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Recorded at CAPA Live October from Puerto Rico

CEO Interview with Swiss International Air Lines, CEO, Dieter Vranckx

Following the bankruptcy of Swissair in 2001, Swiss International Air Lines (SWISS) was formed from the expansion of Swissair subsidiary Crossair. Now the national airline of Switzerland, Swiss is a subsidiary of the Lufthansa Group with hubs in Zurich and Geneva.

A member of the Star Alliance, the carrier operates a domestic and regional network within Switzerland and Europe as well as international services to Asia, North America and Africa. Swiss previously owned a subsidiary unit, Swiss Global Air Lines, which later merged into the parent in Apr-2018. Swiss International Airlines is also the launch customer for the Bombardier CS100 aircraft, rebranded as Airbus A220-100.

Speakers:

  • CAPA - Centre for Aviation, Chief Financial Analyst, Jonathan Wober
  • Swiss International Air Lines, Chief Executive Officer, Dieter Vranckx

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Transcript

Speaker 1:

Okay. So I will shut my video off and I will mute myself. So I will start timing once you start talking, Jonathan, so when you're ready. And then I'll give you the five minute warning towards the end. Okay. Good luck. See you at the end.

Jonathan:

Good morning, good afternoon, good evening, depending on where you are in the world and welcome to CAPA Live. And I'm very pleased to welcome today, Dieter Vranckx, Chief Executive of Swiss.

Jonathan:

Welcome, Dieter.

Dieter Vranckx:

Thank you very much.

Dieter Vranckx:

Hi, Jonathan.

Dieter Vranckx:

Hello, everybody.

Jonathan:

I've got some questions to run through, hopefully we'll get through them all. But I just want to start with some basics about where you are in the recovery. So as a percentage of your 2019 capacity levels, roughly where are you at the moment?

Dieter Vranckx:

Well, roughly at the moment versus 2019, we are at around 50%. So half of the 2019 capacity is currently in the air. We just have the summer month behind us, July and August, and that's the capacity we are counting on also, going forward.

Jonathan:

Okay. And is that reasonably uniform across the network, do you have areas where it's better than that and areas where it's lower than that?

Dieter Vranckx:

Well, generally we have a higher degree of capacity in Europe. We have a lower degree on the Asian front. We still see a lot of restrictions on the Asian side. Also, China is really underrepresented in the portfolio. And now, with the U.S. opening up, we do expect that, that's picking up, especially traffic-wise.

Jonathan:

Yes, I mean the U.S. opening up is good news for many European airlines. So how important was the U.S. prior to the pandemic?

Dieter Vranckx:

Well, there are two aspects we have to take into consideration. First of all, we have seen that before the U.S. opening up, we have seen a stronger demand out of the U.S. into Europe than what we have seen before corona. So we can say that a part of the missing Europe to U.S. traffic was compensated by a higher demand ex-USA. But it's clear that by far, it was not compensating the missing parts. So now with the U.S. opening up, it's a really important factor for us, especially because the U.S. intercont traffic is a large part of the intercontinental side.

Jonathan:

Right. And to the extent that you can tell me, because I know Lufthansa Group obviously is a public company, so the data report is controlled, but capacity is roughly half of 2019 levels, but where is traffic?

Dieter Vranckx:

Well, we can count on traffic picking up especially during the summer month, July, August, and the beginning of September. The big question will be how the business travel is coming back. So is business travel growth going to continue or not, that's one of the important elements for us. We do see a constant growth of business travel, we do expect that growth to continue. However, it's going to take a while before the corporate travel will reach levels which we have seen before corona.

Jonathan:

Yes. I mean, I was going to ask you about the premium cabins, and presumably the share of revenue that came from those premium cabins was much higher than the share of traffic as is generally the case. So how do you replace that lost revenue?

Dieter Vranckx:

Well, traditionally Swiss has a healthy mix in the premium cabins of corporate travel, but also private travel. And therefore, we have seen also in the past that when corporate travel reduces or the demand in specific month in the year, demand reduces on the corporate side that the leisure premium traffic is picking up and partly compensating that. So that trend of course will continue in the next month and years, especially because the leisure segment is picking up much faster than what we have seen before.

Jonathan:

Okay. But you think there's ever going to be a full return to the same levels of corporate travellers in the past?

Dieter Vranckx:

Well, we know in our business that return always comes back. The question rather is, when is it going to come back to a full return? It will be a recovery which takes a little bit longer than what we have seen in the past, especially if you have seen the 2008 financial crisis, the 2001. That was rather a V type of recovery, a steep decline, but then a rather quick recovery within six to 10 months. The expectation is that it will take longer in this recovery. So there, basically, we are counting on an overall capacity of around 80% for 2023, then I'm talking overall, and quite an impact on corporate traffic, especially the big corporate.

Jonathan:

Okay. So 80%, 2023. So back to pre-COVID levels, what '24?

Dieter Vranckx:

Well, we are looking into those numbers. It's very difficult to make predictions at this stage. Pre-COVID levels for total traffic, that we're looking rather at '25, '26.

Jonathan:

Okay. So then moving on from that, how has the crisis affected your fleet plans?

Dieter Vranckx:

Well, basically the goal is really to create efficiency into the fleet and to make sure that we phase out the four engine aircraft over time. So at a certain point in time, we have and we will phase out the 340-300s. The reason why we are still flying the 340-300s is that they give us quite a high degree of flexibility, this is the first point.

Dieter Vranckx:

Range-wise, you can send them almost anywhere in the world, so that gives you a huge network flexibility. And number two is that the 340s have still a high degree of cargo capacity. And we know that during the last 12 to 18 months, cargo has played an important role in keeping up a large degree of our intercontinental network. So cargo capacity is continuing to play a role also going forward.

Jonathan:

Okay. You mentioned that the 340s... and I can see them on the shelf behind you there, you've got those four engine aircraft models there... So you talk about phasing them out at some point, when do you think you will no longer be flying those?

Dieter Vranckx:

Well, it depends a little bit of how the market develops, but I would see the period somewhere between '24, '25, the period to get them out of the fleet. Though we have, of course, also the 777 aircraft. That aircraft is the largest one we have on the intercontinental side in our fleet, but it has proven an extremely efficient aircraft and has shown also that the really large cargo capacity is giving us clearly an edge on the intercontinental side. And then we have the 330s as well.

Jonathan:

And is there also kind of environmental factors that may be pressuring the withdrawal of a four-engine aircraft?

Dieter Vranckx:

Of course, that plays also a role that we have set our targets to reduce our CO2 imprint by minus 50% by 2030, and net zero by 2050. There is no single magic measure which will allow us to reach those targets. It will be a combination of different elements. Of course, sustainable fuel will play a role, but also continue continuing to invest in new aircrafts, new engines, new technology in order to contribute to this CO2 reduction.

Jonathan:

And do you think that the crisis... I mean, looking at the industry more broadly, not just at Swiss, but do you think the crisis has made it harder for the industry in terms of meeting environmental commitments, or do you think it actually gives additional impetus to all of that?

Dieter Vranckx:

I think the crisis has sped up the focus on the environmental focus which we had. We had it before, but it has moved up in our priority list. And it's now in the top three priorities we have set for Swiss going forward. It's important to see that we know that the environmental focus and the environmental topics we have, have been important. But during the crisis, it has shown that we have to focus on topics, which are key for us going forward. And so in a crisis mode, as we have been in the last 18 months, you have restricted access to funds, you have restricted access to manpower. And in that environment, you have to really set the key priorities and environmental focus and reducing our CO2 emissions is one of those top focus topics we have decided upon in our strategic positioning in the last couple of months.

Jonathan:

Sure. I mean, I think, I think that seems to be the case with many airlines, the focus on what the airline industry knows it needs to do, has increased. But do you think there's been an equal... Has that been matched by a government commitment? I don't mean government commitment in words, but government's actually doing things to help the industry because there's obviously a need for funding. I don't mean direct subsidies, but creating an environment that helps investment going into the new technology that's needed. Do you think governments are doing enough?

Dieter Vranckx:

I do believe that the crisis has brought us into a mode where we have created a communication channel with governments. And I can speak, of course, for the Swiss government, the focus and the awareness that only jointly we will reach the goals we have set, is there. We have now to catch up on, let's say, lost time, if the last couple of years ... We have to make sure that we use that communication channel in an efficient and constructive way. And what I think is that during the crisis, we have been very close to the government, that we have gotten government support during the crisis and that connection, that brought us closer together.

Dieter Vranckx:

And also on the environmental side, I do believe that on the government side, there is more to do, but also on the airline side. And in that respect, we are both together in the same boat and we will have to create the future together. The crisis has really driven a closer cooperation. And I strongly believe that by jointly working on solutions, we will also jointly find ways forward and that the government will also play its role in supporting the airline to reach those goals.

Jonathan:

Okay. And obviously, you say you're speaking about the Swiss government in particular.

Dieter Vranckx:

Yes.

Jonathan:

But part of the Lufthansa Group, you have some insight into what other airlines are saying about their own governments across Europe as well. Do you get that sense from other Lufthansa Group companies too that governments know what they should be doing?

Dieter Vranckx:

I think there is a high degree of awareness on the governmental side. It's clear that the solutions might not be all exactly the same in the different countries. At the end, we are Europe, but we are still a combination of different countries and different governments, and certain different approaches. But at the end, the goal for all of us is the same, it's to reduce our CO2 emissions by 50%. And therefore, it might be that the mix of the different measures you have in certain countries will be not exactly the same mix you have in other countries. But I can speak especially of course for the Swiss situation, but I know that all my colleagues also within the Lufthansa Group are in very heavy discussions with their governments and having the sense of intensive discussions in order to find solutions, which basically don't damage our competitiveness, because I think it's important to set up the right measures in Europe and in the different countries.

Dieter Vranckx:

But of course, we are working and playing in a global industry and we have to make sure that the measures we put in place is not damaging our competitiveness in this global industry, and that's really important.

Jonathan:

Okay. Now, coming back to your fleet, I was just looking at the CAPA fleet database, which tells me that you have a number of A320neo family aircraft on order, including A321neo ACF aircraft. I was just wondering whether you see greater potential for these longer range, narrow-body aircraft to reach destinations, maybe across the Atlantic or other parts of the world that you would previously have used wide-bodies for? Do you have plans to use narrow-bodies on those long-haul journeys?

Dieter Vranckx:

Not for the moment. We continuously look at opportunities. We evaluate market changes, also traffic flow changes. But for the moment we don't see a direct need for Swiss to go into the narrow-body long-haul, there are several reasons for that. But especially our model, which we had before corona and during Corona, has shown that our balance of passenger revenues and cargo revenues is really a crucial for a long-haul profitability. And from that perspective, for the moment, there is no plan to change that concept and to go certain routes into the narrow-body. With that being said, I never exclude any options. I strongly believe, in our business, every couple of years you have to revisit topics you have rejected the years before in order to see if things have changed. So it's a continuous adaptation and a continuous flexibility of evaluating the options. But I can say for the moment we don't have any plans for a narrow-body long-haul aircraft.

Jonathan:

Okay. So those 321s would all be in your European network?

Dieter Vranckx:

Yes, they will be.

Jonathan:

Okay.

Jonathan:

Now you mentioned cargo there... Passenger capacity you've told me is 50% of pre-crisis levels, but cargo performance has generally been much better for many airlines. So where is your cargo? How is your cargo performing at the moment?

Dieter Vranckx:

Well, the cargo is performing very strong, that we had last year and a major part of this year, we had three of our 777s which also had main deck capacity on the cargo side. We took out the economy class seats and we're optimising the cargo space. So that gave our colleagues on the cargo side, additional capacity in the network. 50% of our long-haul network, basically it's really supported by the strong cargo performance, and our cargo colleagues are doing an excellent job to really take advantage of the advantages in the markets on the cargo side. We do expect that situation to continue further into 2022, but it's clear that the more belly capacity will come into the markets, the more there will be a pressure on those excellent results on the cargo side.

Jonathan:

Yes, it's been quite unusual seeing the global cargo industry in aviation achieving load factors of more than 50%. It'd be good if that would continue.

Jonathan:

So we've talked about capacity and we've talked about fleet, what about workforce? I know the crisis has led to a lot of cost reduction, a lot of flexing of workforce sizes. So where is Swiss now with that? And also, how has the industrial relations been throughout? This has been a very pressured situation, even to the extent that you have things like mandatory crew vaccination coming in, and all of these things have created very different environment for people to work in.

Dieter Vranckx:

Right. You're right. First of all, I said before that we have a plan whereby we are expecting 80% traffic overall by 2023, which means that we have immediately set up a restructuring to make sure that we take out 20% of our costs and 15% of our capacity as we speak. That was important because if you know that in the midterm you will not need that capacity, you have to take out the costs of that capacity as soon as possible. That basically led us to a point where we will, by end of this year, have reduced 1,700 positions within the company. And unfortunately, it was a difficult discussion, but unfortunately we also had to lay off quite some people, around 500 this year, in the first half of this year. We will have finished the personnel restructuring almost completely by the end of this year, which gives us immediately a better cost position to start in 2022.

Dieter Vranckx:

And that was also the goal, reducing our cost as soon and as much as possible in order to stop the year 2022 with a much lighter cost position, which should help definitely our competitiveness in the market. With the unions we had, of course, restructuring the company and reducing positions is never a really fun topic to discuss. It's tough. It was difficult. We made sure that we had socially responsible conditions for people leaving the company and that we had the social plan for them. So that was also discussed in a consultation phase with the unions. We had the clear goal to explain the reason of that restructuring, why it's so important for Swiss to get to another cost structure. And at the end of the day, we had a lot of understanding. At the same time, it has been really a tough period for many of us, including also our teams which basically saw quite some team members leaving the company.

Dieter Vranckx:

I have a lot of respect for the unions because they represented, of course, the interests of the employees. And at the end of the day, we had the same interests from a company perspective. We wanted to do that in a socially responsible way. We managed to do that, and we will continue that approach. That means that we had discussions, but no fights with our unions. And I think that's the way to manage structural restructuring.

Jonathan:

Sure.

Dieter Vranckx:

Important also for me is that now that we have a clear cut, we also are able to show perspective for the remaining workforce, because we're going forward with this team to create Swiss which is smaller, but more flexible and greener in the future. And that's the vision we have set, and that's what we're working on too.

Jonathan:

Sure. So the numbers that you talked about, layoffs, was that 20% of the workforce? What was the percentage?

Dieter Vranckx:

That was around 20%.

Jonathan:

Okay. I mean, is there some scope for changing the nature of the employment contracts to make it more like the Ryanair model of employing people on a sort of variable contract, so they're not permanent, but they come in and they go as you need them? Is that something that could work with you?

Dieter Vranckx:

No. We believe in loyalty in employees which are with us for many years, and we believe that employees have a high value to the company and as such also a high value to our customers. Experienced, knowledge, learning... And learning also includes for me making mistakes... are part of our culture. We have a very open, a very direct culture. We try to limit the level of the hierarchical levels, and we have a very strong Swiss spirit, and the Swiss spirit is created by the employees, by the teams which work together across functions. The model of hire and fire, and then we need them, we don't need them, is not working for us. It doesn't fit our culture and it doesn't fit also the atmosphere, the knowledge culture and the experience we want to build on. And it would also be a completely different company and it would kill the Swiss. Period. And that's what we want to continue in the future.

Jonathan:

Okay. The other approach that we see with lots of airlines, and this has obviously been before the crisis is the establishment of lower cost subsidiaries. And obviously, a great example is your own parent company, the Lufthansa company which obviously has Eurowings as a lower cost subsidiary. Within your organisation, you have Edelweiss Air. How does that fit into the group? And then is there a potential for setting up local subsidiaries within Swiss?

Dieter Vranckx:

Well, we have Edelweiss. In order to really cover the leisure segment within the Swiss market and the European market, it is very much in sync with the Eurowings discover plans and the Eurowings build up such that there is a lot of coordination between the companies. But Edelweiss has a very strong history in Switzerland and has its roots also in Switzerland, and has been offering an excellent product in on the leisure segment. Edelweiss is a smaller company, which means they're very flexible, they're very agile, and they react very fast to changes in the market trends. We also know that on the leisure side, one year it's more Turkey, the next year it's more Spain, and the third year it's more Greece and Portugal. So those are the elements which is really the strength of Edelweiss, and we also want to continue building on that strength, especially because the leisure segment is, as we see, very strongly picking up as we speak.

Dieter Vranckx:

Now, on the Swiss side, for us, flexibility and making sure that in the future we get more flexible is the key going forward. We do not plan any creation of a low-cost platform. We have a low cost platform with Eurowings within the Lufthansa group. And for sure, the idea is not that every single carrier in the group is setting up their own low cost platforms. We know that in order to have an efficient low cost platform, you need a certain scale. It will be very counter productive that every single airline puts their own low-cost platform. Eurowings has been successful and will continue to grow in that direction, so there is no need for us as Swiss, focused on a premium positioning in the market, to set up a low-cost carrier.

Jonathan:

Okay.

Jonathan:

And this actually brings me to my next question, which is the relationship between Swiss and the Lufthansa group more broadly, how has that worked in the past and has it been changed by the crisis?

Dieter Vranckx:

Well, we have an excellent relationship within the Lufthansa group. We are working closely together on the commercial front. And therefore, we can offer as a group, several hubs and several options for customers to fly from A to B. That gives us also huge flexibility in case of changing habits, changing traffic flows, and in case of, for example, change of routines. So that cooperation has been going on very strong.

Dieter Vranckx:

We have seen during the crisis that it is really important to have several hubs within the group, because Frankfurt has been really the stronghold during the midst of the high crisis in 2020. At the same time, we also see that each of the hubs has its function within the system and we are, as the Zurich hub here in Switzerland, growing at the same speed as Frankfort for the moment. So that's a very clear signal of the importance of the Zurich hub within that system.

Jonathan:

And you mentioned hubs and do you see any threats to the hub system, so connecting traffic from the crisis and also developments to an aircraft technology allowing more point-to-point travel?

Dieter Vranckx:

No, not at all. We have seen that actually the hubs in the crisis have had an extremely important function. And we have clear proof that the hubs before the corona crisis were successful. We have seen now that during the crisis, actually the hubs were keeping certain OND connections in place, just because we had the option to bring several small pockets of people into our aircraft. So from that perspective, from before the crisis and during the crisis, actually at both instances, we have gotten a clear confirmation that hub-and-spoke system is clearly working in both situations. And therefore going forward, definitely the model for us.

Jonathan:

Okay.

Jonathan:

Now moving on to a different topic and that's the broad sort of financial position, so I know the Lufthansa Group... Lufthansa itself has recently completed a new issue of shares. And I know that in last year in the crisis, Swiss received a loan of 1.4 billion Swiss francs, I believe, from the government. Lufthansa wants to use some of the proceeds of this new rights issue to repay part of the German government's investment. Where are you with your state aid, are you paying it back? Will you need more? What's the situation?

Dieter Vranckx:

Well, we have received a credit line from the banks in Switzerland, which was backed by the government. So that's the correct way of looking at it.

Jonathan:

Yes.

Dieter Vranckx:

And so we have been pulling from that credit line in the last one and a half years. And we have been, at certain instances, repaying into the credit line, so reducing our debt again. On your question on how and when would we think to repay the credit, these discussions are ongoing and I cannot give any further comments on that point.

Jonathan:

Okay. Fair enough.

Jonathan:

Just because we're coming right towards the end, the time has gone so fast, but I'm going to ask a final question which is, what new opportunities has the crisis presented to Swiss?

Dieter Vranckx:

Well, I think that on the opportunities definitely on the cargo side, we see that segment was not only crucial for us before the crisis on the long-haul, but also has shown a huge value for us as a company. And going forward, it will be a topic of focus, especially because also for Switzerland, we continue to fulfil a logistic role for for the country. So that's one clear learning and also opportunity going forward.

Dieter Vranckx:

The second one is that, well, I strongly believe that there is not only much more focus on ecology or CO2 emissions, and which was triggered, I believe, also through the crisis and during the crisis and got a higher speed. But I also believe that it will be a differentiating factor. And I am very happy that in our strategic plan, going forward, for Swiss, we have put that topic on the top of our agenda and we will continue to focus on that very heavily. And the goal is there to differentiate us as Swiss and a Swiss carrier from the rest.

Dieter Vranckx:

So those are opportunities which I think are crucial for us going forward.

Jonathan:

Very good.

Jonathan:

Well, thank you so much. We've run out of time, but thank you for taking the time to speak to us. And thank you to those of you who've tuned in to watch.

Jonathan:

Bye-bye

Dieter Vranckx:

Most welcome. Thank you very much. Bye-bye.

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