Lufthansa CEO Eyes Fuel Costs, Consolidation (With Web-Only Excerpts)
Lufthansa CEO Wolfgang Mayrhuber and vice president of the Americas Jens Bischof this month met with Business Travel News editors in New York to discuss the rising cost of fuel, plans to re-introduce inflight Internet service and the pace of airline consolidation in Europe.
BTN: Back when oil was approaching $50 a barrel, airlines said the model was based on $35 tops, yet here it is today at $97 and nobody really is falling away. Why is that?
Wolfgang Mayrhuber: Number one, there were new markets that came in. Number two, we deployed hedging strategies. Number three, the competition is working with the same fuel price, more or less.
I think the ticket prices could have gone down further if these fuel costs had not been going to where it is now.
BTN: You also use fuel surcharges.
Mayrhuber: That's part of it. That's what I mean about prices. The price elasticity is not big, on the one hand. On the other, we have driven efficiency factors and part of them have been absorbed by fuel price increases, but we could still instill more efficient prices.
Jens Bischof: A lot of carriers in this market are using fuel surcharges as a pricing tool. It has nothing to do with the cost, this charge. You wouldn't find it fair, let's say, if you fly to Hong Kong, and because of the competition there is no fuel surcharge, but if you go the other way, there is a fuel surcharge. We feel we have a very consistent philosophy and use them only to the extent that we need to cover our costs.
BTN: Is there a price at which you add or eliminate a fuel surcharge?
Mayrhuber: We have reduced and increased fuel surcharges in the past , but we don't have a specific number. When we saw a $10 or $15 increase or decrease, then we made a decision.
BTN: What is your advantage when it comes to fuel?
Mayrhuber: Anybody in the aviation industry has to manage fuel. Whether it is $40 or $100 a barrel, it is always a major cost block. What we embarked on relatively early on was a very solid hedging strategy, where we are slicing on a weekly basis hedging volumes. We are hedged 100 percent for this year and already now 75 percent for all of next year. With the upswing of the fuel price at the moment, we will have some security and a relative advantage over those who don't have the volume or saved too late. If you do it now for the next nine months, the price to secure fuel at a low price is very, very high. That's why we have an advantage. We also have a very modern fleet. Our fuel consumption is running about 80 miles per gallon per passenger. Third, we do have some operational skills because we have a company that not only maintains the airplanes but also is a development agency. We invented fuel efficiency measures, for instance a special technique to maintain compressor efficiency by washing them properly. Yes, fuel is a burden on us, but it is less than it is on our competitors. We all have the same headwind, but at the end of the race—if you're faster, then you win.
BTN: What can you tell us about inflight Internet? You were using the Connexion By Boeing product until they stopped supporting it.
Mayrhuber: It was a combined product. It was a Lufthansa product combined with Connexion By Boeing's antennae and the contracts they had with satellite providers. It was perceived as being a very important product, but unfortunately Boeing cancelled the contracts they had with the satellite providers. Maybe they brought too big a scope from the very beginning, rather than doing it in modular waves. Contracts in the North Atlantic probably would have given them 70 percent of the current job. Anyway, that's history. We don't have it at the moment, but we are negotiating with three different possible providers. The hope is that by the end of the year, we will narrow it down to two finalists or an exclusive final negotiation. In the first quarter of next year, we can say thumbs up or down.
BTN: Clearly there is demand from the customer for that.
Mayrhuber: Oh, yeah, and it can't be terrestrial or narrowband. We went for broadband and global from the start.
Bischof: We were the first to bring broadband for over the water, and we will be the first to bring it back.
BTN: How have you integrated Swiss into the company?
Mayrhuber: They are a completely separated brand. They have their own operating certificate with AOC and their own union contracts, etc., but we are completely integrated when it comes to customer benefits. We look at the network strategy, where the benefits for our customers are, and that's where we share. We share in areas that are not relevant for customers, like insurance, fuel management, investment, cash management, etc.
BTN: To what extent do you speak with one voice to corporate customers?
Mayrhuber: The principle was that we should have one voice to the customer. On the other hand, we should not have one voice in the sense that one has to shut up. Sometimes Swiss customers want to work with Swiss and Germans with Lufthansa. Sometimes on the sales side they may want to go jointly and other times alone.
Bischof: We didn't declare the entire world a seamless network. We have a clear distinction of those markets that are extremely relevant to Swiss and Lufthansa. Case by case, we decide how to use two parallel sales organizations, but we still have a joint approach to the customer. What we have said about Swiss is that we have one kitchen, but two restaurants. Swiss has to be Swiss as a brand.
Mayrhuber: We as the owner have a big say in the way we want to position them. As one example, they were a stand-alone unit, even in the post-merger integration focusing on profitability, which is natural, but probably at the expense of their relative position in the future. We said, "We don't want you to become a two-class airline. We want you to be a first-class airline with first-class service." This pays off completely because they underestimated the sales power we can generate jointly.
That's a subtle difference with KLM and Air France. KLM is very plain, clean business and economy orientation. Air France in certain areas has first class, in others they don't. We want Lufthansa and Swiss to have first-class service on every long-haul airplane, and position both as top-quality brands. We don't want to have a brand A and a brand B. You want the mobility aspect and the product for which you are looking.
BTN: There are a couple of airlines in play. What is the pace of consolidation ahead in your view?
Mayrhuber: It is very tough to say. There are two airlines. One, Iberia, clearly stated it believed there will be consolidation and it would choose to be an active player or join a bigger organization. They decided on the latter, because the former is just too high a risk against the three big ones. Yet, speculation that came into the market drove their price to a level where it became unrealistic to get value out of it. About three months ago, TPG as a financial investor rather than a strategic investor was able to set a price level that we could not afford to pay, and then the credit crunch came in and they now are not able to finance it. I was told that now maybe they have financing ready, but we don't know at what price. The other one is Alitalia, which realizes they have no chance to sustain their operation. The risk is relatively high as to whether you can turnaround the company and the other is that the price is relatively high. So, we will see. We are looking at it, but we will not be going shopping with an empty stomach.
BTNonline.com WEB EXTRA:Business Travel News' interview with Lufthansa's Wolfgang Mayrhuber and Jens Bischof continues below.
BTN: What's your outlook on demand within Europe?
Mayrhuber: The underlying assumption that we have is that mobility and global sourcing and global selling is the driver for the economy. That's why we believe that the old notion that GDP growth times two would be roughly also the element for the future. Within Europe, which has had strong exports, we have two shells: the European network is a big asset of Lufthansa. We have by far the strongest intra-European network connecting through the three hubs—Frankfurt, Munich and Zurich—where we can connect to the rest of the world. This is the core. Number two is to look at where the export streams are, so that we can direct our investment. I believe that the growth in the next years will be roughly 5 percent to 6 percent out of Europe. We will grow next year by 7.8 percent on a global scale. After we have pushed the envelope in Europe, we will push the envelope on intercontinental flights.
BTN: The United States also is a significant market for you.
Mayrhuber: We are the number-two carrier out of Europe to the United States and we will have a little bit less than 10 percent growth next year and every second ticket we sell is sold here in the United States.
Bischof: Ten percent growth actually is not an amazing number, but it's a very healthy and profitable growth.
BTN: So, 10 percent is based on forecast for demand in the market as well as marketshare shifts, right?
Mayrhuber: Right. Ten percent is in line with what we see with market demand and our new destinations. In this past year in this market, we have opened not only frequencies, but new routes, such as Munich-Denver. We have opened Orlando with Seattle coming up, and Calgary in Canada. I think that shows that our appetite is there. It's a combination of organic growth, we want to be the core, but in areas where it's possible to add faster more opportunities for our customers, the customer should have the choice.
Bischof: We feel that healthy growth will lead to profitability and we are pretty confident that next year we will see Calgary as our new addition, bringing us to 22 North American destinations that we connect nonstop from Frankfurt, Munich and Zurich. Basically, with a one-stop connection, you can reach any point in the world.
BTN: I would think as an emerging market and your geographic location that Russia would be a huge place for investment.
Mayrhuber: It is. We have probably 490 flights a week with CIS countries. Now, also in concert with Lodt Polish Airlines, one of our Star partners, and Austrian Airlines, jointly we are absolutely the number-one carrier there, but when you take individual carriers, like us, we are in a very strong position there. Not comparable at all with Air France or British Airways. Of the global network carriers, we are clearly the number one there.
BTN: And is there a lot of room for growth?
Mayrhuber: There is room for growth because there is a lot of investment. The country has money and natural resources, and there is a huge direct investment coming in from Germany, ten times more, for instance, than from France. Business traffic is growing.
BTN: You were saying before that the small and medium size businesses were a growth area—
Mayrhuber: Absolutely. We learned in an incubator. Germany is one of the biggest economies anyway, but it has a peculiar setting of big corporate accounts and global brands, in car and chemical manufacturing and whatever, and around them are a lot of small and medium size companies that are global. Some of them have 90 percent marketshare in their area. So we exploited our experience with them in a big way, which gave us a huge boost. So now we will roll this out in other areas. In the United States, we have an initiative to grow the small and medium enterprises.
BTN: Certainly we know how important the premium products are to buyers and yet we're increasingly hearing about companies restricting premium class travel. Lufthansa has invested quite a lot into its premium products. Will the return be there on the investment?
Mayrhuber: Yes, absolutely. I agree with you that there are constraints on budgets and all companies are trying to save money. We have seen big corporations, as you said, cut traveling cost and the airfares, and all of a sudden realized that expansion on the budget on hotel was the result as people were not fresh to go home.
If you are on the road, the travel experience for you should be a relaxing one. You should recharge your batteries and the hassles should be taken away. That's why we have seen that if there is a distinction in your product, then people are willing to pay for it. Big corporations learn this a little bit later than smaller businesses. When I talk to such businesspeople, they say the only thing that I can do that's better for an engineer or a sales guy who is always on the road is to make his travel experience as pleasant as possible, because I want him to be flexible and not afraid of going out there. We see this also with our Lufthansa Private Jet Service—it's not always the CEO who takes it. It can be the machinist who fixes a printing unit in Russia who takes the private jet in order to be there and then get back to do other business. It's not at all a unilateral decision.
Bischof: Let me just add that ground services are especially crucial to what Mr. Mayrhuber just said. We feel that we can perform on a very high level with the ground process, which is really different than our competitors. If you have survived this traffic when you come to JFK or Newark, the last thing you need is a stressful line. Our goal is that once you show up at the terminal, we give you the welcoming feeling and try to take away stress from our travelers in order to create that atmosphere from the first second on.
BTN: What's the status of the private jet service? Is that service available beyond Germany today?
Mayrhuber: At the moment it's available in Europe. We went from Germany to Europe, and we want to stabilize it there and then will see from there.
Bischof: That service is serving over 1,000 destinations.
BTN: A handful of large corporate customers—we think they're still only German-based companies—have been using Pay At Lift for several years within Germany and points in Europe. Is that product being made available to other clients?
Bischof: It has not been introduced to the market yet. We actually work with a lot of local companies, especially United when it comes to the U.S., and we now have more than 1,000 joint corporate customers, which is a significant number, and of course, we also think about making flying as easy as possible. On international flights, we still have restrictions in terms of documents that are hard to align with a pay-as-you-fly product. Nevertheless, it is on our list of things that we are working toward to make that part of the trip as easy as possible. You just deduct whatever you use once you board an airplane.
BTN: We've talked to the people at Siemens many times over the years and they have always been very happy with the product.
Bischof: I went to Siemens in Orlando last week and we talked about introducing that service here in the U.S. as well because they have it in Europe and like it very much. I think this is one of the real differentiators—not only that we have a great corporate customer base but also making business with them really easy.
BTN: Will it require regulatory changes to do it here?
Bischof: We do need to adapt some process steps. The problem with all these security issues is that they have been added over time, slice by slice. Looking at the entire process today, you wouldn't design it like that. We need to standardize security procedures and safety measures, which should be at a high standard without any doubt, but they should be harmonized because it is not optimal for supporting the pay-as-you-fly process as it stands today.
BTN: It makes so much sense as a business travel product.
Bischof: Absolutely, and we'd love to have it yesterday rather than tomorrow, but we'll come up with a solution, definitely.
BTN: You've been very successful with AirPlus, particularly in the German market. What is your strategy for controlling credit card costs?
Mayrhuber: Growing it globally. Some new markets that are smaller are easier to penetrate than the United States. Honda and Toyota didn't come overnight into the American market. It took them two or three decades. We will not wait two or three decades to be there.
BTN: AirPlus really is the dominant payment system for German corporations when it comes to air, right?
Mayrhuber: It has features that are very valuable. In Germany and in Europe in general, they have a very strong position. In emerging markets, they have also already a very good position. In the United States, we started just two years ago and it's a slow mechanism, but it will come.
BTN: Is that the preferred approach to tackling credit card costs, as opposed to surcharges or bringing down merchant rates somehow?
Mayrhuber: The division of labor. They are doing the service and the work and there's a charge. I'll take the money, but it's not our prime strategy.
BTN: Does rail pose any challenge to you competitively?
Mayrhuber: No. I think every transport mode has its advantages and disadvantages. A railroad from Frankfurt to New York doesn't make sense and an airplane from Cologne to Frankfurt also doesn't make sense. What we need is intermodal traffic and that's why we want to have the high-speed trains in the airports. We are competing on maybe 1 percent of our total network, maybe less. It's an addition or an amplifier rather than a substitute.
BTN: What about low-cost carriers?
Mayrhuber: You mean us? It's interesting how they have branded a name that implies the rest of us are high-cost carriers. Nobody who is a high-cost carrier could sustain an airline operation. If you look at the price of a ticket, even if you don't compare its value, you'll see in statistics that we have in Europe that we are on the same level. Maybe a day before the trip our prices will go up, but yes, there is competition and yes, they have opened new markets. We have learned from them, no doubt, and there is a convergence that we can see in some areas, but we will not save at the expense of our customers, and we will not try to apply marketing and balance-sheet tricks.