streamline operations and a merger down the
road.
ii. Standardize Eurowings Fleet to Improve LCC
The second recommendation expands upon Eurowings’ LCC strategy.
Eurowings, has the worst CASK of its competitors and needs to overhaul their
operations (Error! Reference source not found.). With new airplanes being acquired
through the purchase, Lufthansa could choose to use them to focus on their LCC

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