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CEO Interview: The Right Balance

Dr Christoph Franz, Chairman and CEO of the Lufthansa Group, says that the solutions to industry problems must respect all stakeholders’ interests

Christoph FranzHow is 2013 shaping up for the Lufthansa Group?

2013 will be another challenging year for Lufthansa and its staff. We are in the middle of our restructuring efforts and this year a lot of these measures will take shape. We will prove that we are not only good at analyzing and planning but also in implementation.

On the other hand, we are currently investing more money than ever—in new aircraft, in new cabins, in new services. Both aspects are aiming in the same direction. Despite all headwinds, competition, and changes in the industry, we will maintain our industry leadership position.

What about the eurozone crisis? Is it over and how is it affecting performance and strategy?

We don’t know if there is another event like Cyprus on the horizon. Certainly we are still dealing with a fragile situation in the financial markets in some European countries, as well as in countries in other regions. On the upside, the economic situation seems rather robust in most of our important markets—Central Europe, the Americas, and Asia. Also, Africa is showing more growth than expected.

We generate almost 40% of our group revenue outside of Europe.

Can you explain the rationale behind the SCORE initiative and the contribution it is making to your performance?

Our industry is under pressure, particularly in Europe. We realized at an early stage that we would only be able to overcome these external challenges by making internal changes and doing our homework.

SCORE represents the greatest change process in recent decades. It addresses all of the airlines and business segments of the Lufthansa Group. We are changing structures and processes, trimming down administration, and improving earnings—we hope by at least $1.96 billion (¤1.5 billion) by 2015.

The momentum is there. We are not only developing new ideas, but also learning to give up old habits. Last year we were able to generate a total of 2,500 ideas to improve earnings. A spearheading project is the implementation of the new Germanwings airline, which is gradually taking over our non-hub services in Europe. The first aircraft are already in new livery.

While the initial success is already visible and measurable, unfortunately the full impact cannot yet be seen on the results, as the positive effects are being eaten away by other challenges. For example, we have spent $1.44 billion (¤1.1 billion) in additional fuel costs. Still, the results do show how important SCORE is because without the program our results would look a lot worse.

How do you manage the various companies that make up the group?
Is there an overriding philosophy?

All of our business segments have full profit and loss responsibility and we trust that airlines such as SWISS or Austrian Airlines know their markets and their customers much better than we could ever do in Frankfurt.

However, there are certain Lufthansa values, such as quality, safety, and reliability that are, and will always remain, part of the Lufthansa DNA across the entire group. The same applies to our promise to always be a reliable partner for our staff, customers, and other stakeholders.

You play a leading role in an alliance. How does this affect your strategy? 

Lufthansa, as a founding member of Star Alliance, has always taken its leading role seriously.
Being a member in a partnership naturally means a certain limitation of freedom—which you trade in for higher benefits. Star Alliance, as a principle, leaves enough room for specific needs and requirements when it comes to deeper forms of cooperation beyond the regular alliance standards.

For example, we have entered revenue-sharing joint ventures with our longstanding partners United Airlines, Air Canada (over the North Atlantic), and All Nippon Airways (between Germany and Japan). These joint ventures include our group airlines, SWISS and Austrian Airlines.
In light of the ongoing consolidation in our industry, alliances will play a more dominant role as providers of platforms for more intense forms of cooperation.

Is consolidation the answer to sustainable growth for airlines?

Consolidation is a tool used in every other sector. And looking at all the activities undertaken by airlines to form commercial relationships it is clear that airlines want consolidation. It is happening on a domestic level. The US market has consolidated and there is movement in Europe, although I suspect that there is much more to come.

I would say that cross-border consolidation is inevitable. The only unknown is when it will happen because governments are resisting. Right now, our industry is much less consolidated than other industries. We face overcapacity, high fixed costs, and declining yields. Such an environment, when combined with fierce competition, does indeed mean that size matters.
Many smaller airlines seem to have no answer to these challenges.

What are the next steps for the industry’s environmental initiatives? Will biofuels be available in sufficient quantity and at a competitive price?

Together with its industry partners, Lufthansa is a pioneer in the development and deployment of alternative fuels. But it remains a challenging area, not least in terms of the pricing structure.
Only large-scale production will enable us to substitute conventional jet fuel with bio kerosene, step by step. For this we need additional support from the European Union (EU) and from individual governments. The commercialization of aviation biofuels will be an industry challenge in the coming years.

But we must never forget it is also a great opportunity given global demand for air transport, the need to reduce carbon emissions, and the price of oil.
The Single European Sky (SES) would save CO2 but is it moving fast enough?

Definitely not! European countries have consistently failed to make progress. A lot of states are still not willing to give up national competences and national air traffic control.

Every intra-EU flight is 50km longer than necessary, which results in $6.53 billion (¤5 billion) in additional costs—every year. And don’t forget the avoidable CO2 emissions, which add up to 50 million tonnes every year. So the arguments about why we need SES now are extremely convincing. The industry has a clear environmental roadmap, we have technology, tools, and procedures. Now it’s up to the EU to finally implement SES to bring true benefits to the public and the environment. Once heads of state realize this, things will progress but I am not optimistic at the moment.

The industry has the technology, tools and procedures- now it’s up to the EU to implement SES to bring true benefits to the public and the environment

Are you happy overall with the airport situation—especially in Germany but also in Europe?

How can we be happy with conditions that make it hard, and sometimes almost impossible, to do business? Finding balanced solutions that pay respect to all stakeholders’ interests is one of the fundamental pillars of modern democracies. We applaud governments like Turkey or the United Arab Emirates that have identified aviation as a key industry and catalyst for economic growth and prosperity.

As for Germany and the EU, the opposite is true. Departure taxes, night curfews, a one-sided Emissions Trading Scheme, and a diverse European airspace make it hard for European airlines to compete globally.

At Frankfurt we now enjoy additional runway and terminal capacity—which is an enormous achievement and results in high punctuality and service quality. But we don’t have access to this infrastructure every hour of the day. The night curfew is a heavy burden for us in global competition—especially for our cargo business. Imagine closing the highways and railways for 25% of the day. We try to compensate by developing new products, but the growth of air cargo in Frankfurt is lagging behind the market average.

Is it right to have aviation-specific consumer laws?

It’s never easy to find the right balance between regulating and leaving markets to their own devices. But there is no other mode of travel, and probably no other service sector overall, where customers enjoy the same standards of protection seen in air transportation. The EU commission acts as if consumer protection depends on them. But we already take responsibility for passengers who get delayed or affected by unforeseen operational difficulties. What we cannot do is take on the burden for other risks in life, such as volcanic crises and bad weather.

IATA is moving forward with the New Distribution Capability (NDC). Would personalized offers improve sales and would the airline need to change its structure to accommodate this?

NDC is a trend-setting initiative that is important for the whole industry. We have assigned a number of our employees to work on the program. It has not yet been decided exactly how NDC will be applied at Lufthansa. But in other areas of the consumer world personalized retailing concepts are very common and we believe that by knowing the customer better we could offer the right products and services. This would improve sales and customer retention. This might mean changes to both the sales/distribution and the IT structure but change is daily business for an airline.

How would you describe your management style?

My team is my most important asset. I value open, even controversial discussions and encourage them from my direct reports. I try to spend as much quality time as possible with employees in Germany and abroad. There is always a take-away from these meetings.

Finally, what makes a good CEO in the modern airline business?

It is our stakeholders who decide whether or not a CEO does a good job. This means investors, customers, and employees. Once a year, we ask each employee to judge the executive board’s performance through a standardized questionnaire. During times of change, the comments are more critical of course, but this feedback is part of our culture and is very important to me. The CEO doesn’t need specific industry knowledge as long there are people around him who can teach him what he needs to know. But it does depend on the situation. You can’t expect someone to come in and transform an under-performing airline within a short space of time if he or she has no knowledge of the industry. 



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