New Delhi: After buying weaker airlines in Europe, Deutsche Lufthansa AG plans to focus on cutting costs and integrating its acquisitions this year.
Europe’s second largest airline has ruled out fresh takeovers in the near future, but it says that given the choice, it would prefer buying a stake in a European carrier rather than an Indian one.
Wolfgang Mayrhuber, 63, chairman of the board and chief executive of the Cologne-based company, explains in an interview why Germany’s flag carrier is intent upon strengthening its network in the continent. But the Indian market is by no means unimportant for him. Mayrhuber also said Lufthansa is planning to offer services to New Delhi using the superjumbo Airbus A380—the first of 15 which it inducts this summer. Edited excerpts:
Where is global aviation going after a poor 2009?
Aviation in history has shown that you always grow with the factor of two to gross national product. At the same time, if the economy is shrinking, we also have the downside. Last year’s financial crisis...meant that we had not only the shrinking but also the failure of business traveller (who had fewer reasons to travel). There was a credit crunch and the yield dropped over-proportionately.
Business strategy:Deutsche Lufthansa chief executive Wolfgang Mayrhuber says his company buys out other airlines only when it is certain it will be able to make profits in the new market. Ramesh Pathania / Mint
The yield decline of last year was more or less the compound of last 10 years, which wrapped the whole industry in despair. Iata (International Air Transport Association) will record $11.6 billion (Rs53,592 crore) losses for last year, which is more than double (of what was) anticipated, even though the fuel prices for a long period of time were low.
What does it mean? Everyone adjusts cost internally but also externally, many reduced capacity and slowly the business seems to (be) picking up. The problem was not so much in the area of business to consumer but business to business where we have seen the decline. Where is it going? I think the economy in this world will not stand still. I do hope that we don’t have new backlash effects from the financial markets, (of) which one can never be sure.
Despite the economic slowdown, you acquired Austrian Airlines. Was it because it was an asset available cheaply?
No. I mean if you buy something cheap and at the end of the day it does not create any value, you shouldn’t do it. Our strong belief is that Europe is so fragmented... We don’t have mega cities that will create market by themselves and the question is how can Lufthansa (in the) long term offer the best product in Europe.
The decision we made on Austrian was like Swiss—that we can synergise with them, We can generate cost reductions, we can generate revenues and the brand is ok, the quality of the product is well received. Vienna is not a very huge market, but for us an important market and a market we will stay (in). It’s a door opener for us into the eastern countries.
Do you plan to buy a stake in another carrier?
Yes, we would be able and willing to do more... We only do deals if we are pretty sure that we can take responsibility for that market and make money.
For the time being—for this year—prime priority is to straighten the profitability issue in Austrian (Airlines), work on integration of SN Brussels, (and) to adapt our cost structure to the new yield levels. From there on, as soon as we see these things running on their own, we would be ready if someone says I am ready to look at other things.
You recently said you will cut down costs by €1 billion (Rs6,530 crore) until 2011. So do you see no acquisition opportunity between now and then?
It could be. I mean our balance sheet is strong enough and we have enough cash that we would be able to buy something.
The question is how many activities would you like to do at the same time. And after the huge price decrease per ticket last year and (given) the fact that Lufthansa was very profitable in the years before, it’s natural to go back to the drawing board and say, well where have we put on some fat? How can we tweak this out? And we have to adapt to the current yield level and the company has to adjust to it. So for all practical terms, I don’t see any (acquisitions) in 2010.
Which areas would you consider for consolidation?
We are focusing on Europe. The only investment outside of Europe that we have done is New York—JetBlue (Airways Corp.). It was our first and biggest inter-continental destination and it was the only one where we did not have any partner.
I think we need to make sure that we are strong in Europe.
If we compare with British Airways, they have London and they have learnt that London is strong enough to generate business because of its size, financial strength, tourism attractiveness, because of the history of the country and the language. Now, Germany is physically in the centre of Europe and we have the growth potential to the east. Everybody who comes to Europe does business in Italy, Poland and that’s where we have our network that we can offer to them.
How have your talks gone with Jet Airways (India) Ltd to bring it into Star Alliance?
Jet Airways is actively—that was the communication outside—pursuing options to become a member of an alliance system.
And I would not be surprised if, because of the relationship that they have, for instance, with us and others, that they chose Star as well. And as I said before, we can do one after the other only.
I know they have shown interest in Star Alliance or other alliances, and my feeling is they would also be welcome. But first we work with Air India.
What about your plans for an aircraft maintenance, repair and operations (MRO) facility and a cargo airline?
Sometimes you think about something, but then don’t do it.
Why didn’t we do the MRO business? Because the market was not right. The market was simply projected to go this way and it went this way (gestures with his hands). And if we would have continued training people, investing in facilities and don’t have the volume, it didn’t make sense—especially in the airframe overhaul side.
Will Lufthansa be interested in investing in India’s domestic aviation sector if 25% foreign direct investment is allowed? Have you been approached?
No, we have not been approached by (Indian) carriers. If we have €200-300 million left, I would prefer to invest in the vicinity, where it would automatically generate more benefits.
We have to have a certain size in European (market) before we think in this other term.
How do you plan to challenge West Asian carriers, which are eating into your market share by offering cheaper tickets in India with a one-stop ride to the US and Europe?
I think, they now have 280 flights (a week)—the three carriers Emirates, Etihad (Airways) and Qatar (Airways). They have managed to build up a very effective modern hub system in this region. (It is) also very cost effective, and with this way they can pull traffic from Africa, from India, from Europe and juggle it around.
So it’s an option for customers to fly via Dubai or via another hub.
The big difference... (is) that India and Europe have a natural requirement because of the population and because of the trading aspects. In the Arabian peninsula, this is not a natural desire.
It’s business logic to implement there, but it’s (traffic) not originating in that market. So it’s a transfer point logistically. They do this business with their means. It’s amazing how fast they grew and the only way we can compete there is with our network offering, efficiency (and) customer conviction that we are a doing a good job. That’s all.
Does it make sense for you to set up a regional hub in West Asia?
No. We have to drive our company with our means. I think we don’t have an integrated situation as they have—airports, air traffic control, travel agents, airlines—everything is integrated. The question (is) wouldn’t it make sense to have a hub in India if the market originates in India? Because it’s value that’s generated here and it’s attractive. I think as the infrastructure is growing, I have seen Terminal 3 (Delhi airport) before we came here, there are options in the future.
Our partners (airlines in India) should set it up, we will feed into it.
Lastly, will one of your Airbus superjumbo A380 fly into Delhi from Frankfurt ahead of the Commonwealth Games 2010 in October?
That’s what we are planning. We have seen that the airport is getting ready for the A380, the bridges (aerobridges), the runway is finished.
I hear that there is an issue with night curfew, which would be bad because it would limit that operation. But I also learnt that they are refurbishing another runway which is not limited during night curfew. Delhi gets ready for it and when Delhi is ready, we are ready.