Airline Leader Interview with Avianca CEO Adrian Neuhauser

Transcript

Nuala McGovern:Adrian, why don't you take a seat over here so everybody can see you? You know, we have up there Avianca. There's a couple of things wrong with this slide. Yes, I am Nuala McGovern from BBC, but Adrian Neuhauser, Avianca, number one, that A is looking Uppercase. And number 2, when I was speaking to Adrian last night, he was sitting on something that he didn't share with any of us. Adrian will take the helm of Abra Group, which owns Avianca and Brazil's GOL, in January 2024.

Adrian Neuhauser:Thank you.

Nuala McGovern:And Frederico Pedrinho, who you may know as the COO, he will be taking over as CEO. But I'm— so I need to jump into that first. I was just doing some last-minute checking as a journalist when this popped up, and it's just been announced over the past 8 hours or so. So congratulations.

Adrian Neuhauser:Thank you.

Nuala McGovern:Is your plan— I was wondering, you're from Chile— is your plan now to take on LATAM?

Adrian Neuhauser:Well, look, our plan for a long time has been, and this goes back to the Avianca restructuring into the lowercase a, we'll get there in a moment. We discussed it yesterday, but we think You asked yesterday, our epiphany, for lack of a better word, during our restructuring in Chapter 11 was to say air travel has gone from being a luxury to being essential in our region. We live and service a relatively poor region of the world. We have to address that. What we're looking to do is create a network that covers the region, that allows connectivity within the region, but that does it at an efficient cost. We think there's room for both models. LATAM has a full-service model, and that's— That's great. We are trying to offer an alternative for what we think is a greater segment of the population.

Nuala McGovern:An alternative, an air grab.

Adrian Neuhauser:There's room for both.

Nuala McGovern:Okay, room for both. Well, really interesting. I did have a quick look at GOL this morning and I saw that they have been approved by the Colombian Civil Aviation Authority to operate flights to Bogotá in Colombia from Buenos Aires, so in Argentina. and also São Paulo in Brazil, so up to 7 frequencies per week using the Boeing 737 MAX 8 aircraft. I thought that was interesting because you begin to see then the connections of agreements. It's not a bilateral agreement anymore. You kind of need these alternative routes to bypass them. Is that the future?

Adrian Neuhauser:That is, we think. I mean, look, when you look at LATAM, who you used as an example, you look at Copa, you look at what Avianca's built historically in the northern part of Latin America, we make many airlines within each of these groups look like one airline. We, Avianca, operate in 9 different AOCs. LATAM operates nearly a dozen when you add the GOL AOC. There's restrictions within the region that are not necessarily visible to our customers when we make it look like one brand, like one product, and we have to deal with different AOCs, different regulatory environments, different labor contracts, different tax issues, different environmental requirements, safety requirements, and what have you. We make that work in a very seamless way. You're right. When we create a group like ABRA where we make it more transparent that GOL is one airline and Avianca and the 9 operating certificates within the other or another, you start seeing kind of that, the building blocks that we have to put in behind the scenes to make connectivity within the region work.

Nuala McGovern:I saw that GOL, that move means they're back in the Colombian market after a 12-year absence. How significant is that?

Adrian Neuhauser:We think it's tremendously significant. One of the One of the drivers behind the model that we've decided to take on within Abra is to maintain the uniqueness of each different brand, the power that these brands have because they're both, Avianca and Gol, brands that have a strong culture, a strong presence in their respective markets that bring a unique proposal to clients. We think having the ability to bring that brand into the Colombian market, reopen it, but also use Avianca's Distribution capabilities, right, and our strength in terms of relationships, in terms of network within Colombia to open up space for them is a great win-win.

Nuala McGovern:As we heard, one of the oldest airlines. 91 years?

Adrian Neuhauser:Avianca? 104.

Nuala McGovern:Okay, I'm a few years behind.

Adrian Neuhauser:Yes, 104. We like to say, and our KLM colleagues will disagree with us, we like to say we're actually the oldest Continuously operating airline.

Nuala McGovern:Okay, and with that operating, let me turn to Avianca. You said a few weeks ago that your company, Avianca, it's about to expand, has undergone what may be, your words, the greatest reinvention of an airline in the history of aviation. Do you stand by that, or is it a slight exaggeration?

Adrian Neuhauser:No, look, I think within the caveat of maybe, there are very few reinventions of airlines from beginning to end, where you take an airline that has a legacy product that has been around for over 100 years, and you basically redefine who your customer is, redefine what your priorities are to service them, change your internal culture, your processes, your product, your service to address that market, and do it while the airline is flying. It's a very, very difficult challenge. In all honesty, I don't think there are many airlines that have undergone as dramatic a change as we have in as short a period. We took an airline that had an over 6-cent CASK, and in spite of X fuel and in spite of high double-digit inflation, we brought that down to below 4 cents. We managed to expand our operating margins. Our EBITDA is nearly twice what it was before in a world where there's been rampant inflation and where we've been able to keep our yields in the network constant over the past 4 years. Unlike our competitors, and this is, again, it's a key part of who we've decided to be, we are trying to maintain accessibility for our network. If you look at yields across our network, we've managed to bring yields across our network over the past 4 years down by 2% while expanding our margin from mid-teens to 24%.

Nuala McGovern:It's interesting in how you've done that. I was talking about the A, I mean, a little bit in jest, but you have made it a lowercase a from the capital A. For you, that represents a real change to the passenger. Can you explain that, why that is?

Adrian Neuhauser:Because it makes it more approachable, right? It's symbolic, it's a very simple brand change, but it basically says, you know, we're not looking down at you, we're looking at you eye to eye, we're accessible to everybody, not just, you know, an upper crust of of high-income people within the region. Our commitment to you is to treat you as an equal and not to look down on you from a world of luxury. It's also very symbolic in the way we did it because, again, as we're focused on costs, as you think about closing a circle of repositioning your product, repositioning the market that you're trying to address, which then requires some sort of rebranding, you need to close that circle and say, okay, well, We're proud of what we've done. This is who we are. How do you do it in a cost-efficient way, right? Relaunching an entire brand, rebranding, is an expensive proposition. Changing a single letter within itself is also a strong statement of we're doing this efficiently.

Nuala McGovern:So the money part of it, but then I was beginning to wonder, do you need to repaint all the planes?

Adrian Neuhauser:Well, that's one of the beautiful things. So with our— we do, we're repainting the A. And with our paint partner, we've actually gone through an exercise because when we did the first attempts. As paint gets older, obviously the color weathers with the sun, etc., so the colors aren't exactly the same, and you could very much see it. What we're doing is we're actually color matching each plane, but it takes the cost from over $300,000 a plane to less than $10,000 to work on one plane.

Nuala McGovern:I was wondering, changing that branding, that part of it, away from the work that's obviously been done behind the scenes, Is it worth it, do you think? I suppose you must think it is.

Adrian Neuhauser:Look, what we always say is Avianca's biggest competitor is not the airlines that fly against us, but in some way, it's the memory of what we were. We ourselves are our biggest competitor. When you talk to our customers, new customers' satisfaction is through the roof and NPSs are higher than our competitors. People that had flown us before and fly us now say, well, You used to give me free food. The seats used to be bigger. The pitch used to be bigger. I had more flexibility in my tickets. I want all of that back. How do you close a circle and say, look, we're not giving you that back. We are proud of who we are now. That requires a dramatic statement. We were trying to find a balance between honoring the legacy of the brand, honoring the 104 years of history we have, Respecting kind of what we've been built on, but at the same time saying we are proud of who we are now.

Nuala McGovern:It's a difficult tightrope, I would imagine, to walk.

Adrian Neuhauser:I think it is. We're happy with the results so far, but it's been, you know, feedback has been a mixed bag. What is true is it's been, for such a small change, it has created very strong opinions and coverage, right?

Nuala McGovern:The latter.

Adrian Neuhauser:Yes.

Nuala McGovern:And for people who haven't looked into the lowercase letter, there are podcasts about it at this point. So definitely, if you wanted to generate publicity, it has worked on that front.

Adrian Neuhauser:Over a very small change, right? And so that's great. And look, it's brought the dialogue to the forefront, right, in terms of, you know, you can— there was an editorial in a Colombian newspaper 2 days ago, right, that basically said, you know, the person that's writing it basically, you know, doesn't agree with what we've done, right? And so, but implicitly in what they're saying, they're acknowledging that the rebranding is related to that. And he's acknowledging that management knows what we're doing, not that we're right or wrong, but that we're aware of what we're doing. and that we seem to be proud of what we're doing, and he disagrees with it. But it does tie to the entire narrative, and it, to some extent, closes the circle. The other thing it's had, which is interesting, because a big part of this big change we've done in the airline is moving our own people along. Because when you've built an airline over 104 years—

Nuala McGovern:The culture that comes with that, that you inherited.

Adrian Neuhauser:That you inherited, but that you have to look. It's important that people understand why they do what they do, and that they're proud of doing it. Right? And we had a culture that was very much about you know our our old our old slogan was you know todo para enamorarte everything to make you fall in love with us. Right? And so we gave you a lot. Right? And when you when you tried to tell the people. that we're proud of giving you a lot for little money, that we're going to stop doing that and we're going to be proud of not doing that, it creates a lot of friction, right? There's been a big transition, cultural transition internally, and over the last, call it, year, you've seen people begin to be proud of working for Avianca again.

Nuala McGovern:How did you do that though? How did you change that mindset, particularly for the people who are working for you that have obviously brand loyalty? This is the way that it has been done. Now, I know you have A phrase which is, sometimes something is done because it's always been done.

Adrian Neuhauser:Well, there's a lot of that, right? And I think—

Nuala McGovern:So how do you change that, you know, for people that were wed to the way of giving a lot?

Adrian Neuhauser:Look, I have an advantage and a disadvantage in that I'm an outsider in the industry, right? I'm a banker. I came in to restructure the balance sheet, and I ended up in this position through basically a bunch of serendipitous situations. I don't mind asking questions. When you try to figure out why something's being done the way it's being done, and the only answer is, that's the way we've always done it, it becomes interesting to challenge it. It becomes interesting to have people try to answer it. The culture change part, When we took the company into Chapter 11 and we had the opportunity, therefore, not just to restructure our balance sheet, but to make a decision on how to reinvent ourselves and who we were targeting as a market and what we were trying to do, we had numerous brainstorming sessions. What's interesting is when you start to figure out what levers you can move and how you make the business work and who you're servicing and why you're servicing them and what's important to them. There really aren't many other answers from the position we were in geographically other than to try to focus on lowering prices and lowering costs to align with those prices. What we did, and this is driven by Mike Swiatek, who runs strategy but also culture for us, we hired an outside consultant and we created miniature versions, if you will, of that brainstorming. Throughout the company. Throughout the company. We had groups of employees that could be opinion leaders go through the same exercise and ultimately funnel into concluding something that overlaps 95% with what we're doing. The conclusion isn't always perfect, but it's very aligned. You create these internal champions, and then these champions help you push it down. It's been the work of 3 or 4 years, but aligned with that, look, people are ultimately proud when you succeed. Part of what we did very early is to define what we thought of as success. Success was growing. Success was being financially sustainable. Success was operational excellence. Within what we've done, we're proud to say that according to Cirium, in the year so far, we are the most punctual global airline in the world.

Nuala McGovern:I like that. Yes, I was looking at those figures for September. Operational in the world, how?

Adrian Neuhauser:Well, that's Fred. That's why he gets to be CEO. When you set that as an objective early on, we're going to have higher margins, we're going to be operationally excellent, and people see it happening, they start recovering pride as well. The combination of understanding why you're doing what you're you're doing and what role they play in it, which is the culture change part, but also seeing, you know, the goals you define being met and therefore you succeeding have created pride, and it's, it's, it's become a very, a very charmed circle within what we're doing.

Nuala McGovern:And I'm glad to hear that, and I will ask you what the biggest challenge has been, but I see a lot of questions coming in for you already. Let's run through a couple of these. What happened with Viva Air was a reminder of how hard consolidation is to achieve? We spoke about that yesterday and a little bit about Viva Air not surviving. What has been learned from this from an Abra perspective?

Adrian Neuhauser:It's a great question. Ultimately, what happened with Viva Air, for those of you that don't know, is we made— or our shareholders— well, but before that, our shareholders made an investment in Viva. We then looked to turn that investment into a controlling investment and look to be able to consolidate Viva, which was a low-cost carrier in our market, with ourselves. Viva was failing at the time, and we had numerous negotiations with the government where at first they were incredulous of the statement that the company was going to fail. Then they sought to avoid consolidation and looked for other bidders to acquire the company. And then by the time we actually started discussing remedies, it was too late, and, and we never agreed on a remedy package that would be acceptable to us, that would, that would be acceptable to the government, and ultimately the company failed. And so that, that goes to, to a really fundamental issue, right, which is governments have multiple interests here that they're trying to balance as regulators. They don't always get it right. We don't always get it right either. The big challenge here was at the same time that they wanted to preserve employment and preserve the capacity, they wanted to avoid greater market consolidation from our side. It didn't work out. I think the lesson is consolidation is hard. We know it's hard. We know it's difficult. That doesn't mean we don't think it's necessary. We didn't set out to do something easy here, so we're, we're gonna keep trying.

Nuala McGovern:Next year at CAPA, when Adrian speaks, he'll be able to tell you all about what it's like to compete from an Abra perspective as well. Just very briefly before we move on to a couple of other aspects, because I see the clock is ticking, you decided to simplify the fleet. You decided to add more seats. I think it's 20% more capacity in some of your planes, and also to the 4 sizes in economy. This may be Made me chuckle. XS, so extra small, small, medium, and large, double XL for business. I was worried at first it was like how much I weighed I was going to be charged.

Adrian Neuhauser:Not the most politically correct branding. We may reconsider that.

Nuala McGovern:I agree with you. I just wondered how that's working out for you.

Adrian Neuhauser:Well, look, I think it's been a great transition mechanism to move people from essentially unbundled pricing to bundled pricing, right?

Nuala McGovern:So extra small would be The bare fare, right? No bags.

Adrian Neuhauser:You have no bags, you have no carry-ons, you have no flexibility, et cetera, and it moves up from there. I think it's been great to educate our customers on the idea of bundled pricing. Again, as we move forward, one of the things that, you know, there's no sacred cows in what we're doing. So we keep analyzing, have we gone too far? Have we taken away too much service? Are we still giving too much service? Should we put in more seats? Should we take out? We're constantly trying to optimize the balance between minimizing costs, but also deploying capital into things that people are willing to pay for. As you see that, and you asked the question yesterday about business class in Americas, as we start rolling that out—

Nuala McGovern:There was a question that came in as well, I see there, about are you looking to replace that demand with another segment of reduced business travel demand?

Adrian Neuhauser:We'll talk about that in a sec. As you think about rolling out products like that, we may reconsider the current branding scheme within the idea of keeping a very bundled pricing mechanism. In terms of business, it's an interesting question. If you go back to— we did 2 restructurings at Avianca. We did one in 2019 that was out court that was basically a restructuring of the balance sheet didn't really allow us to reinvent the company as dramatically as we then did when we were forced to file because of COVID In the first one, there wasn't much reimagining, but there was a lot of analysis. What came out of that is Avianca was never really a great business-focused airline, a very small piece of our income. Frankly, a piece that didn't pay for the real estate it took up was business. As we moved into— in the 2019 plan, part of what we thought we would do because we had no ability to really bring the cost down to where we brought them was to focus on driving up yield. Driving up yield was how do we capture more of that business? When we went into reimagining ourselves in COVID, we had a couple of of decisions that we made. One is, well, we no longer— that's not a market we've ever served. Should we really go for it, or to go back to where we started? Is LATAM strong enough there that really what we should do is compete for a different market? That's one piece of it. The second piece of it is, and I still believe this and I'm on the record for it, we don't believe that, and we didn't believe during COVID that business demand would ever recover its original trends. It doesn't mean that if you had a million business class passengers flying in 2019, there isn't a point in the future where you will have more than a million, right? But the trend lines will never recover. We don't think they recover because one of the things we all learned during COVID is how to work remotely. We can travel less and we prefer to travel less. There's more leisure travel. The ability to work remotely also means that you can travel more with your family, go on more vacations, and work during those vacations, and therefore take more vacations. In terms of business travel, we don't think it ever recovers to prior levels. That's been a big part of focusing more on BFR, bringing costs down, densifying, taking out business class seats, et cetera. We're initiating the reconfiguration of our widebodies now. We're taking out— we have 7 rows of business class, so it's 28 seats, we're taking 2 rows of that out and we're replacing it with coach and we're also densifying coach. So we're going from 251 seats on those aircraft to 290.

Nuala McGovern:And so that is the way that you looked at it. There was a term I heard, I think it's revenge tourism, for people who felt they were cooped up during COVID that they're going to take that travel. So, and maybe working from home. I want to talk about Bogotá briefly as well. 3rd highest capital in South America after— another quiz? It's Quito and La Paz, if you're wondering. But that is interesting, I think, as a— obviously—

Adrian Neuhauser:It's a challenge, right? The airport is at 2,600 meters, and that obviously limits— it makes our fleet strange, right? During our restructuring, we took out 321s, right? Everybody wants 321s. We got rid of them. They just don't get range out of Bogotá, right? We had 787-8s and -9s. We got rid of the -9s, kept the -8s. The -8s will make mission to Europe. The -9s won't, right? It's a unique operating environment, and we have to adjust for that. It is unique. It makes what you see on the map less obvious, right? When you look at the map and you go, well, you know, Copa has a great hub in Panama. Avianca should be able to have a great hub in Bogotá. Yes, on a flat map, that looks logical. The reality is Panama's sea level and Bogotá's 2,600 meters. That challenge makes our operations different, and that's why we've come up with a unique solution where we've kept some widebodies, where we've kept cargo, where it's not as simple as just going single fleet.

Nuala McGovern:You're adapting to the geo. I want to turn to the political now. You were cited, this is a recent International Air Transport Association, IATA, study that found the airport's capacity in Bogotá is currently limited to a per-hour total of around 74 operations, so our total number of arrivals and departures combined. The capacity could be increased, but it would require substantial improvements to infrastructure and also operations at the airport. And also thinking about your new job at GOL, we've talked about how Bogotá comes into that picture. Is there political buy-in For when or if it can happen?

Adrian Neuhauser:Well, at this point, I think so. The story there is Bogotá Airport historically has operated something between, depending on how far back you want to go, 50 and 74 operations an hour. The reality is when it goes much above 65, it collapses. That doesn't mean that in theory you can't have more than 65 operations an hour in an airport with 2 runways. Of course you can. It requires you to design for that. It requires you to think about the restrictions you have in the use of airspace, the number of air traffic controllers you have, the apron space you have, the gates you have, the taxiways you have. It's not just, I have 2 runways and therefore I can do 90 operations an hour. We've had long discussions with the authorities for years over this because the authorities, again, in their natural desire to open up to more competition, to bring in other people, and we do have a large historical base of slots want to increase the operations. What we've always said is we're supportive of the operations increasing as long as it's done with the necessary investment. That study that you cited that IATA did, and IATA asked all of the industry to finance, and IATA ran it. Ultimately, we financed the vast majority of it because our competitors were reluctant to have a light shown, we think, on the issue. The result of the study is the airport shouldn't go much above 68 operations an hour without a lot of things that would allow it to get to 90.

Nuala McGovern:Exactly.

Adrian Neuhauser:The authority decided to go to 74, and 2 weeks ago, we started seeing the consequences of it. We had a week and a half of operational disasters. There's been a lot of media coverage on this in In Colombia, the air traffic controllers are complaining that they simply don't have the capacity to operate that many operations.

Nuala McGovern:Because, yeah, I was interested in that last panel. They were asked, were they optimistic? And I won't go into all of— people will know Colombia, some of the security situations. Everybody will know Luis Díaz's dad, for example, but that's just one. A big piece in the Financial Times about 5 days ago went through, you know, the challenges trying to get to total peace, which the government promised. Of course, aviation is immediately impacted by something like that, by a situation like that. Are you optimistic for Colombia and also the region, I suppose, that Abra will be serving when it comes to those issues? That is my last question.

Adrian Neuhauser:I'm optimistic for the region because I think that ultimately, a large part of the challenges that we see are really income challenges and wealth challenges that then become social challenges and political challenges. I think that global trends are in favor of nearshoring. I think that Latin America is the obvious market for nearshoring. Mexico has been showing huge benefits from that, and we expect it to expand further south. As you see that, and that creates wealth, we think there'll be growth, and we think a lot of these issues get addressed with greater income and greater income equality. Yes, I'm optimistic.

Nuala McGovern:Currently, Avianca's Chief Executive, Adrian Neuhauser, but will be head of the ABRA group come January 2024. Thank you so much.

Adrian Neuhauser:Thank you.

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