Christopher Luxon, CEO, Air New Zealand, says a financially sound and hospitable approach delivers results
Even as Air New Zealand’s reputation for innovation grows stronger, it is straightforward business principles, including strict cost control, providing the platform for success. CEOs from outside the industry continue to guide the airline forward.
What is behind the airline’s good start to 2018?
It’s actually been a great story over the past five or six years. One of the big drivers has been the growth of inbound tourism. New Zealand has proven to be a popular destination and tourism has achieved high single or low double-digit growth for a number of years. The New Zealand economy has also done well and we have about 8% growth in outbound tourism as well.
Air New Zealand is a company that has good cost control, is innovative, and meets customers’ needs. Our culture is strong with staff engagement in the top quartile globally. Also, our customer satisfaction is high, and we have dealt with our legacy issues. We view success in cultural, commercial, and customer terms.
What is the strategy going forward?
Air New Zealand is a relatively small carrier on the global scale and I’m the third CEO from outside the industry. So, the strategy remains to run the airline like a business and not accept anything that would not be tolerated in any other business. That means being very clear on cost management, clear on a customer focus, and clear on investment.
Air New Zealand has been profitable for the past 17 years and we have paid a dividend in the last 15 years. We are perhaps the only airline with that kind of track record. Some 90% of our costs are benchmarked to external comparators. The commercial engine is working well and enables us to invest in both the customer and cultural pillars of our business. Because it is not just about the financial result. We also want a cultural result.
We have developed a customer service model that constantly gets us top spot in many rankings. And that service comes back to investing in our people. This cannot be a soft strategy. It must be endemic.
We benchmark our customer service against Disney and hotel chains, not airlines. There is far more to learn from the hospitality industry.
Is innovation difficult to achieve in a hyper-regulated industry?
No, innovation is easy to do in this industry. Frankly, aviation is not an innovative industry. In fact, the lack of innovation is profound.
We introduced the Skycouch a few years ago and it has been a tremendous, well-documented success, as has innovation in our premium economy and business class products. Yet you don’t see other airlines doing something similar.
The reality is customer service in this industry is poor compared with, for example, the hospitality sector. We send people to
Disney to find out what new ideas they have in customer service. They are experts in many areas that are relevant to airlines.
One innovation we got from an “outside-in” visit was our Airband for unaccompanied minors. It sends out standard texts at certain points in the journey, such as “we have arrived.” It takes a lot of stress away from the parents and the customer satisfaction ratings for this service are incredible. And yet other airlines aren’t that interested in unaccompanied minors because they see it as outside normal operations and don’t encourage the business.
Are governments finally getting the message about the benefits of aviation?
In this part of the world, the social and economic benefits of aviation are well understood.
People in New Zealand travel broadly. And Air New Zealand is the most respected company in the country. People want to work here. So, the government understands the contribution we make. In turn, we understand that we must contribute to the country. More of a challenge is achieving those benefits in a sustainable way and that is where we need to work more with governments.
Is airport privatization one of the challenges that requires greater collaboration?
Australia and New Zealand have some of the grossest sinners. High airport prices are compounded by lax regulation. Five of the top six highest-margin airports are here. Globally, airports have an average EBIT margin of about 53%, but in Australia and New Zealand it’s close to 80%.
Airlines in the region are putting immense pressure on the governments of Australia and New Zealand to think about regulatory reform. There should be a level playing field so we can have normal commercial conversations, arbitrating to a final offer like they do in Canada, and an end to the dual till.
Another element of sustainability is biofuels. How can aviation achieve the necessary price and quantity?
It’s a real challenge. I’ve reviewed every major project since 2008 and none have scaled up in any meaningful way. It looks like we need to solve this locally by virtue of the feedstock available. In New Zealand, it’s likely to be a woody biomass because of our forests. But, the challenge is how to build the facilities we need because they are prohibitively expensive.
We will continue to monitor biofuels, but the reality is there are no easy solutions. We have focused our environmental efforts on things like fully electric vehicles and making sure the Carbon Offset Reduction Scheme for International Aviation (CORSIA) delivers a good outcome for the country as well as the airline. Offsetting is going to be our go-to model until we find a way to solve the biofuel challenge.
Can airlines do more about human trafficking?
This is a subject that I am very passionate about. It is great to see the industry embracing issues such as this. The crime of modern slavery is enabled by aviation and we should be responding.
Air New Zealand has signed up to various agreements and regulations even though we don’t see this crime too often in our country. I’m very keen to see the industry keep pushing on this because we can never do enough.
More broadly, what opportunities and challenges do you see ahead?
The opportunity is clearly the continued growth in air travel in the region. We will explore improving connectivity with China and Latin America and we want to drive further into the Americas. Domestically, there are also plenty of opportunities.
The issue of rising fuel prices is so overplayed. We know the playbook for this part of the cycle. It’s pricing action, capacity reduction, strong cost control, and hedging to buy time to adjust. I do think the industry this time around is infinitely more commercial and rational.
The real challenge is disruption. I come from a country that gets 90% of its electricity from renewable sources. Will that kind of innovation lead to electric aircraft? What about vertical take-off and landing? All these disruptive innovations are really interesting to me.