Winning When Airlines Look Alike: Strategic Coherence as the New Competitive Advantage

Transcript

Liege Eimerz:Good morning, everyone. Thank you very much for CAPA for giving us the opportunity to speak here today. I will shortly introduce our company and then ourselves. Lufthansa Consulting, we are 100% daughter of the Lufthansa Group, experts in aviation consultancy. And mainly airline and airports consultancy. We are celebrating our 50 years of existence this year together with our mother, who is celebrating 100 years, and we are in total 120 employees, out of them 100 consultants. We also have an office in Brazil. Our main office is in Frankfurt, but we also have an office in Brazil which aims to serve the Latin American market. My name is Liege Eimerz. I am partner at Lufthansa Consulting and also managing director of our daughter company in São Paulo. Together with me, Florian.

Florian Erbach:Yes, good morning, buenos días a todos. It's a pleasure being here on stage, and I'm happy to guide you a little bit through our presentation and The keynote. I think the good thing to what we have learned from the panels before us, that a lot of these patterns the panelists, CEOs were talking about, that this is also incorporated into our insights we're going to speak about in the next almost 20 minutes. So the question is, winning when airlines will look alike, strategic coherence. As a new competitive advantage. When we take a little bit the look back, there are— and this was also the outcome from the other discussions here about today— that the aviation industry is facing kind of a paradox. On the one hand, we see a clear growth on a global scale. Until 2045, the RPKs on a global scale are projected to be doubled. On the other hand, it seems like endless crisis, air traffic restrictions, regions which are not accessible by air transport. Inside this paradox, there are also a lot of things happening to airlines when it comes to the purpose of strategy and also to business models. What we saw in the last couple of years was a clear trend that airlines even become more and more similar in the trends of convergence. Former full-service carrier unbundled services introduced ancillaries, but also low-cost carriers introduced services which were in the past part of more premium, or the full-service carriers introduced their own loyalty programs, priority boarding, and all these kind of stuff. This then brings us, of course, to the question, what will this mean for the future of airlines globally, but of course also here in the Latin American region? So we as Lufthansa Consulting believe in one or two simple things, and we say it's the winning airlines in the future will not be those who have the biggest fleet or the best technology, the boldest initiatives towards the customer. We believe that the airlines who are able to manage the complexity of the world with all upsides and downsides, that these are the ones who will win and sustain their competitive advantage in the future. And what this means in particular, we're going to speak a little bit in more detail about now. So what you see now here is a little bit of an insight from earnings calls of larger airlines in the last 5 years. I mean, in general, there are some not that spectacular insights that topics as network planning, fleet management, revenue management, premium and loyalty topics are still on a board level the dominating ones. And on the right bottom-hand side, you see the small icon also of AI and digital, which might become even more focused in the future. What this teaches us is, I think, in 2 ways. The first one, that the classic aviation topics need to be rocket solid for each strategy and business model. They need to be in line. So network needs to be in line with the fleet structure, revenue management, the offering, but of course on the loyalty side, of course at a sustainable cost basis. And the second, and this is also what we're experiencing in a lot of airlines around the globe, is that these priorities might stand in conflict to each other and departments, stakeholders are competing, so to say, on the agenda for CEOs, for airline executives, and board members. So in the next step, I will go a little bit further here in the market, and then we see also what this might mean as implications for airline strategies and business models in the future.

Liege Eimerz:Florian, before you go further, this analysis was done by Lufthansa Innovation Hub, which is also one of our daughters dealing with big data analysis. They have looked into the profit and loss statements and discussions by the CEOs of the 10 biggest airlines and airlines groups in the world from 2022 until first quarter of 2026. Those are the topics that they are still worrying about.

Florian Erbach:Absolutely. There will be, I think, even way more. So then let us dig a little bit deeper into the market and the one or the other number I already heard. And I'm coming back to my opening statement. I think the opportunities, especially here in Latin America, never have been so limitless when we're looking at it from a market perspective. So in general, when you see the breakdown here on, on the growth projections in the next 10 years, the Caribbean overall leading with 5.3% CAGR throughout the next years, and similar trends also South America and Central America. The region, beside of course the traffic, and we learned it from CAPA this morning, the intra-Latin American traffic is especially to Africa, of course, at the bigger growth market, to Northeastern Asia, but also to the Middle East and Europe. When we then take a closer look, and this is more the middle section here of the slide, into the particular segments the airlines are facing, we see a clear trend that premium here in Latin America is rising, 22% growth in last year. So there's a clear opportunity, and you will also see in a couple of seconds that premium is not that well addressed so far here in Latin America. The second topic, business travel. The average spend until 2034 is projected and forecasted with an annual growth of 5.4%. Also, this segment, being it more premium or also in the economy class, is also expected to grow in the future. Then one thing, this was in the panel right before where we took a look into tourism, of course, It's heavily impacted by all the crises around the globe, but compared to the recovery times back in 2000, we saw also that this recovery time almost came down to 10 to 12 months, which is 50% of the time to back of the century. Technology, this was the last question right before we came to stage. I think this is, of course, a key pattern. The age of AI brings limitless opportunities when it comes to customer insights, to customer analytics, personalization, retail media on board. So you should know your customers, the data, you know who's sitting on the respective seat. So you might also use your IFE to bring in some advertisements and to keep the customers loyal. But of course, it also the technology size has implications on operational processes, on servicing, and of course on administrative efficiencies. One observation we have, and this is then on the right-hand side and on the bottom, that there are also some undiscovered potentials, I would call them. Less than 7% here in the Latin American region have offerings which are beyond the pure ticket sales. What do I mean with this? This is insurance, ancillaries, intermodality options to the customers. So there's a lot of opportunities where you can partner up. And also when we think about further partnerships in alliances, we see that less than 20% of the airlines here are part of alliances. So partnering up in networks, in revenue management, and of course on the loyalty side. And the deeper integration as part of a joint venture where you then have a deeper cooperation than in the alliances, in joint ventures also quite limited so far. This brings us then to the question, what does this mean from a from a market and customer perspective to the strategies and business models of the respective airlines. I was talking about a little bit of this convergence of business model right at the beginning, full-service carriers, low-cost carriers, which has shifted throughout the last couple of years. And on the graphic, you can see here that the premium topic at the very top level of services There's also a small or simply a small portion of airlines dealing with this segment, especially in the Middle Eastern region, not here in Latin America. The all-rounder business model, which broad or which serves a broader market segment. Then the long-haul value carrier, more like a niche business model, and then the value carrier or former low-cost carrier, which puts a lot of emphasis on low prices, which are then handed over to the customers. So what does this now mean for the business models? I think the key questions behind these business model types are for the premium carrier to ask yourself the question, which each and every decision, in the best case of course, how do we sustain a superior customer experience and customer satisfaction? The all-rounder and executives as for these companies should ask themselves the question, how do we manage this complexity with short-haul flights, medium-haul flights, long-haul flights potentially in different customer segments? So handling the complexity here and staying consistent is the key question here. For the long-haul value carrier, it's a particular question toward the focus. So are the network designed to the respective traffic flows? And last but not least, the value carrier, of course, should ask himself the question from a strategic point of view, how to keep it as simple as possible towards the customer and maybe not overstress topics as ancillaries on a cost side to the customer.

Liege Eimerz:One example. Lufthansa Airlines is a premium, right? The expectations are quite high. The prices are higher than the average, but then everything is spoiled if the passenger is waiting 1 hour for his baggage. So this is exactly what we try to say. Whenever you decide as an airline for one of these models, be very consistent and try to really focus your strategic activities in the customer journey, in the customer touchpoints, and keep the strategy everywhere functioning.

Florian Erbach:I fully agree, and this is also the reason why we brought now some potential traps, because the questions you should ask yourself might be very easy, but when it then comes to realization and operations, it's of course a different perspective. So what you see here now are 3, we call them strategic coherence or strategic consistency traps in the respective of commercial operations and also loyalty. Let me guide you a little bit through these ones. The first one is addressing especially the segment of premiumness. So I think the one or the other already heard that airlines LATAM is a good example, but also Lufthansa, that they introduced light fares also in the premium cabins. The rationale behind, I think it's quite clear, to capture the willingness to pay to fill also the premium compartments. But at which cost is the question here. So what from an airline and revenue perspective might look nice to increase revenues, then bring also a potential downside to the customers. Liege, you were explaining right before when it comes to convenience to different services in rebooking or refunding. So again, here, take care and make sure that this is— everything is consistent to what the customer is expecting. The second example is towards the ancillary, also trade-off between commercial and operations. Baggage allowance fees, and Avianca proved as an example here because they introduced different fares on cont versus intercont fares. In cont fares, you don't have any allowed baggage, but you have it on the intercont fees. So this might also trigger a certain degree of confusion towards the customer. There's a competition on board when it comes to the cabin. Space, but you also might need a check-in agent who's then controlling what the people have brought and what weight the luggage is about. So again, here a big trade-off because leveraging— between leveraging revenue on one hand, but again also having a risk of increased cost on the operational side causing delays and then refunds potentially for passengers who might have missed their connecting flight. Last but not least, and I was already talking about unexploited partnership potentials, brings us potentially also to Azul, who have a broad scale of loyalty system where you can also redeem your points and intermodality services with buses and topics like this. And again, here, consistency between the core airline focus and the complementary services, which is also easy to understand for the customer, is key on that end. What we want to pinpoint here for all of these decisions, standalone, they totally make sense. There might be business cases behind, but again, always have in mind that the overall business model stays consistent and addresses the expectations the customer have.

Liege Eimerz:As we could see, or as it was discussed this morning regarding Copa, who has a very consistent business model for many, many years.

Florian Erbach:Exactly. The trade-off here was, I think, also the question if the business model with more long-haul flights or with longer flights makes sense. Again, here it was quite a consistent statement from Copa this morning. This brings us to some latest insights, and this is very hard to read. Sorry for this one. The handout will be available via the download function. But what you should see here on the top left-hand side is the financial performance of the carriers here in the region. And again, here our finding was that we simply recognize value carriers and all-rounders being present here in the region. So premium is not that well addressed so far. And on the right-hand side, and this is way easier to read, our top levers for customer satisfaction, and then at the end also as a contribution to the financial performance. Again, consistency is key here. What customers do value is the travel class offering to what they expect in the respective business model. The right balance between ticket and ancillary sales, and then the overall service level from booking to the flight experience over to loyalty and servicing. So a consistent customer journey from the beginning to the very end. And then again, also the consistency of the service level in case you serve different market segments or stage lengths. These are the key levers. We also took a little deep dive into what the top airlines here in Latin America have in common and also what we saw here. Copa is again a very, very good example that there is a distinct positioning in their core market and at the home hubs. There's a hard alignment between the commercial and the operating model, so network, fleet, and then also the other operations functions. Clear differentiation in the product towards the customer experience in line with what you promise as a brand and as a business model. And last but not least, we also see that loyalty and partnerships become even stronger in the future and can become a key pillar for strategic Success. Now to summarize everything together, again, our key message is about coherence and consistent business models. So for your next question, when you're going to leave the room, you should have in mind 4 questions you should ask before your next decision-making or board meeting. So which customer promise is the key one in your business model, and if or how does this decision strengthen your business model? What economic logic is pursued by the respective decision you're going to talk about? What else must change? So avoid isolated decision-making on a strategic level, and always a good question to answer yourself what complexity can be removed at the same time when introducing new services to keep it really consistent, coherent, and clean to the customer. And with this, I would like to thank you and hand it back to you, Liege.

Liege Eimerz:Thank you very much for all of you. This is based in a framework that we have developed together with University of St. Gallen. Where we help airlines to detect the holes in the system and what needs to be done in those holes in order to keep the consequent strategy being implemented. Thank you very much.

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