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CEO Interview - A Top-Down Approach

Swiss CEO, Harry Hohmeister

Swiss CEO Harry Hohmeister says positioning as a premium carrier has created far more opportunities for the carrier.

How is 2011 shaping up for Swiss, particularly in light of the rising fuel prices?

Despite a difficult start to 2010 and the volcanic ash crisis, we ended up with a profit of $413 million (CHF368 million). We’ve had a similarly tough beginning to 2011 but last year’s experience shows that we shouldn’t worry just yet. I’m optimistic we will be able meet our targets and post a profit again.

Fuel prices continue to rise. When fuel prices went up in 2008, it affected passenger demand because the cost eventually had to be passed on. It was a price-sensitive market. This is still the case, of course, but Swiss is now clearly positioned in the premium segment and better off. When prices rise, people look for quality and value, and that creates an opportunity for us. Of course, we also have to pass on some of the cost of higher fuel prices through increased fares and surcharges. But when prices in the market are high, carriers like Swiss become a much better proposition for the customer. In truth, high fuel prices are not my biggest headache.

So what is your biggest headache?

It’s uncertainty. The overall geopolitical situation and the consequences of the tragic Japanese earthquake and tsunami have made the market very nervous. This instability is being reflected in booking behavior. There is a trend towards booking later, but this has spiked recently.

Without those early indicators, deciding what capacity to offer the market is very difficult. You suffer if you have too little capacity and you suffer if you have too much. And it affects your pricing strategy too. You have to try and pitch it just right so you anticipate passenger requirements. The market is moving so fast, though, that it becomes very hard to judge what to do. How should you position yourself if you’re unsure of the market? What should we do for 2012 or 2015?

So my biggest headache is deciding how to manage these new market dynamics. Our load factors are always good so we know the passengers are still there but their profile is constantly changing. Having generated profits in some very difficult years, I am confident that we will be successful. But the challenge has grown bigger.

Why has the Swiss brand changed from almost low cost to a high-end product?

For me, it was absolutely clear that Swiss needed to present itself as a premium brand. When the new management team arrived at Swiss in 2004, there was no real strategy that put the product in context. Trying to cut back on food and drink in economy didn’t tie in with a premium concept, for example. There has to be continuity in product as a network carrier. You can’t fly from New York to Zurich on full service and then get a connection to Geneva that has no service at all. It was difficult finding the investment to upgrade the product but it was absolutely necessary.

There was also a lack of continuity with Switzerland itself. The country has a premium image in the world’s eyes and so it was logical for us to work with that perception rather than against it.

Being low cost didn’t work for the staff either. They found it strange not to be offering a service in economy class. Moving back to a high-end service motivated them again. They instantly saw what we were trying to achieve and aligned themselves with the vision. They also saw that the strategy was bringing the passengers back. We are meeting customer expectations of Swiss and we have regained the customer’s trust.

It’s important to note that we still compete with low-cost carriers though. We keep costs low and we present those customers seeking value for money with a viable alternative to a no-frills service. Our position in the premium segment means we can still capture traffic from the lower end of the market but I don’t think any low-cost airline is really set up to entice passengers looking for a premium product. I think Swiss gets the best of both worlds.

Are all your decisions made in conjunction with Lufthansa?

Swiss and Lufthansa are distinct airlines offering distinct products. We act independently. But we do share information and work together when it makes sense to do so. For example, some back‑end processes, such as fuel hedging, benefit from a joint strategy. It doesn’t matter who is doing something like that as long as it is done well.

But there is no prescribed formula that says Swiss must tell Lufthansa what it is doing. And anything customer-facing is always a decision for the individual airline. You would destroy motivation if you lost independence.

How do you position Swiss within the Star Alliance? Should the airline or the alliance come first in the customer’s mind?

That depends on the market. In Switzerland, I would like the customer to think of the national carrier first and decide to travel specifically with Swiss. Our schedule, product, and prices are very much oriented towards the home market so we really want to be the brand they choose.

Then there is an extended home market—Austria, France, Germany, and Italy. There we want to make it clear that we are different from other foreign carriers. For these markets we have a multilingual crew, who can speak in any of the native languages, so the passenger feels at home instantly. We want to be a carrier of choice in these important markets too.

Beyond that we are probably a niche carrier and benefit from our status in Star Alliance. We have less than 2% of the transatlantic market but we can still make an impact and we are working hard at pulling in customers to Swiss premium quality.

Could the success of the Lufthansa/Swiss model help governments to relax ownership rules?

Giving up the national carrier was a huge deal for Switzerland and its people, with a psychological and emotional dimension. But the agreement with Lufthansa was very carefully negotiated by the government. It didn’t hand over an airline to Germany. It was simply that a financial investor called Lufthansa was taking a stake in a Swiss company—the same way that people can buy shares in other Swiss companies.

And it was much easier to talk about the airline with an investor that had an interest in the subject rather than some inexperienced fund looking for a quick profit. The truth was that Swiss was a small carrier in a small market and it needed a bigger company to help. Many airlines are in a similar situation where there is no alternative to fresh investment.

Would that argument work on a global basis?

Aviation is a global industry but we must not forget the strong national interest in flag carriers. If you look at the automotive industry it is normal for a company to have a production plant in other parts of the world. An airline has a production plant in its own country; nowhere else. In the long run that isn’t feasible. Aviation has to be liberalized.

This is a political issue, though. If governments want an airline, they should have an airline. But they should not stop investment in a private company. That doesn’t make any sense to me at all.

It’s difficult to tell whether governments will eventually change the mindset and whether the industry will consolidate. It is a very complex question—like asking what the weather will be like in five years’ time. You simply don’t know. All you can do is make sure you are very fast and flexible. By all means have a plan for the future but be prepared to change it!

Speaking of the weather, is aviation doing all it can for the environment?

Yes and no. I think the industry is doing everything it can. IATA has done a great job. We are the only industry that has set its own targets, and they are tough targets too.

But we could achieve so much more if the governments supported us. They have to remember that the industry’s growth is coming from passenger demand. We are not putting more aircraft into the sky because we love aircraft so much. Politicians on the one hand try to dampen demand by taxing passengers, but on the other hand fail to make quick enough progress in something like the Single European Sky, which could do so much more for the environment. We can’t burn unnecessary fuel just so governments can be proud of having their own national air traffic control management. There is no point in that.

Governments also have to work with the industry to speed up the development and support for biofuels. Realistically, we will need jet engines for a long time yet: warp drives aren’t here yet. That means we will also need fuel. It is essential, therefore, that we emphasize the use of biofuels. We are cooperating with Lufthansa to develop biofuels. It would be helpful if governments would step in to ensure correct land use and a commercially viable biofuels industry.

The European market is stagnant and infrastructure development is difficult. What can the region do to get back on track?

If we do not get the right infrastructure and support from politicians then European carriers will never be competitive with Asia-Pacific or Middle East airlines. And if European carriers do lose out then the European economy will also suffer. We must look at improving the industry-government relationship here in Europe. We are not asking to get financial support from our governments but at least they shouldn’t hold the airline industry back through taxes or regulations that, in many cases, do not even serve the purpose.

Aviation is Europe’s transport link with the world. The region’s governments should support it. If someone is traveling more than 300 kilometers then flying is the most economical and least environmentally harmful way of doing it. And if countries want to continue exporting goods, again flying becomes essential.

We have to find solutions. If aviation cannot grow, countries will also lose one of their best employers. We are a service industry and service is delivered by people. Governments should respect aviation’s contribution to the overall economic picture.

Technology has been successful at solving some industry problems, but do we need still more innovation to cater to traffic growth?

We have one answer already in new aircraft that can move people more efficiently. These are definitely part of the solution.

That doesn’t solve the infrastructure problem, of course. We need to adapt our facilities to new market dynamics. For example, runways could be better configured at many airports to allow for more aircraft movements. Basically, all infrastructure needs to be brought in line with best practices. The current concept of an airport doesn’t facilitate customer service or throughput efficiency. We need to get rid of some of the processes. Self-service check-in is an example of this. It’s better for the passenger and better from an efficiency point of view.

Security is still being discussed but we need to find something— a process or technology—that will allow people to walk through a checkpoint without stopping to unpack. Profiling will doubtless play an important part here.

When all this is done we can look at how to redesign an airport to make it more efficient without increasing its footprint.

Looking ahead a few years, where would you like Swiss to be?

We want to remain profitable so we will have to invest money in new products and technology. If we can maintain an 8% profit margin, we will be able to continue investing. It’s also important we keep a highly motivated team that is committed to the Swiss brand. That is a real challenge because the labor market is dwindling in numbers. So we’ll be growing as the number of available employees is shrinking. We have to attract the right people to the company and make sure we train them in the right way.

I just want the Swiss premium brand to be maintained and the company to stay successful by delivering quality and value to our customers.

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