CEO Interview - An agile mind
CEO, Air New Zealand
Do you think we are past the world economic crisis?
Traffic levels seem to have stabilized now but the reality is the scale of the downturn was such that it wiped out about three to four years’ growth.
The challenge now is capacity. There are a lot of aircraft parked and I suspect that as signs of a recovery take root capacity will feed back into the system and a return to growth for the industry will be slower than anticipated as a result.
Has the crisis forced you to change your outlook?
We won’t be changing the business model at Air New Zealand (ANZ) too much. But then we are already very flexible and used to adapting our business at speed. The airline no longer has
five- or ten-year plans. Rather, our strategy has been to look at different business scenarios and decide how we would react. It’s a necessary strategy because we are small and simply don’t have the resources available to larger carriers. We have had to be agile to survive.
At an industry level it can’t be “business as usual”. The main reason for this is access to finance—particularly for smaller airlines.
How have the production delays of the Boeing 787 affected you?
We can talk about the economic crisis and other industry issues such the price of oil, the environment and so forth, but the biggest challenge for us—the biggest impact on our business—is the delay of the Boeing 787.
We have a really good relationship with Boeing but the delay has materially affected us and caused us to change our strategy far more than the economic recession.
At the moment, there is still such uncertainty about when the program will deliver. It means we have to re-examine all our lease agreements, we can’t commit to any new routes, we can’t access the performance improvements available with a new aircraft, we have higher MRO costs looking after older aircraft … the list goes on.
Is the industry going in the right direction on environment?
We have a strong commitment to the environment because it is part of our New Zealand heritage and the airline can certainly provide leadership in this area.
The environment has always been critical to our business plan. Our focus is on New Zealand and this means we deal mainly with tourism. Around 70% of our international traffic is leisure based, so we’re dependent on New Zealand as a tourist destination—and the image that presents is very clean and very green. “100% Pure New Zealand” is the tourist-board slogan. Obviously, we have to align our brand with that image if we’re to represent value to our customers and present the right proposition to them.
But you can also come right down to economics.
Anything that reduces fuel burn makes commercial sense for an airline. Our 2008 fuel bill was $1.28 billion (NZD1.7 billion) and our net profit was $113.1 million (NZD150 million)—that’s over ten times as much. It shows that whatever improvements you can make in fuel burn have an enormous impact on the bottom line.
I’m not adverse to incentives to improve carbon management but we already have every incentive we need. So I’m not sure why we have all these interminable debates about targets. We support the IATA targets, which are appropriate and achievable, but I’m nervous about Copenhagen—it may just be talks about having more talks. Aviation should show leadership and simply carry on with the great work we are already doing.
The industry is also looking for governments to make decisions about liberalization. Is this something you support?
I’m a strong believer in liberalization. New Zealand is one of the most liberal markets in the world and we have Open Skies agreements with countries around the world.
However, we do fly to places that are restricted and this creates distortions in the market. So, while I support liberalization, there are two important caveats. First, there must be universal acceptance. And second, there must be mechanisms in place to ensure that states and carriers do not abuse any freedoms they are given. You must be disciplined to understand freedom.
Another challenge for the industry is the price of oil. Is hedging the answer?
My hedging people say the price of oil doesn’t make any sense but then they’ve been saying that for two years now. There is very little rationale about the price of oil and the market seems to move in a disconnected way from the usual fundamental drivers—supply and demand.
Speculation has played its part although this seems less of an issue now. However, it remains a factor in the oil price and over the past few years there is absolutely no doubt that airline profitability has suffered as a result of speculation.
We do hedge, but it’s to reduce volatility and nothing more. Sometimes, that means we end up paying more and sometimes, we pay less. The crucial point is that when I’m selling a seat for a journey in six months time, I need to know how much that seat and journey will cost me. In other words, we hedge against forward bookings. Effectively, when someone books, I lock in the fuel price and that gives me a clear picture of my financial situation.
Are airports finally getting the message about the need to cooperate with airline partners?
We have a good relationship with all our home airports. Having said that, there is only one airport per city, which means each one has a monopoly. They can set prices at any level they want and that is a power that is too often abused.
Look at the cost savings airlines have achieved across the board. I don’t see that reflected in airport charges. They just keep on going up and up. I don’t see the same focus on productivity and there will continue to be tensions in the airline-airport relationship because of this.
Is technology the key to a sustainable future for aviation?
Technology certainly offers the industry a huge amount—especially in the area of customer service. In terms of the aircraft, although there is no silver bullet, fuel savings of around 20% are genuinely achievable through the latest technology such as winglets and new materials in the airframe. For example, we have retrofitted winglets to our Boeing 767s. They save 1.3 million litres of fuel per aircraft per year. That’s a near 6% improvement and payback only takes two or three years. That is very significant when you operate on small margins.
But it is self-service where technology is most visible. We have everything available from online check-in to kiosks to self-tagging bags. It creates new challenges, such as a passenger getting to an airport shortly before departure and going directly to the gate, but it’s a smooth process and we’ve not noticed any deterioration in our on-time figures. In fact, if anything, moving to self-service has improved our performance. And it’s very unusual for us to see any queues forming anywhere at the airport.
For the passenger, it means less hassle, a shorter journey time and an improved experience, and for us it means a competitive advantage. It’s important to note, though, that we didn’t reduce staff numbers. We took our people from behind the counters and turned them into roaming concierges. They’re no longer typing information into a computer, they’re actually helping people. The human touch can actually improve through the use of technology.
For more information visit: www.airnewzealand.com