The global aviation industry has been going through trying times since mid-2008. Oil prices have been playing truant, there has been a fall in traffic, premium travel has slumped and yields have been on a free fall.  German airline Lufthansa, however, seems to have weathered the storm and has, in fact, spent most of 2009 buying up or picking up a stake in rival carriers such as Brussels Airlines, British Midland Airways (BMI) and Austrian Airlines. Lufthansa’s chairman of the executive board and CEO Wolfgang Mayrhuber was in India recently. Speaking to BW’s Anjuli Bhargava, he said Lufthansa is not interested in buying  a stake in an Indian carrier. Excerpts:

How bad have the past two years been and when will the industry recover?
This industry is one of the most competitive. It is capital intensive, labour intensive, and is critically dependent on the growth of the economy. We usually grow with a factor of 2 to the gross national product (GNP). At the same time, if the GNP falls, we shrink with double volume. If we look at the past two years, the airline industry has suffered massive losses as the price decline was extremely strong and was backed by volume decline. IATA (International Air Transport Association) made an announcement recently that airlines have lost revenues to the tune of $80 billion during the period.

As far as the second part of the question goes, we are not dreaming of a miracle. The world economy can only grow if people communicate with each other through travel and with trade picking up. We are seeing small signs of demand picking up again, but even if volumes come back, it may be a while before yields reach the level required for the industry as a whole to be profitable. Yields may not rise enough even in the long term, so we need to adjust our capacities and cut costs.

How have airlines like yours adjusted to the slump in premium travel? When the recovery happens, what will lead it?
We have seen the biggest decline in the economy has been business-to-business. Business-to-consumer stayed much more stable in every segment regardless of country, region and area. Discretionary spending was not as badly affected. Business-to-business was hit because if companies do not have the financial pipeline to go into fresh investments, premium travel also stalls. The credit crunch has now eased and we are seeing investments beginning to take place... we will see business-class travel pick up again. My strong belief is you cannot bank on virtual business. There is only real business, and in a global economy, this can happen only with travel. As far as growth is concerned, this has happened ‘over proportionately’ in the low-yield area of the spectrum for the past 40 years. This is true across sectors. The second car in a family in developed countries is cheaper than the first. The broader we reach out to the community, the more likely it is that we get people who are travelling on a budget level than on mobility desires.

Then the market is likely to move towards low-fare airlines...
People tend to say that passengers will exchange one vis-a-vis the other. I am saying no. There will be Mercedes, BMWs and Audis in this world, and there will be people who want to own these cars. But there will be many more in this world who aspire to a Volkswagen or a cheaper car. It will not be a situation that those who have or aspire to a Mercedes will exchange it for a Volkswagen. It is only a question of relative growth. Carriers like ours, which were born at a time when budget carriers were non-existent, have to adapt to the fact that we want to capture both markets.

Lufthansa is a classic example where we have products to capture the entire array of products from a classical no-frill, budget airline offering (Germanwings) to price-worthy economy class travel globally right up to first-class travel and even a private Jet service. People want to have the choice and make their own decisions. The same man who is
taking his wife for a holiday on his wedding anniversary may choose to fly first class for the trip, and for a short haul flight, where he feels he doesn’t need any specific service he may choose to fly a budget airline. For Lufthansa, in terms of volume, the highest growth is always at the lower, cheaper end. In terms of value, it is in the front.

What have airlines, including yours, done to increase yields?
Nobody was able to increase yields. The yield drop last year was roughly the compounded yield drop we had in the last decade. This drop varied across regions but this is what it was for Lufthansa. The capacity that was in the market was not adapted fast enough to the fall in demand. This is because a lot of airlines don’t own their aircraft but lease them. They have cashout anyway... they choose to fly them at the cheapest possible price.

How have airlines dealt with the rise and fall in oil prices — anything other than hedging?
Not everybody hedges. Some gambled, some didn’t have the money to hedge. We follow a very stringent hedging policy — roughly 85 per cent of our fuel needs within the next 12 months are hedged. We were profiting when fuel prices were rising from $40 to $145, and we lost some money when oil prices collapsed. We did this under the assumption that when the oil price goes down, the economy grows. But for the first time in history when the oil prices were going down, the economy was also down so it was a double dip. But we are not guessing where the fuel price will go. We simply lock the price in so we are not at risk.

In India, the market is dominated by the low-cost airlines but in Europe, the larger low-cost airlines such as Ryanair and easyJet seem to be the only ones giving legacy carriers a run for their money…
That’s not true. There are many no-frill airlines in Europe, too. But Europe has three specific situations. We always had a huge traditional charter operation. In
Germany, 10 years ago more than 50 per cent of the traffic leaving the country was through charters — a low-cost, high-density operation for many years. Then, Europe in terms of an intercontinental operator is one of the most competitive markets because the distance in flight time between the main hubs (London, Frankfurt and Paris) is one hour. The longest distance between two hubs — Frankfurt and Madrid — is about 2.5 hours. In the US, hubs are 5-6 hours away from each other. So, competition among carriers is higher in Europe. Then we have high speed trains, the autobahns — the competition is intense and that is why our prices for short haul are very low compared to other regions. Germanwings grew from three airplanes five years ago to 26  today. They will be growing further next year. In our own fleet, we offer a low-price product for people who don’t need much flexibility.

Through the downturn, Lufthansa has been aggressively buying up airlines in Europe. What is the logic behind this?
We are in the business long term so we try and put ourselves in our customers’ shoes. What are we really selling? Yes, we are selling a flight but what are people really buying? They are not buying a flight but trust and mobility. Network is important, connectivity is important, options to transit are important. Since Europe is a very fragmented, decentralised market with a number of smaller cities, we thought we need to have best connections within Europe. Take for instance, the Austrian or the Swiss market. These markets are there, but we can offer to these markets our global network and we can bring business to them through our global network.

But isn’t it a challenge to try and integrate with airlines that have different cultures? Isn’t it easier to grow organically?
We are doing both. We grow organically and we are growing through buyouts. In the past decade, Lufthansa’s revenue doubled. This was not through consolidation. Yes, if we were to completely integrate and make a cocktail, I would agree with you that it is better to grow organically. But that is not our concept. Yes, we are buying airlines. But we are leaving the airlines as they are with their specific service characteristics. We give them the technology and other competencies, and in the back office we synergise our operations. For instance, insurance and fuel hedging can be done together to everyone’s advantage. We are not looking at blending everything. They are serving their markets. It is like a hotel. Passengers come to Vienna or want to transit or stay in Vienna. It is not like a manufacturing unit where you produce at the cheapest place and then sell to everyone.

Was 2009 a good time to buy — in terms of getting the airlines cheaper?
The wind of opportunity is not always there. It could come at a time when the airline is willing to be sold. And we had to make a judgement. Is the reason why they are in a distressed situation something we can fix? Is it just the market conditions? What kind of process can we instill to make them profitable? We also take a lot of responsibility for the market. As far as price is concerned, both parties need to agree and come to a common price. There is no free lunch. So I would say the buyouts were done at a fair price.

The Gulf carriers in India are taking away large chunks of the market. How are you responding to that?
We can only respond by having a sound product with a lot of connections. The benefit we have is that we have a natural market — Germany is one of the biggest economies in Europe with 80 million inhabitants. The Gulf carriers don’t have a natural home market, so they are very much depending on sourcing markets. So they attempt to use their hub as a transfer point. A lot of people come to Germany to stay there (60 per cent of our traffic from India stays in Europe) and some go beyond. In Doha or Dubai, a lot of people come to go beyond (maybe 80 per cent transit) and some stay there. That’s the difference.

Would you buy an Indian carrier? India is considering allowing foreign carriers to take a stake in Indian carriers…
We want to be the most attractive European carrier for any intercontinental partner. We want to make sure we can offer you any destination in Europe. So buying a stake in an Indian carrier is not something we would envisage in the near future. We need to do our homework in Europe first.

(This story was published in Businessworld Issue Dated 15-02-2010)