German flag-carrier Lufthansa celebrates its 60th anniversary in April. New CEO Carsten Spohr has only been in the job less than a year but he’s determined to turn around the fortunes of Europe’s largest airline group, which means more clashes with the fast-growing Gulf carriers, German labour unions and anyone else looking to get in his way
Carsten Spohr is running late for our 9am meeting, which is unusual considering a) he’s German, b) he’s a trained pilot and c) he’s the chief executive of the Lufthansa Group, Europe’s biggest airline company.
As we wait, the door of his suite swings open and his breakfast companion is revealed to be Sir Tim Clark, president of Emirates Airline. What could they possibly be discussing over croissants and coffee?
The rival carriers haven’t always enjoyed cordial relations and when Spohr took over as Lufthansa boss in May last year he quickly reignited a long-running war of words with the Gulf carriers, claiming the likes of Emirates and Qatar Airways are not operating on a “level playing field”.
Spohr’s predecessor, Christoph Franz, had previously clashed with Gulf carriers and in 2011 Lufthansa was embroiled in a row with Emirates Airline over landing slots in Germany.
The German airline allegedly lobbied Chancellor Angela Merkel’s government to stop Emirates gaining additional landing rights in Germany and Clark famously accused the German flag carrier of mounting a deliberate campaign to undermine it and of planning to “take the Gulf carriers down”.
Lufthansa, along with other European operators, has long claimed that the Gulf carriers use unfair government subsidies to finance aircraft deals and to take market share from existing airlines.
It is highly likely that subsidies was indeed a topic of conversation as Clark is currently embroiled in another increasingly bitter war of words over the same issue, but this time with the big three US carriers.
Delta Air Lines Inc, United and American Airlines have asked the White House to look into the financial statements of competitors from Qatar and the UAE, which they accuse of receiving more than $40bn in government subsidies since 2004, and have called for the open skies agreements with both countries to be renegotiated.
Despite the denials by Emirates and the cosy breakfast chat, Spohr seems unmoved in his stance and almost seems pleased that the Americans have now joined with the Europeans in their opposition to the trio of fast-growing Gulf carriers.
“It is an argument we have been using in Lufthansa and in France, if I can speak for my Air France counterpart. This is the American cowboy version of having the discussion, but the discussion itself, Lufthansa has been having for many years.
“I leave it to those who have written the report to know how much truth there is but I think we would all agree that without government support the success of these three parallel Gulf carriers’ growth, basically outgrowing each other, wouldn’t have been possible.
“When does it start to impact the other side where there are no subsidies? That is where things come to a level of discussion which, in a global industry, needs to be discussed,” he says.
This is certainly an issue Spohr feels passionate about and he gets more animated and forceful in his language as the conversation continues. “I see two levels. One is the consumer view, where the consumer has a choice, which is what we believe in. In our part of the world, Lufthansa has been the primary choice for consumers for 60 years and I am not afraid of anybody. The best way to fly is to be on a Lufthansa airplane and the way I like to put it is ‘Lufthansa is to flying what a BMW is to driving’. Any competitor who wants to compete with my product, my people, my crew, my engineering or my safety level - then be my guest.
“There is a second level; That’s the framework of competition and there is a clear framework between competition and fair competition and that is how the Western world works. Why don’t we talk about this in other industries? Because the WTO [World Trade Organisation] mechanism makes sure that the level of fairness and freedom of competition is in line. Aviation is not regulated by the WTO and therefore I need to make sure that whenever there is any kind of competition, fair or free, I will match it. That is the pressure we are putting on our government to make sure competition and Lufthansa and the Gulf carriers is as free as it is fair.
“The Americans are now moving a big step forward saying it is not fair and therefore it cannot be free, which is in line with what we have said for many, many years. When it comes to the individual passenger I am happy to compete, because I think our product is superior. But when it comes to the framework of how competition is set up it needs to be, as I said, only as free as it is fair, not the other way around.
The issue certainly has generated heated and emotional debate. In an interview on CNN, Delta Airlines CEO Richard Anderson blamed his company’s 2005 bankruptcy on “Arabian Peninsula 9/11 terrorists” and hit back at Gulf carriers’ assertion that the
US airlines had received backdoor government subsidies via Chapter 11 bankruptcy protection.
“It’s a great irony to have the UAE from the Arabian Peninsula talk about that given the fact that our industry was really shocked by the terrorism of 9/11, which came from terrorists from the Arabian Peninsula, which caused us to go through a massive restructuring,” Anderson said. Following much criticism, Delta issued an apology, which was quickly rejected by Emirates.
Spohr appears to view Anderson’s comments with some understandable unease, but he believes the underlying argument remains as strong as ever: “You might argue if the right words have been used, or they might not have gone as emotional, but the discussion behind it, how liberalised, how private is aviation and how much aviation is subject to governments supporting, even destroying the business…that discussion, in my view, is there to stay. It will hang around for a while and it will not just disappear in the next few weeks.”
While Emirates and Lufthansa appear to be making inroads, even on an unofficial basis, you get the feeling the same cosiness doesn’t exist when it comes to Abu Dhabi’s Etihad Airways and its stockpile of equity stakes in major European airlines, including Alitalia, Air Serbia, Aer Lingus, Darwin Airways and Lufthansa’s national rival, Air Berlin.
Last summer, the European Commission launched an investigation into Etihad’s investments in European airlines, as part of a wider examination into whether foreign ownership of European airlines complies with EU airline licensing rules.
Later that year, German authorities threatened to veto 34 codeshare agreements between Air Berlin and Etihad for the winter 2014 period and Swiss authorities were looking like they were going to throw cold water on Etihad’s deal to buy a stake in Darwin Airways, which is currently being rebranded as Etihad Regional.
“Our commitment to work with Darwin Airline remains strong and will not be compromised by the aggressive actions of competitors,” Etihad president and chief executive officer James Hogan said in an emailed statement in October in response to a report by Swiss-German newspaper 20 Minuten, which claimed the partnership was struggling in the face of strong competition from rival Swiss International Air Lines (SWISS), Lufthansa’s sister airline and part of the Lufthansa Group.
When pressed on the issues and Etihad’s deal to buy a stake in Alitalia, which was finally rubberstamped by European authorities in November last year, Spohr is very direct on the matter.
“In Germany and Europe we believe in the law and whatever the law allows to be done shall be done, like it or not…if it’s illegal it shall not be done. I think there are two levels here: is there foreign ownership and control, which the governments and authorities are looking at. And the second issue: are the bilateral frameworks - in this case the UAE and Germany - are they allowing certain things or are they not allowing certain things?
“When it came to the codeshare, not even by our own work, but someone else’s - the European Commission [EC] - it turned out that there was a, let’s say, illegal codeshare in place which, in our view, has to come to an end as it is not allowed by the bilateral agreement.
“They were given an extension, in the case of Berlin another half a year, and we agreed to it as you should try to protect the consumer’s interest as well.
“But that is the situation and at Alitalia there are some issues about slot usage at Linate [airport] in Milan, which the commission is looking into [to see] if that is something which is against European law. Again, in these situations we believe in the law being applied and that’s what the European system is built on.”
While Spohr may be against the extent of codesharing being allowed between Air Berlin and Etihad, German authorities appear to be softening on the matter as Germany’s Federal Aviation Office this month approved the summer flight schedule between both airlines, including all codeshares that had been submitted.
In relation to Darwin and its rebranding as Etihad Regional, Spohr is in favour of the concerns being voiced by Switzerland’s Federal Office of Civil Aviation about the makeup of the deal.
“If you respect the legal system of a country you are doing business in you better check that legal situation before you act. There was an expectation that things would sort out one way or another, but that is not how a German or a Swiss legal system works... I would have looked at that before... If you had looked carefully into the legal system before you invested you would have known you could not do this.”
You can see why Spohr is not in favour of Air Berlin and Darwin feeding capacity from Europe to Abu Dhabi. In October, Lufthansa announced it would not fly between Abu Dhabi and Frankfurt in the summer of 2015 because overcapacity on the route meant it had become uneconomical. It pointed the blame squarely at Etihad and Air Berlin for the overcapacity on routes to Abu Dhabi and declared that their codesharing arrangement was “unjustified.”
One of the first things Spohr implemented when he took over was to begin upgrading Lufthansa’s business and premium economy class offerings on Middle Eastern routes, amidst strong passenger growth in the region.
“The premium growth in the UAE has been impressive over the last months with more sales potential at the horizon,” Lufthansa’s UAE manager said in May 2014.
The announcement came at the same time as Etihad launched ‘The Residence by Etihad’ on its A380s. Located on the upper deck of the Airbus superjumbo, The Residence accommodates up to two people and includes a living room, separate double bedroom and ensuite shower room, use of a personal butler trained by the Savoy Butler Academy in London and is described as “the world’s most luxurious living space in the air”.
However, Spohr says he has no plans to follow the Abu Dhabi carrier’s lead and almost seems dismissive of the idea. “Part of luxury is style and there is no way to travel in more style than with Lufthansa. There may be a way to travel in more luxury but there is no way to travel in more style. We are not competing for the number of golden faucets at Lufthansa, we try to create a European upper market travel experience and style has a lot to do with it.”
While he may not be going hyper luxurious, Spohr is bringing Lufthansa’s new long-haul low-cost flights to Dubai. Under the Eurowings banner, services will start from October 25 to destinations from Dubai World Central and one-way ticket prices will start from 99.99 euros ($111).
With all this in place, managing Europe’s largest airline is no easy feat. Lufthansa said in February that it will not pay a dividend for 2014, deciding instead to conserve cash for restructuring and to pay for 32 billion euros ($37bn) worth of planes on order.
The company slumped to a loss of 732 million euros in 2014 from a profit of 407 million the previous year, on the basis of German GAAP accounting standards. However, according to the international IFRS standard it posted an operating profit of 954 million euros for the full year, against a target for 1 billion, on revenue flat at 30 billion euros.
One issue that is ongoing and affecting Spohr’s balance sheet is the carrier’s ongoing dispute with its pilots. This resulted in industrial action late last year, which cost it an additional 62 million euros, taking the total amount of operating profit lost to strikes over the course of 2014 to 232 million euros.
“To the staff of Lufthansa, I never go without saying this is a core asset for any airline,” Spohr says. “Does it require restructuring in some parts of the business? In my pilot strikes, yes it does. But even with the resistance there is, for the future
sustainability we have to overcome that resistance to make the success story work in the future.”
I point out to him that Qatar Airways CEO Akbar Al Baker once told Arabian Business in an interview two years ago that western companies were jealous of Gulf carriers not having to deal with unions and that the West’s unemployment problems were “caused by unions making companies and institutions uncompetitive and bringing them to a position of not being efficient.”
Spohr has a rather witty comeback when I read him Al Baker’s comments: “We want to go back to the negotiating table to have constructive discussions and if that doesn’t work my back-up plan is to hire Akbar as my union advisor.”
Despite his comical aside, would Spohr, for all his blazing talk of a war of words with the Gulf carriers, seriously contemplate a formal partnership with any of the three big players? Or even a situation where one might join the Star Alliance aviation group Lufthansa helped set up?
“Memberships have been discussed in this industry for years. They only make sense when there is a win-win to both [sides]; the existing members of the alliance, the alliance itself and to the new airline joining the alliance... Apparently this has not come out to a win-win situation otherwise things would have happened before.”
In April Lufthansa celebrates its 60th anniversary, while in May Spohr will celebrate a year at the helm. With his mix of feisty determination and German directness it is to be hoped that he’s the right man to take the carrier through its current troubles and fly it to a new, more profitable future.