Jens Bischof, Lufthansa vice president of the Americas, last
month sat down with Business Travel News
senior editor Jay Boehmer to discuss the transition to joint venture
contracting with partners Continental, United and Air Canada on the Atlantic
and its approach to penalizing underperforming corporate clients.
Business Travel News:
Does the closing of the Continental-United merger slow down implementation of
your joint venture with them and Air Canada, as they begin to focus on their
own integration?
Jens Bischof: We've
never reassessed the timeframe, so we're in line with the targets we've set for
2010, especially for the business travel community with contractual
implementation, which is important. We have to revisit every single contract to
have the right pricing and the right value proposition in place, and this is
going contract by contract. I can only say we're overachieving by the total
numbers for 2010. From my point of view, that's a great testimonial for United
and Continental, because they had to focus on the merger, which was conducted
very fast, and it helps to drive the joint venture efforts.
BTN: Are you
phasing out Lufthansa-only corporate deals on the North Atlantic?
Bischof: This is
something that the U.S. Department of Transportation requires of us: that we
give a unique and unanimous offering to the customers. You have to work with
the customer. You can't say, this is what we have; take it or leave it. The way
we do that is to discuss in a very open and constructive atmosphere about how
additional routes and services bring value to the customer. We can frame that
with competitive pricing, and at the same time really create an environment
where it's easy to deal with us. We believe a lot of those joint deals could
add a lot of complexity to the customer, and this is exactly what the joint
venture is trying to avoid. We want to be easy to deal with.
BTN: Are you
revisiting every contract or will they expire before you address the customer
with the joint offering?
Bischof: We're at
the stage where a huge number of contracts are already converted—even beyond
the two-thirds point are already converted and framed in new joint venture
contracts.
BTN: Is that
two-thirds of the entire universe of United, Lufthansa and Continental
contracts?
Bischof: That's
two-thirds of all points of sale, no matter if we talk about agents, tour
operators, consolidators or corporate contracts, and it includes point-of-sale
Europe, U.S. and Canada. I think we're on a pretty successful path. We have a
prioritization for how we work through the contracts, staggered in terms of
contract value, expiration and so on. If a customer comes to us and says, I
have no idea where I stand, please get me converted, we'll do that right away.
BTN: How long
before you convert the remainder?
Bischof: It was a
very fast process, but some deals are more complex than others. The clear
target is to work through all the contracts through 2011.
BTN: What happens
when a corporate buyer wants to stay with a single-carrier contract on the
North Atlantic?
Bischof: Let me
put it the other way around: My key argument to customers is always to say, if
we have an agreement in place that provides you with certain discounts with a
competitive route network, and you have four carriers sitting on that piece of
paper under contract, we don't assign a percentage that you have to deliver to
United, Continental, Air Canada or Lufthansa. Just take the entire contract,
choose your preference; it's your call. It's a metal-neutral contract, and we
won't push you into a corner. This is why I don't see that a customer
desperately would want to stick to a single airline contract. It just gives you
more choice.
BTN: Do you take
the view that the more carriers in your corporate program, the more you're
diminishing marketshare? Is that the argument for contracting in the joint
venture structure, instead of with individual carriers?
Bischof: I was
for many years the VP of procurement for Lufthansa, and of course you can have
different supplier strategies. You can have single sourcing, you can have
multiple sourcing, or you can just go to the spot market and try to find the
best deal available, if you don't care at all to whom you give your business.
From a perspective of real value creation, you would go in
only a very few cases to a spot-market strategy and just shop around. You would
always try to implement a procurement strategy where you focus and leverage
your volume, at a single supplier or with multiple suppliers. Let's take the
aircraft business: Continental was a pure Boeing customer, so they have a
single-sourcing strategy in that regard, and they believed that this was the
ultimate lever to get the best deal, whereas other airlines would take the two
big players and try to leverage those relationships. I believe this also counts
for business travel. If you're able to steer your demand and your volume and
travel to one or a few players, you always have a certain value in leveraging
your own power. As a procurement guy, I would always go in that direction.
BTN: Where do
Lufthansa's subsidiaries fit into your transatlantic joint venture deals?
Bischof: Besides
SN Brussels Airlines, they are part of the antitrust immunity. SN is the only
member in that regard that is not. British Midland, Austrian, Swiss—they are
all part of the ATI. This is where we can add, if we think it makes sense to
the customer, some of those services to a JV deal. Without any doubt, the
primary goal is to have the traffic flow within a joint venture. There is
nothing that holds us back from adding those services to a joint venture
contract, which is basically a Star contract. At the same time, the assessment
of the extent we'd like to have new players in the joint venture is always in
progress.
BTN: Your Star
Alliance partner US Airways publicly said it was interested in joining the joint venture. Have they taken any actual steps to do that?
Bischof: I heard
it from a third party and wasn't involved in direct talks with our dear
partner, US Airways. US Airways is a great airline and we have number of very
good codeshares and a very solid and established relationship. If we can widen
the pie, make the picture of the joint venture even more valuable to the
customer, there's nothing from my side that would speak against it. We have to
see if this is really something US Airways wants to be in, and we would also
have to see regulatory approval.
BTN: Does
Lufthansa see joint venture opportunities outside of the North Atlantic?
Bischof: The
whole joint venture phenomenon is Alliance 2.0, and it could happen between
Europe and Latin America, on the Pacific, or it could happen between Europe and
Asia. We're just entering this era, and the North Atlantic was just the most
mature market.
BTN: Is there any
hope of overturning the new German departure tax, which takes effect Jan. 1,
2011?
Bischof: It is
already implemented. The bottom line is we don't think it's the right tool and
we strongly oppose it. Fortunately, it's not applicable to a huge share of our
U.S. customers, since it doesn't apply to travelers connecting through Germany
with a final destination in another country. Also, it's applied to all other
airlines flying on relevant routes, so we're all impacted. I think for the
airline industry overall, it's just bad news.
The Netherlands had this instrument two years ago, and they
realized very fast that customers took other routes to circumvent the country.
They took it off. They decided it wasn't the right plan. Hopefully Germany
discovers as fast as the Dutch government that this is probably not the right
thing to stimulate traffic.
BTN: Tell me
about Lufthansa's new corporate contracts that cut rebates if companies fail to meet deal targets.
Bischof: The bad
news in the past was that there were a lot of promises and commitments. Maybe
you were committing 40 percent share to everybody, but finally you came up with
the reality of only 5 percent to one carrier, 8 percent to another and so on.
For us, capacity is associated with assets, incredibly
expensive airplanes, and we assign our fleet on those routes where we have a
structured demand, and corporate contracts are the biggest part of that
structured demand. When we assign those airplanes in a wrong pattern, it costs
us a lot of money, because this is totally perishable inventory once the door
is closed. For that reason, I believe it makes a lot of sense for both sides to
deal on a straightforward and honest basis.
I know in general press coverage penalties were seen as a
very bad thing that you shouldn't do. How the process works—and it is not an
unknown practice in other markets, by the way—is that if the customer is
willing to dedicate a certain portion of business to a certain airline, you
determine what discount can be offered in return. That's basically the deal. If
we see from data that share is not reached, there are several steps in
between—talks between the customer and the airline to determine how to reach
your goals. This is a process, and let's say after many steps in between, at
the end you deliver 5 percent instead of 25 percent, then yes, there has to be
a consequence, because I committed my discount on the basis of a volume
commitment, and we assigned those resources. That's pretty natural behavior,
and the so-called claw-back or penalty clause is a process that makes a lot of
sense for either side. The assumption is that if you don't reach your targets
we immediately pull the contract—that's not the way it's going to work. It will
be a process.
BTN: Do you see
more opportunities for that kind of consequence-based contracting? Can you
apply that concept to North America?
Bischof: It's
hard to determine, because every market has such a different mechanism and
there are so many factors influencing how you structure deals. Ten years ago,
U.S. airlines were trying to implement those mechanics, and it didn't work at
that time. Maybe the time is different. I don't see a huge trend going in that
direction right now in the United States.
This report appeared in the Oct. 11, 2010, edition of Business Travel
News.