A decade after liberalisation and European Union integration efforts, Europe’s aviation industry has evolved from a regulated and relatively static market run by governments and dominated by flag carriers and other nationalistic players into one of the continent’s most dynamic sectors.
Europe’s journey to a common aviation market has been accompanied by some significantly positive milestones. Air travel, for example, tripled between 1980 and 2000 and is projected to double again by 2020. New market entrants—low-cost carriers (LCCs)—penetrated the market in significant enough numbers (26% of all capacity in 2005) to spark widespread fare decreases. Routes have proliferated, productivity has improved and so many other market advancements have occurred in the wake of liberalisation that Giovanni Bisignani, director general and CEO of the International Air Transport Association, was inspired, during a September 2006 speech, to label Europe’s aviation players as among the strongest in the world.
But opportunity never emerges without hurdles, and the market restructurings wrought by liberalisation have posed a tremendous number of challenges. From the traffic congestion and delays resulting from increased air travel to the growth of regulatory requirements attending terrorism and climate change concerns to the reinvention of long-standing business models necessitated by new market entrants and increased competition, players are struggling to navigate this profoundly altered business landscape.
The implications and dynamics of converging aviation market forces especially are evident and powerful in the German-speaking aviation industry, which includes Germany, Switzerland and Austria (GSA). The LCC trend may have taken longer to penetrate GSA territories than it did Ireland, Italy and the United Kingdom, but the country’s decentralised characteristics provide particularly fertile ground for LCC growth, according to Moody’s. German press coverage on Ryanair, Europe’s leading LCC, lends weight to Moody’s assessment. Reporting on Ryanair’s plans to open a third German base at Düsseldorf Weeze, the media characterized the LCC’s move as intensifying the competitive battle in the German aviation market and pitting the market leader against German stalwart Lufthansa and its low-cost subsidiary Germanwings, and Air Berlin. Ryanair’s most important European operating base is located at Frankfurt-Hahn, an additional testament to the GSA’s growing profile in European aviation.
While the forces and trends propelling the market to this point have been well aired by both the media and the industry, what is far less clear is the C-suite’s plan for managing these changes. Which market forces most concern each individual sector segment? And how is the leadership within these segments responding? Is it business as usual, or are leaders identifying and tapping new skill sets and fresh talent pools to survive amid new market realities?
To determine the answers to these and many other critical questions facing European aviation leaders, Russell Reynolds Associates solicited input in late 2006 from all the major players in the German-speaking aviation, travel and tourism sectors on the market’s evolution. To ensure that the findings represented independent beliefs and observations, Russell Reynolds Associates included industry experts, associations and potential investors among the 128 executives at 96 organizations targeted by the survey.
In terms of the overarching themes that emerge from the study, respondents agree that competition in the European aviation sector—and GSA territories in particular—is extremely heated and requires companies to devise and examine a plethora of new business models in order to stay viable and profitable against increasingly stiff odds. The findings detailed in this report provide a window into what high-level executives are most focused on in the sector and what issues top their agendas.
Executive SummaryTo understand the competitive forces and pressure weighing heaviest on the GSA segment, Russell Reynolds Associates and the Financial Times Deutschland designed the survey questions to elicit respondents’ views on the most significant market drivers and their implications, as well as their reactions to the drivers. Particular emphasis was placed on how consolidation will restructure the market and on the role that private equity and other investors might play. Some emphasis also was placed on the consequences that these trends hold in store for industry executives.
The range of companies covered by the survey included aviation companies such as traditional and regional airlines; LCCs; maintenance, repair and overhaul providers; air traffic control providers; and manufacturers and suppliers. Airports of various sizes also were surveyed, as were travel agencies, online providers, aviation associations, investors and other industry experts.
The findings are highly instructive, showing a general agreement among respondents from all market segments regarding key market drivers. The individual sector segments, however, do exhibit significant variation in their preferred business methods for responding to the drivers, and the respondents from the segments demonstrate different perceptions regarding the urgency with which they must react. Specifically:
- Respondents view the competition generated by the LCCs and online businesses as ubiquitous market drivers. Players and executives are reacting to them with familiar measures such as cost cutting and optimisation of their business models. Tourism providers, in particular, are placing strong emphasis on differentiation of business models. Interestingly, the market segments favour different measures to react to the drivers.
- The entry of Near East/Middle East providers is on the radar of airport executives, and these executives regard the competitive threat far more urgently than the other players. This is not surprising given that airports are the first point of contact for these new providers.
- Consolidation is inevitable and is being driven by existing players. Despite emerging interest from private equity and foreign investors, few respondents expect these groups to have a significant influence on consolidation. Nevertheless, one out of four respondents expects private equity to play an important role in the industry.
- When it comes to consolidation, respondents clearly favour partnerships that maintain recent ownership structures.
- Respondents are evenly divided about whether traditional players can level out competitive disadvantages or be forced into a defensive posture.
- Executives are facing a tough list of requirements, including mandates to beat competition and heighten differentiation of services and products while simultaneously guiding their companies through consolidation. Moreover, they will have to fulfill the growing demands and oversight of investors.
- Despite the above-listed expectations, cross-market recruiting measures rarely are used. This means that leaders are expected to undertake new initiatives and directives without the support of executives well versed in other business models.
What is most interesting to note, perhaps, is the apparent disconnect between our respondents’ market observations and their demonstrated recruitment actions. Most respondents seem acutely aware of the intensifying competition brought by new market entrants sporting new business models. Furthermore, most agree that successfully competing against these entrants will require them to revamp and optimise their existing business practices, which place new skill demands on leadership. Nevertheless, very few actually are adopting the cross-market recruitment practices that would support such a vision. Ultimately, these findings indicate that while industry players are aware of the need to act—and act quickly—that necessity has not yet sufficiently transformed into recruiting actions. As market forces intensify and trigger more pronounced reactions from GSA players, Russell Reynolds Associates anticipates that cross-border and cross-industry recruitment strategies will become increasingly important.
Market DriversThe survey finds three clear trends driving evolution in Europe’s aviation industry: competition by LCCs, competition by online travel providers and consolidation (see Figure 1, below). Given the complexity of the industry and the numerous forces that have affected and continue to shape the marketplace, it is significant to note the tremendous uniformity exhibited by respondents from all market segments. While fuel costs, capacity, international market development, and growing regulatory and safety issues, among others, continue to influence market development and individual players’ competitive prospects, our findings clearly show that it is the penetration of LCCs and online travel providers upon which respondents are focused. No one can predict, of course, the long-term fates of Europe’s LCCs and online providers, but it is abundantly clear that industry participants view such impact today as critical and significant. Almost nine of 10 (87%) survey respondents said they consider LCC competition as an important or very important factor propelling the market. Competition by online providers was the next most noted market influencer, with almost three-quarters (74%) calling Internet travel companies’ presence an important or very important factor. Consolidation was cited as being important or very important by two-thirds (67%) of respondents, while slightly more than half (54%) said that entry into the market by Near East or Middle East providers would fall into one of these two categories. Only a quarter (25%) consider the entry of private equity investors an important or very important market driver.
While the executives surveyed exhibit fairly uniform views regarding the principal market drivers, the weight they attribute to each one varies, perhaps expectedly, according to their industry segments. LCC competition is an important (57%) or very important (36%) market driver but even more so for airports (93%) than for aviation companies (83%) or tourism providers (82%). In contrast, 100% of tourism providers consider competition by online providers to be an important (42%) or very important (58%) influence on the market. As could be expected, airports (57%) and aviation companies (66%) are somewhat less concerned about the prevalence of online providers.
According to our airport respondents, one of the greatest single pressures is the emergence of Near East- and Middle East-based providers. In fact, the survey finds that 71% of airport executives view Near East/Middle East providers as an important or very important factor affecting the industry. Not quite half (44%) of aviation companies hold this view, and only 18% of tourism providers list this as a significant issue. What is evident is that the looming presence of this outside competition is of great concern to GSA domestic airports. It also may mean that future directors of the countries’ airports, which often are a bellwether for change within the industry as a whole, may require international experience. Having a more comprehensive understanding of the worldwide market, many in the industry believe, will enable executives to keep GSA airports competitive.
Merger FeverAlong with heightened competition, the emergence of new business models also has sparked industry consolidation—a trend already evident. A major example occurred in the summer of 2005 when Lufthansa acquired Swiss Air. Another deal took place last summer (August 2006) when LCC Air Berlin, the country’s number two airline, announced the acquisition of smaller rival DBA in a bid to take on industry leader Lufthansa in the fierce battle to dominate the skies over Germany. Moreover, with the takeover of LTU in March 2007, Air Berlin arrived among the top-five European airlines. And TUI, Europe’s largest tour operator, recently announced that it is merging its Hapagfly and HLX airlines to create Germany’s third-largest airline. In addition, there is speculation about the future plans of domestic airlines Air Berlin/LTU and Condor as well as Germanwings, Lufthansa’s budget carrier.
Consolidation is occurring among tour operators as well. Germany’s number two travel provider Thomas Cook announced in February 2007 that it would join with MyTravel to create Europe’s second-leading tour operator. Then in March, German-based TUI, Europe’s largest travel and tourism enterprise, and Britain’s First Choice announced their own plans to combine forces. Changes already are taking place in the executive suites at these revamped companies, and it is likely that once the dust settles from these mergers, they will look to bring in new executives to help them prepare for the daunting business challenges that lie ahead.
As far as how our respondents expect consolidation to play out, more than three of four respondents predict that partnerships or mergers will occur among existing players, while 37% foresee LCC and online providers either acquiring or investing in other players. Only 28% feel that new financial investors or foreign investors will enter the European aviation market and realign the companies.
Consequences of Market DriversIn some ways, our survey shows that companies believe “business as usual” is an appropriate response to prevailing market forces. Respondents generally cite well-worn business methods as tactics for managing change, including differentiating their products and services (63%), optimising their business models by becoming more customer focused (61%) or reducing costs (52%).
Not surprisingly, executives of companies in the different market segments within the industry diverge significantly about what measures to take to stave off the competition. Aviation companies are more likely to focus on differentiation (56%) than cost cutting (44%) or business model optimisation (33%). Airport executives seem to be most urgently aware of converging market pressures and are overwhelmingly in favour of trying to combat it through optimisation of the business model and cost cutting (80% each), while 67% say differentiation would be important. Tourism providers, on the other hand, prefer differentiation (83%) as their primary strategic measure. Half say they would focus on optimising the business model and a third on cost cutting. But what is most surprising about these findings is the urgency respondents assign to these drivers. For example, as shown below, aviation companies see prevailing forces to be less threatening than do airports, which see the need to launch attacks on all fronts. Tourism providers fall solidly in the middle.
While most of our respondents accept the inevitability of consolidation, the majority say they are exploring partnership arrangements over merger and acquisition (M&A) options or private equity investment. Clearly, they prefer not to change the ownership structures currently in place; however, recent activities have contradicted this.
Regarding outside investment, private equity is very much on the minds of aviation executives. Almost nine of 10 agree that private equity is a relevant factor affecting the industry, while 15% fear negative consequences for companies acquired by private investors. One-third call for the improved involvement of shareholders.
The survey shows an even split regarding expectations for the industry’s traditional players: Forty-one percent say these companies will be able to level out competitive disadvantages, and 41% say competitive pressure will further force traditional players into a defensive mode. What is evident is that a large number of executives recognize that traditional players will have to adapt and evolve with the times, which may require innovative new ideas and leadership. “The competition is increasing and forces all providers to rethink their strategic game plans,” one respondent notes. Another thinks that, “All players will push down their cost bases on a competitive level—or leave the market.” And one predicts that, “Travel operation providers will increasingly use direct sales and push travel agents and other intermediaries out of the market.”
Relevance for Executive RecruitingHalf of the executives surveyed envision the convergence of various existing business models that are being employed throughout the industry. Executives essentially will borrow from one another in the pursuit of the optimal business operation. And slightly more than half (54%) of the industry is aware that future executives will need to bring new skills to the table in order to help their companies succeed. This seems especially true among tourism providers, three-quarters (75%) of whom expect a changed managerial environment in the near future as companies strive to keep pace with the quickly evolving marketplace. Overall, the executives surveyed believe that incoming executives’ responses to these issues will involve differentiating products and services (63%), optimising business models (61%) and cost cutting (52%).
While all the survey respondents see the need to adapt their business models because of increased competition, a surprisingly small percentage (28%) actually plan to recruit executives from outside the industry who have experience with different business models. As the competitive pressure continues to spread throughout the industry and the reality of the business environment sets in, searching for executives in non-traditional talent pools and cross-model recruiting in general likely will prove beneficial in meeting organizational goals.
Most of the executives surveyed indicate they will rely on well-worn fixes such as improving operations, streamlining leadership structures and establishing new partnerships as well as fostering the innovation to help them thrive in the face of fierce competition. Almost two-thirds (65%) of respondents expect to react to competitive pressures by improving processes and management structure, while exactly half want to accelerate strategic decision making. Developing partnerships and increasing the focus on differentiating products and services are cited by 44%. And while survey respondents do not believe that private equity will play a large role in the industry, almost nine of 10 (87%) call private equity a relevant factor. More than half (56%) indicate greater private equity involvement will lead to new requirements for executives, and more than a third (35%) report it will create improved opportunities for executives or a change of company culture (37%).
Core Competencies for Future ExecutivesAt some point, every company must ponder the question of what kind of leadership it needs to remain competitive in an evolving marketplace. It is apparent from this survey that many companies in Europe’s aviation, travel and tourism industries are keenly aware of this fact and already are taking action on this front. Russell Reynolds Associates’ extensive experience in the industry suggests that, in addition to possessing experience and knowledge of the aviation, travel and tourism sectors, the ideal executive of the future will be well versed in core competencies such as managerial capability and interpersonal skills.
The ability to reduce operating costs and maximize operational excellence builds the basis of the list of specific competencies that will be required for the next era of GSA aviation industry executives. Financial acumen that allows this new breed of senior executives to take on increasingly complex issues brought on by consolidation (such as M&A, private equity, foreign investment and partnerships) is the second key skill set they will need to succeed. Creating a unified vision and instituting a clear strategy that will enable a company to focus on differentiation, manage ambiguity and rethink its value chain or business model is the third core skill set these executives ought to possess. Future executives also should be well schooled in the art of using their influence and networking experience to handle internationalisation, an increasingly complex industry, government relations and communications with stakeholders. The last essential ability needed in this new breed of executives is a combination of leadership and interpersonal acumen, meaning they must possess a global cultural astuteness and international networking capability as well as the ability to manage change and leverage diversity.
At this stage of the industry’s evolution, the LCC players are ahead of the pack in terms of recruiting and hiring from outside the traditional pipeline. At the same time, there is clear evidence that the current needs within the aviation industry are forcing traditional players to extend their recruiting initiatives by targeting, for example:
- Executives for the merchandising/retail units of airlines
- Executives for the non-aviation and real estate activities of airports
- Executives with a focus on operational excellence, process optimisation or supply chain management