Cutting-edge mobility tech is changing aviation
ESMT Annual Forum
June 7, 2018
Thank you very much for that nice introduction for, indeed, what is my first visit to ESMT and I must say, and I said this to my neighbor, Dr. Zetsche, this is quite a different Audimax than the one I’m used to at the University of Karlsruhe. But, I just realized, if you hadn’t joined ESMT, the University of Karlsruhe must be the second-best place in Germany because if you graduate in electrical engineering you can become the CEO of Daimler Benz and if you only graduate in industrial engineering you can still become the CEO of Lufthansa! So, or the other way round if you do electronic engineering you can do two-dimensional jobs; industrial engineering three-dimensional. But, we hopefully talk a little bit about the real dimension of technology later on today.
It’s about technology; it’s about management; I understand that’s what we want to discuss today. And it’s maybe not by surprise that all three of us who are allowed to address you today, indeed, are from the world of mobility. That, in my view, says two things. First of all, mobility is a cutting-edge industry and technology is changing our industry. Also, in all modesty, it’s a very interesting and fascinating industry where many other industries can be quite boring. Imagine having three speakers from the financial industry, for example!
Oh is there… sorry! Not a good introduction for the first time is it! So, it might be last time as well, so you’d better listen carefully to what I have to say!
Of course, a few words of our industry and a few words about aviation in general and, of course, a few words about Lufthansa as well, there must be a few customers here in the room but that’s of course why I’m particularly here.
Mr. Zetsche mentioned the past and the future. Without coordinating, that’s part of my little remarks as well because I think one thing is important, especially since we are in Germany, of course, trying to be international in the past. Legacy, history and future, modernization, in no way are conflicting with each other. I actually would go as far, if you look at many German companies, maybe some of them represented here, including banks, are showing that the perfect combination of legacy and thinking into the future can be a USP of our economy in Germany and of some of the landmark companies in Germany.
I think as education is, of course, about learning from the past and moving the next generation into shaping the future, I think that’s important to have in mind that it’s not all about forgetting about the past which, sometimes, when you look at some of the American trends to some industries I always find a little bit disturbing that there’s not necessarily always the rooting in the past which I think makes, again, some of us quite successful.
In our case, it was in 1926 when we were founded that some of our pilots set out to fly to Asia. At that time unheard of, and it actually took them 30 days to get to Beijing. Nowadays, to get to Beijing takes about nine hours and you can do it four times per day with my company alone. So, I think that shows a little bit how the world has changed. Or, it was a couple of years later in 1928, our pilots set out to be the first ones to cross the North Atlantic from Europe towards the West which is against the wind so it’s the more difficult way to do it. It took them 36 hours to get there which was, obviously, an amazing time in ’28. Nowadays, in 36 hours, basically, you can cross the Atlantic, back and forth, twice and probably still feel better when you arrive than how they must have felt after 36 hours.
So, I think it’s obvious from all of our experience that things have changed enormously in our industry, fundamentally. Actually, our industry has not been an industry, basically, until the days of the ‘60s when mass transport was really made possible with the more or less civil use of the jet aircraft. And, our company in those years, has developed into one of the world leaders and that was not easy as in ’45 aviation was banned in Germany. In Germany, we were not allowed to fly for 10 years until 1955. And you had all these engineers who, of course, in the war were on the cutting edge of technology as well and one of the reasons, by the way, Germany still builds the best liner planes in the world – not that Airbus, the next speaker but some other companies – it’s because all these engineers who didn’t want to give up, combining their drive for technology with their work went to the only allowed at that time aviation in Germany, glider airplanes and they were somehow able to stay there long enough, in ’55 when aviation was opened up, make two success stories in Germany possible again. Of course, one is Airbus, Tom will talk about, and the other I think is us where we have developed from nothing in 1955 to the largest aviation group in the world in the last years.
So, I think technology has been driving that process but, and I think Dr. Zetsche made a nice introduction in that regard, technology nowadays is not the same as digitalization. Sometimes when people invite to talk about the future and talk about technology, always drills down to digitalization. I just don’t believe that’s true. Like mobility, probably, is the one industry where of course there is huge disruptive elements, definitely, in the car industry, Dr. Zetsche explained some, in our industry as well.
But, one thing is for sure, it’s not to be foreseen that the core element of mobility moving people or goods from A to B, be it by car, be it by train, be it by airplanes can anyway be disrupted to be replaced by something else. I think that is the difference to the financial industry, for example, to the entertainment industry, to many industries, that basically moving something physically is something which is disturbed, disrupted around it, the interfaces to it, but the physical element itself is not which is, by the way, Zetsche, if you believe that your car is until recently been behind the iPhones, you should visit our airplanes, that’s not criticizing Tom Enders, it’s the same with the other company in Seattle which tries to build airplanes.
My iPhone breaks, I will say it breaks down once per week. Imagine our airplanes had that reliability of an iPhone! My car hasn’t broken down in years but if it does break down I just stop. In an airplane, you can’t do that. So, I think technology and digitalization and overlapping in an enormous way, it’s technology is more than digitalization and, secondly, I think moving the world forward in terms of technology cannot only be done by the pace or digitalization because it’s just too dangerous. The failure rates are too high. In many ways, by the way, the technical failure rates of our iPhones breaking down, also the entrepreneurial failure rates, to start a start-up and to close it after a few months is one thing, it happens all the time, it’s part of the innovation culture that industry has and, like Daimler Benz, of course, we also have a connection to that kind of culture entrepreneurial culture. Developing a new aircraft or even developing a new route which really is what I’m responsible for, and failing, shouldn’t happen to you too often because it can, basically, endanger your company.
So, I think to the students in the room, I think it’s important that looking at the past and our legacy, looking into the future there is, of course, no way to ignore digitalization, it’s at the core of what we do but there is more around it and I think that’s key. Our company moves about 400,000 people per day, safely. That is at a failure rate which, fortunately, is down at 00000 and is not in any way boring because of that. We transport 6,000 tonnes of cargo every day which really makes globalization feasible. In my view, globalization is not just global data transport or transport of financial means, basically, globalization is people moving across the world, goods moving across the world. In our case, as we don’t just operate airlines we operate service companies around airlines like catering or MRO maintenance, repair and overhaul, every fifth aircraft in the world is actually maintained by Lufthansa Technical, every third meal you, anywhere in the world enjoy or don’t enjoy on an airplane, comes from our kitchens as well.
Those 140 million people we are flying around the world only represent 4% of the global passenger volume which is a special situation in our industry that even being the largest aviation group in the world you only have 4% market share. So, consolidation is about to happen. Huge other industries, strong ones buy the weak ones, consolidation takes place in a much higher speed than our industry but since our industry is regulated in many, many ways as global as anything could be global, flying from Sydney to Frankfurt or from New York to Tokyo, at the same time it’s highly regulated because infrastructure still is seen as part of what governments are very interested in.
That is also, I think, my advice to those people who go as students as young executives into the future, it’s not only about technical visibility, I think we all, especially those of us who have executive responsibility, also need to keep in balance what this means to other stakeholders. Stakeholders not obviously, like customers who you need to develop your business or the obvious important stakeholder of your staff, I think it’s also the next stakeholder, putting the shareholders aside of course who also are part of the core triangle, it’s the stakeholder of society.
So, what are we really providing towards society or in a more defensive where are changes in society limiting what we can do in technology? There is probably more true, for example, biotech industry than it is true for our transport industry but there are limits of what you can do due to limits which are outside of the technology visibility of what you do and I think sometimes talking to young people who, of course, are eager to change the world, I think it’s important to remind them that there are limits beyond that what the pure technology we are also fascinated by is allowing us to do.
One of those limits in our industry which we are currently basically seeing is not technological limits where engineers don’t have new ideas or digitalization wouldn’t provide new thoughts. We have very physical limitations as physical as not finding enough pilots around the world to fly all these aircraft. That’s something 10 years ago we wouldn’t have thought could ever limit our growth.
We don’t find enough engineers and mechanics to maintain some of these aircraft around the world. We don’t have enough airports to land all these aircraft or the ones we have are not used efficiently enough, and sometimes airports are only used 60% of their capability, again not because of technological limits but just because the people around the airport want to have their peace for a few hours at night, at least.
So, I think it’s another example of technological feasibilities not purely just being used to their level of exploitation just because of the fact there are other limiting factors. Nevertheless, the industry has grown tremendously. Our company has grown at least by 20% over the last three years. We now have grown up to 800 aircraft, most of them actually built by Airbus as hopefully Tom always remembers? Yes, thank you!
And that has brought us to a leading position but, I would not describe leading, nowadays just by pure numbers be it turnover or, in our case, the number of aircraft or number of cars. I think lead, when I talk about lead, I talk a lot about we are the leading employer in our industry. I think the human resource element of what a company does, in the end, probably is a bigger differentiator to our competitors than many other things we do. That’s why I’m actually happy to be here at ESMT because I think it is important that those of us who bear responsibility are looking into probably ultimately the most limiting resource which is HR, human resource and we have spent more time and sometimes even spend even more money, on developing that resource just as we spend on R&D or, in our case and of course the most expensive resource we spend money on which is fuel.
So, we train people around the world, not only at ESMT but also here. We try to be more international in our training which sounds always easier than it is, to be honest, starting with the language issue. Who really works for our company, which is a very German company from its origin, who really works in our company and has not just lives abroad? I think nowadays every graduate has lived abroad somewhere but who really moves around in English as he moves around in his mother tongue, German, that is still something which is unsexy to talk about but I find something which I experience every day, and especially, I just came back from our global association meeting in Sydney when you meet these Anglo Saxon players in the industry, their pure advantage in language is still something which, I think, cannot just be ignored, so I’m trying to become more international, both in the student body but also in the way we teach the next generation, it’s not something people find boring because it has been talked about for 30 years; I think it just is as up-to-date as it always has been.
Or, another issue if you look at historically in Germany, the dean, the standard of industrial engineering being set by, initially, a German institute of norming and providing regulations, if you now look at other parts of the global economy, including aviation, the Anglo Saxons have purely taken over that element of the industry, setting standards, setting rules, setting laws and that, of course, usually not to the disadvantage of those countries where these people come from.
So, I think with all the legacy of hi-tech in Germany, of hi-tech in Europe, I think it’s important that the global element we all are so aware of and truly in all modesty, somebody who runs an airline is well aware of because we live off globalization, is something in my view to put into more importance when it comes to educating the next generation.
Talk about the next generation, in our case we’re hiring 8,000 people, alone, this year. The question of choosing the right ones, those who only want to stay a year, those who look for lifetime employment and, sometimes, those who you would like to have for lifetime employment are those who leave after a year, and sometimes those who you like to leave after a year are the ones who decide for lifetime employment! That is also a challenge, of course, combined with German labour laws which makes it even more important that we have a focus on finding the right, again, resource in terms of human resource and that’s why we in Lufthansa are so proud to at least dedicate a lot of our time to that; I think it should be even more.
In the end, just being a commodity doesn’t work. And differentiating each other in our industry has a certain degree to do with technology – I will come to that in the final minutes of my little presentation – but the differentiating factor, indeed, are the people you hire, the people you train, the people you lead, the way people lead. So, I think with all love for technology, being an engineer, with all love for the technology advancements of our industry over the last years it is in the end the individuals. And there, I think, the things come together, as I said before, aviation is a fascinating industry, we find it fairly easy to attract people to our industry but to keep them in the system, to make sure, also Dr Zetsche explained that to have enough legacy in the company, stability, that all of you can enter an airplane safely and, at the same time, enough challenge by young people, new people who want to do things differently, I think that’s a nice [unclear 51.31] which makes our job also so exciting.
I don’t really want my people to reinvent the way we land an Airbus 380 every day. I am quite happy that there are years of training and practice behind that. When it comes to the digital way of selling our tickets, I’m very happy that there are almost weekly ideas on how we can do that better.
I just came back from China a couple of weeks ago, 70% of our tickets in China we sell via the mobile phone; a long way to go for that in Germany where people still call the travel agencies. That, I think, is quite obvious in this room what the future will be, and to adapt to that at least as fast as your customers want you to adapt, or being a leading player in any industry, even being faster than your customers and try to shape the industry in the way people try to behave, of course, is a core challenge. Again, in a company which is not a start-up and only thinking about innovation every day but which has to create some liability, some reliability, some standards of production at the same time.
So, what is the future in terms of technology? Why is it such an exciting time, I think you all, we all live in? Because innovation has happened in this industry, sometimes faster than others. It was only 50 years ago that we introduced electronic booking systems. Until 50 years ago people in Frankfurt had paper files, people from around the world would call “is there a seat available on Lufthansa 401 from New York to Frankfurt on 10th November? People would look through the file, would check the number of people on the list and say “we have five more seats available”. That’s only 50 years ago. The aviation industry was the first industry to introduce electronic booking. So, I think that shows you how things have come.
It’s only 20 years ago that electronic tickets were introduced in our industry, moving away from paper tickets has taken another 10 years and, of course, nowadays we have gone to paperless basically wherever we can. We have paperless cockpits where people, our pilots don’t have charts anymore, physically, but just bring them up on their iPads. We have, of course, nowadays, paperless entertainment onboard where people don’t bring their magazines anymore but load them on their files. So, I think it’s obvious that digitalization has taken place there.
But, I think the most exciting thing, indeed, is taking place on the customer end because there, also, failure rates can be higher than on the operational side of the business. I think that’s once again I repeat that without trying to be boring, here, there is, of course, a difference in how advanced you can be trying things when it comes to just trying a new business model when life eventually could be endangered.
For that kind of technology, being as fast as anybody we have here in Berlin introduced an innovation hub, as we call it, because indeed working at the headquarters in Frankfurt and combining those two cultures with each other is a difficult thing. So, we thought, already going to berlin is something which allows more freedom of thinking, trial and error, different cultural attitude, and again I’m talking not about the operational things of the company but of the more or less commercial adventures, products, and services. We’ve now decided to go to Asia, to China, with our innovation hub to bring more of that dynamic in. In our particular industry, the US is not necessarily the place where standards are set – if you’ve ever flown on a US airline you know what I’m talking about – so it is more towards the East, China, and Singapore, where we are believing that there could be also a cultural addition to what we do in Lufthansa and where we try to bring people in.
We are spending more or less 500 million in the next three years on digitalization alone; compare that with about 10 billion we spend for new aircraft in the next three years, that might be fairly limited but it goes back to what I said before, the core, of course, has to be right. But, also, and this will allow me to hand over to Tom eventually, the advancements in operating new aircraft, of course, are huge. If we introduce a new aircraft nowadays, it basically reduces fuel consumption by 25%. And of course, emissions as well. Of course, it lowers other fuel bills at the same time at 25%.
Unfortunately, his aircraft are so expensive that it almost compensates that but that’s not for public discussion! But, let’s come to something where we both have an advantage. Those modern aircraft take 50% less noise. 25% less fuel, 50% less noise. This comes back to what I said before, who else as in our management job has a say beyond the triangle of stakeholder, customer, staff, and shareholder? Society.
Basically, with 50% less noise, it doesn’t show up on your balance sheet; it doesn’t show up on your profit and loss statement because nobody is charging you for noise, to a serious degree. But, still, there is a responsibility out there. and if you talk to people outside of our industry about the aviation industry they speak a lot more about noise than they speak about other things we like them to talk about; so, responsibilities for stakeholders outside of your classical stakeholder environment, I think, is key. That’s why in our particular case innovation which – and I’m sure Tom will talk about that – highly depends on new aircraft designs and new engine designs, on new technology being used in the engines, even more sometimes in the aircraft itself is, of course, driving this industry in making it able to show the growth we believe this industry will have.
We as an industry think that we will grow by 100% in the next 20 years. That’s a very nice problem to have because many of you, I’m sure, working in industries where you don’t know if there will be growth in the future, where there might not be enough growth in the future compared to the past; or, again, there might be disruptive elements which will not bring growth but even shrinkage to your core business models in the future. That is not our problem but again it’s only able with modern technology to actually cope with that growth, to make that growth feasible, make that growth being tend dependable to other parts of the world in a safe way where we are going beyond the mature markets of North America and Asia to a high degree and, surely, Europe. And, also, to make that growth acceptable for those stakeholders I was trying to refer a little bit to, because it is not growth which is getting 200% on the same in terms of noise, pollution and so on.
So, that I think is where technology makes our industry not only feasible, going back to what I explained of how it all started in ’26 and ’28 and where it has come to, today. I think it’s only with technology used in a responsible way beyond, again, focus on digitalization alone and beyond the focus on just trying to make feasible whatever is feasible by keeping in mind these other responsibilities, is what really makes technology and management – and this I guess is what we’re here to talk about today – exciting because it has to fit into each other.
One of the two things can be easy. Not easy in an actual way but easy in a moral way, easy in a stakeholder way of thinking. Combining them in a responsible way and also of course in a way that will help your company to thrive because that’s in the end what we are all there for, safeguarding jobs, safeguarding customer interest, safeguarding shareholder value, creating value to those who own companies, I think that’s the real-world challenge.
Also, ESMT, hopefully, is preparing the next generation for and we very much look forward, indeed, to work with you more on that. I think, again, our industry needs partners to really move the technology forward. One of our closest partners will be speaking in a few minutes. So, I hope I was giving you some insight into an industry and company you all hopefully have heard about and used. Of course, I have business cards for complaints about the current delays when we have a coffee break after this! But, we are proud, in this industry, not just to create shareholder value, not just to satisfy customer needs, not just to safeguard jobs – the famous stakeholder triangle – but we are proud to make this work a smaller place and to add to globalization in a positive way, to have a positively acceptable contribution to globalization which we all need, is the megatrend of our times; and different than, probably, most of us in this room.
It’s not shared by everybody in this world, the globalization, as something positive. We believe exchanging people around the world is what we as the good guys in globalization can provide. So, thanks for listening, thanks for being a stakeholder, one way or another, be it a customer, a shareholder, future staff member, and we just designed a new slogan for our advertisement campaign which reads “we say yes to the world” and we are proud of that to make that world an even better place. Thanks for listening, it will be your job in the next generation to continue that. Thanks.