Carsten Spohr can afford an extra smile or two these days as he looks back on a challenging first three years as chief executive of Lufthansa Group.
February and March brought breakthroughs in protracted negotiations with unions over pay, pensions and other conditions, as Lufthansa pilots tentatively agreed to a new contract, following earlier deals with ground staff and cabin crew.
Labour disputes had cast a shadow over Spohr’s first three years as Lufthansa Group chief executive, a challenge he inherited after previous agreements expired in 2012. In its full-year 2016 results, Lufthansa stated that industrial action by pilots in November alone hit earnings by €100 million ($114 million). The pressure to resolve the conflict was huge.
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"I would be lying if I didn't admit it was stressful," Spohr told FlightGlobal on the final day of the recent IATA annual general meeting in Cancun. "There probably wasn't a single day where I didn't think about the labour conflicts going on because I fly every day, so I meet crew every day, on the ground, in the cockpit, in the cabin.
"And of course there wasn't a single day where I wasn’t somehow – sometimes verbally, sometimes by looks – basically confronted by the situation."
Bringing that uncertainty to an end leaves Spohr freer to concentrate on meeting the other challenges faced by the group, with the premium offerings of its mainline operations – Lufthansa itself, Austrian Airlines and Swiss – and the low-cost offering from Eurowings and its subsidiaries central to its plans.
"I think we are now harvesting the fruits of the hard work of the first three years I have been in this job," he says. "And that makes us feel good and positive about the years to come."
When Spohr replaced Christoph Franz as Lufthansa Group chief executive in 2014, he took on a business already in the midst of a cost-saving effort in response to the competitive threat from Gulf airlines and Turkish Airlines in particular. The group's airline operations were perceived to be at a disadvantage compared with rival major European carriers because of Germany's federal nature and therefore dispersed population: its Frankfurt and Munich bases traditionally rely on people travelling from other large German cities such as Berlin, Dusseldorf and Hamburg.
In short, the door was open for the Gulf carriers and Turkish to take a significant portion of passengers in those latter cities, offering links to Asia and beyond without the hassle of connecting to a Lufthansa base. At the same time, Lufthansa Group had no Gulf carrier partnerships, unlike its main European rivals.
The threat from low-cost carriers was also growing, with EasyJet and Ryanair encroaching on Lufthansa territory, among other developments.
SCORE MISSES
Piling more pressure on Spohr, the group's cost-saving effort, named Score, was about to fall short of its target, while analysts were questioning the group's reliance on bigger, four-engined aircraft amid wobbly yields and an industry trend towards fuel-efficient twinjets. Spohr was under no illusions about the size of the task ahead as he continued to reshape the group's cost structure. Resolving the labour dispute was central to that.
"In Lufthansa’s case it was obvious. We had [labour] agreements from the days when we were state-owned and we had to go through that," says Spohr.
That pressure to resolve labour disputes quickly tested Spohr's mettle. The pressure increased even further in March 2015 when a Germanwings flight crashed in the French Alps, killing everyone on board. By most accounts, his handling of that incident and a strike-ridden three years has been impressive, marked by a cool head and affable manner.
"Part of the CEO job is not to let others see… how much stress you are under, or at least try to not let others see how much stress you are under," Spohr says. "My line I always used to stabilise myself was: rather a few days without Lufthansa than one day without Lufthansa [existing] at all. And that put things back into perspective. But it was difficult.
"We have to remember we've put our stakeholders through a lot in the past three years – shareholders, customers and staff. Labour conflicts, share price – which dropped after the bubble of promising the market too much kind of broke. Obviously our customers had to go through these labour conflicts – and had 29 days of strikes."
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Despite a slight drop in its full-year 2016 results, the group's recent financial performance has been positive and Spohr is able to look to the future much more confidently than he could a few months ago.
While not quite a lifer, Spohr has been with Lufthansa in various roles for the vast majority of his career. He initially trained as a commercial pilot with Lufthansa Flight Training before a brief interlude to complete a management training course with Deutsche Aerospace. Spohr then returned to Lufthansa Group in October 1994, eventually becoming Lufthansa Cargo chief in 2007, then head of Lufthansa mainline in 2011. He took on his current role as group chief in May 2014.
That left him in charge of what is, in terms of number of staff, one of the largest airline groups in the world; a substantial challenge that means he has oversight of five large business segments: passengers airlines, MRO, catering, logistics and other activities.
"Any group the size of Lufthansa – 130,000 people – you need to find decentralised management structures to keep control of the business," he says. "Not only cost control – quality control, control about motivation of staff, control about ethics and compliance, I could go on.
"There is no way the small board could control such a huge company the size of my home town without decentralised controls," he adds. "So years ago we established a structure by spinning off Lufthansa Technik, Lufthansa Cargo, IT, catering, flight training – so we created a decentralised management structure where basically cost control is done locally and divisionally."
But does this decentralised structure make it harder to judge how the business is performing?
"Part of my thinking is we should focus a bit more on the overall group result than just individual results," Spohr says. "We went a bit too far in decentralising the success or non-success element. In the end it is one group."
Spohr is firm that airline operations are the core of Lufthansa's world. Indeed, he suggests that when he took his current role, he "brought some clarity back" on that issue.
"As someone who ran Cargo for four years and Lufthansa airline for almost four years, the core of Lufthansa is the airline," he says. "We are not a financial holding. We are not a conglomerate. In the end we are an aviation group centred around the airline business. and that again is centred around the Lufthansa brand.
"People thinking about Lufthansa think about our airline first. And they should."
The structure of Lufthansa’s airline business is a key area where Spohr has instigated major changes in the face of tougher competition. Germanwings, the low-cost unit covered by the same pilot contracts as Lufthansa mainline, has been phased out, having once been the centre of its budget expansion plans. Eurowings, and its separate labour agreements, is now the focus for that growth, leaving Lufthansa mainline to concentrate on premium markets.
"By establishing Eurowings as part of our dual-brand strategy, we could focus more clearly on Lufthansa being premium," he says. "Investing into products on the ground, investing into our crews, investing into IT – especially on the distribution side.
"Part of the recent commercial success we've seen in Lufthansa mainline comes from the fact that we are so much more focused now on premium because of Eurowings covering other markets, other products, other customers."
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Spohr is positive about recent yield developments, particularly in those premium markets, where there has been a focus on transatlantic growth.
"The yield to really look at is the yield after fuel effects," he argues. "I don't think we do that enough in this industry. So my positive outlook for this year is not only based on our cost development; it is also even more based on our yield development.
"You also need to be aware that with our premium positioning, having 100 first- and business-class seats [on an Airbus A380 or Boeing 747-8], Lufthansa is especially focusing on the upper end of the market where we have seen positive developments."
Crucially, Spohr says his optimism about the mainline operations has been boosted further by the recent labour agreement, which will allow it to take on trainee pilots for the first time since the previous agreement ended in 2012.
Under the dual-brand strategy, the Eurowings brand now leads its low-cost efforts, with secondary airports a key consideration.
"We don't want to withdraw to hubs only. So we wanted – and needed – a business model for those secondary German, Austrian and Swiss markets that are in themselves very powerful business centres," he says. "We all know, especially in the geography of Germany, there are other potential economic centres apart from Frankfurt and Munich that we don't want to give up."
The second function of Eurowings is an attempt to head off the competition from low-cost carriers, and hoover up underserved leisure markets, particularly as Air Berlin undergoes a fundamental transformation into something much smaller.
"We know that there is – especially on the leisure side – a customer group which is just basically choosing their products by price. That also applies to long-range," notes Spohr.
Eurowings was established ahead of long-haul low-cost efforts from European rival groups Air France-KLM and IAG. "It feels good that my other two big European competitors have followed suit," Spohr says, acknowledging that the group had been "somewhat slow maybe" to respond to short-haul low-cost challenges.
Lufthansa's strategy sees Eurowings operations from the group's main hubs, raising the question of cannibalisation. The low-cost unit is expanding at Austrian's Vienna home, for example.
"We do operate Eurowings out of our hubs," Spohr says. "Usually we try to focus on more point-to-point demand. Go off the banks in terms of timing. Go for efficiency of the aircraft rather than just hitting the perfect bank structure as you do in a hub. And we have a much more leisure-orientated destination portfolio."
Spohr sees this development of its dual-brand strategy as a positive thing: "In the end, all these markets overlap. You cannot cut one market from the other."
Eurowings is also central to Lufthansa's response to low-cost carrier incursions on its territory. Swiss, for example, faces a big EasyJet presence at its Geneva base, while both the UK carrier and Ryanair have significant German presences; notably, Ryanair now operates from Frankfurt Main. Spohr says Lufthansa is well-placed to handle this competition.
"We believe that with Eurowings we have a response if needed. And I think Lufthansa in all its strength has also learned in the last few years to take any competitor seriously.
"Nobody has yet endangered Lufthansa, but surely many have challenged us. So if there's a new competitor as we now have in Frankfurt… we learned that they can be successful and we can be successful. So I think to be honest in Europe right now it's not the successful carriers hurting each other, I think it’s more the ones who are less successful who are getting squeezed."
BRUSSELS STRATEGY
Despite this confidence, the highly telegraphed absorption of Brussels Airlines has led some analysts to question how the Belgian carrier's business model sits under the Eurowings brand. For Spohr, the answer is obvious, even if he acknowledges a business-model gap does exist between the two.
"Both Eurowings and Brussels are hybrid models," he says. "They are not pure point-to-point models because in the geography of our home markets – Germany, Austria, Switzerland, Belgium – there is no such city that you don't need connecting traffic for long-range. You can do it in Paris, do it in London, do it in Tokyo or New York – but in my home market, there is no city big enough.
"On the other side, they are both not big enough to create a full-fledged hub as we have in Zurich or Munich. Therefore, this hybrid model might be another 10% apart – that's a job we are now doing in the initial phase of creating more synergies."
The incorporation of Brussels Airlines raises the trend of consolidation between European airlines. Lufthansa Group has been at the centre of much speculation in this area recently, and Spohr acknowledges that there is plenty of room for further development.
"I think in Europe we're not striving for the consolidation level in US numbers where by now the top five carriers have 90% of the market," he says. "But the fact that the top five carriers in Europe only have 43% of the market is definitely too low."
Two carriers often linked to Lufthansa in recent months are two businesses that might lack appeal, financially at least: Air Berlin and Alitalia.
On its fellow German operator, Spohr acknowledges an interest beyond a current arrangement under which Lufthansa Group is wet-leasing 38 aircraft from the beleaguered carrier. "Of course, there is therefore an interest to potentially go further," he says. "But there are three hurdles to be overcome. Any of these could stop it," he adds, citing Air Berlin's cost structure, its debt and unavoidable anti-trust concerns.
When asked if Lufthansa is interested in acquiring Alitalia, he is more blunt: "The Italian market, indeed. Alitalia as it stands now, no."
WIDER PARTNERSHIP
Air Berlin and Alitalia are also notable as having received significant investments from Etihad Aviation Group in recent years. Earlier this year, Lufthansa announced a partnership with Etihad, mainly covering catering and MRO. But will the partnership survive the departure of the Abu Dhabi group's chief executive James Hogan?
"The partnership we established goes beyond individuals because it creates a win-win," says Spohr. "And you might recall that even in the highest public attention on the competition between the Gulf carriers and European carriers, I always said I am open to partnerships as long as they do offer win-win."
Lufthansa Group's range of services means that Spohr – a sometime high-profile critic of perceived Gulf carrier subsidies – has to look beyond competition with the region's big three.
"All Gulf carriers are important customers of our Lufthansa Group – be it MRO, catering, IT, flight training. Specifically on Etihad, we have found synergies in taking part of the capacity of Air Berlin, which then helped Etihad as an important shareholder. We were able to create codeshares on routes which one of us has not been operating… and we have some interesting agreements to sign on catering and MRO.
"Is there room for more? If there is a win-win out there, why not?"
The Etihad partnership raises questions around Lufthansa’s existing relationship with Singapore Airlines, for example. SIA might reasonably be concerned about any deepening of Lufthansa's Etihad partnership and the impact it could have on the German group's Asia strategy.
"They need to be complementary. Otherwise we wouldn't do it, because there is a clear hierarchy: our own metal and joint ventures first, other partnerships second," Spohr clarifies. "So we wouldn't endanger our own metal or a joint venture with a codeshare partnership with anybody."
Spohr notes that Lufthansa now receives 75% of its intercontinental revenue through its joint ventures with Air Canada, Air China, All Nippon Airways, SIA and United Airlines. He describes this level as "unique among the industry", reflecting the "overproportional" importance of joint ventures to Lufthansa Group.
It operates those services using a fleet of around 160 widebodies. More central to its fleet strategy is the impact of on-order twin-engined widebodies such as the A350 and 777-9 and the fundamental impact they have on traditional assumptions about the group's hubs. Flight Fleets Analyzer reflects Lufthansa mainline's current focus on large, four-engined aircraft, showing it has 31 A340s, 14 A380s and 32 747s in service, within a widebody fleet that also features three A350s and 19 A330s.
"Historically, Frankfurt always had an advantage because it had extra-large aircraft with the lowest unit costs, and our three smaller hubs – Zurich, Vienna and Munich – were somewhat disadvantaged by having smaller widebody aircraft with high unit costs," Spohr says. "That advantage of Frankfurt will disappear now gradually – and the disadvantage of the smaller hubs will disappear – so that will allow us to play the multi-hub model at a much higher level of perfection in the next few years."
Consequently, Spohr sees "no need for additional A380s", even though "passengers love it – all 14,000 who fly it every day with us".
Despite a perception in the industry that Lufthansa's fleet make-up has been somewhat conservative, Spohr has also shown himself to be fully aware of the myriad disruptive factors circling the industry; indeed, he has turned Lufthansa Group into a disruptor on global distribution system fees, controversially introducing a charge for flights booked outside its group websites in 2015.
"It was a brave move, we were aware of that, but even as a legacy carrier with the strong history of Lufthansa, sometimes you need to be disruptive. And I think we've chosen the right topic to be disruptive. Even though maybe others talk more about being disruptive than we do, we just did it."
As Spohr continues to plot Lufthansa Group's future shape, global geopolitical uncertainties and security worries show no signs of abating. Some of its biggest rivals have been at the centre of some significant developments recently: the Gulf region has been mired in a dispute over Qatar's alleged support for extremists amid uncertain traffic growth, while Turkish has been hit by terrorist incidents and the fallout from the country's attempted coup. While Germany and the surrounding region has not been immune from troublesome incidents, Spohr is still keen to highlight one of Lufthansa Group's biggest advantages: its home markets.
"I have to be honest, having a home market which is called Germany and Switzerland is probably not the worst thing in the world right now," he concludes.
Source: Cirium Dashboard
