Focus: bmi turnaround strategy

When you are offered the chance to head an airline headquartered in an impressive 17th century English gothic mansion, it cannot be all bad. But bmi chief executive Wolfgang Prock-Schauer has his hands full, charged with taking Lufthansa's latest acquisition into the black, writes Victoria Moores in Derby

When former Jet Airways chief executive Wolfgang Prock-Schauer took leadership of bmi late last year, he had a Herculean task ahead of him. The airline had made a £181 million ($286 million) loss for 2008 and its 2009 performance turned out to be even worse. He needed to raise £190 million in funding for the period to November 2010, partly at the expense of bmi's crown jewels - its lucrative London Heathrow slot pool.

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"It was critical," says Prock-Schauer. "When I arrived there was a lot of uncertainty. The employees were scared about what might happen, whether the airline would be broken up or taken over, so my first job was to reassure them that we had a turnaround plan in place."

For years the question had hung in the air about whether bmi chairman Sir Michael Bishop would exercise his put option, forcing fellow shareholder Lufthansa to buy his stake. As one bmi employee said at the time of the Lufthansa takeover: "Now the ownership speculation is finally over, we can start speculating about our future."

But, in April, Prock-Schauer reassured them that bmi, which comprises bmi mainline, bmi regional and budget arm bmibaby, would stay intact. "We have no plans to divest any of these elements. Every airline has a flow in our set-up, each has a specific role to play. There are no plans [to sell bmi] and no talks with Virgin Atlantic or any other carrier."

JULIAN CARR MANAGING DIRECTOR BMIBABY Since Lufthansa's takeover of bmi, budget arm bmibaby has been slimmed down from 17 Boeing 737s to 14. "At the moment we are focussing on being good at what we do. We aren't looking at massive growth plans. There are no plans to wipe out Ryanair," jokes Julian Carr, who became bmibaby managing director in April. "Our role within the group is to be a successful business in our own right." Despite tough trading conditions, he says 2010 has been "a hell of an improvement on last year" as bmibaby continues to learn from its experiences and tweak its network accordingly. He readily confesses that bmibaby does not have any "huge, earth shattering stuff coming up" and 2011 will only see a gradual iteration of this year's programme. Growth will resume in 2012. In the meantime, Carr is looking to promote bmibaby's service focus. "There is a negativity towards the Ryanair brand where people generally prefer not to fly with them, so if we can be in the ballpark price of Ryanair and give good service, people will go for that. I want people to say 'bmibaby, they're the good service one'." He uses the example of US low-cost carrier Allegiant. "Even though we're small, we can still be damned good at what we do. We don't have to be a big airline to succeed."

Prock-Schauer joined bmi with a firm mandate. "My job is to create a valuable asset for the Lufthansa Group," he says. "I think bmi's strategic value is understood and acknowledged by our parent company. We have 10% of the slots at London Heathrow, the biggest aviation market in the world. Together with Star Alliance, I think we can really do something. Now it is our job to be profitable as quickly as possible. Luckily, I found a good management team here."

Although the clouds of uncertainty had lifted a little, the hard work was just beginning. The team had to deliver an initial tranche of £100 million in combined cost savings and synergies. This was communicated to bmi's staff in April via a series of briefings. "Some sacrifices needed to be made to turn this company around," says Prock-Schauer, who comes across as kindly and engaging, but firm. "I must say, I am really impressed by how all our colleagues have responded."

No restructuring measure is more painful than job losses and cuts formed "an important part" of bmi's turnaround plan. Around 670 positions have been made redundant, against a target for 800. Prock-Schauer says this is a work in progress, but he adds that there will be no more "big bang" cutbacks. The remainder will materialise as bmi streamlines its operation.

On top of the job cuts, bmi has implemented a wage freeze, shifted its network focus, increased its utilisation by 15%, slashed capacity by 20% and axed some of its worst loss-making routes. This means Amsterdam, Brussels, Kiev and Tel Aviv have been abandoned in favour of a new Vienna link and expanded services into Berlin, highlighting bmi's Star Alliance and Lufthansa Group loyalties.

"We are now building a solid base for future expansion," says Prock-Schauer. "The greatest problem bmi had was it had to do everything on its own in order to get economies of scale." A fundamental part of bmi's turnaround plan rests on its carefully managed integration into Lufthansa Group, which will deliver 20% of the £100 million target through back office synergies. But bmi will maintain its independent identity in the areas that matter.

"As much as we talk about the European Union, we are not the 'United States of Europe'. This becomes clearer every day. The Swiss want a Swiss airline, the Austrians want an Austrian airline. We have to go with what the consumer wants, but we have to act like one airline, getting the economies of scale of a big airline," explains Prock-Schauer.

Leveraging its Lufthansa ties, bmi has already integrated its overseas sales offices and pooled resources for some of its airport activities, such as maintenance. It is also working with the wider group on financing, procurement and hedging, as well as some marketing functions, and bmi is planning to join Lufthansa's Miles & More frequent-flyer scheme, shifting away from its own scheme, Diamond Club. Prock-Schauer is also promoting strong connections and communication between departments at bmi and its parent.

"This is the basis really to get all the synergies we have been talking about. We are a smaller airline, but nevertheless we get the economies of scale of a big group. That's what we're aiming for and we can already see good results coming through," says Prock-Schauer, who is expecting to deliver 60% of the £100 million target in 2010. "The most major benefits will come from having the right network and marketing it in the most efficient way."

On some domestic routes bmi operated seven or eight daily frequencies, but it has cut its Heathrow frequencies to Aberdeen, Belfast, Dublin, Edinburgh, Glasgow and Manchester to maximise its precious slot pool, increase load factors and boost yields. "Our focus will be to further reduce our domestic flights and this capacity will shift to our continental Europe and Middle Eastern routes," says Prock-Schauer. But he insists domestic services will remain part of bmi's core business. "By capping frequencies [on domestic flights], we've already seen improved results because we're using bigger aircraft and keeping prime timings. Even with five flights a day, we can offer perfect timings for connecting traffic."

During its restructuring bmi sold 18 of its Heathrow slot pairs - although they all remained within Lufthansa Group - and leased out a further 10, leaving it with 10% of the total pool. This resolved bmi's liquidity issues and its portfolio, which has shrunk from 87 to 66 slots, is now stable. The leased slots will be returned to bmi over the next one to three years. "This puts us in a unique position because we are possibly the only carrier which can expand at London Heathrow," says Prock-Schauer. "The plan is to stabilise the business, return to profitability, get the slots back and make something meaningful out of it."

STEWART ADAMS MANAGING DIRECTOR, BMI REGIONAL Unlike bmibaby, Embraer operator bmi regional fits in to Lufthansa's network strategy, offering high quality business links from the UK regions. "The positioning is ideal for bmi regional," says Prock-Schauer. "It's a niche carrier and it's also part of the bigger group if we want to make use of it to feed Lufthansa Group hubs." But despite these group ties, bmi regional managing director Stewart Adams says his team is left to its own devices in terms of commercial activity. "If there's something out there that we like the sound of, and it is profitable, we can put a business case together. If it's approved, we get on with it." This means bmi regional's activity is quite diverse. "We have quite a large portfolio of wet-lease customers and we operate charters for clients like Premier League football teams," says Adams. "We're very much a niche carrier. We make no apologies for that at all." Today bmi regional has 18 Embraers, seven of which are leased out. Three are internally contracted to bmi mainline, two are placed on a long-term staff shuttle contract for Airbus and the final two are operating for Brussels Airlines. The marketing and codeshares benefits of being part of Lufthansa Group are becoming increasingly apparent, says Adams. And although Lufthansa is typically moving away from 50-seat operations, he believes this could create a niche role for bmi regional within the group. "Our future lies in developing the relationship with Lufthansa and our other family members to see what role we can play," says Adams. "Even on a niche market, being part of a wider group helps," adds Prock-Schauer.

With the £100 million plan well on track and already active on an annualised basis, Prock-Schauer is finalising a second £100 million tranche, to be squeezed from bmi's optimised network and its Lufthansa ties reaching maturity. "We need a certain amount of time before we see the full effects," he says. "The first £100 million is clearly quantified, it is coming. The second £100 million is more difficult to achieve, but we are very confident we have identified the majority of measures for the second programme which will take us to breakeven and eventually into a profit scenario."

AMBITIONS

Prock-Schauer expects bmi to enter the black in the medium term and both £100 million programmes will "definitely" be complete in three years. "I am a bit more ambitious than that, so the medium term for me might be a little bit shorter than three years," he says with a disarming smile. New aircraft orders do not feature in the plan. "When we are profitable, then we will start evaluating aircraft types. This is not my priority. My priority is to return to profitability," he says.

The airline has secured the cash it needed and Prock-Schauer says bmi is now "on track" in terms of liquidity, despite the volcanic ash crisis causing a "big dent" in its recovery. By 2011-12, bmi should be stable and heading for break-even. It will then look to shift its network focus to fully maximise its Heathrow slots, expanding its mid- to long-haul network with new destinations in the Middle East, selected markets in Africa and the CIS. Early signs of this strategy are already emerging with the launch of services between Heathrow and Libya's capital, Tripoli, in December.

In the longer term, Prock-Schauer does not rule out a return to transatlantic flights. "We are evaluating certain projects on the North Atlantic. That could be a complementary offering because of the huge traffic flow from the Middle East, via London, to North America." He says the North Atlantic operation would "not be big scale" and would simply complement Lufthansa's existing network. He adds that no definitive decision has been taken and timelines are entirely dependent on the success of the restructuring plan.

Although bmi only retained one of its three Airbus A330s to serve its three Saudi Arabian routes, a second A330 that it operates for another airline is due to be returned in March 2011. Together with the return of bmi's leased slots, this could be used to support its network redevelopment plans.

In terms of the wider Lufthansa Group, bmi would offer an alternative hub at Heathrow for onward links. "Lufthansa Group has many different hubs and traffic flows. Eventually the passenger decides," says Prock-Schauer.

But it is still early days. Prock-Schauer's first objective is to consolidate bmi's strongest medium-haul services and maximise their potential, shifting away from its domestic heritage. These medium-haul flights will then provide a feed for its possible re-entry into transatlantic services. Meanwhile, bmi regional will do the legwork of connecting the UK regions to Lufthansa Group's other European hubs.

In the shorter term, Prock-Schauer is focusing on rolling out some tangible signs of bmi's new direction, such as a refurbishment of bmi's Airbus A321 fleet, including new business class seats and an in-flight entertainment system upgrade over the next two years. "Especially on our mid-haul services, we want to offer a really competitive product," says Prock-Schauer. "Our goal is to be one of the best in class when we fly these mid-haul routes." The airline has seven A321s in its fleet, configured with two classes, and it is due to take delivery of a further three in 2012.

In the meantime, bmi is rolling out a "quick refurbishment" of its interiors and its lounges, which Prock-Schauer says is in the completion phase. Another immediate measure is harmonising bmi's fleet into its "whale" design livery after the airline ended up with three colour scheme variations - its old colours, the whale livery and an interim scheme from the former BMed fleet. "Now we have the time and are willing to invest more and paint the aircraft properly."

A year after arriving at bmi's headquarters, Prock-Schauer says: "There has never been one day where I thought it [bmi] would collapse." He describes the mood as cautiously optimistic, without getting over-excited. "Everybody knows we're still loss-making, but they see that something is happening. We are doing more flying, the aircraft are being repainted into a standardised livery and small investments are coming on line. Naturally, in a loss-making situation, you cannot spend huge amounts of money, but everyone sees that we want to position this company for the future and make something out if it."

Prock-Schauer acknowledges that his clear mandate from Lufthansa is to turn round bmi. So will he make a sharp exit as soon as the beleaguered airline sees sunnier days? With an enigmatic smile and a jovial laugh, he responds: "I am staying here. That is my plan. I am not here to do a quick turnaround job and then move on to something else. I have settled down in Nottingham and my plan is to stay here."

Shortly after Prock-Schauer took leadership of bmi, we caught up with him to hear about his turnaround strategy for the company:

Source: Airline Business