The global aviation market is booming. A strong growth in passenger traffic in 2016, especially in India, has prompted both domestic and foreign airlines to focus more on the Indian aviation sector. According to the International Air Transport Association (IATA), passenger traffic rose 6.3 per cent in 2016, which is above the 10-year average annual growth rate of 5.5 per cent. The fourth-largest carrier in terms of total passengers carried on international routes, as per IATA, Lufthansa, which is the largest foreign carrier group operating between India and Europe - with a market share of 15 per cent, recently made Delhi its first global destination to launch the commercial service of its most modern long-haul aircraft, Airbus A350-900. In a conversation with Business Today's Rajeev Dubey and Manu Kaushik, Carsten Spohr, Chairman of the Executive Board and Chief Executive Officer of Deutsche Lufthansa AG, and Wolfgang Will, Senior Director, South Asia, Lufthansa Group Airlines, spoke about the emerging trends in international aviation markets and Lufthansa's India plans. Edited excerpts:
Do you think the worst is over for the globalaviation industry? Which way is it headed now in terms of profitability? What about theconsolidation happening all over the world?
Carsten Spohr: Let us start with the global perspective. First of all, this industry has never been safer than it is today. This is always worth mentioning when we talk about aviation. Second, the industry has been able to return its cost of capital on a global scale last year, and has been growing faster than the GDP [gross domestic product] around the world. From the global perspective, we are seeing better years than we probably had seen for a long time. It is obvious where markets are as open as they are fair. The markets where consolidation is taking place show better results than those parts of the world where competition is distorted by government subsidies or lack of consolidation.
We will hopefully see more consolidation, like in the US, and more level-playing field in parts of the world where we don't have it yet.
How do you see the Indian market in this context, especially the capping of fares at `2,500 fordomestic flights with duration of up to two hours?
As a frequent visitor to India, I am glad to see how well the country has understood the importance of aviation for a healthy economy. Obviously, there are huge challenges. Infrastructure is always a challenge when you have fast growth. India needs to make sure that this is a healthy and competitive industry. Again, wherever in the world we are, and in whichever industry we are in, trade can only be as open as it is fair, and that's what regulators have to provide. With that, and the dynamics we see in this market, which is bigger than anywhere else in the world, we definitely see a healthier development of the aviation sector in India than we have seen for a long time.
How do you see capping of fares?
To be honest, as someone who doesn't operate domestically, I leave this to Indian experts, who know more about it than I do. It's probably not an issue for a global European carrier to get involved with.
When you talk about government subsidies, we assume you are referring to some Middle East airlines. How much of a disruption is that for the global aviation industry?
I think it's a huge element of disruption. I see airlines from Europe and Asia leaving routes between Europe and Asia. The WTO [principles] apply to industries all over the world but aviation. We may not be able to bring aviation under the WTO, but nothing keeps us from applying the WTO principles. That's our expectation from governments around the world, including the European Union, which is now assuming a stronger role in negotiating aviation.
Is it [subsidy] largely a Middle East problem or does it happen in other parts of the world too?
When it comes to the network of Lufthansa, the biggest impact comes from the Gulf... It's a global industry, so we should have a global agreement thatopenness and fairness are in stable relationship with each other.
The biggest subsidies come in which form - capital funding or pricing?
There are various forms of subsidies around the world. The US carriers talk about subsidies of 41 billion euros for one region - the Gulf. In the end, it doesn't matter which form of subsidy is given. We need to have fairness for all players in one particular market, and that's how other industries have worked.
How will the rise in global fuel prices impact airlines? How are you gearing up for a crude price hike?
We should not be too nervous because the recent increase in fuel prices takes us nowhere near the high we have seen before. This industry has always been able to react to changes, even disruptive changes. I think what we are seeing right now is not unhealthy but something in the range of what we have seen over many years. I am not at all pessimistic about 2017.
Has fuel cost as a percentage of total cost gone down? You do hedging to take care of fuel prices. If oil prices keep rising, do you have some mechanism to keep your profits intact?
The Lufthansa group has shown healthy profits over the past years with varying fuel prices. One way for us to stabilise ourselves is hedging. One very important answer to high fuel price is modernisation of Lufthansa. We are introducing 40 new aircraft this year; we introduced 46 last year. The A350, which brought me here, uses 25 per cent less fuel per seat, and generates 50 per cent less noise. That's the answer of Lufthansa. Modernisation is the answer to challenges. Of course, you need to be healthy to be able to make those investments. We are spending more than€2 billion euros a year on new aircraft and modernising Lufthansa, which not only has an economic output but also an ecological output, making this a healthier industry for our shareholders, people living around airports, and our staff.
What model do you follow for aircraft acquisition?
Lufthansa is one of the few airlines in the world with investment-grade ratings. Historically, we have always been conservative and have been buying aircraft rather than leasing them. Don't forget that we are conservative but innovative Germans.
What are the new trends in financing or buying aircraft? What's the most innovative thing that Lufthansa has done in recent times?
One of the most innovative things Lufthansa has done recently doesn't sound innovative at all. We have been looking at used aircraft in addition to the 250 new aircraft we have ordered for the next few years. There's an over-supply of used aircraft in the market and we have to take advantage of that. We have got used A330s and A320s for our subsidiaries. We are now operating 15 airlines in the group and there are too many aircraft out there.
What's your strategy for the Indian market?
Bringing our brand new Airbus A350 to India first is in line with many other introductions here over the past few years. India is one of the fastest-growing markets. So, our India strategy is to foster our position as the No. 1 European airline in this market. When it comes to frequency, we are operating 70 flights a week. We are also introducing a new service, from Mumbai to Brussels, this summer. As for our product promise, five of our 10 flights that we operate every day have first class. It shows that we are realising the potential of this market, not only in terms of growth-we are growing at 3 per cent a year-but also in terms of the premium demand that we see here. [We have seen] a very successful demand for the premium economy that we introduced three years ago. We are one airline that has a consistent business-class product in all of our aircraft flying to Europe. Those premium investments we did over the past years in India are now paying off, giving us a successful 3 per cent growth.
That 3 per cent growth is passenger growth?
Yes, which is 3,000 passengers a day right now.
What's the configuration of A350?
We have got 48 business-class seats, 21 premium-economy seats and 230 economy seats. Five out of the 10 aircraft we operate every day have first-class seats. We are the No. 1 first-class airline between Europe and India.
Is 3 per cent growth lower than the average growth of the group?
It is a little higher.
Where else do you see higher growth?
Nowhere. India is the fastest-growing market, that's why I am here so often.
What about regional connectivity the government is talking about? Will you tie up with Indian carriers?
We are working closely with Air India. We are also in talks with Jet Airways. We established our airline 20 years ago, so there's probably no other airline in the world with such an extensive partnership network like Lufthansa. We are also expanding that in India.
What's the typical lifecycle of your aircraft?
We tend to not have aircraft that are more than 25 years old. By introducing 40-45 new aircraft every year, we are bringing down the average [fleet] age to 10 years. Usually, we buy and keep it on our balance sheet. If you are as healthy as Lufthansa in terms of balance sheet structure, there are cheaper ways to finance aircraft than most companies do. That is why we buy aircraft.
Do you think operating in India is costlier with airports charging higher landing and parking fees?
That's the general statement from every airline CEO. Airport and air traffic control are too expensive.
How does India compare with the rest of the world?
Wolfgang Will (Senior Director, South Asia): We are not happy about the fact that the price of ATF [aviation turbine fuel] is one of the highest in the world because of taxation. We are proud to have a lot of terminals and good infrastructure, but it comes with a price, and it came with a tremendous hike in airport fees. Unfortunately, thats something we find all over the world. The cost is going up everywhere, but we also cope with it as best as we can and try to stay competitive in this challenging environment.
Are you pushing for more bilaterals in India?
Will: Our bilateral agreement is not yet fully utilised - it's about 75 per cent of the bilaterals, 24,000 seats per week. That's still more that we can handle.