FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

Big Changes: British Airways, Club Med, Lufthansa.

To start the new year, my thoughts on what I believe are important changes that will have a wider affect outside these companies. At British/Aer Lingus, Club Med, Lufthansa/Germanwings.

 

 

British Airways

In December, IAG (a holding company that comprises British, Iberia, Vueling) made a surprise bid to buy Aer Lingus (AL). There was an initial refusal, as usual, and there is likely to be further developments.

 

But outside that there are important factors. At the time British (BA) and Iberia formed IAG in 2011, I said BA should have taken over AL and not Iberia – which was in trouble and which is still not out of it.

 

Part of my reasoning was that the Willie Walsh, head of BA (and now also of IAG), had previously been 26 years at AL, including his CEO role there. To say the least, he must have known a lot about AL.

 

If he did not buy then because AL was not in a good state (it was losing money at the time he left), then Walsh was presumably not a good CEO. (Indeed, I also raised the question as to why BA had chosen him.)

 

And why now buy AL now? If AL is in better shape – it is, marginally – then that is an even more negative comment about Walsh.

 

But overall, IAG’s move may be for different reasons. FSAs* in Europe (and in many other regions as well), such as BA, are finding it hard to survive. IAG has already bought Vueling, part-LCA*/part-NFA*. And AL could be another move in this direction; AL is similar to Vueling – albeit NFA on its intraEurope routes, and FSA/LCA on its transAtlantic flights.

 

Ironically, British has been here before, being in the rather ridiculous situation of having started two NFAs itself and then selling them off – because, in the common- but often-misguided-belief, that it must ‘stick to its core competence’.

 

Air France is still trying to reorganise itself to expand its NFA Transavia into an LCA – although it is so far being prevented by unions in France from doing so. And Lufthansa is doing the same thing, see below.

 

 

 

Club Med

China’s Fosun has agreed to buy Club Med at a price that values the company at about US$1.1bn (although that is not the amount paid by Fosun). Fosun first bought into CM, just 10%, in 2010. At the time this was hailed, and that Fosun would save CM (although the logic was shakey; it was a Chinese company and China was an important and growing travel market – but Fosun was not in the travel business before that!).

 

The stockmarket, at least, does not think Fosun has been much help – CM’s share price has fallen from over US$150 in 2000 to around US$30 now. It is trying to go upmarket. Even though that is far from its image, even today, still it persists.

 

I need to go back a long way to explain today’s problems at CM. A commentary in People-in-Travel, a version of which was published in The Economist in the year Fosun bought its 10%:

 

The reason CM’s decline started – in the 1980s – was when co-founder Gilbert Trigano preferred to give the top job to his son Serge rather than the then equal number-two, Jean-Robert Reznik – who was generally considered to have a better grasp of marketing. Serge was just the son of his dad.

 

Going up-market seems a sound business tactic – getting more revenue per customer. But there are some important challenges: converting existing customers to accept, in effect, a new product costing more; or finding new customers; or making more profit from a product that costs more to produce.

 

We believe the post-Trigano- and subsequent-teams underestimated these challenges, and indeed were not able to overcome them.

 

Also, Henri Giscard d’Estaing has been in his post more than 10 years [now 15] and has also failed to make the upmarket push (which he has tried twice [now four]) to work. The blame is put on 9/11 but the decline started well before that.

 

I am amazed that HGdE is still in the top job after 15 years of failure. For the present he will stay, but surely Fosun will replace him in the next six months? But to do what? CM is now such a mess of products and marketing messages that it is probably not possible to save.

 

One way might be to dump the luxury and return to the original formula – simplicity and fun. The other way – build luxury resorts – does not seem to be what customers want, and is certainly still not the image inspired by the CM name.

 

But then there is Fosun. I know little about its competence in strategy, but I guess it has little, if any, in this area of business. But, being a Chinese company, it will not back down for some time (five years?) and then either steadily drop the luxury business and concentrate on fun resorts in locations popular with pleasure-seekers from China – such as Hainan, Maldives, and probably also France.

 

 

 

Lufthansa

The Lufthansa Group (LG) is reworking its airline strategy. It has broadly understood what needs to be done, but its changes are 4-times more complicated than they need to be. Let me explain:

 

As I have noted before, FSAs of a certain size (I’m not certain of numbers, but one measure could be around 70mn seat sales in a year) need to operate an LCA and NFA as well as their FSA. The LG has its FSA Lufthansa (LH; plus Austrian, Swiss), and its NFA Germanwings (GW). GW is not a success because LH controls it too tightly; LG did not follow NFA ‘rules’ – see end of this story.

 

Now LG is trying again, albeit it an unnecessary complicated way. Firstly, this is what LG plans (slightly abridged to make it easier to follow!):

 

LH has transferred its intraEurope routes not serving Frankfurt and Munich hubs to GW, and GW and Eurowings will continue also to operate their current networks. Longhaul services, due end-2015, will be with Sun Express (a JV of Lufthansa and Turkish).

 

LH is needed, but only one other – either GW as a LFA, and Eurowings (EW; with or without Sun Express) as an LCA.

 

The current plan indicates that LG management still does not know what to do. After making the first mistake with GW, this seems strange. But perhaps it will learn from what both Air France and British/IAG are trying to do, and then make the necessary further changes in its own structure.

 

I give LG two years before it readjusts its structure closer to what I am saying.

 

 

*Notes:

-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates – full service.

 

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs (cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. Usually similar to the parent airline, but a different name, and competition against parent airline allowed.)

 

-NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; no seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.

 

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.