Lufthansa Chief

Wind in his tails

Airside Flight Operations At Frankfurt Airport Following $1.3 Billion Regional Greek Airport Privatization
Lufthansa is sitting pretty, according to the CEO of the company says. Source: Bloomberg

At Lufthansa, they say boss Carsten Spohr has kerosene in his blood. Born in 1966 in Wanne-Eickel in West Germany, he qualified as an industrial engineer before training as a pilot with Lufthansa. He joined the management of Germany’s largest airline in 1994, leading the freight subsidiary LH Cargo from 2007 before taking up board membership in 2011. He has been the group’s CEO since 2014.

And recently he has enjoyed a fair bit of success. Lufthansa is the only German airline to have made a profit in 2016 and will soon acquire large parts of insolvent rival Air Berlin. In an interview with Handelsblatt, the airline chief said he expected the integration of Air Berlin staff and systems to take at least a year, explained why he has already set his sights on another ailing airline, Alitalia, and how he’s grappling with the challenges of aviation regulation, airline consolidation and digitalization.

 

Mr. Spohr, Lufthansa is the main company to benefit from Air Berlin’s insolvency and is now by far the biggest operator on the German market. How are you feeling about this decision?

Like all those involved, I mainly feel a big responsibility for protecting as many jobs as possible in the German aviation industry. The end of Air Berlin is the biggest insolvency ever of an airline in Europe – with serious consequences for many thousands of employees and significant effects on the German market. No one should be surprised that, as the leading aviation group in Germany and Europe, we’re getting involved, within the limits of what is possible under antitrust law. With the purchase of parts of the Air Berlin group, we’ll be able to significantly strengthen our successful point-to-point airline Eurowings.

Consolidation is not an end in and of itself. What's crucial in my opinion is that we have airlines in Europe that are important at global level.

Was the insolvency of Air Berlin a one-off event, or will bankruptcies become the new normal in the aviation industry?

Aviation is a global sector, but it’s very fragmented. Consolidation is much more difficult for airlines compared with other industries. That’s linked to national restrictions, but also transport rights. The Lufthansa Group is one of the world’s biggest players in the airline industry, yet still only has a 3 percent share of the global market. You’ll struggle to find another sector where global market leaders have such a low share.

The term “global market leader” sounds very presumptuous.

That’s why we don’t describe ourselves as such, even though the Lufthansa Group is the largest aviation group in the world in terms of sales, along with American Airlines. The aviation sector is a long way behind when it comes to international consolidation. However, faster progress is being made within continental boundaries. Like in the US, for example, where there are still a handful of large airlines. They have a combined market share of 90 percent. With the latest developments at Air Berlin, Alitalia and Monarch, consolidation in Europe is also gaining momentum. But for me, consolidation is not an end in and of itself.

What’s crucial in my opinion is that we have airlines in Europe that are important at global level. China, the US and the Persian Gulf each have three strong operators. We also need three strong operators in Europe.

CARSTEN SPOHR, LUFTHANSA, 9.10.2017
Lufthansa head Carsten Spohr: That feeling when you just bought up the competition. Source: Handelsblatt

Cartel authorities have yet to approve the partial takeover of Air Berlin and they do tend to think in more national terms. Could they still scupper the deal?

We expect the competition authorities to look at the takeover – at least from the point of view of European competition – over the coming weeks and months, and not to limit their analysis to the German market. They should actually take a global view, as the sector is global. If a market leader has a global market share of only 3 percent and a market share of 14 percent in Europe, you can’t talk about market dominance.

No doubt some passengers are worried that Lufthansa will increase prices substantially on some routes, as it will have a virtual monopoly in Germany.

First of all, we promise our customers safe and reliable air travel. That’s something you can’t take for granted any more, as we are seeing in Berlin, as well as in Ireland and the UK at the moment. We’re also seeing Lufthansa become a lot more popular again with passengers, precisely because factors like reliability, decent pay for staff and German standards are anything but outdated. They’re suddenly very sexy again.

But at what price? You still haven’t answered the question about price rises.

Prices in our sector have fallen continuously in recent years, unlike in any other industry. In some cases they are so low that airlines could no longer survive. The last few weeks have shown this very clearly. And there are no monopolies in our industry: If a route has over 200,000 passengers a year, a second operator will very quickly establish itself.

That doesn’t apply to all routes, though.

I’m certain we will experience even tougher competition from healthy airlines on the whole. And if you compare us with other sectors, you’ll notice that competition among airlines is incredibly stiff compared with other industries.

It is true that competition is intense. And it’s seen some operators in financial distress. In that case, why is consolidation taking so long in the sector?

We have major regulatory obstacles for historical reasons. For example, foreign investors are allowed to acquire only limited stakes in national airlines. Transport rights make takeovers difficult too. Moreover, the entry barriers to our sector are low. You can lease aircraft relatively easily, find a few pilots and off you go. In contrast, the barriers to exit are often huge, because it has a massive detrimental impact and cost for passengers. At Air Berlin, it took years and cost several billion euros in subsidies from Abu Dhabi.

We want to invest a total of €1.5 billion in the growth of Eurowings. No other bidder wanted to invest anywhere near this sum.

Are you saying that the market in the EU is over regulated?

When it comes to the topic of air transport and regulation, Europe doesn’t lag behind. We were the first after the US to have dealt with open skies concept [which liberalizes rules in international aviation]. You can’t really criticize the founding fathers of European aviation there. The next step will involve getting a handle on things like air traffic taxes and the costs of safety. Those things are weakening the ability of European airlines to get involved in global consolidation.

Lufthansa is taking on only a small percentage of Air Berlin staff. Why?

I strongly regret that we will only be able to take on 3,000 employees, for antitrust reasons. We would have very much liked to offer more Air Berlin staff secure prospects – because they have an excellent reputation and do a very good job.

Is it true that part of the reason why Lufthansa’s bid for Air Berlin was successful was that you were in close contact with the German government from an early stage?

We have never denied that we have been preparing for over a year for Air Berlin to potentially drop out of the market. However, any other competitor could also have had that idea just from looking at the publicly accessible accounting. We held talks at an early stage and explored how such a step could work. Now we want to invest a total of €1.5 billion ($1.77 billion) in the growth of Eurowings, creating 3,000 new jobs.

Taking over parts of Air Berlin is obviously a major step for Lufthansa. But will this be enough to secure the company’s future?

Consolidation is only one part of our plan. Lufthansa has proved that sustainability is right at the top of our agenda. If I promise 3,000 new employees a secure future, then that is what we will offer. I don’t make statements like that recklessly.

But that doesn’t change much about the low margins in the aviation business.

No company boss would be opposed to higher margins. But our current margins are sufficient to enable us to play an active part in consolidation and simultaneously drive forward the modernization of Lufthansa, particularly with regard to updating the fleet.

In terms of consolidation, how many airlines do you think would suffice, worldwide?

I think that in the medium term we will see three global operators in the US and one or two strong US low-cost providers, with a similar situation in Europe. In China, I envisage three global operators plus a few regional airlines, and then the three airlines in the Persian Gulf.

14 p12 A Possible Reason Why Air Berlin Went Bust-01

Is your desire for growth fulfilled with the takeover of Air Berlin, or are you already preparing for the next coup? After all, Lufthansa is regarded as the most promising potential buyer for Alitalia, which is also insolvent.

Italy is our most important foreign market after the US. It has a similar decentralized structure to Germany. We are very keen to at least preserve our market position there or, even better, to expand it. That won’t be possible with Alitalia in its current state. Whether it will be possible with a new Alitalia is what we are currently in talks about.

Aren’t you concerned that the massive expansion of your low-cost line, Eurowings, is happening just as doubts are growing about budget air travel, as seen recently with the problems at Ryanair?

I see it the other way around. Our competitors’ problems make me more convinced that our concept, which is much broader, is the right one. It starts with fair treatment for staff, who are quite rightly calling for this at other low-cost airlines too. The extension of short haul routes with intercontinental flights in a point-to-point system also sets us apart from the business models of other low-cost operators.

Streik der Lufthansa-Flugbegleiter – Frankfurt/Main
Not always happy: Lufthansa has had to deal with its share of employee action too. Source: DPA

So will you have any time to invest in the core brand, Lufthansa?

Lufthansa is, and will remain, by far our most important brand. With the upgrade of Eurowings we are in the situation where we can really position Lufthansa as our premium brand. For me that relies primarily on our team.

We are creating 600 new openings for captains, for example. Which will open up new prospects for co-pilots. And naturally our new generation of pilots is also happy, as we will be taking on 700 of them with immediate effect. With the collective pay agreement, we will reduce annual unit costs in the cockpit by 15 percent for the core brand. That will make us competitive once again and better able to grow.

You’ve been promising your premium customers more comfort, for example through digitalization, for a long time. But there still seem to be a lot of outdated systems that are not keeping pace with a new world of apps and smartphones.

Well first of all, the global air travel association, IATA, recently named us the most digital airline in the world. That shows how strong and successful our investment has been here. But many systems in the aviation industry are actually outdated, partly because they have to function worldwide. It’s clear that they need to be replaced gradually. A lot has already happened within the sector.

 

This interview was conducted by Sven Afhüppe, co-editor-in-chief of Handelsblatt, Jens Koenen, who leads Handelsblatt’s coverage of the aviation industry, and Grischa Brower-Rabinowitsch, head of Handelsblatt’s companies and markets section. This interview was adapted to English for Handelsblatt Global. To contact the authors: afhueppe@handelsblatt.com, koenen@handelsblatt.com and brower@handelsblatt.com.

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