Group strategy: Market dynamics in Germany

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Shifting market dynamics in Germany have galvanised TUI, Europe's biggest tour operator, into decisive action

The German aviation market is an intensively competitive environment that is being shaped by three principal developments. Overcapacity, which is expected to stay at 2% above growth at least until 2008 an ongoing shift from charter to low-cost with the consequent pressure on yields and market consolidation are all having an impact.

In view of this, when Christoph Müller was brought in at the beginning of this year to examine the TUI airline structure, the message from the executive board was clear: "We need an airline strategy for the whole group, and we need to start where the pressure is highest, and that is in Germany."

TUI has two main carriers in Germany: and Hapagfly, which was formerly Hapag Lloyd. Across Europe TUI has seven airlines with a combined fleet of 122 aircraft carrying 25 million passengers annually.

In Germany Müller found two separate airlines operating in distinctly differing markets. TUI never had a collective bargaining agreement with the German pilots association, so was set up in 2002 as Hapag-Lloyd Express to develop the low-cost model. It existed at arm's length from Hapag-Lloyd which now trades as Hapagfly in the package holiday market.

"The traditional charter business in Germany has been shrinking in absolute terms over the past five years. This has not just affected TUI, we have also analysed the activities of Condor, LTU and all other existing charter airlines operating in Germany, which confirmed our findings. So within this downturn, we examined what is the old traditional package business, and what portion of this is sold on a seat-only basis. The conclusion was that the number of seats offered in the traditional charter market has diminished, and how the seats are sold has also fallen within the absolute numbers. The clear winners have been the low-cost carriers," says Müller.

"The key strategic findings in the entire exercise were that past travel was stimulated by the glossy brochure, families went on holiday mostly once a year for three weeks. Now the availability of cheap air fares has changed the dynamics of travel. The perception is that a two-digit air fare or a one-digit air fare at times, stimulates traffic," he adds.

Opening doors
"For the customer [under the old model], there was only one entry door. It was a one-way street from the travel agent to the glossy brochure, which included the flight, hotel and other services in a single package. That was the tourism group of the past. Now it is more likely that the customer will go directly to the airline. The website will now enable the airline to offer an endless assortment of services, from flights to hotels, insurance, car hire and more."

Given those findings, Müller says: "One has to come to two conclusions. Firstly is to adopt a low-cost airline model with a modular build-up of service elements, high aircraft utilisation, and 100% internet sales. You really have to be brutal with costs and go all the way. Fiddling at the edges with 20% internet sales is not an option." Secondly, he adds, recalling earlier discussions within the TUI executive board that focused on becoming "asset light", leading to wild speculation in the German press that TUI would be selling its airlines, "it is very important for TUI as an integrated tourism group to retain control over its airlines, to keep control over scheduling. Only the guaranteed availability of cheap seats will fill our hotels."

In the intensively competitive environment that is Germany, Hapagfly, as the charter airline, operates in a shrinking market with strong seasonality and a weak half-yearly period over the winter months., however, has the highest growth rates within TUI and is its strongest internet brand - and is all-year-round. "After tough negotiations we solved the pilots' issue, so we basically had the liberty to do with the two airlines what we wanted," says Müller, "and the decision was integration."

What the TUI group achieves through this integration, Müller adds, is the retention of the high-quality tourist offer, the flattening out of seasonality through maintaining the strong growth in the low-cost sector, and the adoption of the low-cost model and internet sales. While the two airlines will retain their separate legal status because of traffic rights issues and supply contracts, they will be run as a single airline, with a combined management, single brand and one website. A full merger may be possible by 2008, says Müller. A combined flight schedule for next summer is being prepared, with a 25% boost in capacity to continue its successful participation in the still-growing low-cost market. The aim is to achieve a 60/40 split between the low-cost segment and the traditional tour operator business. Although no decision had been made at the time of writing on a new brand, TUI says the name will have high internet recognition for the customer.

Behind the scenes, improving efficiency and cutting costs will dominate the integration process. According to Müller, basing crews with aircraft will slash travel times, overnighting and positioning flights, while traditional sales channels will be cut. The new business plan is also pushing aircraft utilisation above 12 hours a day on the Boeing 737s by combining tourist flights with European city pair connections, and adding night flights. Service quality will be tailored to the market. While the buyer of a package holiday will not accept a no-frills service, the single-seat customer will have to pay, says Müller, but can pre-order hot meals from November onwards. "We are promoting a travel experience," Müller emphasises, "that begins and ends with a flight."

Although Müller believes the German market is still too fragmented and needs further consolidation, the country's competition authority may not be as enthusiastic. This is especially true if the two largest tour groups, TUI and Thomas Cook, which includes Condor Flugdienst, TUI's biggest competitor, forge a partnership. KarstadtQuelle, which owns Thomas Cook in partnership with Lufthansa, wants to gain full control and Lufthansa is willing to sell. Karstadt may then sell off Condor. Lufthansa could buy Condor to operate as its in-house holiday airline or TUI could step in.

Behind the scenes discussions are taking place between all players on the future shape of the German airline market. Müller does not give too much away about TUI's intentions, but he does admit that TUI is in discussions with various potential partners. It has already forged a successful codeshare partnership with Air Berlin. This, Müller says, has given the customer a greater choice of frequencies on the combined routes.

Both Air Berlin and Hapagfly have similar business models, combining the traditional tour destinations with a low-fare intercity operation. However, Air Berlin has recently expanded its budget operation with the acquisition of Munich-based dba, and while there is no overlap between Hapagfly and dba, there is with HLX.

The new situation is being examined as, under the current agreement, the two partners are obliged to talk if anything changes. Müller would not be drawn on whether this could lead to a still deeper co-operation or a parting of the ways. According to Müller, TUI would definitely not be interested in loss-making LTU, which was not part of the sale of dba to Air Berlin, as it has never considered the already well-served long-haul market. Furthermore, Müller adds, "we would have to take over their higher collective-bargaining agreements."

Beyond saying that he "has to open up a European perspective", Müller is not elaborating on his plans, other than extending his remit to TUI airlines in other countries. He will be visiting Belgium, France, the Netherlands, Scandinavia and the UK to examine if their business models fit with TUI's strategy.

In the UK, Europe's biggest travel market, Thomsonfly operates a very similar model to TUI in Germany. "Travel is still growing, but we have to analyse where the tourist market is going," says Müller. If he finds a trend away from the traditional holiday package, similar to that in Germany, this could lead to a restructuring of Thomsonfly.

In Scandinavia, TUIfly Nordic serves the traditional holiday areas in the Mediterranean, but also flies to Thailand, while Arkefly in the Netherlands and Corsairfly in France, which both operate long-haul services with high-capacity aircraft, apparently no longer fit into the new TUI concept. All these will come under close scrutiny by Müller.

Fleet harmonisation
One element of the new TUI approach is to establish a completely harmonised fleet. In three to four years, it will number between 90 and 100 737-700s and -800s, all with identical specifications. With aircraft on order, this would take TUI up to 2014-15, says Müller, after which successors to the 737 and Airbus A320 will both be considered. The fate of its 757s, 767s and 747s and Airbuses in the fleet is still to be decided.

In the 10 months since being given the task of developing a sustainable strategy for the TUI airlines, Müller has already made significant progress, but the job is not yet done. "We not only have to look at opportunities on our side, but also keep an eye on our competitors," he says. "Both our airlines [Hapagfly and HLX] are profitable, we have a strong customer base and an excellent brand. The traditional charter market is in decline and will not come back. The question in all markets is, can we, as TUI, compete in the low-cost market."

Steep take-off

Christoph Müller's rise since starting as an analyst at Lufthansa in 1989 has been as meteoric as that of the transformation of TUI.

Müller went on to become financial director at Deutsche Airbus and director of finance control at Daimler Benz Aerospace, before returning in 1994 to Lufthansa. He gained further airline experience with Philippine Airlines, then as chairman of Sabena in Brussels, simultaneously becoming a member of the Swissair board. He was plucked by TUI from DHL, where he was responsible for the global flight strategy at parent Deutsche Post World Net. He became a member of TUI's six-strong executive board in September.  


© TUI   

"We need an airline strategy for the whole group, and we need to start where the pressure is highest - Germany"  Christoph Müller, executive board member, TUI

TUI's transformation from industry to tourism

The transformation of TUI from an industrial conglomerate to Europe's foremost tourism and shipping concern began in the difficult economic climate of the 1990s when Preussag, then involved principally in the steel business, decided to enter the expanding service sector.

The rapid progress was characterised by a programme of restructuring, investment and disinvestment, starting in 1997 with the acquisition of Hapag-Lloyd, a worldwide travel and logistics service with its own airline, and travel agent TUI Deutschland. Other travel companies followed, but the decisive step was taken in 2000 with the takeover of the UK's Thomson Travel Group, including its holdings in Scandinavia, such as Fritidsresor. French travel group Nouvelles Frontières followed, and by forming new companies in Belgium, the Netherlands, Switzerland and Eastern Europe, the group established itself in all-important European markets.

The adoption of the TUI name and the famous broad "smile" created from the TUI initials was the next step in presenting a unified brand. The restructuring is now almost complete and the last of a handful of industrial operations are being wound up or sold in the near future.

In 2005, TUI had a turnover of €19.6 billion ($24.5 billion), of which 72%, or €14.1 billion, was generated by the tourism sector, which also contributed €360 million to the group's pre-tax profit.