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CEO Interview - Thinking Differently

CEO - LOT

Sebastian Mikosz, President of the Management Board of LOT Polish Airlines, explains how the regulatory mindset needs to change if aviation is to evolve

How would you describe your business model and what role does Star Alliance play?

I cannot imagine how we could function in today’s aviation world without alliance membership.
For many years LOT has been actively involved in alliance cooperation. In the mid-1990s we worked closely with British Airways and American Airlines, although it was some time before the oneworld alliance was officially launched.

Following that, we had close ties with Swissair and we became a Qualiflyer Alliance member. After the demise of that alliance, Star Alliance accepted our candidacy in 2002, and since October 2003 LOT has enjoyed full membership status.

Our business model is founded on the network concept, with Warsaw as our hub and with long-haul and short-haul connections, plus extensive and growing domestic services. Our customers expect good connections to and from Poland, including regional Polish airports, as well as convenient transfer possibilities via Warsaw. They expect a varied product, fulfilling the needs of many market segments.
Our membership of Star Alliance certainly helps us to provide for such complexity through enhanced connectivity, a stronger presence, and access to a global alliance network. The Star Alliance-wide loyalty proposition is favored by LOT’s frequent travelers. Our participation in Star Alliance sales initiatives also allows us to reach additional customer groups.

Do you agree that governments should allow more consolidation in the industry? And how would such a future affect LOT?

Worldwide international air services still operate under traditional bilateral agreements between countries, which prevent consolidation and mergers, due to the restrictions on ownership and control. These restrictions have been removed in the European Union where a common aviation market has been created. Although this indicates a more positive trend, the situation in third-country markets still remains traditional. And the outcome of the liberalization talks between the European Union and the United States means that the barriers to cross-investment stay in place.

The process of removing restrictions on ownership should be supported strongly as I believe that cross-border investments and privatization leads to the significant growth of airlines on the one hand, and on the other to greater consumer choice, lower fares, and an improved product.

Especially at times of economic crisis, and the limited access to financial opportunities we face nowadays, consolidation is a solution that could help to overcome difficulties in modernizing the fleet, developing networks, and meeting customers’ expectations. In particular, carriers of our size see consolidation as an opportunity to expand services and improve the product.

The aviation industry is certainly overregulated and restrained more and more by the archaic notion of protecting national interests. I fully endorse IATA’s efforts to simplify and to modernize the regulatory environment. Such future actions will bring overall benefits to customers, to the airlines and to the global economy.

The environment remains a big topic. Can an agreement be reached at the ICA assembly and COP-16?
I believe that this industry must proactively propose environmentally ambitious solutions to reduce its carbon dioxide emissions. If we do not make a proactive contribution with sufficiently early implementation, there is high risk of inappropriate, costly, disruptive, and overly bureaucratic policy being imposed on the sector. These policy measures will be environmentally ineffective and will reduce the cost/benefit ratio.

It is critical that industry emphasizes the importance of equal treatment and the need to avoid market distortions and carbon leakage. Therefore, I’m supporting the concept of a global sectoral approach using market-based measures. A so-called ‘cap and trade’ system, although complicated, is the one which could eliminate the possible unbalanced treatment of airlines. But it must be applied globally, to avoid a patchwork of different regulations between countries and regions.

I’m convinced that the aviation industry should propose credible mechanisms to address the issues of common but differentiated responsibility (CBDR) between countries and equal treatment between carriers. This requires a little more time, but I’m sure that ICAO should be given the responsibility for administering and coordinating the system. This is, however, a massive task and therefore I would rather expect that we will witness visible results during COP-17. As an aside, Poland will hold the presidency of the European Union at that time.

New aircraft will be vital to reducing the carbon footprint. Are you happy with the financing options available or is it still a struggle for smaller carriers to find capital?

There are more and more positive signs in the financial market, at least in comparison to 2009. However, it is still far away from the financing opportunities that were available for smaller carriers before 2008. Most of the airlines are financing new fleet through Export Credit Agency arrangements. This is also the case for us. In the second quarter of 2010, LOT Polish Airlines finalized a transaction with BNDES (Banco de Desarrollo de Brasil) for four Embraer 170-200s, and four Embraer 190-200 aircraft.

Furthermore, this year we would like to re-establish our relationship with the Exim Bank and start the procedure for acquiring the export credit Exim Bank guarantee in connection with the purchase of our Boeing 787s. LOT Polish Airlines has experience in this type of financing, which was arranged in the 1990s for 17 Boeing aircraft.

Is the European Union moving quickly enough with the Single European Sky?

The Single European Sky has been in progress for a long time. And the goals are not going to be achieved according to the planned schedule. For example, not all functional airspace blocks (FABs) will be introduced by the end of 2012.

It seems that some governments and air navigation services providers (ANSPs) do not fully support the idea of deep integration and would like to retain as much independence as possible, regardless of the fact that they officially support the Single European Sky as well as SESAR, which is the technology to support it.

It should be noted that the majority of ANSPs are either State-owned entities or at least fully controlled by the state. As service providers, these ANSPs are monopolists and this fact has a significant influence on the speed of implementation. An ANSP’s point of view and its interests sometimes have much stronger government support than the ideas presented by airspace users.

As the Single European Sky uses European Community legislation to synchronize the plans and actions for the development and the implementation of the required improvements, I would like to address one of the most recent events in this field. One of the most important issues from the air carriers’ standpoint is speeding up the progress of work on charging regulations and on the implementation of the performance scheme. These regulatory changes would mean dropping the present cost-based system of air charges in favor of a system that would promote efficiency and fairer risk-sharing between air carriers and ANSPs.

Ideally, work on the performance scheme and the update of the charging regulations would be carried out in parallel. But, unfortunately, there are separate consultations at different times. This fact does not support the creation of a coherent system, as the two documents should be strictly linked.

Progress is slow and several governments have submitted their own proposals that, in the opinion of air carriers, may lead to the dilution of the basic and most important assumptions. Clearly, the main Single European Sky goals might not be reached as quickly as they could be, and therefore the efficiency and competitiveness of airlines is not as high as it could be.

This issue is more crucial for Europe than ever after the bad experience of the chaotic response of European airspace services and governmental authorities to the volcano crisis last April.

What is your view of the European emissions trading scheme (EU-ETS)? Is it causing a lot of extra cost and work for LOT?

The system is complicated. It required us to implement a bunch of new procedures and to change some others. We’ve created a special unit, which deals just with the EU-ETS, and there are still some details which are not clear enough.

There is still no transposition of the directives into the Polish law system, so despite the fact that we submitted our monitoring plans to the competent authority in good time, they still have not been approved. Also, we are afraid that the data on historical emissions being used by Eurocontrol may underestimate actual results. This will result in assigning smaller quantities of emissions permits to the carriers.

On top of this, the Icelandic volcano eruption caused serious problems in our part of Europe. Polish airspace was closed entirely for five days, and that obviously resulted in a drop of in revenue tonne-kilometers (RTKs). This will have a direct impact on the proportion of emissions permits allocated to us. We informed our authority about this, but we are still awaiting a response on how to mitigate this problem. But it is worth underlining that the ‘cap and trade’ system introduced by the EU-ETS is the right solution in principle, being a market-based measure. This model could be adopted globally with some of the technicalities simplified. 

What impact will the oil price have on the industry, and will biofuels play a role sooner rather than later?
Considering the significant proportion of total costs made up by fuel expenses for aviation companies all over the world, proper management of the physical purchase and securing of fuel supplies will play a vital role in maintaining a competitive position.

A period of economic revitalization, partially stimulated by the assistance programmes of particular countries, may lead to an increase in demand for raw materials and finished goods. This may cause an increase in the price of oil worldwide.

LOT is actively working with Star Alliance to coordinate fuel purchasing. I believe that an appropriate and rational policy, along with regular investment in new information technology systems and human capital, will create a higher level of quality management across the board.

If we further develop our cooperation and exchange experiences concerning fuel projects, this will bring measurable financial benefits to all members of Star Alliance.

Regarding the application of biofuels in aviation, there is significant future potential. The use of biofuels on a broad scale in the near future will depend on their general availability, price, and technical compatibility with specific types of aircraft.

Can security ever achieve a balance between comprehensive measures and a good passenger experience?

Security incidents are manifestations of threats against countries and political visions. Airlines and airports are only the tools or backgrounds for these activities. So, governments should finance security from public funds.

Citizens legitimately expect their governments to ensure that security is supported by the most appropriate measures and the best available technology. The technology must be both effective and efficient, and passenger facilitation and convenience should not be negatively impacted.
The European economy needs fast and smooth transport systems. It cannot maintain the current situation where lengthy security procedures paralyze the mobility of societies. Especially for shorter distances, this situation undermines the competitiveness of aviation in comparison with other transport modes like trains or even road transportation.

Security is a general issue. At the moment it affects aviation more than other means of transportation, but in reality it concerns all aspects of the public functioning of a state.

If responsibility is taken by the governments and regulators now, any solutions that are found to solve problems for aviation will be useful in other areas of public life.

The use of self-service technology is on the increase. Can you still maintain customer service and brand value with ever-increasing automation?

We don’t want to overwhelm customers with technology. But automation does help customers to plan and execute travel. We want to attract customers to our automated solutions. Our website gives them not only more possibilities in planning travel but also informs them about the whole journey experience, including hotels, rental cars, and even places of interest in their chosen destination. In this way, LOT is building customer understanding of the new technologies presented to them.

As another example, web check-in could cut the time spent at the airport. We are more than happy to help our customers with personal assistance, but many of them appreciate automation tools, allowing them to save time and money.

IATA’S 2050 Vision is ambitious. Where do you see most progress being made in the near term?
This is a vision for aviation in four decades time and so it’s important to lay down the most ambitious prospects. IATA’s ideas for our future are exciting.

Since it is always more difficult to change people’s mentality and given that regulatory changes usually take time to happen, I see the best potential for quick, positive results in the fields of technology and infrastructure.

The biggest opportunity for airlines is alternative fuels, which promise to reduce emissions of carbon dioxide by up to 80%. This would certainly resolve the issue of aviation’s carbon footprint. Research is very advanced and tests flights have already been carried out by several airlines.

I also believe that improving airport infrastructure and airspace capacity is within our reach in the near future. Airports must reshape their structure and organisation around the needs of airlines, which bring them customers and profit.

A consolidation of air traffic control services would also bring quick results by making air travel more efficient, faster, and more environment friendly. This is especially important and urgent for Europe, as airspace is particularly uncoordinated and chaotic.

We have to keep in mind the prospect of fast growing traffic, and the constant increase in demand for passenger and cargo movements. Accommodating this growth will be a challenge for all of us. A change in mentality, especially in government, will be vital to seeing through the evolution of aviation.

For more on LOT Polish Airlines visit www.lot.com

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