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CEO Interview - Lufthansa Looks to a Sustainable Future

Wolfgang Mayrhuber - Lufthansa CEO

Wolfgang Mayrhuber, Chairman of the Executive Board and CEO, Deutsche Lufthansa AG, details his thoughts on building a sustainable industry.

 

How do you see 2010 shaping up?

We have seen two positive signs. Cargo has come back quickly and strongly, which is an indicator of an upturn in the economy. And we are also seeing improvements in several markets. So I am cautiously optimistic. But we have also witnessed the impact on travelers and the supply chain during the closure of European airspace due to the eruption of the volcano in Iceland.

This and the financial crisis has reinforced that there is a fundamental need for mobility, and that communications technology isn’t a substitute for travel. In fact, the technology at our disposal now—from smartphones to video conferencing—actually stimulates travel. It is an enhancer.

Lufthansa has interests in a number of other airlines. How do you manage the overall strategy of the group?

The basic principles for the group and for every single company are the same. All our decisions are based on what is right for the customer. What the customer demands is plenty of travel options, an extensive network and a price-worthy reliable service. Consolidation is simply a response to customer needs.

Consolidation is also a way to achieve synergies and economies of scale. It’s an opportunity to learn from your partners about best practices. Airlines share the same airspace, the same technical and operational requirements, and similar processes. So there is a lot we can standardize across the group.
But we also have to balance standardization with sensitivity. Europe is made up of many different countries, each with their own language, culture, and history. We want to reflect that uniqueness in our business relationships. Every company has a home market that needs services tailored to the requirements of the customer.

The whole group of companies in which Lufthansa has a stake is set up as a modular system. We can learn from each other and each company is flexible, transparent, quick and individually responsible for the success and the services offered.

Your interests have been primarily Europe-focused. Are you looking beyond Europe as well?

Lufthansa was created by a merger of three small airlines in 1926. Not long after, we were major shareholders of a Russian joint venture and a Chinese airline. When Lufthansa was re-created after World War II in 1955, it was a purely German airline serving the German market. We are still based in Germany, but through liberalization and globalization Europe became our home market, and our growth market is the whole world.

To be attractive we need to be strong in Europe but we could, on a long-term basis, envision worldwide opportunities. Many governments see airlines as a sovereign issue rather than a regular business. But it is a business tool that people can use to facilitate trade and which leads to greater economic prosperity.  Air transport should be liberalized and, as part of the World Trade Organization, enjoy the same freedoms as other industries such as telecommunications and automobiles.

Today, the rules on foreign ownership prohibit trans-Atlantic or trans-Pacific cross-ownership. One also has to consider the financials and timing. But that is not an excuse to deny airlines the eventual opportunity to become truly global businesses.

Were you disappointed with the second stage EU-US talks?

Yes, it was a missed opportunity to lead the way for other regions. If you try to live in a connected world but rule in isolation then you are bound to fail. It was a disappointing result. I was talking about the desire for mobility earlier. Europe was the cradle of mobility. The US has pushed it forward, leading in many ways. 15% of the world’s population on the two continents account for the vast majority of global aviation. From California to the eastern part of Europe, there is essentially the same economic jurisdiction, an open aviation area. We could have built a single, integrated, open market with foreign direct investments.
It could act as a blueprint for other parts of the world. While travel density across the Atlantic is still very high, the center of gravity is shifting to Asia. China in particular has developed at an enormous speed. Washington and Brussels must act now if others are to have a path to follow.

What are your views on the environmental issue? Were you disappointed in the Copenhagen outcome?

Yes and no. IATA did an excellent job in explaining our industry and the contribution we could deliver if the airlines, manufacturers, air navigation suppliers and others acted in concert.

I take ecological issues and sustainability matters seriously and I am critical with the public and political process that is going on. As a global citizen, a father of three kids and as a CEO, I feel responsible. But as an engineer and tax payer I am puzzled. Governments seem to have difficulties to act as a guide and pacemaker. It would be logical to look for those priorities that deliver the fastest and greatest return on investment first, and then stimulate technologies and solutions that reach further out and could act as game changers.

Aviation should not be exempted, but it contributes far less CO2 emissions compared to other sectors like households or ground transportation. Hence we did and are doing our homework. Big improvements have been achieved and more are on their way. Our four-pillar environmental strategy provides answers. In Europe, a single sky would reduce CO2 emissions 12%. No investment, no lead time, just reorganization could deliver it. We have Schengen on the ground but not in the air. On intercontinental routes, we still see many opportunities to reduce flight time. Manufacturers should be stimulated to enhance the introduction of new technologies. They should get more support. Biofuels could be a breakthrough technology which should be pushed.

Will the COP16 meeting in Mexico achieve anything?

We can only hope so. Looking at the circumstances I have my doubts. The scientific analysis is being questioned, and the economic situation means there is a very limited ability to finance mitigation efforts.
It is also in danger of becoming one-dimensional regarding emissions. We need some bigger thinking. Emissions per passenger mile is on everyone’s mind these days. Here, we are already competitive and optimistic about delivering an even better performance.

There is a bigger picture that requires an understanding of the lifecycle of emissions. You must consider the carbon footprint of the infrastructure. An airport consumes relatively little surface area—three kilometers of runway take you around the world, a railroad carries you only three kilometers with the same space. Air corridors do not need maintenance, bridges, tunnels, or street lights. And the carbon footprint from manufacturing an aircraft is far less than that caused by the manufacture of any other vehicle when you consider the passenger miles delivered during its lifecycle. Only then will you start to have a true understanding of the relative carbon footprints. And this is a necessary tool to understand where the most beneficial investments can be made in mitigation.

Interestingly, I should point out that environmental issues with automobiles are taken up with the producers. The manufacturers have been given emissions limits and they must ensure the final products stay within those limits. In our industry, such burdens as the European emissions trading scheme (ETS) are put on the consumers and operators.

How important will India and China be to the industry’s growth prospects?

Both are already very important markets that will further gain in importance. Lufthansa is the leading European airline to Asia—including both India and China. There is a natural fit for us because a lot of German companies, particularly in the technology field, have taken advantage of direct investment opportunities. Germany also has a huge leisure market and a lot of German travelers want to go to those countries.

There are also distinct differences between China and India though they are often lumped together. For example, India has completely different travel patterns. Indians living and working abroad and using Europe as a gateway are a big component of the market.

Moreover, despite rapid growth, infrastructure issues in each market are very specific. In China, the pace of airport development is incredible; but air traffic control is lacking efficiency. Civil/military cooperation to allow more entry points into Chinese airspace still has some way to go. There is a big difference compared with a few years ago, but they still need to catch up.

In the case of India, the biggest issue is airport infrastructure. There is a new terminal in Delhi coming soon. And airport developments in Hyderabad and elsewhere are helping to change the face of India’s aviation infrastructure. But again, growth outpaces airport capacity and charges remain an issue. I have high hopes that the Airport Economic Regulatory Authority, the new regulator, will be effective in bringing cost-effective solutions that will facilitate the industry’s growth.

Can we learn any lessons from the six-day shutdown of European airspace caused by the Icelandic volcano?

Firstly the risk evaluation process failed. The mathematical model that was used turned out to be false. It was based on undifferentiated assumptions. There was no feedback loop to adjust or calibrate the simulation tool. The airspace management process was inconsistent. It became evident that the fragmentation of air management control systems of the member states and Eurocontrol hampered the whole crisis management process.

In my opinion we need a global advisory and steering board to create detection tools, set contamination standards, and devise operating procedures for both instrument and visual flight rules. And we need better means to measure the development of ash clouds—both theoretical models, and the ability to test actual atmospheric concentrations of ash. Now that this crisis is over, we should not forget about the threat of volcanoes. Continuous work to understand the phenomena is important.

The six days of airspace closures also highlighted the need for the Single European Sky. The fragmented decision-making structure that exists today involved governments, air traffic control, airports and airlines—with nobody in charge on a Europe-wide basis. The situation in the air is completely different from that on the ground where the Schengen agreement took away the borders.

What must the industry do to become financially sustainable?

More discipline is needed. Profitable growth instead of market share is the name of the game. Capacity has to be managed. Revenue and costs must be managed. Don’t produce more than you can sell. And don’t spend more than you earn.

With respect to the structural environment, we must have free, fair and open markets. Simply put, we must liberalize. Then we need a better balance between entry requirements and exit barriers. The market is distorted because this industry is easy to get into but hard to get out of. We also need a fresh look at the “integrated” value chain. Airlines must be supported by airports and air navigation service providers and not exploited by them. We should act as partners.

How would you characterize your approach to managing Lufthansa?

Safety and reliability are top priorities. Trust is our biggest asset and service is always most important. We are conservative with respect to financial exposures and we balance long-term decisions with staying clear of short-term obstacles. And finally, I want to ensure our employees continue to embrace our brand value, which is all about the customer.

The industry is meeting in berlin at this year’s iata agm. What does the city mean to Lufthansa?

A lot. After all, Berlin is Lufthansa’s birth place. The city has a vivid history and a bright future. I think it has a special flavor because of the historical mix of eastern and western Europe. It also symbolizes the strength of this industry. When we were allowed to return to Berlin 20 years ago, there were only a handful of Lufthansa staff. We now have 3,500 employees and a new airport is on its way.

No other place demonstrates the need for mobility like Berlin. It used to be an island, and the famous air bridge nourished it. We were reminded when the Wall came down that the basic desire to travel and meet other people is a human issue and not only a commercial one. In fact, this desire was one of the driving factors in taking down the Wall. Lufthansa is pleased that IATA accepted our invitation to hold its AGM in Berlin. We look forward to serving this city and welcoming all of our colleagues to experience its unique charm and atmosphere.

 

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