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CEO Interview - What’s in a Name?

CEO - Finnair Finnair CEO Mika Vehviläinen explains the importance of brand in a competitive market

You have been very public about your efforts to lower costs and are increasingly outsourcing. Can you retain control of your brand while pursuing this strategy?

Our brand is very important to us but so too is lowering costs. We might not survive unless we meet our target of close to $200 million (EUR140 million) in savings by 2014.

This is such a competitive market and we need to differentiate between what is core business and what is non-core. We recently started negotiating with Swissport to provide our ground services at Helsinki Airport and we are looking at other partnerships in areas that we believe are outside the core competency of Finnair.

Of course, you need to keep control of your brand. It is important for winning and retaining customers. But there is no reason why you can’t combine lower costs and a distinctive brand. It doesn’t matter to the customer if Swissport is handling their bags as long as the service is the right quality.

Where will the savings come from?

We have a cost base of $1.7 billion so there is plenty of scope for improvement. There are a lot of costs outside of our control but we will leave no stone unturned. We think there is a lot we can do to be more efficient in sales and marketing, maintenance, and fleet costs.

We plan to focus more on digital marketing, Internet sales, and corporate sales in important markets. In maintenance, we’re reviewing our own technical services and what other suppliers are offering. We are also negotiating new aircraft leasing agreements to bring them more in line with the current market situation. It is painful but we must improve our competitiveness. The Finnair cost structure is considerably higher than that of many of its competitors, and this means we must re-evaluate operating practices and structure. Another area we’re studying is global distribution system charges. This could bring some interesting results. We don’t use social media as a distribution channel yet, even though we have a good following on Facebook.

The deal to form Flybe Nordic is another example of how to be more efficient and yet provide customers with a better service. Finnair owns 40% of the new airline and the routes will appear in our schedules.

How do you keep staff motivated during a cost-saving strategy?

Increasing the productivity of our staff is a key element of our strategy going forward so we have to engage with them as much as possible.

At the start of 2010, we reached a new agreement with the pilots union that increased pilots’ productivity 13% per unit of cost. Across the board, productivity improvements average 8-9%. We’re heading in the right direction but staff costs account for about a fifth of our operating expense. There is still a long way to go before we’re comparable with some of the airlines we compete against on point-to-point routes.
We are being honest and open with our staff and, again, it is about understanding what we can do in-house and what is better served by an outsourcing agreement.

We have also introduced a process to further improve the customer experience. This has truly inspired our personnel. Our positive customer feedback has massively improved and negative feedback has been reduced significantly since its introduction. This is a great achievement that shows the Finnair team is focusing on things that really matter.

You have been active in sustainable biofuel research. Can we commercialize this fledgling industry in the short term?

There is no doubt that sustainable biofuels will have an enormous impact in the long term. But at the moment, depending on the source, biofuel is about three times more expensive than conventional jet fuel. And in the current economic environment, that is a cost that no airline can sustain.

The financial crisis has also made it unlikely that we will see any significant government investment in biofuels. That doesn’t mean they can’t encourage the industry. There is a lot they can do to support the logistics of the industry and fast track development.

We will play our part and certainly will do our best to accelerate the biofuel take off.

What is your view of the European Union Emissions Trading Scheme (EU ETS)?

I’m not against emissions trading but the European scheme is far from ideal. There is absolutely no sense in a unilateral action in a global industry. We must have a global approach. The EU ETS will be a real cost for European airlines, and it places us at a competitive disadvantage. And there is also a risk of a trade war with China, among others.

Questions remain about its actual implementation, too. Airlines are still trying to find out exactly what’s required of them. The proportion of free allowances for individual airlines is still unknown, for example, and it is not clear how biofuels can be used as Clean Development Mechanisms in the period of 2013-2020. It’s important that IATA and other industry bodies remain active on our behalf. They can’t let this go.
Finnair is known for its innovation. Are there any major areas left to explore?

Innovation is a key part of the Finnair brand. We advertise our creativity. But it’s not just an image. Agility and speed are absolutely essential in the modern market for a carrier of our size. We don’t have economies of scale to fall back on. Technology enables us to respond quickly to the market and that is why we are always looking for new ideas and processes.

Innovation also gives us the opportunity to improve the travel experience and provide a better service to the customer. Our internal Peace of Mind project has been reassessing the existing consumer aviation experience—on and off the plane—and identifying the customer encounters that matter most in this process.

Some of these encounters, such as check-in, are obvious. Others, like how passengers tend to get settled into their seats in different ways, are less so. The resulting refinements in service can be quite subtle, but we have already seen our negative customer feedback drop by 16% from 2010, while unprompted positive feedback has quadrupled.

We will keep being creative and we’re exploring lots of ideas. It is difficult because other airlines can be quick to adopt a new idea—for a lot less money. But you have to push ahead. There is nowhere to hide in the modern market.

Will you be able to compete against carriers with greater resources in the East-West market?

Like all of aviation, the market is very aggressive. But we have one important, sustainable advantage: geography. There is no denying that we are ideally placed, especially for connections between North Asia and Northern Europe. Other carriers may have more resources but they can’t change where they are. And we’ve worked hard on maintaining this advantage. We have the shortest connection time on a significant number of city pairs.

The fact is there is simply not enough traffic in and out of Finland. We have to concentrate on transfer traffic and we’re targeting the business traveler in particular. Asia is central to this strategy. We plan to double our traffic to Asia to 140 flights per week by 2020 and we are always evaluating new route opportunities. In May 2012 we will become the first carrier to operate scheduled nonstop services between Europe and Chongqing.

Helsinki Airport must be important to this strategy. How would you describe your relationship with your primary gateway?

It’s excellent. We work together very well. Helsinki is a multi‑award winning airport and we’re very happy with our partnership. We are totally aligned on strategy. We both want to concentrate on quality service and make the customer experience as smooth as possible. It’s an ideal gateway for transfer traffic.

Is IATA’s Checkpoint of the Future the right way to go?

It is. I’ve seen the Checkpoint of the Future and it is an excellent concept. I think it is vital that the industry gets behind the idea and pushes it as much as possible. We have to do something about the security experience while ensuring we don’t relax the actual security at all. The Checkpoint of the Future enables aviation to provide a great experience and great security.

This is a very important issue, not only because of the security question but also because it is having an impact on aviation’s competitiveness. Especially within Europe, airlines compete with other transport modes. The current security experience is a very large negative for us and it affects passenger confidence in airlines.

How important is the oneworld alliance? Do you think partnerships and ultimately consolidation are essential in the modern economic environment?

The alliance is crucial. Every airline in an alliance benefits from it but as a smaller carrier we probably benefit more than the majors. The oneworld alliance has progressed a lot in the past couple of years and I’m extremely happy with the new drive and direction.

Consolidation is inevitable. There are very clear benefits in economies of scale. I’m from a telecommunications background and, if you look at the history of that industry, you will see national, state-owned companies transformed into private, cross‑border enterprises. Aviation will go the same way. I know some countries still place great emphasis on national airlines but after the financial crash, governments will realize there is no point in hanging on to an airline when a quality service at reasonable prices can be provided by somebody else. Market forces will prevail and they will lead to consolidation.

Coming from telecommunications, has anything surprised you about aviation?

I’m surprised every day but that’s a good thing. I’ve heard it said that when you’re not surprised any more, it is time to get out of the job.

A couple of areas stand out. The general public are a lot more interested in and savvy about aviation than telecoms infrastructure, for one. So the impact of the environmental debate seems huge. There isn’t the same kind of pressure in other industries—or the same efforts to improve. Second, so many airline costs are out of our control. It is a very tough market anyway but not being able to control the fuel price, for example, or the charges for overflying Russia, makes life even harder. And we have strong unions, too, that make labor costs a challenging issue.

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