Airline Leader Interview SunExpress CEO Max Kownatzki

Transcript

Michael Bell:Thank you, Marco. Absolute pleasure to be back here at this important summit and realize it was actually a year ago today in Abu Dhabi. I think we were sitting having a similar discussion, Max.

Max Kownatzki:That's when the picture was taken, I think, a year, you know, or a year and a little longer than a year ago, and you as well.

Michael Bell:Anyway, absolute honor to be here with Max. I mean, he's— I'll just say this— one of my favorite people in the industry and has done a remarkable job at SunExpress. For those of you unfamiliar with the airline, SunExpress, joint venture between Lufthansa Group and Turkish Airlines, operates really a leisure business. It's actually 3 businesses in one: leisure, VFR, and domestic. Turkey, with the first 2 being the prominent part of that, bringing people to Turkish sun markets primarily from Europe. Substantial company now. It's— we're going to talk a little bit in a moment here about the growth that the airline's undertaken, but currently up to 77 airplanes, 737-8s, and now MAXs with a large MAX order, 4,000 Staff from 36 countries. Revenues last year hit on $1.8 billion. This is no longer a small company, Max, that you're leading. Max himself, I'm going to say veteran, but he's nowhere near being a seasoned veteran, but he's touched a lot of parts of this business. Management consulting, having spent time at Oliver Wyman in their practice, worked in Australia, Chief Strategy Officer at Jetstar Group, a great company with a strong legacy. Came into Lufthansa Group and served in different roles there, Chief Commercial Officer of Eurowings, their low-cost carrier subsidiary, then Senior VP of Network and Partnership Management of the hub airlines for the group overall, and then through Lufthansa's role, put in as the CEO of SunExpress. It's been a great story, Max. You've painted the picture of the 3 phases initially of, hey, surviving COVID, Regaining strength and then growth. But now, like, you're on a juggernaut growth trajectory. Tell us a little bit about that journey. Maybe just a quick and dirty summary of how you got to this point, and then more importantly, where are you taking the company from here?

Max Kownatzki:First of all, thanks, Michael. Great to be on the panel with you. The first press article that was published in my new job, April 2020, was the 4 most pitied CEOs in the industry because we basically took over an airline right at the beginning of the crisis. And I remember flying to Istanbul to our chairman of the board of directors who, you know, I thought I was going to convince about our reprioritized project list. And, you know, the first thing he said is, Max, you better try to get back to Germany because there's a travel ban as of tomorrow. That's kind of— that was the beginning. We went through some tough times. We had 2 airlines at the beginning. We had SunExpress Turkey and SunExpress Germany.

Michael Bell:Which you've since shut down the German business.

Max Kownatzki:We shut down the German side of the business, which also eradicated basically the German AOC, the European AOC, and hence the traffic rights between Europe and some other places, which we'll get there. We backfilled quite nicely, but back then, obviously, it was not only drinking from a fire hose, it was You know, ice cold water as well. Since then, we've really gone through a fun, fun, fun time. And, and this family spirit that I hope we'll be talking about a little bit about SunExpress has carried this company through crisis. We did a very, very quick turnaround. We had ASK levels. I think I mentioned that earlier, 101% in 2021 already. We already broke even again in 2021. 122% in 2022, 146% last year, and we're operating at 175% this year. Great turnaround story. Again, we had to make pretty significant cuts, as I think all of us have during the crisis. We switched from a 90% fixed remuneration scheme, 10% variable, to a 50-50. And, and we, we really sort of turned that place around.

Michael Bell:That's pretty novel right there. Let's just take that. We'll come back to the trajectory of the company. But explain a little bit what you did with your crew that way and how that was received by your crew, because that's something you could just pull off in any US—

Max Kownatzki:That's true. Actually impossible. Impossible. And the amazing thing is, so we needed— we have, we have our HR, Yasin, here who I think came up with a crazy idea. Was it you, Yasin? I think so. Right. I was like, really? How is that going to work? Basically, you need individual signatures by all employees to do that. We basically said, look guys, we need to cut down and we want to do this in a fair way, so 50% fixed salary, 50% for whatever you fly. At the same time, we promised that the flying distribution would be fair.

Michael Bell:Among the employees?

Max Kownatzki:That's right.

Michael Bell:Okay.

Max Kownatzki:We had a 100% acceptance rate within 5 weeks. Not a single objection. Not a single objection. Coming from a European and American background that is more unionized and with collective bargaining agreements, that was just mind-boggling.

Michael Bell:How has it actually worked out net-net for the crew though?

Max Kownatzki:Fantastic. The great thing is it works in both ways. If you fly more, you make more. Obviously, we're operating at 175% ASK compared to 2019.

Michael Bell:Clearly, you're better.

Max Kownatzki:They are flying more, they're making more money. At the same time though, and this was culturally interesting, in Turkey, you need to— if you take something away, you better have something up your sleeve that you give back. It's a matter of personal authenticity, personal credibility as well. I think the dialogue we struck with our operational staff especially was one based on trust, being open about the severity of the problem, being open about the severity of the COVID pandemic, later the earthquake. This is a country that's gone through a lot of market crises.

Michael Bell:We've talked about this at the last one. Think about Turkish inflation, seasonality, which we're going to come back to, the Ukraine war, staff shortages. The earthquake, COVID, the geopolitics of the region and Turkey being caught up in that, if you will, and the fact that it's a joint venture. You couldn't throw more at the company. Tell us a little bit about what that has meant and how you've embraced the crises, if you will, to put the team all on the same side, if you will.

Max Kownatzki:Well, I think there's a wonderful characteristic about the Turkish people and that is They live in an environment that is constantly changing. The way of solving problems, being agile, being— going with the flow and finding a solution is incredible. I'll give you the example when we had this massive earthquake in the Hatay region. We put up an air bridge within a week with 4 weekly flights. Together with Lufthansa Cargo, with warehouse companies, customs, immigration companies. We, we, you know, brought in evacuation workers. We evacuated people from there. So sort of the dynamic of jumping to action and helping out is incredible. And so I think if you're— if you again talk to your counterpart at eye level and, you know, I'll take you seriously, you take me seriously, I need your help right now. I think that goes a long way.

Michael Bell:You were very transparent with them, why you needed them to do that. They saw that and said, okay, let's go along and do this together. Now it's working out for them.

Max Kownatzki:It's working out. Obviously, we've given back since. We have 2 aircraft orders. I'm sure you're jumping ahead in terms of questions.

Michael Bell:No, we're good. Let's come back to the growth story. You're at 77. Placed a big order, I think it was in November at the Dubai Airshow, for how many airplanes?

Max Kownatzki:That was 90. We have another open order of 42, so in total it's 132 aircraft.

Michael Bell:You're en route to 166 airplanes?

Max Kownatzki:166, that's right, in 2032.

Michael Bell:You've called it Route 166.

Max Kownatzki:That's right. For the few Americans in the audience that would listen.

Michael Bell:The few that would understand that. What does this airline look like when you get to You know, the end of Route 166. Dimension that for us so we get a picture of the future SunExpress.

Max Kownatzki:Well, one of the things, you know, when Delta became the largest airline, they had a slogan, bigger ain't better. And there's a couple things I really want to keep and maintain when we get to 166, and that's this family spirit. And I've had, you know, my first flight down to Antalya on SunExpress was Row 1A, and there's this elderly lady coming in, and they put her down next to me and gave her a glass of water and got her bags in the overhead compartment when boarding was completed. They walked her to her seat. To me, sort of this hospitality, I think we've touched on it in a couple of sessions before, this hospitality is amazing, and that's the one thing I don't want to lose. So I'll give you a negative definition. At the same time, what got us here won't get us there.

Michael Bell:Why is that?

Max Kownatzki:Automation, for example, digitalization. We can't gain those efficiencies by just working harder. We need to do things differently. That's where we're looking into a lot of digitalization activities, basically having fewer touchpoints, automating more, Especially topics on sort of internal back-office processes, procurement, for example, HR contracting, things like that, but also even on the customer side.

Michael Bell:So you use some pretty interesting technology in your call center. Tell us about that, if you will.

Max Kownatzki:We do. So we have a couple of different things. So one is you can talk to us on WhatsApp, you can do video conferencing as well. And there's one tool I love especially. This is based on artificial intelligence. It actually measures your, you know, your otomandibular joint and your muscle tension and the expression on your face. And it tells sort of the service agent, you know, whether you're stressed or your counterpart is stressed, open to potentially purchasing, you know, another service. And it even gives you recommendations on what to offer that customer.

Michael Bell:Just based on the facial image?

Max Kownatzki:Facial, voice recognition. So how much tension is there?

Michael Bell:What are you seeing in my face right now then, Max?

Max Kownatzki:I think you're asking about the growth plan for now.

Michael Bell:Is it working?

Max Kownatzki:It's working like a breeze. It's beautiful. We can do a lot more.

Michael Bell:Do you think you can blend this automation digitization agenda, which is necessary and the way the industry is going anyway, with keeping that personal touch in the hospitality? How are you making that happen, if you will?

Max Kownatzki:Well, I think we had a discussion earlier on. I think you want to dehumanize it in areas where people actually don't care about a service agent, and you want to humanize it in areas where I have a problem, I need you to understand my situation, I need your help right now. I shouldn't say this in this group, but I have a lot of people reaching out to me personally via Instagram or my email account, and they're literally looking for personal touch. I think that's where we need to increase while gaining the scale on areas where it's literally just mass and where the customer actually doesn't care about the touch. I'll give you an example. We have mandatory online check-in, and we've been asked, oh, are you trying to make more money with it? Is this another revenue generation opportunity? I was in the UK a couple of weeks ago, and I said, well, look at the Ryanair If you go to the check-in counter and you need to get checked in, it's £55. On easyJet, I think it's £40. We're charging £2.99 if you book it in advance, £4.99 if you happen to forget and you got to do it at the airport. That shows you we're not doing that to make a buck off of it. We're doing it to—

Michael Bell:You actually charge someone to check in though?

Max Kownatzki:Well, if they— you can pre-book it or You can do it online, then it's free. So the only reason we're doing that is to have people pushed into doing it themselves on the phone. If you do it at the check-in counter on your phone, you still don't pay anything. So we're just trying to trigger a behavioral change, just a small nudge. Again, otherwise it'd be £55, not €2.99. It's that kind of stuff. We now have a 65% rate of online check-in. That's what we wanted. So that's the kind of stuff.

Michael Bell:Coming back to Route 166, Where are you going to put these airplanes on? You talk a little bit about the revenue diversification you're looking at, the markets you want to serve, etc. Maybe with that, Max, you look at a lot of the US low-cost carriers that have massive aircraft orders coming in, Spirit and Frontier, JetBlue. One of the concerns they have is deployment. You talked about, I think it was you, about discipline, overcapacity, no one to blame, or that was Dave. How are you going to keep this profitable juggernaut going, having to put all these airplanes on the ground?

Max Kownatzki:Right. I think there's 3 columns. There's the traditional airline business model. There's the aviation-related business where we talked about earlier on insourcing more, gaining control over processes like training, maintenance, things like that. Then there's the beyond aviation business side. On the airline, on the first column, it is obviously we have a tier 1, 2, 3 model. We have tier 1 destinations that are our home turf. We defend them by all means. They're our bedrock basically, and we really try to leverage them as best as we can, which is pretty much the Riviera where we have a market share in Western Europe of 55%. But then we're looking into experiments, and that's the tier 3. So we're now flying to Samarkand, we're flying to Cairo, we're flying to Kuwait, Barcelona, Madrid, Rome, where we're literally trying things. We have 200 routes in 36 countries, northern Finland and things like that. And here again, more of an agile, dynamic organization. So succeed fast or fail fast, right? So if they work out great, they become a tier 2. If not, they drop out again, we try something else. That's one thing. The other thing is that we're expanding also globally. For example, in the winter period where in the past we've had a pretty big seasonality issue, we're now not mothballing any of our aircraft in the wintertime. We're putting them into South Africa.

Michael Bell:Let's talk about that.

Max Kownatzki:Yeah, sure.

Michael Bell:Davis was talking about how airlines very seasonally move their capacity around. You guys are doing something quite interesting. First of all, what is the issue? How much is the drop in your business? Then what are the 2 or 3 different levers you're using to address the seasonality? Sure.

Max Kownatzki:In the past, we'd have about a 30% drop from summer peak to winter trough. We looked at the traditional vehicles, extending the summer period, We diversified in terms of sports travel, golfing, tennis, cycling, culinary travel, archaeological travel. For example, I didn't know there's great ski resorts in Turkey, in the Kayseri region. Culture, like also religious travel, for example. I mean, really, really interesting stuff. So you expand the summer period. That's sort of topic one. The second thing is that you then, for the down time and we're not downtime, but lower period, we deployed aircraft in other markets because obviously, rather than cutting costs in this, we'd rather grow our way out of it with revenue rather than cost. We deployed aircraft in South Africa. We started last year with 2 aircraft. We went to 4 aircraft. We're going to be increasing that very likely even during—

Michael Bell:It's a wet lease operation?

Max Kownatzki:That's a damp lease, so we provide the aircraft, maintenance cockpit, and the cabin crew is provided by South African. That's worked like a breeze. We have a countercyclical, counterseasonal demand, and that's worked well. We've also deployed cabin crew members to cruise line MSC.

Michael Bell:That I find fascinating.

Max Kownatzki:It is. It's outside of the—

Michael Bell:Talk about that. It's an interesting, very innovative approach. Creative. How's it work?

Max Kownatzki:It works, it works really well. So at the beginning, obviously, given the crew compensation model that we talked about, you know, if you drop down to a 50% fixed remuneration, 50% variable, we also obviously have an obligation. Again, it's a yin-yang, you know, give and take. We also want to make sure that we give our employees the chance to actually get that productive and get those hours and make that money. Again, cruise lines in the wintertime have staff shortages. We struck a deal with MSC and now we have cabin crew members, actually even from other employee groups, members of the SunExpress family who are now working as stewards on cruise line ships and they're coming back to us at the beginning of March, beginning of April.

Michael Bell:You run the risk that they keep them?

Max Kownatzki:We have contractually tried to avoid that risk, but that risk is always there.

Michael Bell:Yes. It makes sense because there are service employees, an interesting alternative way to spend the time in the wintertime for your crew.

Max Kownatzki:A lot of people love it, actually. Same for South Africa, by the way.

Michael Bell:You mentioned that you shut down the German sub, but you still are servicing Germany. You found an innovative way around that. Why don't you share that with the group?

Max Kownatzki:We were one of the largest leisure carrier between Egypt and Germany. That was a bit of a blow at the beginning. Given that 85% of our point of sale is in Western Europe, Germany, Austria, Switzerland, now with our UK expansion, it's about 90%. We partnered with Air Cairo out of Egypt. Air Cairo, brand new aircraft for the Airbus folks here in the room, A320neos, I believe. 2, 3 years old, a great aircraft. I had, you know, our shareholders' safety and security departments check them out from tip to toe. We do what we do best, which is the commercial steering, which is the selling part in Western Europe, so basically managing the point of sale. It's working.

Michael Bell:It's a SunExpress product effectively.

Max Kownatzki:Well, the aircraft itself is Air Cairo.

Michael Bell:Marketed as SunExpress.

Max Kownatzki:Yes, completely.

Michael Bell:Correct.

Max Kownatzki:What's wonderful about it is that it's a win-win. We're now operating over 130 weekly frequencies on this. It's been so successful that we have actually expanded in terms of destinations within Europe. We've now copy-pasted that model into Bulgaria with an airline called Elektra, where we're starting flights between Burgas Varna and Germany.

Michael Bell:You even have a relationship with Turkish's E-Jet subsidiary, and tell us about that, how that works, if you will.

Max Kownatzki:That's right. So we've had a long relationship with them. In the past, they were called Anadolu Jet when they were still a department basically of Turkish Airlines. They're now a separate legal entity, separate AOC, and for the winter period, we'll, we'll be providing them with 9 wet lease aircraft completely staffed by us. So that's another way to basically compensate for some of the seasonality volatility.

Michael Bell:It sounds like a common theme at the company is partnership effectively with employees, with third parties, whether other airlines, with cruise lines. Is that the mantra, if you will?

Max Kownatzki:I don't think it's a mantra, but it fits very well with our family spirit, with our personality of Liaising with people. Actually, one of the things I had to learn when I moved to Turkey, it's more of a relationship way of doing business, not a transactional German-American, let's get to the point and we have 6 minutes, let's go.

Michael Bell:We have 6 minutes 49. Okay, so it's part of what you did. How does the relationship With the 2 parents, if you will, Lufthansa Group, Turkish on the other, work with you guys? I mean, there's the Star Alliance membership, etc. Do they just leave you to your own devices given the results have been good, or do you try to tap into the strengths they bring as massive network carriers?

Max Kownatzki:I think we're trying to do a bit of cherry-picking. We're trying to get the best of both worlds. I know I've seen your son, so I'm sure he's played the mommy said, daddy said card. That's helpful sometimes. Lufthansa wants this, Turkish wants that. That's helpful because it gives us independence. There's really a great balance between leveraging synergies between them. For example, fuel procurement, for example. We're doing that through Lufthansa. Some insurance products we're doing through our shareholders. Then again, I think you mentioned at the beginning, we're 4,000 employees. We're a small shop, and that allows us to really negotiate deals very dynamically and change and adjust. There's other cases where our shareholder companies have actually piggybacked on deals that we have negotiated and used that. We're trying to really leverage the best of both worlds in terms—

Michael Bell:Are they able to pick up on some of your innovative approaches as well, or is it hard for them to do in their kind of more unionized—

Max Kownatzki:You got it. I think Tomor's here. Tomor, you want to answer that? I'll leave that to them. But hopefully, hopefully we do have— we do inspire, you know, our shareholder organizations as well.

Michael Bell:At the end of the day, with shareholders, it is about money. The results have been incredible. I mean, your revenue's up from €1.5 billion in '22 to €1.8 Your EBITDA is super impressive, $187 million, record.

Max Kownatzki:That was last year EBITDA.

Michael Bell:$187 million, best in your history, up from $85 million in '22 and $59 million in '21. You were like in '20 on the question of whether you're going to make it or not. How do you keep those results up while you're growing? We've often seen this be the nemesis, if you will, of airlines.

Max Kownatzki:Well, I think Güliz was saying it before. One, we got to really penetrate the market more. Turkey is, again, a wonderful destination. We're sharing the number one spot for Western European as a vacation destination. There's still more demand to be captured. That's the traditional side. I also think we need to look beyond that and we need to start diversifying in terms of, again, maintenance, in terms of maybe flight training. We have to think outside of the box a little bit in terms of— What's the next big thing?

Michael Bell:That's what you meant about how we got here isn't necessarily how we're going to get there. The recognitions have been substantial as well. Best leisure airline in Europe by Skytrax in '23 and '24, best leisure airline in the world in '22. I mean, how do you avoid that getting to your heads as well? I've seen that become an issue for some.

Max Kownatzki:Who said I was? No, no, no. You know, this is— that's a team effort. And these are— I mean, these were surveys done by passengers. I think it was 14 million passengers worldwide. So this is something that the team deserves. This is not a management recognition. This is an operational staff recognition. And again, kind of the story I told you about the elderly lady who was sitting next to me, that is the SunExpress spirit.

Michael Bell:That's—

Max Kownatzki:again, that's something that really just blows me away in this beautiful country. Every, every day I spend there. So again, that's, that's the DNA we need to keep.

Michael Bell:And we're going to turn to a question here in a few minutes we've got left. But just before that, I am a firm believer that leadership is what it's about. Of course, I'm in the leadership business. But what is your leadership style? How have you helped nurture this incredible success story? And what do you do every day to make sure that You are leaving your stamp on the company.

Max Kownatzki:Well, I have a few witnesses here, so I definitely— the bar is high.

Michael Bell:They're going to call you on it.

Max Kownatzki:Probably. I'll get some questions here from them. No, but look, you got to be in touch with yourself. I've really defined what drives me and what makes me happy. Sometimes I think about, well, If I'm on my deathbed and, you know, not, you know, not very soon, I hope, but, and I'm looking back on my life, what is it I want to have achieved? And it's—

Michael Bell:You'll talk about this interview right here, I hope.

Max Kownatzki:Absolutely. It's right up there. You know, I want to have created— I want to have made something better. SunExpress, the world, something that I thought was impossible to do before. together with a team. That's what drives me. Again, I think SunExpress, there's no place I'd rather be in a time of crisis than SunExpress because, again, if you do that teaming part, and again, this doesn't mean agreeing with everything. It can be hard discussions. It can be confrontational topics, but it's the doing something together that we all thought was impossible. I'll give you the South Africa example. You know how many people told me, Max, it's never going to work. 2 different regulations, South Africa, Turkey, forget it. It's never going to work. Now we pull it off and okay, we're 2 aircraft, 4 aircraft, 6 aircraft. We're going to do more with them next year. That's the stuff. That's what drives me.

Michael Bell:Well, you can feel it in how you come across, Max. We've only got a minute left, but here's a question. Leisure market seems to be quite saturated in your key markets. Do you see growth potential and where?

Max Kownatzki:I actually wouldn't fully agree with that. I think there's still pockets that aren't yet saturated. You see that in the network expansion. I'll give a short answer. One is obviously the network expansion, tier 1, 2, 3. I think I explained that. 2 is extending the summer period into the shoulder periods and even winter. That's 2. 3 is outside, Air Cairo, Bulgaria Electra, South African, MSC. There's other things. The last item is, again, what I said, aviation-related or even beyond aviation types of business that we need to get into.

Michael Bell:I'll put a plug in for the panel on workforce, which we're having tomorrow, because your CHRO, Yassine, will be there who could talk more about the culture and some of the innovative things you've done around the labor side. We are at time, so I just want to say, honor again to share the stage with you, Max. It's a great story. I mean, I think if anyone could buy stock in SunExpress, they should. But it's evident that your leadership has been at the center of that success to date, and we wish you all the best going forward, and this wonderful team. Please join me in thanking Max for his time today. Thank you.

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