Having served as chairman and CEO of Deutsche
Lufthansa AG since Jan. 1, 2011, Christoph Franz in May will leave the company to
become chairman of Swiss healthcare firm Roche, where he is a board member. Lufthansa
this month appointed Carsten Spohr to succeed Franz, effective May 1. Franz
recently spoke with The BTN Group editorial
director David Meyer about his accomplishments, his outlook for the airline
industry and Lufthansa's corporate relationships. Edited excerpts follow.
What are the biggest accomplishments you've achieved during your three years at the helm?
I think one of the major accomplishments clearly was creating consciousness of the need for change in the company. This is always easy when your P&L has your back against the wall and everyone is aware that they must contribute, but when you are showing profit, even a tiny one, then the willingness to accept difficult changes is much more limited. I feel the fact that we have been able to create this awareness that we need change and that we got the buy-in of management and employees to contribute to this process is a major achievement, which I cherish and that I hope will continue because I am absolutely aware that this is not going to be a process which ends when we accomplish our Score program of internal cost-cutting and change processes. The need for change will go on, as the framework for the airline industry is constantly changing as well.
Looking back, the new strategic setup for our European traffic in order for us to improve substantially our market position towards the low-cost carriers by growing our own low-cost carrier Germanwings, thus protecting our German home market, was a major step forward, which will bring a lot of benefits even next year.
Also, Lufthansa culture generally has been a very inward-oriented airline culture, but our customer base is a very broad one that includes people from all different parts of the world. That has to be reflected in the way that we are running our business and the diversity of our employees—not only in the cabin, where we have been very diverse for many years, but also in general. Competitive pressure is requiring a lot of flexibility and this also is reflected in mental openness. So, never be too satisfied. Always be self-critical enough and be vigilant when we look around at what our competitors are doing and ask, "What can I learn?" We went from an only-invented-here syndrome to a steal-with-pride orientation. There are a lot of good ideas around. It's not only important that I, and the executive board, have this attitude, but this has to become part of the culture. Cultural processes are not a three-year issue, but I've succeeded in starting it and being an example, trying to convince other people to buy into that way of having open critical discussions and fighting for the best solution rather than fighting for the best guess of what the boss with the most stars on his shoulders is intending to do. Also provoking people to tell me when they feel that something is not the right step forward and that they have specific arguments, that's important.
What is your outlook on business travel demand from a European perspective?
European economies are showing increasing signs of growth. Even those countries where we have seen shrinking GDP in the last years have stabilized their economies. More importantly, the stabilization is not just coming off a general upswing, but it is also the outcome of a structural reform that has been implemented in recent years and that is now starting to show positive effects. It gives me a lot of confidence that the way forward for the European economy has a fundamental positive basis that will continue over the next years. We are not expecting a boom or a very strong growth situation, but stable and increasing growth is something that we would highly embrace.
Lufthansa is in the very healthy situation that we are running our business out of the most attractive European markets: Germany, Switzerland, Austria and Belgium. Our home markets are less affected from the downturn than other European countries. Clearly, we are running a 360-degree hub business with all European countries connecting via our hubs, but we also are enjoying an upswing again from some of the Mediterranean countries.
We've been seeing corporations restrict premium travel. Is your launch of premium economy the way forward or do you think that corporations and their business travelers eventually will return to the premium cabin?
There is a big question mark about how difficult it is to reverse corporate travel policies once you restrict them, whether this is reasonable or not. I question to what extent this affects a shift from first to business class. With regard to the new premium economy class, I'm quite confident that we will see, particularly for businesspeople, a shift from economy class to premium economy class. I don't see this as downgrading because the product quality between premium economy and business is quite substantial. That was actually the reason why we introduced it. With fully lie-flat beds in business class, the product gap between business and economy has increased again and is now very substantial.
Looking forward, do you see the relationship between the airline and its corporate customers changing in any significant way?
It will strongly depend on the budget pressure inside big corporations. We have seen that the classic way of setting up corporate agreements has not necessarily always triggered a move towards using an airline. In many cases, we have seen that we basically fix the upper price level and, given the IT tools, the best-price buying policy has spread quite a lot among big corporations. Maybe this is only a temporary trend, but it is also clear that if all the investments we do with regard to product quality, etc., and in the end the ranking list on the computer screens is reduced to the two letters L and H, that's not enough. Whatever we will do, I think we should always be aware that at the end of the day we are reflecting customer demand. Lufthansa is trying to be innovative in offering quality products at a price premium. If the willingness is not there to pay for this quality, then we will have to adapt our offering.
A lot of corporate travel buyers in Europe are concerned that there appears to be more influence of airline revenue management departments in negotiations. That makes it harder to get deals, and that is why they are looking more at this kind of best-price policy.
In a good and open discussion with our corporate travel partners, we have to achieve balance with the interests because we are willing to give attractive discounts to our best partners. This is true for today and also for the future. The other way around is that we need adequate volume because clearly we have substantial seasonality in the demand structure, and it is always difficult to give substantially discounted tickets in high-peak demand times. That is what you mentioned in referring to the revenue management guys, and we have to balance these two interests. That's the job of the negotiation. On the one side, the corporate travel departments and the travel agencies are able to better steer traffic flows and our revenue management is able to better to steer in peak times. The ability to have more sophisticated steering tools on both sides requires having a different quality of discussion.
Because of a ruling by Germany's cartel authority, Lufthansa no longer can require clients to submit to its AirPlus International subsidiary card payment details with all airlines.
Yes. I am familiar with this ruling. This was a consequence of a change in our contracts. It was not designed to get competitive details but to create incentives to use Lufthansa as compared to the overall sales with other airlines. The cartel office refused the way we set it up, and we have thus adapted our contracts and the structure of our incentives. It's not an issue anymore.
Around that same time, Prism came in with its data disclosure requirements. We were hearing from German travel managers association VDR and individual corporate travel managers a lot of contentiousness with Lufthansa. Have those relationships been repaired?
This issue has created a lot of discussions. We cherish our relationship with the corporate travel departments and our corporate travel partners more than these technical details, so we have adapted and this has calmed down a lot of the discussions and we enjoy a lot of strong and good relationships with VDR.
Former American Airlines leader Bob Crandall said that fuel costs were not the biggest concern going forward but that labor issues are. Do you agree?
These are two cost concerns of a very different nature. We try to influence fuel costs as much as we can with efficient engines and other measures. At Lufthansa, we have a high-performing fuel hedging program in place, but at the end of the day the fuel cost is derived from market prices that are the same all over the world. So in that sense it doesn't create a competitive advantage, whereas labor costs can contribute to a competitive advantage. You can influence it, although it might be very difficult particularly for legacy airlines where you have a certain relationship that has developed over many decades. Cutting back is always more difficult than starting from a very low labor cost position as a new player in the market. The U.S. airlines have gotten rid of a lot of legacy labor contracts through Chapter 11 on the back of pensioners and tax payers. We don't enjoy this freedom.
We've seen an evolution with joint ventures in recent years. Is that the platform for significant global growth?
It is a very important tool for doing things in the market in the future, but we should not underestimate the need to build the same label. A commercial joint venture can cover a lot of different mechanics and structures behind it. It is not one tool that remedies everything. We need approximately 10 years of bilateral cooperation with United to go one step further and modify it in order to further increase the quality of cooperation and also increase the right incentivization. So yes, I think it's something that will continue to grow but at a slow pace.