CEO Interview - Balancing the Equation
Agean Airlines’ Managing Director, Dimitris Gerogiannis, says all aviation partners must strive for greater efficiency.
How has the Eurozone crisis, and the Greek situation in particular, affected you?
The most obvious outcome has been a significant drop in domestic demand. The Greek consumer has been hit hard by the crisis and has cut back on travel. Our domestic passenger numbers have dropped even though our fares are 20% lower compared with pre-crisis levels. Athens International Airport also saw a drop in international traffic in the last two months of 2011.
Despite this, we increased the number of passengers in our international network last year and over the past six years we have tripled the number of passengers on our international network.
Fortunately, we haven’t had to park any aircraft as yet. We had a number of aircraft on short-term leases and wet leases and that gives us the flexibility we need. But 2012 isn’t looking any better and may even be worse than last year. Greece will be affected the most but there is a problem across Europe. Not only Spain and Italy but even the United Kingdom, France, and Germany are seeing their growth rates reduced almost to a standstill. The first half of the year will be very difficult indeed.
And you have to add in the price of fuel. Despite the tough economic conditions throughout the world, oil manages to hover around $100 a barrel, which seems inexplicably high to me. The only good thing is that in recent months it appears to be less volatile. We have some hedging in place for 2012.
Greece has been badly affected by strikes. Do you expect any improvements over the next 12 months?
Some of the policies here didn’t help matters at all. We had a major problem in June and again in August 2011. But after that, things started to improve and they’ve got even better since the new government took power in November. Hopefully, from this point of view at least, 2012 will be better.
You did explore the possibility of a merger with Olympic. What would that have achieved?
I think it would have created a stronger presence in the international market. Aviation is a very competitive industry and improving economies of scale is important for growth and development in the international markets. Anyway, the European Commission ruled against it. Since January 2011 our strategy and all our efforts have been focused on developing Aegean Airlines.
Is airline consolidation inevitable?
It’s certainly a growing trend. We’ve seen some major players merging in the past five years or so, including Continental with United, Delta with Nothwest, British Airways with Iberia, and Lufthansa with Swiss and Brussels and Austrian Airlines. They’ve obviously seen plenty of advantages to consolidation.
I think that networks and economies of scale will be very important in the future. Size does matter and it becomes even more crucial during tough economic times. It makes sense from a business point of view and it is also better for the consumer as network access, traveling choices and related benefits improve.
Whether we will get to cross-border consolidation, especially transatlantic, is more difficult to answer.
There are so many factors involved in the deal, from slots to staff. Trying to merge all these details across different regulatory regimes will be really difficult. It’s a hard enough task doing it intra-European. Still, it seems almost inevitable to me that it will happen at some point.
Although Aegean Airlines didn’t merge with Olympic, it has joined Star Alliance. Will your membership help the airline through these tough times?
Star Alliance is an additional benefit to the airline, but it won’t make or break us. The core strategy of Aegean Airlines is what will define our success or failure. If you join an alliance because you think it will save your airline, then I suggest you have joined for the wrong reason. You have to be a strong individual player first. That is the only way to benefit and the only way for your partners to benefit.
We have gained from being a member of Star Alliance, of course. It helps with our international strategy and is proving beneficial to domestic traffic too. For example, it brings in customers from the United States and Asia that previously would have been beyond our reach. And it seems the linking of frequent flyer points has also been a very positive experience for us and our customers. But we’re only 18 months into our membership, so there is a lot we are still trying to assess. It’s certainly our goal to exploit the alliance as much as possible.
Can airlines cut costs even further or has most of the hard work been done already?
Aegean Airlines has been operating for 13 years in a very tough environment. Our competitors ranged from a heavily subsidized state carrier, in the first 10 years, to extremely efficient low-cost carriers and big network carriers. Competing in such an environment dictates that we must be very cost-conscious and efficiency-conscious too. Improving efficiency and productivity are part of the culture of the airline.
The name of the game is to be strong on costs because in the current economic environment an airline has very little opportunity to increase its fares. Because our domestic fares have dropped 20% versus the pre-crisis period, we have had to try to recoup that revenue gap by managing costs as tightly as possible. We’ve done everything possible to improve processes and technology has helped enormously. It’s not only the frontline customer services that have benefited. The back-office functions also get streamlined as you move towards automation.
But of course, the major problem is that such a high percentage of an airline’s costs are external. We can’t influence the price of fuel and monopoly suppliers have no incentive to change.
You’ve been outspoken about the charges at Athens International Airport. Can they be persuaded to reduce their fees?
Athens International Airport is a very good airport and offers very high quality services. We enjoy a very good working relationship. On the other hand, it has some of the highest rates in Europe. It seems we operate in different worlds. Our fares have had to drop— it is what the economic environment demanded—but the airport’s charges have remained high. It is an issue that depends mainly on the Greek State.
The high prices have a knock-on effect of dampening demand. Tourists are avoiding Athens as a city break. Overall, in 2011, Greece had a 10% rise in international arrivals, probably because visitors felt there was good value to be had here. All the islands did well, Rhodes had more arrivals, as did Crete, Corfu, and Kos. In fact, the only place that saw a reduction in arrivals was Athens. The cost of Athens Airport isn’t the only factor behind these figures but it is a factor nonetheless.
More than 50% of the price of a domestic ticket goes to the Greek State in some form. You can’t work with equations like that. What is the point of one partner doing everything it can to be more efficient while the other stands still?
The European Union Emissions Trading Scheme (EU ETS) is another external cost the airlines will have to bear. What can be done?
The EU ETS is here and the airline has no choice but to comply. It is an extra cost and not just because of the carbon credits an airline will have to buy. It is a complicated process and involves a lot of work and, in this economic environment, we won’t be able to pass this cost on to the consumer.
It reminds me of passenger rights–no other mode of transport is burdened by this type of legislation. And like passenger rights, it is not well thought-out and seems unfair. Clearly, there should be a global solution through ICAO because the EU ETS distorts the market.
It is yet another battle that airlines have to fight. I don’t see why aviation should be put in the position of trying to sort out the EU’s environmental strategy. We all agree that a greener planet would be a good thing but penalizing the airlines won’t achieve that.
You come from a non-aviation background. Has anything surprised you and have you had to adapt your management style?
What surprised me when I joined Aegean about 12 years ago was the archaic nature of the airline industry in terms of absence of modern technology to implement and link frontline customer service and back-office processes. I am an engineer and worked in product development and manufacturing and I found it amazing that the use of technology in the airline business was so far behind compared with other industries. It is not what I was expecting.
I think this is where IATA has had a huge impact over the last decade. E-ticketing and all the other Simplifying the Business programs have hauled aviation into the modern world. There have been some very positive developments.
As for my management style, I don’t think it has changed because business is business. People are at the center of it and processes and systems are the support infrastructure. This holds even more true in a service business like air transport. I think you have to be very close to the product delivered at the frontline and remain hands-on.
There is so much detail that drives the quality of customer service and the process through which it is delivered. You can’t ignore any of it because any detail could improve the quality of customer service, unnecessarily cost you money or boost your revenue. You wouldn’t understand that if you just sat behind a desk staring at spreadsheets. Fortunately, Aegean was a small airline when I joined and the founders had a hands-on management style, which we have managed to develop and maintain at all levels.
Taking everything into consideration, are you confident about the future?
I am an optimist! Aegean Airlines will fight through this crisis as we have fought through others and we will emerge stronger than before. Despite all that has happened we were voted Best Regional Airline Europe at the 2011 Skytrax Awards. Every crisis ends, and there is life and business through and after the crisis. It is the only way to think. Otherwise, why would you bother?
For more information visit www.en.aegeanair.com