Customer Relationship Management: Lufthansa

CONTENTS

1. Introduction

2. Overview: Current situation
2.1 Lufthansa’s current CRM strategy
2.2 Level of importance of Lufthansa’s CRM strategy
2.2.1 Strategic CRM
2.2.2 Operational CRM
2.2.3 Analytical CRM

3. Analysing Lufthansa’s CRM Value Chain
3.1 Lufthansa’s CPA
3.1.1 Market segmentation
3.1.2 Data mining
3.1.3 Tools models
3.1.4 Life-time value
3.2 Customer Intimacy
3.2.1 Use of database
3.2.2 Database integration
3.2.3 Evolution of IT
3.2.4 Database architecture
3.2.5 Single view of the customer
3.3 Lufthansa’s Network (Development)
3.4 Value Proposition Development
3.4.1 Cost perception
3.4.2 Source of customer value
3.4.3 The customer experience
3.5 Customer Lifecycle
3.5.1 Identify new customers
3.5.2 Acquire new customers
3.5.3 Transacting with customers
3.5.4 Retaining existing customers

4. Financial Factors

5. Market Watch

6. Evaluation
6.1 Strengths
6.2 Weaknesses
6.3 Opportunities
6.4 Threats

7. Recommendation and Conclusion

Table 1

References

1. INTRODUCTION

Lufthansa is Germany’s aviation flagship company and also one of the major airlines operating on a global scale. Established in 1926, Lufthansa currently is one of the biggest members and also founders of the Star Alliance, the world’s most important airline cooperation. Divided into five strategic business segments (passenger business, logistics, Maintenance Repair Overhaul, catering and IT services), the following report will focus on the passenger business segment and Lufthansa’s activities in terms of customer relationship management (CRM) in this division. Being one of the first airlines to have established a customer loyalty program, Lufthansa successfully runs its frequent flyer concept Miles More (Lufthansa, 2007).

In a competitive environment like the aviation business, relying on a loyal customer base which generates a major part of the company’s revenue is one of the key drivers for success. Due to cost pressure in the late 1990´s and the crisis in the aviation business after the terror attacks in 2001, airlines more than ever before recognized and appreciated the value of a relationship to its important profitable customer segments. Thus CRM strategies have become increasingly relevant for Lufthansa and other airlines.

Lufthansa’s CRM strategy in the passenger business segment is concentrated within the Miles More program. Different statuses of memberships are designed to attend to customers throughout the stages of customer’s lifetime and therefore represent the value of the customer for the company. Beneath the Miles More surface, an accurate value chain is required. The value chain contains Lufthansa´s Customer Portfolio Analysis, IT and Database Integration, Value Proposition Development and Customer Lifecycle Management. These factors combined enable Lufthansa to create a state of the art CRM system.

2. OVERVIEW: CURRENT SITUATION

2.1 LUFTHANSA’S CURRENT CRM STRATEGY

In line with a majority of airlines, Lufthansa has developed an important CRM strategy aiming to satisfy customers’ needs over the past few years. The main objective is not only to focus on the most profitable flyers, but also to cover the entire target market, i.e. the whole range of customers from basic economy class to prestigious first class. Each passenger’s experience is critical to Lufthansa for the simple reason that these people will become the ambassadors of the brand. In this context, results of various studies about word-of-mouth are of significance: if for example a customer recalls a negative experience such as a broken entertainment system or a delayed flight, this customer will make this experience public to friends and relatives. The likelihood of a negative experience being shared compared to customers mentioning positive ones is multiple. The importance of offering and delivering satisfying services is even more significant for Business or First Class customers as these customers have higher expectations and are willing to pay a premium price, thus making them the most profitable segment of Lufthansa’s target market. This also means that in case something negative occurs, it is imminent to resolute the situation in a short time.

Although Business and First Class are the most profitable ones and thus the most likely target for a CRM strategy, Lufthansa tries to consider and treat any customer as something special, independent of the price that has been paid for the ticket. This is done in the hope that customers that start in Economy class might be grown to become Business or even First Class passengers over time (up-selling). In order to develop strong levels of loyalty among its customers Lufthansa launched its Miles More frequent flyer program in 1993. This program now counts around 13 millions members who can earn and redeem frequent flyer miles on twelve European airlines as well as on all Star Alliance members. Moreover, each customer is able to build different status levels, allowing him to benefit from a number of privileges; this will be explained in more detail further on. A significant reason for the program’s attractiveness is that Miles More is a free program and everybody can sign up.

BENEFITS

Members of the Miles More frequent flyer program can access a wide range of privileges. The more members fly, the better their status will be which gives them even more advantages. Privileges can only be achieved once the frequent traveller status is reached, which is the first level after the entry Miles More member status. Being a status member of Miles More gives customers a range of advantages such as access to business lounges at the airport, an increase in registered baggage allowance, fast check-in and various other privileges. The number and the quality of the privileges increase with the level that has been achieved.

CHALLENGES

Miles More offers a number of advantages however the main problem is that the system is too complicated and confuses the customer. There are four kinds of status (miles more status, frequent traveller status, senator status and HON circle status) and three kinds of miles. When conducting research for this project, logging onto the website and trying to apply for this loyalty program seemed to be considerably complicated and the website as well as the application process is not formulated in a simple way. Only after searching the website for some time does a majority of interested customers realise that the basic Miles More card is the only card that can be applied for. Once the system is clear, the reason for that is obvious, i.e. a minimum amount of miles is required to obtain a higher status (35,000 miles for frequent travellers, 100,000 miles for senator and 600,000 miles for HON circle) and then the higher status will be valid for a minimum of two years.

Problems become even more evident when customers are interested in signing up for a Miles More credit card, co-branded with VISA. Each status has its own corresponding credit card that can only be applied for when having reached this status. In addition, there are gold cards and credit cards are not available in all countries in which Miles More is available. So an important question to ask is: does the credit card change every time the status changes?

In addition, it is absolutely imperative that Lufthansa delivers the value that has been promised to different types of customers. Indeed by having a look on different websites or forums that relate to Lufthansa feedback, there are a large number of complaints regarding the quality of services being inconsistent at times. The priority for Lufthansa is to reinforce the system and train its employees harder to better serve customer needs.

2.2 LEVEL OF IMPORTANCE OF LUFTHANSA’S CRM STRATEGY

Being the first European airline to have launched a loyalty program, Lufthansa appears to be concerned about CRM and the opportunities offered by CRM tools and strategies. In order to better understand the level of importance of Lufthansa’s CRM strategy, the chart below summarizes the principal stages in which CRM activities take place.

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This chart shows two important parts of Lufthansa’s marketing in general and its CRM strategies in detail. On top of the table, the market segmentation that Lufthansa is operating with is highlighted, showing that two different approaches towards segmentation are used: firstly, a distinction of customers for the price of the ticket, i.e. starting with premium prices for First Class and going down to low-c]ost offers by Lufthansa’s budget airlines. A second approach to segmenting its target market is using its loyalty program’s statuses, starting with HON circle members who are the most valuable and profitable ones, ending with basic members without any specific status.

In addition, Lufthansa’s CRM strategy is present at every phase of a passenger’s journey, which can be followed when analysing the bottom chart. The services offered to customers start with the flight reservation which can be performed through different channels, then proceed to Lufthansa services at the departure airport, during the actual flight, at the destination airport and finish with post-flight services. Although the normal passenger solely perceives the flight itself as relevant for how customer satisfaction takes place, all other parts of this process also offer an opportunity to satisfy customers and gain an advantage over competitors. These processes are critical in building a strong brand image because going the extra mile in these areas might positively differentiate Lufthansa from its competition.

2.2.1 STRATEGIC CRM

To retain customers and satisfy them in the best possible way, Lufthansa had to segment its customers and subsequently generate profit through customer knowledge. This is the basis for the launch of Miles More, with the original system being similar to other airlines’ loyalty program. What differentiates Lufthansa’s program from other airlines is that there are three different miles, i.e. award miles, status miles and HON circle miles.

AWARD MILES

These are miles that can be earned and later on be used for flights on Lufthansa or other Miles More partners, upgrades, merchandise from the Lufthansa WorldShop or for rental cars and hotels. For standard Miles More members, miles remain valid for 36 months after which they expire. For Frequent Travellers, Senators and HON Circle Card holders, miles have no expiry date.

STATUS MILES

Status miles can only be earned when flying on fully integrated partner airlines or on Star Alliance members. There is no other way to earn these miles. In addition, status miles expire at the end of each calendar year. They are used to identify the frequent flyers and members are able to qualify for a higher status on the basis of the status miles that they have collected in one year. The number of status miles earned is always equivalent to the number of award miles earned on the same flight.

HON CIRCLE MILES

HON Circle miles can only be earned when flying on fully integrated partner airlines (up to a total of 100,000 Miles within two calendar years). They are necessary to attain the top-tier status on Miles More - HON Circle. HON miles are valid for two years.

EARNING MILES

Every time Miles More members fly with Lufthansa or other airlines that have agreements with Lufthansa, such as Star Alliance member airlines, miles are credited to the member’s account. The number of miles depends on the value of the ticket: whilst discounted Economy tickets only earn 50% or even only 25% of the actual distance flown, Business class tickets earn twice this number and First Class tickets earn thrice. However, flying is not the only way to earn miles as Lufthansa has numerous agreements with non-aviation partners, such as major hotels, rental car companies, retail chains, mobile phone providers and even banks and newspapers.

In addition, Lufthansa’s Miles More VISA credit card allows users to earn one point per Euro spent with this card. In contrast to banks in Germany offering VISA cards for

free, an annual fee applies however the Miles More VISA card is one of the most popular credit cards in the German market. Similar credit cards are also offered in markets outside of Germany, however it seems as if the potential for other markets is not fully exploited as yet.

As with other airlines or nearly every business operating loyalty cards, Lufthansa also makes use of a number of promotions, such as double mileage on new routes, extra miles for using online check-in or signing-up for newsletters, however it needs to be noted that restrictions to these promotions often apply, such as only residents of particular countries can participate. There are also promotions that are solely aimed at status customers, e.g. Senator or higher.

MILES MORE STATUSES

The miles more loyalty program is divided into four main segments as shown in the chart below.

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MILES MORE STATUS

This is the introductory status after having joined the program. With this type of status, no privileges are incorporated into the membership card, except for the ability to earn miles on Lufthansa’s entire partner network. Initially, new member start off with a temporary paper card that can be torn out of Lufthansa magazines or that is printed off the internet after signing-up.

FREQUENT TRAVELLER STATUS

All Miles More members that have earned a total of more than 35,000 status miles in one calendar year receive the Frequent Traveller Status. This status remains valid for two years and members can requalify for the same status in any of these two years.

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SENATOR STATUS

Upon having collected 100,000 Status Miles (130,000 Miles for residents of Germany) within one calendar year, Miles More members will receive Senator Status with a validity of two years. The main benefits of being a Senator are:

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HON CIRCLE STATUS

When having collected 600,000 HON Circle Miles within two calendar years, Miles More members receive HON Circle Status, again with a validity of two years. The main benefits deriving from HON status are:

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