DOING IT RIGHT

Until he joined Air New Zealand in mid-2011, Christchurch-born Christopher Luxon had spent his entire working life with Unilever, a global company that based its fortune on understanding and profiting from the fast-changing tastes of consumers. Trained to win in a tough multi-national school, the Air New Zealand CEO told Orient Aviation’s chief correspondent, Tom Ballantyne, he “is putting growth back at the heart” of the airline.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

April 1st 2014

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Fourteen months into his job as CEO of Air New Zealand (Air NZ), Christopher Luxon, 54, could be forgiven for feeling a little smug. Across the Tasman Sea, the airline industry is in tumult. Bottom lines have being ravaged by a capacity war, big losses and a divisive political and public debate over the Australia’s competing carriers. Read More »

Christopher Luxon CEO Air New Zealand

But in Auckland, Luxon, and the “11,000 Air New Zealanders” he oversees, could not be in a better place. They, and he, are continuing not only to do it differently, but do it right. In February, Air NZ reported an interim after tax profit of US$119.4 million - up 40% on the same period a year ago.

Luxon, who mastered the business of building brands at the consumer coal faces of supermarkets and convenience stores, is bent on further improving the innovative airline. That developed the radical and best- selling Skycouch, turning three economy seats into a bed for two with the pressing of a few buttons. But that is not say he is ignoring the Australian aviation scene. As the largest shareholder in loss-making Virgin Australia, he will soon be a board member of the airline. He wants a return to commonsense in Australian aviation and, most particularly, for the Virgin Australia balance sheet to pass into profit.

While the dramas in Australia have been capturing most of the headlines, Luxon’s main game is pushing ahead with his “Go Beyond” plan. The record profit came on six-month revenues of $1.96 billion and a 3% reduction in unit costs. With nearly $1 billion in the bank, the carrier is on the verge of a new phase of development as a fleet expansion begins. Twenty two new jets, valued at $2 billion, will be delivered to the airline in the next three years.

From July, two B777-300s will join the fleet, adding to the present five of the aircraft type. By mid-year, the first of 10 B787-9 Dreamliners – Air NZ is the launch customer – will begin touching down in Auckland. These aircraft, along with eight B777-200s that are being refurbished, are destined for destinations around the Pacific Rim and in Asia and North America. “We have made very good fleet decisions,” said Luxon. “We’ll end up with 25 wide body aircraft, all of one type rating from a pilot point of view. It means we can be a lot more flexible with scheduling and rostering.”

As the new jets arrive, the carrier’s last two B747s will be retired by year end, with its B767s leaving the fleet by 2016. “It’s a genuinely hard fleet simplification versus just mucking around with a configurations of different fleets. We will have a level of simplicity, which will give us a run for five to seven years of advantage, potentially, over other airlines,” he said.

All of Air NZ’s B737s will be removed from service on domestic and regional short haul routes in 2015, leaving the airline with an all A320 single-aisle fleet.

Fleet development is only part of the Air NZ story. Luxon said there are four legs to the carrier’s stool: domestic New Zealand, Trans-Tasman, the international business and its investment in Virgin Australia.

“All those cylinders are starting to fire. We are diversifying the markets and the assets that we are deploying. We will put growth back at the heart of the company. After a period of not growing we are ready for accelerated levels of growth.

“We will build our revenue in a high margin way and in a profitable way.”

As a result, unit costs are being lowered. “This is creating these record profits. It enables us to manage our cash and we have an awful lot of cash. We have a very healthy gearing ratio, have very good credit ratings and pay a very good level of shareholder returns.”

The carrier is investing in market development, building the profile of New Zealand and Air New Zealand in offshore markets. It has beefed up its sales teams in China and Japan and put a lot of effort into streamlining sales and distribution channels everywhere.

“There’s a big opportunity in the Pacific Rim. There are a lot of markets we want but we want to find intelligent ways to build businesses in them,” Luxon said.

“It’s a virtuous circle of quality revenue, good cost control, expanding profits and reinvesting behind the “Go Beyond” plan thrusts.”

With his sights set firmly on the Pacific Rim, Luxon dismissed the view that New Zealand is a lonely island at the end of the world. “We think we are bang smack in the middle of things. That may be an odd thing to say when you live in New Zealand. The New Zealand narrative historically has been that we are sitting at the end of the world, we’re an end-of-the-line carrier and it’s all very difficult,” he said.

“It’s lots of excuses really. We see the Pacific Rim as an opportunity. We are 12 hours from anywhere in Asia, the Americas and Australasia. The whole region is a massive catchment area for us.”

Luxon is focused on three main questions: Is the commercial engine of the business right? Has it faced up to the tough calls? Is it making the most of the revenue and cost levers that are there?

“We are building our city-pair presence. It’s been very important to diversify our markets and assets across the Pacific Rim region,” he said. Part of that adjustment included terminating its Hong Kong-London service, pulling out of Beijing and adding more capacity to Shanghai.

Three years ago, Air New Zealand, like Qantas Airways, was losing money on its international operations. How was that turned around?

“A lot of it has been going through the mechanics of the business and clarifying strategy. We had to get the revenues right and make sure we have sales and marketing teams on the ground in the foreign markets. That’s a mixture of local and expatriate staff, but predominantly becoming more local. So we have leaders of the business who understand the customer, the markets, the government, the trade in these cities. That’s been working very well for us,” Luxon said.

“The second factor has been facing up to loss-making routes. Routes are very similar to product lines. If you are not making money on a product line, you face up to revenues versus cost and make a call. We tried to make our routes as profitable as they could be. We ended up saying some of them just cannot be profitable. This is why you saw us come out of Beijing and Hong Kong-London.

“We go through a very simple market development wheel: have we got the product right, do we have the pricing right, do we have the place and the distribution correct, do we have the promotion and marketing right, do we have the partnerships in place and finally do we have the right people? We call it the six P model. We go round the wheel to say, even on a domestic NZ route or an international route, have we got the offering and the service perfected.

“The third piece has been the alliance structure. At the end of the day we have been very innovative in our commercial constructs. The joint venture revenue share models that we have built, particularly with Cathay Pacific Airways to service Southern China, with Virgin Australia for Australasia and Singapore Airlines will be transformative for us.”

Regulatory clearance for the deal with SIA is expected by mid-year, with Air NZ planning to return to Singapore with its own aircraft by December. Said Luxon: “It opens up 58 new destinations across Southeast Asia, continental Europe, India and South Africa. We will have seamless connectivity. The two airlines have different brands, but very comparable product. Both of us are constantly listed in the top three of the Star Alliance ratings on customer experience. Both of us are upgrading our product between New Zealand and Singapore.”

As well as the Cathay Pacific partnership to Hong Kong, Air NZ has strong partnerships with Air China and All Nippon Airways, United Airlines and Air Canada. South America is the only gap in its network because the merged carriers, LAN and TAM, are oneworld alliance members. Luxon said South America is a medium-term issue and not a pressing item on its route planning agenda.

Luxon made one other surprising management change. It has become common for airlines to set up their different divisions as profit centres. The AirNZ chief executive thinks it is the wrong way to go.

“The customer is dealing with Air New Zealand. That’s the brand. They want one seamless journey from a small New Zealand provincial town to London whether they’re on a turboprop, a domestic jet or a long-haul flight. We want one common standard in their flying experience from the airport experience to how the cabin crew is managed. We want one common thought about how we commercialize the entire journey,” he said.

“We have moved from a business unit structure that was made up of separate short-haul, international and regional airline businesses into a functional structure. We single out points of accountability. For example, one person is responsible for sales across the whole of the Air NZ group, from China to Invercargill. Our chief operating officer runs operations worldwide for us.

“We are not duplicating costs that exist when you are a business unit structure so we are able to leverage the scale and the synergies of the airline. It’s important for a business like us to maximize the scale benefits we have within the business.”

Air NZ’s biggest shareholder is the New Zealand Government, which bailed out the carrier in 2001 when it faced bankruptcy. A 73% government holding in the carrier was reduced to 53% last year after the airline sold off a shareholding for US$324 million.

Luxon said this financial relationship has no influence on the airline. “We have been rather disingenuously presented in Australia as a predatory state-run airline with endless cash that we are deliberately tipping into Australia to hurt Qantas. That’s unfair.

“The headline is that it has been a very positive experience. “I can tell you it is an independent company with independent directors and an independent chairman. I don’t talk to the government. They are just one shareholder. There is no intervention from the government. In fact, the shareholding minister, when I first met him said: ‘you won’t be seeing much of me or hearing much from me’. This has been important because Air NZ is a commercially run enterprise.”

As for the state of the airline industry and and its problems Luxon said “everybody will blame high fuel costs, foreign exchange, natural disasters or competition. This is our [airline] reality. You need to learn to deal with them.

“A lot of poor performance is blamed on these variables, a factor which is peculiar to the industry. It would not be acceptable in other businesses or other sectors. Yes, fuel is high, but we have been achieving record profits with elevated price levels for fuel. Yes, foreign exchange bounces around depending on different markets. We have dealt with that issue, but we still expect a return.

“Competition will be what competition will be. Natural disasters sadly come and go. We have good risk mitigation on fuel and foreign exchange to buy time to adapt to changed circumstances.

“But most importantly, our company culture and our speed mean we adapt much quicker than our competitors because it is happening to all of the airlines at the same time.

“So if the Japanese Yen devalues, within two weeks we can make a change to capacity, to pricing, to scheduling. They are all levers and choices. I think the airline industry, at times, is quite fatalistic. It seems to use things outside its control as excuses for poor performance.” And that, Luxon said, is something Air New Zealand will never do.

From supermarkets to Skycouches Youthful Christopher Luxon, (54), has the business of understanding the modern consumer in his blood. The eldest of three boys, Luxon was born in Christchurch, New Zealand, where his father worked for worldwide consumer product group, Johnson and Johnson, and his mother was a psycho-therapist and counsellor. When Luxon was seven, the family moved to Auckland. At 15, he  returned to Christchurch to finish high school and undergraduate studies before completing a Master of Commerce at the city’s University of Canterbury. In his final year at university he won a highly competitive management traineeship with global consumer goods supplier, Unilever. It turned into an 18-year career with the company. As he rotated through different areas of the company, Luxon earned a reputation as a very capable “Young Turk”. He became brand manager of Unilever’s detergent branch in Auckland, followed by five years in Sydney in several sales and marketing roles, positions that were extended to leadership of Unilever’s Asian Innovation Centres in his final three years in Sydney. He rapidly progressed through the ranks in London and then Chicago, where he became one of the youngest vice presidents in the company. From 2008, he was president and CEO of Unilever Canada and a member of the company’s North American Leadership Team, along with holding responsibility for Unilever’s US$4 billion personal care business in the U.S. Then a call came from home. At the time, Luxon and his family were about to move from Toronto to the U.S. It turned out Air New Zealand’s timing was percipient. Luxon recalled in interviews following his elevation to CEO at the airline: “We were about to move permanently to New York when the opportunity to come home [to New Zealand] came along. While the move was a huge decision, with much to consider for our young family, the opportunity to be involved in the leadership of such an iconic and significant New Zealand company was one I simply could not pass up.” “On a personal level, I was keen for the opportunity to bring both my internationally born and raised children home to their roots and to make my contribution to New Zealand.” Luxon started work as Group General Manager International Airline at New Zealand’s Auckland head office, under then CEO, Rob Fyfe, in May 2011. At the start of 2012, Fyfe announced his plans to leave the airline in the followiong December. After the company conducted a world-wide search to replace the outstanding Fyfe, the board found the man it wanted down the hall. Luxon was named CEO-designate in June 2012, which gave him six months to transition into the top job. He officially took over in January 2013.