For a man who has just steered a foundering european flag carrier back to profits, Sabena's Paul Reutlinger remains surprisingly reserved about discussing his achievements. But then, self-publicity, it seems is not Reutlinger's style. It has rather been the Swiss chief executive's prudent and patient consensus-building that has helped bring Sabena back from the wilderness of union confrontation and heavy losses.
The omens were far from good when he arrived at Sabena in early 1996, brought in by the Belgian carrier's new Swiss owners. Swissair's parent SAirGroup had picked up the 49.5% stake left begging when Air France withdrew its investment. Conflict with Sabena's unions over cost-cutting plans had already culminated in the departure of his predecessor Pierre Godfroid. The Swiss group was talking ominously of giving Sabena only three years to show a profit.
Reutlinger set about instilling a new philosophy into the airline, based on sound communications and his own unshakeable belief in the virtues of social partnership. His aim has been to create a "culture in the company where social partnership is taken seriously".
The push for partnership, however, has been closely accompanied by the pursuit of the necessary hard cost savings. Major union concessions on job numbers and salaries have already been made and there is a clear understanding that the cost-cutting must continue. Since the initial agreements with unions in October 1996 secured a 2% decrease in payroll costs and a net reduction of 300 jobs, the drive for savings has been relentless. The latest programme aimed at readying the airline for a future downturn - suitably dubbed Fit for the Cycle - is targeting a 15% cut in unit seat costs by the end of next year.
Cost cutting continues
Reutlinger is under no illusions that these efforts must continue. "We have no choice. We have to get the cost structure down to overcome a particular situation in Belgium, where social costs are high." The issue remains closely interlinked with politically sensitive and long-running plans to relocate Belgian pilots and crews to Switzerland. Reutlinger admits that this has turned into a "complicated and time-consuming project".
Pilots would be registered abroad first, with similar measures for cabin crew implemented later, yielding potential savings of BFr1.2 billion ($31 million). Yet the pilots too want a share of the benefits, claiming compensation for the reduced Swiss social insurance cover. Reutlinger does not have to look far to see the potential for a damaging union confrontation. A dispute at Brussels-based Virgin Express erupted in mid-May over plans for the partial transfer of the carrier's operations to lower-cost Ireland and pilots demanded the departure of its USchief executive Jim Swigart.
A realist, Reutlinger does not expect the issue of social costs to be resolved soon. But he is nothing if not persistent. Meanwhile, he has been far from slow in tackling areas where more immediate benefits can be felt. The construction of an efficient Brussels hub, route development and the expansion of the long-haul network, alliances and fleet harmonisation have all contributed to the radical turnaround in Sabena's fortunes.
For his part, Reutlinger leaves others to fill in the details of the success story. His senior management team are more than happy to oblige, enthusiastically sketching out the extent of Sabena's comeback.
Among them is Mark Petit executive vice-president finance. He points out that Sabena's traffic has grown at more than four times the industry average over the past two years. Passenger numbers have averaged annual growth of around 30%, while load factors hit a record 67.5% last year, topping 70% for long haul. Admittedly, yields have slipped as economy traffic grew faster than business, but by any measure, the group's financial transformation has been dramatic. For the first time in its history Sabena is cash-rich, ending last year with a group position of BFr8 billion - helped by the use of operating leases for all of the latest aircraft acquisitions. The carrier returned to profit last year, with a net gain of close to BFr1.3 billion for the airline and its associated activities on revenue of over BFr80 billion, compared to a loss of BFr1.9 billion in the previous year.
With the parent airline at last showing profits, Sabena was able to put into effect a new group structure from the start of this year. Following the SAirGroup model, it intends to split off non-airline activities into standalone subsidiaries. Sabena Technics became the first on 1 May. The aviation school and information systems will follow soon. The rest has been reorganised into three business units: the hub, which includes related activities such as catering, ground handling and cargo; the charter operation, Sobelair, now part of SAir's European Leisure Group; and DAT, Sabena's regional operation. "The airline has never been the most profitable part. The new structure will benefit the other elements. Until yesterday everybody was working at cost for the airline," says Petit.
The potential of Brussels as a regional hub at the heart of the European Union may have seemed obvious to many, but it took the Swiss chief executive to turn it to reality for Sabena. He and his team have quietly but effectively doubled the previous three daily waves of flight arrivals and departures. The result is an addition of frequencies across Europe and a deliberate targeting of the key secondary cities, particularly in the main markets of France, Germany, Italy and the UK. This enables passengers to bypass their national hubs in favour of faster connections in Brussels. "We are targeting four or five flights per day-and adding destinations that hardly any international carriers fly to," says executive vice-president commercial Hugh Fraser, another enthusiastic member of the core management team, brought in from British Airways. Sabena now has a hub to rival those of Frankfurt and Amsterdam in terms of the number of flights operated into and out of each wave, says Fraser. "Brussels has about 26,000 hits this year - in other words 15 saleable connections per incoming flight," he says.
Intra-European operations
But, in contrast to Lufthansa and KLM, which have a high proportion of connections on to long-haul flights, 78% of Sabena's operations are intra-European. At last Brussels has found its role as the intra-European hub par excellence. Part of this strategy has been to evolve a "complementary" wave structure to link northern and southern Europe. Southern Europe has long suffered from poor connections and inadequate air services and Sabena has filled this gap. "We have a deliberate strategy of opening up business and leisure destinations predominantly in southern Europe," says Fraser.
A key part of the hub's success is the result of Sabena's 30min turnaround and connection time, which is helped by its so-called Quick Transfer Centre (QTC). This is a small facility at the end of the B pier to which connecting passengers are transported in a minibus after being met off their flights by QTC staff. They can clear immigration and customs at the QTC before being put back on the minibus and taken to their connecting aircraft. Sabena has fondly dubbed its airside QTC staff the Care Team. These people identify late incoming passengers and are responsible for collecting them and speeding them through the QTC. The centre employs over 100 people and another 40-50 will be added this year. Some 5,000-6,000 passengers a month pass through the centre, in what is claimed to be a unique feature of Brussels.
Faster connections and higher frequencies means more satisfied passengers, but also pushes flights to the top of computer reservation system (CRS) screens, particularly in Europe where elapsed journey times are a primary ranking criteria. "Elapsed travel time is vital in the CRS," says Reutlinger.
But the price of the huge increase in traffic volumes, has been a fall in average yields. Yields per revenue passenger kilometre fell by 4.1% in 1997 and by 8.1% last year. Sabena's aggressive pricing over Brussels has been a contributory factor in itself, as it has moved to position itself in the "value for money market". But it is not just capacity that has put pressure on average yields. The strategy to bring connecting traffic through Brussels - estimated at over 60% of passengers - has had an impact. So has the addition of more holiday destinations in southern Europe and the increase in the number of long-haul flights. Sabena has experienced most of its phenomenal growth in economy class and the leisure market, underlining an industry-wide trend. "This will continue - there will be higher market growth in economy class and particularly in the leisure field," says Reutlinger. But business class still accounts for 27% of Sabena's total traffic and the increase in overall load factors has more than compensated for any yields dilution.
The development of the hub has gone hand in hand with the rejuvenation and harmonisation of Sabena's fleet. By 2002, the acquisition of new aircraft will have cut the average age of the fleet from 17 to four years. Fleet commonality, in the shape of the Airbus family and Avro regional aircraft, also largely used within SAir, will produce tremendous savings in the form of optimised maintenance and cross qualification of pilots, says Reutlinger. By 2003, Sabena's fleet will be based on three categories of aircraft: the Avro RJ85/100 for its regional operations, handled by DAT; the A320 family, (of which 34 have been ordered) for medium haul; and 14 Airbus A330/340s for long-haul routes.
The fleet renewal programme will cut the number of aircraft types from 15 to 10 and reduce break-even load factors across the network. The Avro fleet, operated by DAT, is crucial to the viability of the intra-European network and will probably have a break-even load factor of just 40%. "With their very low seat mile cost, we can make our midday operations viable with relatively low break-even seat factors," says Fraser.
The expansion of Sabena's long-haul network is held up as a another significant achievement by Reutlinger. The carrier added three new long-haul destinations in April last year, from Brussels to New York Newark, Montreal and Sao Paulo, through a complicated leasing arrangement with City Bird, the low-cost long-haul carrier founded in Brussels by Victor Hasson, the originator of what has since become Virgin Express. The deal involves the lease of two Boeing MD-11s from City Bird. Sabena supplies the pilots, cabin crew and maintenance services, but all the staff are paid by City Bird. "Our pilots did not want us to operate aircraft that were not staffed by Sabena people, so it effectively is a compromise," explains Petit. Of the three new routes Sao Paulo has been the least successful and the twice weekly flights were suspended on 1 June. Sabena will continue to operate three weekly flights under a codeshare agreement with Brazilian airline VASP, while transferring the spare MD-11 capacity to the Montreal route.
Legal proceedings
Meanwhile, Sabena's relationship with City Bird has been marred by legal proceedings. Sabena took action after the start-up signed a co-operation agreement with Congolese carrier LAC for the launch of Brussels-Kinshasa services in May. Sabena argues that it has first right of refusal for co-operation on any new passenger routes launched by City Bird to points served by Sabena.
Sabena has boosted capacity on the North Atlantic, doubling it in the first three months of this year, compared to the previous year. Most of the increase relates to the new routes and an extra frequency to Atlanta, operated under the Atlantic Excellence partnership with Austrian, Delta Air Lines and Swissair. A service to Washington DC is planned in September in addition to Boston, Chicago, Cincinnati and New York Kennedy.
Under the Atlantic Excellence partnership, there is full co-operation and codesharing on all the flights of all four carriers which benefit from multilateral antitrust immunity. "The difference between other alliances and ourselves is that we feel we have progressed more in the areas of joint corporate agreements, joint pricing and joint schedule integration," says Fraser. The Delta relationship is of great value to Sabena and adds an estimated 30-40% of its transatlantic passengers. While Sabena is obviously concerned over Delta's emerging partnership with Air France and Swissair's refusal to work with its French rival, Reutlinger doubts whether a Delta-Air France tie-up, the scope of which would be limited by the lack of US antitrust immunity, could match the benefits of Atlantic Excellence. "I think that we will find ways to continue co-operation," he says.
Sabena's route expansion is intrinsically linked to its alliance strategy. "We recognise that we need to grow our international network, but we see little point in duplicating the network of our partners. Instead our aim is to develop spheres of influence and competence," says Fraser.
There is little dispute to Sabena's position as the dominant carrier on African routes within the Qualiflyer Group (see alliance feature, P37). While Austrian and Swissair are strong in the Middle East, India and the Far East and Eastern Europe, Sabena is building its presence in western, southern and northern Europe. Reutlinger does not rule out building a Far Eastern operation. Sabena serves Japan and is to add services to India this year, with China a prospect for next year.
Reutlinger recognises that Africa remains the backbone of Sabena's long-haul operation and the carrier has cultivated a strong image in the region. "There is a clear philosophy and policy that, where there is a conflict of some kind, we will be the last out and the first back in," he says. Sabena has abandoned its pursuit of a stake in Uganda Airlines, because of uncertainty over its true value, and believes it can continue to develop in Africa without an East African hub. The Qualiflyer 2002 project has been set up to look at how Africa can best be served by the partner airlines. "A lot of African destinations do not have the potential for a daily flight by one airline, or we lack the traffic rights. The Qualiflyer group can co-ordinate services to say to the customer that we have a daily operation," says Reutlinger.
In Europe, Sabena's controversial wet-lease arrangement with low-cost Virgin Express on routes from Brussels to London, Barcelona and Rome, continues to be held up by the management as a success. "Sabena has never transported as many passengers between Brussels and London as since the co-operation with Virgin," says Reutlinger. Fraser is as enthusiastic, saying the feeder business from Virgin to all three European destinations is "amazing". He adds: "The Virgin agreement frees eight aircraft for Sabena to fly to other points in Europe - we have been able to grow our network to other points." Apart from some schedule refinements and the increase of Virgin's seat pitch to match Sabena's European seat pitch, there are no plans to change the arrangement. Virgin's lower costs mean it can make a profit where Sabena once lost money and Reutlinger recognises there is a long way to go before Sabena's production costs can hope to match Virgin's.
Sabena's future includes some key targets, such as a 25min turnaround time in Europe, and at least one vital challenge: its image. The fleet renewal and new livery have set the ball rolling and the carrier has reinvested savings squeezed from its airline suppliers - more than BFr1 billion this year - into improving service and training. But shaking off a state-owned mentality is one thing, convincing the marketplace it is gone is another. That will rely on Reutlinger's ability to demonstrate that work on productivity and costs is permanent.
| Sabena traffic and financial results | |||||
|
| 1994 | 1995 | 1996 | 1997 | 1998 |
| Turnover ($ million) | 128 | 1892 | 1836 | 1827 | 2214 |
| Net Profit ($ million) | -43 | -67 | -269 | -54 | 35 |
| Operating margin (%) | 19 | 0 | -7.1 | 0.5 | 2.9 |
| Passengers (million) | 4.26 | 5 | 5.17 | 6.87 | 8.75 |
| Traffic growth (RTKs) | 13% | 15% | 5% | 25% | 36% |
ATK=Revenue tonne kilometre
Reutlinger's rally
Paul Reutlinger, president and chief executive of Sabena. Grew up in Altnau, a French canton in Switzerland. Attended commercial college in Zurich and various Swissair management seminars, undertook an international senior mangers' programme at Harvard Business School in the USA before beginning his three-year commercial apprenticeship at Swissair in 1959. After passing through the market research department, reservations and three years as head of the City Office in Brussels, he graduated to be supervisor of the congress service and then became chief executive of interconvention AG, a conference-organising subsidiary. He then moved to more senior management roles at Swissair including sales manager in Argentina, country manager France, head of sales co-ordination abroad, general manager, traffic (product planning) and vice-president of the market Europe II division. In 1992 he became Swissair executive vice-president with responsibility for all the marketing divisions. Two years later he was president of Swiss Tourism, joining Sabena as president and chief executive in February 1996. Directorships include Montreaux Palace Hotel, Diners Club.Source: Airline Business
