CEO interview Abra Group CEO Adrian Neuhauser

Transcript

John Strickland:Thank you very much, Marco. I hope you've all enjoyed your lunch and you're back here bright-eyed, not too sleepy after some lovely food for our next discussion. And I'd like to welcome to the stage Adrian Neuhauser, who is CEO of the Abra Group. Welcome, Adrian.

Adrian Neuhauser:Thank you.

John Strickland:And I think, although you are a Latin American yourself, you've just flown in from the North American continent today to be with us. So we're glad to have you with us.

Adrian Neuhauser:Thank you. Thanks very much.

John Strickland:Adrian, just, we've got a relatively short time and a lot to say. And by the way, guys, if you could give us a timer just so we don't run over, please, that would be great. Just a bit about yourself. I mean, you're a finance man and I'm a diehard airline man, but what I've seen over the years is that the only way the airline industry is going to get further forward is by good financial discipline. So just to allude to how you ended up running a major airline group, you came in through a financial restructuring, I believe, of Avianca.

Adrian Neuhauser:Sure. I joined Avianca in 2019 when Avianca had gone into default with some of its ECA debt. I came in to help restructure the financial side when Anko van der Werff came in as CEO. And then Then the movie got more complicated, right? Then what was viewed as a short restructuring became a longer restructuring driven by COVID. We filed for Chapter 11. Anca went on to SAS, and I got a proverbial battlefield promotion to the CEO of Avianca. So it's been a great ride. And then we consolidated that with GOL into what's now the Abra Group. So it's continued from there, but it was a bit of a— of a lark that became, that became a huge project. It's been a lot of fun.

John Strickland:And Abra Group, I mean, certainly to me, less familiar sitting across the Atlantic in Europe, but when I was researching and we did have a chance to talk the other day, it looked to me like there were parallels with what we have in Europe with IAG. Just tell us again, how did Abra come about? Was, as the restructuring and coming out of Chapter 11 took place with Avianca, did that provoke a kind of discussion amongst some of the investors about let's look to something bigger and more?

Adrian Neuhauser:So, so it did, right? So, so One of the original Avianca restructuring out of court in 2019 was really to deal with mostly the financial aspects when we ended up with pretty much the entire airline grounded in COVID because Colombia and El Salvador, our 2 main hubs, Bogotá and San Salvador, were 2 of the actually very few countries in the world that completely shut their airspace to commercial flights. The proverbial short straw twice. So we had most of the airline on the ground. That, that allowed us to sort of do a broader reimagining, if you will, of what the airline was. And, you know, we redesigned the airline to be a very different animal from what it was before, right? It's now a carrier that, you know, while it retains its 105-year roots in, in kind of the legacy of one of the most important and most service focused airlines in the region, also has a very strong focus to drive connectivity, to drive penetration, to allow more access to people. Really, that has by necessity a cost focus. Really, it's a very cost-driven design. As we looked at that, we came out with a stronger balance sheet. We came out with this re-envisioned business plan and product. Then the question was, okay, what do we do with this? We've created this very powerful platform in the northern part of South America, great connectivity to Central America. What's next? The what's next, we said, is to find other geographies and really other companies in those geographies that have a similar vision. GOL stood out in Frankly, being the original low-cost carrier in the region and having built simplified models, simplified fleet, lots of point-to-point flying, and really having driven the penetration and growth of air connectivity in Brazil. It was a bit of a natural conversation.

John Strickland:As you said, Gol led the low-cost emergence in Latin America. I think if I remember the history, it was a family, was it Oliveira family? They ran buses. So the classic, you know, people getting off buses onto planes. Avianca, though, as you said, there was a very different airline. It was more of a classic flag carrier. I don't know if I'm right, but maybe more of a prestige politically of having national carrier. But now it's a very different entity. And we were talking this morning, a number of the panels touching on the number of first-time flyers in Latin America. And I believe that is now applicable to Avianca. You're actually cultivating new travelers in a way.

Adrian Neuhauser:It is. So if you look at any given year, somewhere between 15% and 20% of the people flying our network now are first-time flyers. And that's— look, if you go back to the diagnosis that we, that we, you know, did and believed during, during, during our Chapter 11 restructuring, it was, you know, why does Avianca sort of continue to find itself in a corner? It's because you've, you've, you've, you've got needs that you're not meeting, right? You've got people that need to fly. You've got other carriers that are sort of fulfilling those needs. We live in a region where road connectivity is poor. There's basically no rail connectivity. There's very little waterway connectivity. There's a highly distributed population, and people are poor, so they need to fly to connect, to see their families, to see their friends, to do business. Flying is the solution, but it needs to be cost-effective. That's what we've tried to address.

John Strickland:And yet on the face of it, they are 2 very different airlines, different markets. I think the 2 biggest markets in Latin America with Brazil and Colombia. But as you say, achieving the same purpose. And despite being different, this is where my, my, you know, European angle comes in. IAG's got very different airlines, network airlines, low-cost airlines, feeder, point-to-point, but they've kept the brands and identities, but they've developed something over a number of years, which to me, speaking personally, has been the most successful large airline group in Europe across a range of business models, Ryanair being the other purely in low cost. And I guess, is that something you're striving to do? And over time you would aim to add other companies to the portfolio?

Adrian Neuhauser:It is. And it's really hard, right? Because, because the question is, okay, you have these 2 companies that now have sort of a similar vision of opportunities, of their ethos, of how they connect, of what their role is in society, right? Because yes, of course we want to create shareholder value. Of course, we want to do well by our creditors, but we also want to solve a problem that the societies that we work in need us to solve. And so you come at it with this very kind of similar view, but you've got these companies that have gotten there in very different ways. They've got different brands, they've got different customer bases, they've got different kind of view— ways they're perceived. And so how do you create synergies between these things? That are really accretive without destroying what's already there? How do you avoid destroying customer relationships, supplier relationships, institutional relationships that have taken years and years to build? The approach we took was to say it's not worth it. The juice of having a single brand is not worth the squeeze. You keep the brands separate. You keep the internal and external cultures that have been built separately. And then you see what you can build on top of that. What you can build on top of that is better network integration, better commercial strategy integration. You can align best practices in terms of operations. You can, you can consolidate your large OEM and supplier relationships. You can start driving synergies through the frequent flyer programs. And we've been doing all of that. It's been a lot of fun. And, and obviously, yes, it does, to your point, then create a platform where it's easier to bolt on Other assets, other geographies. Vamos is a little bit of a left-field example of that. We also hold a convertible loan that gives us an as-converted 42% equity stake in Sky. So we keep looking at different opportunities.

John Strickland:Yeah, I mean, because you say Vamos is the most recent, is it less than a year?

Adrian Neuhauser:I think it's a little over a year now that came about.

John Strickland:And to me, I'd always seen them around. They were flew 747s in the past and A330s now in the, you know, typically wet lease market, filling in large capacity for other people who needed it. Uh, it puts you across the Atlantic in addition to what Avianca is doing. But one thing I wondered with that is, you know, recently we've seen what for me is an unusual story playing out in Europe, which is Air Europa, which again, European carrier, very exposed to Latin America, and now it's going down a Completely different consolidation route that I would have imagined, not within Western Europe with one of the groups like IAG, but with Turkish over to the east. In this kind of consolidating world, is that an airline that would have been of interest to you had what I just described not happened?

Adrian Neuhauser:Look, I think we have a very good relationship with Air Europa, and we always look at things we can do together in terms of network, in terms of synergies. It's certainly an interesting asset. If you look at what they built, if you take a step back and you say, what are we trying to do? We're trying to drive connectivity within Latin America and between Latin America and the world. Where does Latin America really connect to? It connects to North America and it connects to Europe. There's limited flows to the Middle East, certainly to the Far East and beyond. reasonably segregated, again, because it's poor. It doesn't mean that you don't have connectivity to Japan, to China, but it's the smallest of the flows. If you think about where the core is, it's that. What we are doing from the Americas side is a little bit of the opposite of what Air Europa has been doing from the European side. They're complementary. Air Europa also plays a little bit of what we've tried to do in Avianca in terms of balancing A very cost-efficient structure with adequate service, etc. So it's, it's, it's a really interesting asset, and we, uh, we enjoy a good relationship with them.

John Strickland:And in terms of a fleet, I mean, the airlines we're talking about— Avianca, you would probably say the oldest airline in the world, certainly one of the oldest, maybe there's arguing a toss-up with perhaps KLM— and a large fleet. GOL, you know, large fleet, 737s. Would you aspire into the future as the, if you like, the consolidating entity, Abra, behind the scenes to move fleet, the suppliers more in the same direction? Because obviously you've got a mix of Boeing and Airbus in Avianca. You've got Boeing only.

Adrian Neuhauser:Would you like to leverage more power with the OEMs to push for the whole, you know, you can have a piece of the whole action in the future Boeing, Airbus, or indeed Certainly in terms of making the strategic decisions and moving the strategic relationships with the OEMs, we are increasingly consolidating that at the Abra level, not just Boeing and Airbus, but also GE, Pratt, et cetera, right? The engine relationships, we have a very good relationship with Rolls, and even further downstream components, et cetera. So we are moving that. In terms of We value the simplicity in each operation and keeping them neat. Do we believe that means that we need to have all of the same plane across the over 300 aircraft that we have narrowbodies in our network? We don't. We have enough scale to operate narrowbodies from both suppliers, and we're doing it. Even on On the widebody side, as we think about growing, we've announced an Abra order for A350s, which is complementary to the 787 in terms of gauge. We have some uniqueness in our network too. Bogotá is a very strange animal in that it is a very large but yet high-altitude, hot and high airport. The operational considerations come into play as well. Again, we are driving synergies there. We're not overly fussed about moving into single supplier. We, we have very good relationship with, with all of the major OEMs.

John Strickland:Another aspect of your operation here, again, early on in Abra's existence, I remember following this myself in Europe. There was the expectation or talk there was going to be consolidation in Colombia between Avianca and Viva, who'd come along as a low-cost carrier. And it seemed to run out for quite some period. I mean, it just didn't happen. And then Viva, if I'm not mistaken, disappeared altogether. Is that— does that reflect maybe political, either, I don't know, interference or not understanding about the need? There's been a lot of discussion about consolidation this morning in Latin America. Is that a missed opportunity?

Adrian Neuhauser:It is a missed opportunity, right? Ultimately, ultimately, you know, we believe that competition is important, that it keeps us all efficient, it keeps us all providing our best product, but our best pricing. It's healthy, right? But by the same token, it's also true that irrational competition is not healthy for not just the airlines and our investors, obviously, but really for the market. It's not good for our investors. It's not good for our creditors. It dissuades people from continuing to invest in the sector. It creates situations such as the Viva situation where a lot of consumers ultimately get hurt when these airlines fail. It wasn't just Viva. Viva failed, Ultra failed, Aerogal failed in El Salvador. We've had a lot of these small airline liquidations. They're not good. They're not good. It becomes a political problem. On the one hand, and you talk to the regulator, you go like, these airlines are not going to be there. Either you allow them to be consolidated or they will disappear. It doesn't help. It's better to actually allow them to be consolidated, we think, and save the employment and save the customer relationships. etc. But ultimately, you know, the regulators have to decide.

John Strickland:And on that point, regulators, have they got sufficient understanding again of what they can sensibly require in terms of, as you said, keeping rational competition without being obsessive? Because again, if I think about the whole Air Europa thing, the way that played out, and I'm speaking very personally, it looked to me in Europe that would have been natural to go to IAG, less so in my eyes, to Air France-KLM or Lufthansa. But the European Commission put in place such incredible remedies. I think IAG had even offered to give away more than half the slots.

Adrian Neuhauser:We tried to be remedy takers with WAMOS. We offered up, you know, a solution that we thought was great with Air Europa. Yeah, yeah, where we offered— but we offered to use the WAMOS certificate to be the remedy taker, right? And sort of We thought it would've been great for us, great as a solution. Look, again, this is a personal view, but it is strange to me that regulators agree that in a world where there's a business that is a natural monopoly, whether it's power generation, whether it's distribution, for example, whether it's water, those businesses have a return, right? They determine a market return for them and they set fares based on those market returns. If you were to look at airlines, none of us actually make the return that we would make as a regulated entity, right? The idea that you have to keep piling and piling more competition to drive down prices when at the pricing we have, it's very hard to even make a reasonable cost of capital is a strange one, right? There's a balance there that needs to play out if you actually want a sustainable airline industry. You could say, look, what I care about, and many do, what I care about is lowering the pricing as much as I can today, and tomorrow's a different problem. I think that's a lot of what's going on. Over time, hopefully, this will turn into a market where we continue to compete very aggressively. We can continue to drive very competitive pricing, but at the same time, we have healthy balance sheets. Healthy returns, and there's a little bit more stability.

John Strickland:And still on the consolidation theme, I mean, if we'd been talking, what, 8, 9 months ago, the hot news then was a key consolidation move by you for in Brazil between Gol and Azul. And now we're, what, 8, 9 months later, that seems to have just gone away completely. Gol coming successfully out of Chapter 11, lo and behold, Azul just gone in. Do you think that may come back again, or has that moment been a goner?

Adrian Neuhauser:I don't know. Like, again, we are big believers in consolidation. We are big believers in, in, in, in taking complementary assets and driving out of that not just better financial results, but better service, better connectivity, providing a solution that is healthy for consumers, healthy for the countries. that we operate in and healthy for our investors. Within that, we found that Azul's network and operations were very complementary to GOL's. Now, like you said, GOL went through a bankruptcy. It's very healthy now. We have a standalone plan there that GOL has actually been outperforming on. We're very happy with its performance. Azul is now going through its own restructuring that just needs to happen. Whether the stars align in the future to make those things coincide or not, I don't know. Right.

John Strickland:It's interesting reflecting on the continents because just as you were talking about Azul, which of course comes originally, if you like, from the JetBlue stable, David Neeleman, the low-cost carriers in the US, and I mean, you can argue JetBlue is not really a low-cost carrier, it's kind of hybrid, but even the ones that originated like Southwest or Spirit at the extreme end, they're losing ground to the network carriers. In Europe, still holding firm with the likes of, you know, Ryanair, EasyJet was leading the way and holding a large market share. And here in Latin America, it's still a much smaller part of the total. We've got JetSmart, who we were talking to this morning, moving up. You've got parts of that in your entity. How do you think the mix is going to play out in Latin America? And is it all going to be about price and the demographic that needs the low price?

Adrian Neuhauser:It's certainly not about price, right? But these things have— we all like to give simple answers to really complex questions, right? There's a lot of different aspects to what's happened in the US, right? On the one hand, there's certainly kind of the phenomenon that everyone points out where a lot of the consumption has concentrated in the top 10%, 20% of income producers. Add to that that we have a younger generation that is a much bigger spender than we were. They get married later, they don't have kids, and so they give themselves these little pleasures. Add to that the fact that capacity growth has not been that large in the US in recent years. And so what you have is you have a limited size of premium cabins that you can charge more and more for, and that gives you the ability to subsidize the back cabin, and that gives you the ability to use your back cabin to compete very aggressively with low-cost carriers, puts low-cost carriers in a corner. And add to that the fact that in the US, increasingly connectivity is between major urban centers and between those major urban centers and the world. You have very few people going from Detroit to Birmingham. That doesn't happen that much in the US anymore. It's just how things have evolved. Europe's different. Europe, there's a lot of people flying from big towns to small towns. It's a great form of connectivity. They go for the weekend. You and I were talking before, people in the UK that have their weekend homes in rural France. People in France that have their homes in Portugal. That connectivity, which is very structural, to the UK and people want to go every weekend, the low-cost carriers provide and they do very effectively. They're playing in a different game than the low-cost carriers were playing in the US that was less relevant. Latin America, what we have is we have a population that needs to connect, that needs to fly, that we service with low fares. Of course, there is connecting that population to the world. That's a different product and that's a different— It's both, but what we think is essential, and we've made a key part of our business plan, is when we service that person that needs that short-haul connectivity, that needs to do it at a cost-effective price or at an accessible price, we can do it without requiring that subsidy from the front. We focus on being able to adjust the product, and the cost so that when we do that, it pays for itself, right? And that, that puts us, we think, in a strong position to shift around as, as hopefully our region grows, grows richer and we can also drive more people to the, to the front cabin.

John Strickland:And where that front cabin is relevant, I mean, you've made, I know, big changes in what is offered in Avianca. And again, I'm just reflecting with a European hat on, indeed, more parts of the world coming out of a pandemic. saw this shift where I was of the school that like premium traffic's dead, you know, corporate traffic's dead, the airlines are doomed. But it came back, but it was premium leisure and it seems to be sticking. Do you think that might be more space for— there's an opportunity in Latin America, not only outside of the continent, but some of the longer sectors within? It's not the rack rate high fare levels that they were in the past, but it's still a big margin improvement for you and more accessible.

Adrian Neuhauser:It is. And that's why, you know, We don't have a lot of things that are written in stone. We've kept trying to adapt what we're doing as we see the market shift. When we came out, we were very adamant about it's all cost-focused. Yes, we have a couple of premium seats. We sell them as a seat upsell. We don't— but if you look now, over 80% of our network, we've rolled business class back into as a bundle. We're selling it. Because you're right, there is latent demand there. And it's a mix of corporate travel and sort of premium leisure. We still think it's more price sensitive than, you know, just wealthier economies. There's less of that. It's a smaller population and it's still a more price sensitive population, but it is a significantly upgraded product to what we have in back and it's working really well for us.

John Strickland:Good to hear. And in terms of partners here on the continent, airports, there's been a lot of talk before you arrived about the new Lima airport and cost levels. Do you think there's enough opportunity for you to negotiate with airports across Latin America, or does it vary significantly by country? Can you go in and hammer out terms of volume deals and the like?

Adrian Neuhauser:Look, it varies significantly by country, but it is true that As airlines, and I'm not going to be the only airline CEO to say this, as airlines, our constant frustration is that while we are the ones that face the customer, behind us we have very consolidated, and we do it in a very competitive manner and with lots of players that spread out the field. When you take one step behind us, it's very concentrated. Whether it's airports, whether it's OEMs, it just gets very difficult upstream very quickly. And so what tends to happen is there's— and you've seen it with the OEMs and you've seen it with the airports— is there's significant cost escalation. That cost escalation ultimately, because it is a relatively level playing field, passes through to the customer. And there's a perception, you know, that we're driving up pricing to the detriment of the customer. But it's very— there's— we don't have huge margins. Ultimately, over time, that, that will pass through. The same issue, by the way, and, and we, we've made significant statements about this with, with, with ticket taxes, which are, which are high in Latin America, whether it's VAT, whether it's landing fees, etc. Those ultimately end up being a pretty significant piece of ticket.

John Strickland:That latter point really came up this morning, and again, I was wondering about How much time you would have to give to— I don't know what's the word— to charm offensive could be a polite way of putting it, with politicians, you know, about the way that the aviation sector, air transport, is seen as a source of tax revenues rather than as a driver of much greater revenues economically if it's used in the correct way.

Adrian Neuhauser:But again, it addresses the point that we made earlier. These are poor economies. They have to find ways to to service the needs of their populations, but they also have to find ways to finance themselves. Transactional taxes, whether it's VAT, whether it's ticket taxes, are much easier to determine and easier to collect than things like income taxes that are much harder to audit. We tend to trend towards sales taxes, VATs, etc. And, you know, that's a direct impact to the consumer. And it is a little bit contradictory with the idea that you want more accessibility and cheaper tickets and you try to drive that through competition. But ultimately, you know, you're— it's a difficult balance.

John Strickland:Adrian, the clock is running against us. I just want to see if anybody After lunch, would like to ask you a question directly, you can use Slido on the screen. Oh, we've got a couple in fact here. Let's have a look. Well, it comes— there's a question here that touches on, you know, the scale and synergies we talked about, about Avianca and GOL being very different airlines, asking the question about whether that really benefits Latin American traveler. I mean, I think we've touched on it because there's such a wide, wide church of travelers, and I guess both are large airlines.

Adrian Neuhauser:Well, this is— it is true that— well, let's start with something, with something unique about Latin America, right? And in that sense, you made the comparison with IAG, right? There's— if you look at the travel patterns in Latin America, right, the travel patterns in Latin America tend to be Latin Americans flying north or Latin Americans flying east and Europeans and Americans coming down. There's actually much less flying within Latin America than you expect right now. Now, we want that to grow. One of the things that we are doing now is integrating our networks, making them more efficient, etc. I think the benefit to Latin American customers, as you describe it, is less about perception than about the product you deliver, right? We interconnect the networks. We offer tickets. When you, when you, when you, when you look at our websites, increasingly you'll find tickets that essentially are crossing from one network to another that are allowing us to give better connectivity, better pricing, better, better, better schedules in a way that we couldn't do it otherwise, and that we do it at a better cost because we do extract pretty significant scale synergies from, from the 2 brands, right? I don't think that necessarily branding it as a single thing is necessary. And then over the next couple of years, you're going to see some pretty significant frequent flyer integration, which is going to try to keep you within the bubble of our different brands as a consumer as well.

John Strickland:Yeah, I mean, as you know, why, if it ain't broke, don't try to fix it in terms of the brands. There was another question up there. We talked about the 3 the 3 sort of parts of a triangle in Abra as it is now. But you do have a minority stake, I think it's a stake in Sky, and there was a question there whether Sky is likely to be another airline that will join the Abra Group.

Adrian Neuhauser:We've made no secret of the fact that we do have a financial investment. It's, it's a loan convertible. We have not converted it into Sky. We don't, we don't have a vision that we should be minority investors in airlines. So over time that will either unwind as a debt instrument or we will seek to consolidate it. And we certainly have interest. The markets that Sky flies in are very complementary to ours. The brand is very complementary to ours. Their, their, their product and sort of their, their, their strategy, we think, is very similar to ours and fits in well. But ultimately, the Sky shareholders need to make a decision there.

John Strickland:Adrian, we are actually out of time. I could ask you more questions. You've got to fly off and do important business. So It's been great to learn about the Abra Group and how far you've got so far. Look back to— look forward to speaking to you again in the future. So, Adrian Neuhauser, CEO of Abra Group, thank you very much.

Adrian Neuhauser:Thank you for having me. Thank you all for attending. Thank you.

John Strickland:Thanks a lot, Adrian. Cheers.

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