One-On-One: Austrian CEO Airs European Perspective

Vagn Soerensen, CEO of Austrian Airlines, in January assumed the chairmanship of the Association of European Airlines, a group now in its 50th year, representing 31 airlines that carry 300 million passengers annually. BTN editor David Jonas recently spoke with Soerensen about developments in European aviation, including issues that divide the European Union and the United States.

BTN: An ongoing controversy between the United States and the European Union is aviation security. What is your view of the current situation?

Vagn Soerensen: Security costs since 9/11 obviously have put a tremendous burden on airlines. Security for other modes of transportation clearly is the responsibility of the state. The security of the traveling public is the responsibility of society, not the airlines or the individual traveler. There also is discrimination with respect to the U.S. government covering security costs for U.S. airlines, unlike in Europe. Our claim is that post-9/11 security costs should be borne by the member states and we are now trying to accomplish that.

BTN: What is AEA's position on the U.S. request to deploy armed marshals aboard foreign aircraft entering and exiting the United States?

Soerensen: You will not find a uniform European view. Opinions among individual airlines and the member states range from absolutely opposing them and instead canceling flights if there is a credible security threat to agreeing with the idea. What we do oppose uniformly is that the request was made overnight without any chance to coordinate the matter with the European Union. Hopefully, we will be able to agree on common procedures. It was similar with the passenger name record data access. The agreement we ultimately reached is satisfactory, but the way it came along was not. It was like having a gun to the forehead that forced individual carriers to choose between two evils.

BTN: Though AEA generally welcomes deregulation of global distribution systems in the United States, the association still is concerned about the elimination of rules prohibiting display bias. Please elaborate on the European perspective.

Soerensen: AEA welcomes the decision of the U.S. Department of Transportation to eliminate most of their CRS rules, as it has a liberalizing effect and will lead to more competition among CRSs. AEA, however, is concerned that DOT has also decided to eliminate the rules prohibiting CRS display bias within six months, because it can lead to an abuse due to the vertical integration of some airlines into CRS providers, not only to the detriment of the non-owners but also potentially leading to misleading information for consumers. Therefore, AEA feels that this problem could be resolved by regulation prohibiting such abuse.

BTN: Of course, another huge development in Europe is industry consolidation. How will that proceed in 2004?

Soerensen: The Air France-KLM agreement marks the start of the process, but it won't happen overnight. These agreements are extremely complex, involving states, airports and the national and regional infrastructure, but it means everyone needs to strive to lower unit costs through economies of scale. Alliances are tying themselves even more closely together. They have succeeded in capturing revenue synergies but have not yet succeeded in capturing cost synergies. In the wake of Air France-KLM, you will see a lot more of that, including joint procurement of information technologies, aircraft, etc. The general view is that consolidation has to take place and that there is severe overcapacity. Consolidation also will have to happen among low-cost carriers that soon will have to compete against each other. In general, business models around the industry that used to be unique now are starting to converge.

BTN: Regarding Air France-KLM, how can regulators ensure that competition is maintained?

Soerensen: We are not trying to block anything, but it has to happen on a nondiscriminatory basis. If restrictions are put on other alliances, then I'd expect the same to happen in this case.

BTN: There will be new faces in European regulatory bodies this year and, at the same time, the United States is gearing up for a presidential election. How will these developments impact ongoing Open Skies negotiations between the United States and the European Commission?

Soerensen: New commissioners will be put into place, so the goal is to make sure there is a secure overlap and to build up the relationships. I cannot comment on the impact of the U.S. presidential election, but these Open Skies talks have been dragging on for a long time. It is a big priority for us. The most recent talks have been the most constructive yet, and we hope that will continue.

BTN: The European Single Market this year will gain 10 new member states. What are the potential ramifications on the airline industry?

Soerensen: It is a positive development because it means more deregulation. These states are relatively small, but there will be improved market access. The growth potential is being realized and increasing traffic flow in Europe. It also will mean that the alliances can shift more to include carriers in these new countries, such as LOT Polish joining the Star Alliance.

BTN: What are the other top priorities for AEA?

Soerensen: We are very focused on a more efficient air transportation system and the single sky initiative. Right now, there are many states with their own air traffic management systems, which does not provide a basis of efficiency. It leads to lots of delays, which cost the airlines and the customers. In 2004, we hope to lay the groundwork to understand the inefficiencies and see exactly where the improvements are needed.

BTN: Your two predecessors at AEA, Rod Eddington of British Airways and Leo van Wijk of KLM, both came from very large carriers. Being from a smaller airline, what fresh perspectives can you bring to the table?

Soerensen: Small and midsize carriers that are not able to live on economies of scale, and that maybe are not seeing consolidation as the only solution, instead have to focus on other regional issues. There is a necessity in having efficient infrastructure, for example. Coming from a regional, niche airline, I can bring that perspective and drive business issues in a neutral, objective fashion.

BTN: What are the main goals for Austrian Airlines this year?

Soerensen: Like everyone else, we have been cutting costs tremendously, but we also have a new orientation and a new dimension and we are on the offensive. We brought Tyrolean closer and rebranded it Austrian Arrows as a feeder for Austrian. We also are developing new products to reflect the tendency toward a much stronger value proposition for business travelers, who require stronger product differentiation, and new price concepts in economy class toward availability pricing. Our main focus is eastward. We are now serving deep into central and eastern Europe. We want to gain a first-mover advantage in these markets. Our second focus is Asia. There is little nonstop service now between those two regions. As we add service, it makes us an even better alliance partner in Star Alliance.Vagn Soerensen, CEO of Austrian Airlines, in January assumed the chairmanship of the Association of European Airlines, a group now in its 50th year, representing 31 airlines that carry 300 million passengers annually. BTN editor David Jonas recently spoke with Soerensen about developments in European aviation, including issues that divide the European Union and the United States.

BTN: An ongoing controversy between the United States and the European Union is aviation security. What is your view of the current situation?

Vagn Soerensen: Security costs since 9/11 obviously have put a tremendous burden on airlines. Security for other modes of transportation clearly is the responsibility of the state. The security of the traveling public is the responsibility of society, not the airlines or the individual traveler. There also is discrimination with respect to the U.S. government covering security costs for U.S. airlines, unlike in Europe. Our claim is that post-9/11 security costs should be borne by the member states and we are now trying to accomplish that.

BTN: What is AEA's position on the U.S. request to deploy armed marshals aboard foreign aircraft entering and exiting the United States?

Soerensen: You will not find a uniform European view. Opinions among individual airlines and the member states range from absolutely opposing them and instead canceling flights if there is a credible security threat to agreeing with the idea. What we do oppose uniformly is that the request was made overnight without any chance to coordinate the matter with the European Union. Hopefully, we will be able to agree on common procedures. It was similar with the passenger name record data access. The agreement we ultimately reached is satisfactory, but the way it came along was not. It was like having a gun to the forehead that forced individual carriers to choose between two evils.

BTN: Though AEA generally welcomes deregulation of global distribution systems in the United States, the association still is concerned about the elimination of rules prohibiting display bias. Please elaborate on the European perspective.

Soerensen: AEA welcomes the decision of the U.S. Department of Transportation to eliminate most of their CRS rules, as it has a liberalizing effect and will lead to more competition among CRSs. AEA, however, is concerned that DOT has also decided to eliminate the rules prohibiting CRS display bias within six months, because it can lead to an abuse due to the vertical integration of some airlines into CRS providers, not only to the detriment of the non-owners but also potentially leading to misleading information for consumers. Therefore, AEA feels that this problem could be resolved by regulation prohibiting such abuse.

BTN: Of course, another huge development in Europe is industry consolidation. How will that proceed in 2004?

Soerensen: The Air France-KLM agreement marks the start of the process, but it won't happen overnight. These agreements are extremely complex, involving states, airports and the national and regional infrastructure, but it means everyone needs to strive to lower unit costs through economies of scale. Alliances are tying themselves even more closely together. They have succeeded in capturing revenue synergies but have not yet succeeded in capturing cost synergies. In the wake of Air France-KLM, you will see a lot more of that, including joint procurement of information technologies, aircraft, etc. The general view is that consolidation has to take place and that there is severe overcapacity. Consolidation also will have to happen among low-cost carriers that soon will have to compete against each other. In general, business models around the industry that used to be unique now are starting to converge.

BTN: Regarding Air France-KLM, how can regulators ensure that competition is maintained?

Soerensen: We are not trying to block anything, but it has to happen on a nondiscriminatory basis. If restrictions are put on other alliances, then I'd expect the same to happen in this case.

BTN: There will be new faces in European regulatory bodies this year and, at the same time, the United States is gearing up for a presidential election. How will these developments impact ongoing Open Skies negotiations between the United States and the European Commission?

Soerensen: New commissioners will be put into place, so the goal is to make sure there is a secure overlap and to build up the relationships. I cannot comment on the impact of the U.S. presidential election, but these Open Skies talks have been dragging on for a long time. It is a big priority for us. The most recent talks have been the most constructive yet, and we hope that will continue.

BTN: The European Single Market this year will gain 10 new member states. What are the potential ramifications on the airline industry?

Soerensen: It is a positive development because it means more deregulation. These states are relatively small, but there will be improved market access. The growth potential is being realized and increasing traffic flow in Europe. It also will mean that the alliances can shift more to include carriers in these new countries, such as LOT Polish joining the Star Alliance.

BTN: What are the other top priorities for AEA?

Soerensen: We are very focused on a more efficient air transportation system and the single sky initiative. Right now, there are many states with their own air traffic management systems, which does not provide a basis of efficiency. It leads to lots of delays, which cost the airlines and the customers. In 2004, we hope to lay the groundwork to understand the inefficiencies and see exactly where the improvements are needed.

BTN: Your two predecessors at AEA, Rod Eddington of British Airways and Leo van Wijk of KLM, both came from very large carriers. Being from a smaller airline, what fresh perspectives can you bring to the table?

Soerensen: Small and midsize carriers that are not able to live on economies of scale, and that maybe are not seeing consolidation as the only solution, instead have to focus on other regional issues. There is a necessity in having efficient infrastructure, for example. Coming from a regional, niche airline, I can bring that perspective and drive business issues in a neutral, objective fashion.

BTN: What are the main goals for Austrian Airlines this year?

Soerensen: Like everyone else, we have been cutting costs tremendously, but we also have a new orientation and a new dimension and we are on the offensive. We brought Tyrolean closer and rebranded it Austrian Arrows as a feeder for Austrian. We also are developing new products to reflect the tendency toward a much stronger value proposition for business travelers, who require stronger product differentiation, and new price concepts in economy class toward availability pricing. Our main focus is eastward. We are now serving deep into central and eastern Europe. We want to gain a first-mover advantage in these markets. Our second focus is Asia. There is little nonstop service now between those two regions. As we add service, it makes us an even better alliance partner in Star Alliance.