Provocateur

“When you go back through our history we’ve had tremendous highs and tremendous lows and clearly a hard reset that was needed at that point in time,” Luxon observes in an interview with Australian Aviation.

“First of all, you had Sir Ralph Norris and he was very instrumental, frankly, in opening up technology, building the culture by talking to the staff, and certainly helped with the financial underpinnings in place at that point in time.

“Then Rob Fyfe came from a different background in telecommunications, broadcasting and banking. He put a lot more focus around customer and staff culture. And I’ve come in, I guess, with more of a global experience base in fast-moving consumer goods.

I want to drive that commercial, customer and cultural dynamic in the business.

“But all three leaders, frankly, coming from outside the industry, were very positive because they all could bring provocations from their past experiences.

“And within the business we have deep aviation experts who are also very open to that provocation but are also very good at making sure those new leaders from outside understand the aviation dynamics and structural economics too.

“So I think the blending of that has been very good. ” Those ‘provocations’ and the ‘blending’ of expertise have helped transform Air New Zealand into an airline that is not only now delivering record profits (its latest reported result was a NZ$180 million pre-tax profit for the first half of the 2013-14 financial year – up 29 per cent), but is innovative in its product development (Skycouch), and imaginative and sometimes daring in its marketing (from The Hobbit to Bear Grylls to Sports Illustrated swimsuit model safety videos). Further, it has over NZ$1 billion in cash on hand, has become a cornerstone investor in Virgin Australia, and is investing for future growth with new widebody 787-9, narrowbody A320neo and turboprop ATR 72-600 aircraft on order. And it holds an investment grade credit rating.

“But a lot of that is [a result of] what we continue to do today, which is really focus on the culture of our people,” observes Luxon. “We fly people not planes, as we keep saying, and that starts with our own people because if we have them positively charged, bordered to what we’re trying to do,

I want to drive that commercial, customer and cultural dynamic.

connected to a mission and purpose that’s bigger than their day job, that’s really, really important to us. ” That sense of mission and purpose, in fact, starts at the top. Luxon joined Air New Zealand in May 2011 from Unilever. He began his career with the consumer goods multinational (whose brands range from Dove soap and Rexona deoderant to Flora magarine, Magnum icecream and Lipton tea) as a management trainee in 1993 after graduating with a Master of Commerce in Business Administration from Christchurch’s University of Canterbury. He would ultimately rise to become president and CEO of Unilever Canada, based in Toronto, and it was there that he was approached about working for Air New Zealand.

“Someone said ‘talk with Rob Fyfe about the cultural journey I’ve been on in North America’. We did that and one thing led to another and there was a job [offer] to run the international business, which was half the airline at that time. ” It was an appealing proposition on a number of levels, including “the possibility, but no guarantee” of in turn being appointed to succeed Fyfe as CEO.

“It may sound a bit odd, but I grew up in New Zealand, a small country, wanting to be a business guy – lots of failed property developers and wheeler-dealer types and very little corporations or corporate life there really. And so this was the chance to come back and lead a company and be a really successful CEO but, more importantly, be a CEO of a successful business that actually can make a big difference to our country because our country becomes quite small quite quickly if we don’t have a successful Air New Zealand. ” Says Luxon: “Think about what we do in terms of tourism, in terms of trade. We have high value exports in the belly of the aircraft tonight; we’ve

Our country becomes quite small quite quickly if we don’t have a successful Air New Zealand.

got flowers going to Japan; we’ve got lobsters going to China; we’ve got seafood going to LA and to Australia.

“We’ve got a million New Zealanders living overseas which as a proportion of our total population is a very large number. And so connecting that new grandmother in Timaru in New Zealand with the new granddaughter in London is quite an important mission. ” He continues: “I want to spend my time on things that matter. I could do lots of things but I really felt this company in particular is a really special one and one that can make a big difference. And I think that’s really important. Our generation wants to lead companies in quite different ways from the one that went before us. ” Luxon’s “quite different” leadership also extends to bringing across to Air New Zealand his experiences from the consumer product world.

“The big focus, for me, has really been on the sales side of the business. When you work for a company like Unilever, one of the world’s largest companies, they’re in some 200 countries around the world, when you would open up a new market . . . there was a process by which you understood the customer and you understood what you had to adapt or adopt in your product mix and in your offering in order to actually meet their needs. And so that’s the thinking that we’re bringing onto the table. ” Sales, says Luxon, has been “one area where I felt that the aviation industry in general does a pretty poor job relative to other sectors”.

To redress that, Luxon explains, “We’re bringing a lot of skills from a tech company, or a fast-moving consumer goods, or a pharmaceuticals company, into the way we do our frontend sales. That’s the sharp end of our organisation and the tip of the spear so it needs to be those people who go to build our business in China that need to understand the customer, the trade [environment], the government incredibly well. ” Elaborates Luxon: “A lot of it is, ‘yes, do I understand the customer well?’ Or am I hitting this with a New Zealand or Australian mindset rather than do I deeply understand what’s really hitting those young, wealthy Chinese under 30-year olds? Do I really know what’s driving them? Do I know what’s driving a retiree visit or a ten-day bus tour through New Zealand by Japanese customers?” Luxon’s other focus is bringing a manufacturing perspective to the airline’s ‘supply chain’.

“The second [focus] I’d say is on the supply chain. When you manufacture Dove soap in three sites around the world, there’s a lot more to work on the productivity of these businesses. I’ve done a lot of case studies into airlines that have failed, and what you learn is, you have to be really good at customer service, but if you don’t have a grip on your costs, that’s what brings you down,” he says.

“So it’s very important to be bringing continuous improvement and increasing productivity to your operations. And so, for us, again, we’re coming from outside and bringing a whole bunch of talent as we roll out lean six sigma into the operations of our business, and essentially think in the same way that a manufacturing organisation does with factories. It’s no different from how we should think about running maintenance facilities or how we should run airports, etc. ” Luxon says the airline has only just begun a journey of bringing discipline to its processes, having brought into the company people “who have come from fast-moving consumer goods or a manufacturing environment”, who are placing a particular focus on process and waste. “When you start focusing on waste, it’s quite exciting because you’re doing several things at the same time. One is you’re lowering your cost and you’re certainly improving your environmental status as well in terms of footprint. ” Luxon explains the airline has “rapid improvement teams” that examine functions “end-to-end” with the aim of streamlining processes.

“How do I create benefit from that process; strip out costs completely that customers aren’t prepared to pay for; improve the process for people to operate in and then share those benefits either with ourselves or our suppliers? Then we’ve got choices. We can either drop that back to the bottom line or we can invest that in lower ticket prices and being more competitive. I think the industry has to take accountability for being productive and improving productivity. And I think that’s been a big focus for us, and it’s going to be an even bigger focus moving forward. ” In all Air New Zealand aims to save “$50 million a year for the next few years, just in improving the way we do procurement; the way that we run our business processes”.

Nonetheless, Luxon is also quick to point out that aviation has lessons for other industries as well.

“Going back from this industry into something else, you would take a lot about capital management and safety management systems, that would be great to have known about for instance. ” And Luxon is clearly enjoying his time in the airline world. “The airline industry is highly addictive and a lot more interesting, challenging and rewarding than any other industry I can think of to work in. ” Still, there’s no doubt Luxon has brought a fresh perspective to the airline business, an industry that he points out is too fixated on what he calls “uncontrollables”.

“My big learning coming from outside has been the airline industry and the commentators in the media focus a lot on uncontrollables, as I would call them. So foreign exchange, fuel, competition, natural

CEOs from other sectors wouldn’t use those excuses for poor performance.

disasters, and there’s a lot of fixation on ‘it would have been a great year but for those things’.

“CEOs from other sectors wouldn’t use those excuses for poor performance. And the way you handle those uncontrollable events is really around good risk-mitigation to buy you some time to adapt to changing circumstances, but it’s about speed and culture and nimbleness to respond to those events. So when an ash cloud hits us, we work out how to deal with that. When the Japanese yen devalues, you work out how to deal with that within two weeks and you move quickly. And it’s about your relative competitiveness at that moment versus your competitors’ that make you win.

“Then, on the other side, on the controllable side, the industry in general is quite fixated on supply push. So people go off and buy hundreds of new aircraft, they arrive and then they work out where they’re sending them. Well, we want to be a demand-triggered organisation and so we’ve come the other way, … we can fly aircraft anywhere in the world but what we’re going to do is build businesses around the world. We don’t have any loss-making routes because we treat them as product lines and either they get fixed or … we exit them. ” Luxon says Air New Zealand aims to be “demand- driven” and “then we go purchase aircraft and meet that demand. That, for us, is probably quite a different way of thinking than the industry norm, but I think the fact that we think we run a great deal on it but we always try and put a twist into it in terms of what we offer the customer, but then in terms of the commercial success.

“So by growing our revenues we’re getting scale advantages and we’re growing revenues in profitable ways, not just going to new destinations and losing money from day one. We’re trying to do that so that we’re profitable and then we’re getting scale benefits, lowering our unit costs, expanding the profits and ploughing that straight back into the business, keeping that virtuous circle very positively charged.

“When it’s negatively charged, you say, oh, it was declining, the costs are going up with inflation, your profits are falling away. You can’t invest back in your business, you diminish the customer proposition, your staff get very frustrated, you don’t convert commercially and the whole circle starts again. And so, for us, that’s been very important. ” Luxon, then, brings a “very deliberate” ‘glass half full’ view of the airline world, and the opportunities it offers.

“It’s my job to be incredibly optimistic but also realistic about the future for Air New Zealand. ” It is, he says, “a world of opportunity out there. It really is. We probably just think differently in terms of what that opportunity actually is and so if stuff happens around natural disasters, foreign exchange, fuel, well, let’s deal with that. Ash cloud, we can find a way to fly around that; the Japanese yen devalues, within two weeks we reschedule, change capacity. We can do all those sorts of things.

“There are choices that we get to make. We have control over our business, right? And I think sometimes in the industry there’s a lot of fatalism and there’s [a view that] a lot of my circle of control and influence is very small and therefore what’s the point? Because, you know, you can have a great management team, be in what’s called a difficult industry, and you get a random outcome. Well, that’s not the way we want to be at all. We want to be in control of our future, happening to it and not have it happening to us. ”Luxon highlights a number of opportunities ahead of Air New Zealand.

“We think there’s big opportunities in the Pacific rim; a big opportunity to convert the alliances. We’ve got these new aircraft that will see five to seven per cent . . . capacity growth in the next five years.

“On the cost side, we’ve got the scale benefits of profitable growth which means our unit costs per seat are being lowered and then we’ve got this continuous improvement productivity drive going on across the whole of the company. And it’s about how do we simplify the business? How do we make it smarter? How do we make it better? “And then we’re freeing up cash that we can then do other things with, which is typically go buy more aircraft. So as we’ve got better and better, we’ve gone and bought two more 777-300s. We’ve committed $100 million to refurbish the 777‑200 fleet. We’ve upped our Dreamliner order from six to 10. We’ve now got 13 A320neos on order and we’ve accelerated delivery of our A320s into domestic New Zealand. We’ve got nine more ATRs coming.

“That’s all fully funded and it’s done off the back of a virtuous circle of improved investments. ” The new fleet arrivals will also allow Air New Zealand to address one of Luxon’s biggest frustrations.

“I’d love to have more customer consistency across our organisation. We’re pretty good by most airline standards and that’s very obvious, but I want all those aircraft with our best product and service on them as quickly as possible. ” Fleet growth should also mean network growth, with a focus on bedding in the planned – regulatory approval pending – alliance with Singapore Airlines.

“And then, the other white space for us I’ve talked about publicly has been Latin America … It’s a medium-term priority but if you’re sittingsouth of Shanghai, Hong Kong, coming through Auckland is a very efficient hub to connect through into Latin America. If you’re north of that point, there are often six other routes that are just as effective as coming through Auckland potentially.

“We need to crack the code on that, but again we’re going through a process of how do we build a business and develop a market and not just fly our aircraft operationally into a place where we could … lose tens of millions of dollars if we don’t do it right. So, which kind of trade partners are we going to need to work with? Which channels do we need to work in? Which segments of customers, which alliance partners are we going to need along the way? “That’s a process and that’s a study that we do internally as we follow a market development model and we bring discipline to that so that when we go, we know exactly what we’re doing and where our risks are and what we’re trying to achieve. ” That would see a continuation of an alliance strategy that has seen it form revenue-sharing joint ventures with Virgin Australia, Cathay Pacific and Singapore Airlines, and strengthened partnerships with Star Alliance partner airlines ANA in Japan, and United and Air Canada in North America.

“And then we have a series of other bilateral relationships. We connect a lot with Lufthansa traffic over Tokyo which then drives the Germans into New Zealand through Tokyo. It’s just a smarter way to run our network.

“As a consequence, because we fixate on the Pacific rim region, we’re not super worried about Middle Eastern carriers because you don’t go to the

How do we simplify the business? How do we make it smarter?

desert to come back to Asia. And, likewise, we’re managing Europe, which we see needs a lot of developing and is going to be sick for some time, is there a real opportunity for tourism there? We’ve seen it with Germans and we’ve actually seen it with the British even in the last year as well.

“But the structural economics mean that we don’t want to fly that second leg. And that’s true for any and every airline, that when you fly that second leg, you never get twice the fare for travelling twice the distance. ” With Air New Zealand dropping flights to London over Hong Kong, the airline’s only one-stop long-haul flight is its NZ1/NZ2 Auckland-Los Angeles-London service.

“LA-London’s a slight anomaly,” Luxon observes. “We now have a much healthier mix of through traffic, of people coming from Britain to New Zealand but we also have people who just frankly use it because their head offices are in LA and they are in London. So people like Warner Brothers and corporates actually say, ‘I like the product, I like the service’. ” That service, Luxon explains, is underpinned by four “service values” of “being yourself”, “sharing New Zealand”, “show can-do” and “welcome people as a friend”. Luxon says Air New Zealand wants its staff – indeed ‘Air New Zealanders’ – “to have personality – we don’t want them to be robotic servers and offering robotic service”.

Luxon continues: “We’ve got some wonderful examples of where our staff have stepped in to help customers in trouble, or where a system has broken down or where a service is needing to be recovered. We entrust our people to actually make the right call and use their judgement to do that. We’re not bound by endless rules that sometimes get in the way of you doing it. . .

“They sound four really simple things but that really does define what an Air New Zealander is all about. ”Certainly the term ‘Air New Zealander’ is an interesting reflection of the airline’s internal culture. The term “is shorthand for recognising that we feel very great pride working for this company, about this responsibility for the country, and that we have a purpose and a mission bigger than our day jobs,” Luxon says.

And that the term ‘Air New Zealander’ is a source of pride reflects the airline’s perception among Kiwis more generally.

“People are proud about the recovery of the business over the last 12-13 years. We’ve made a profit every single year in quite tough times and against the context of a difficult global aviation market. But more importantly people feel very invested in the business. I’ll be in a supermarket and people will come up and tell me whether they think I’m doing a good job or a bad job or about a great service or a bad service they had. That’s exactly what you want, high engagement.

“Amongst the public, they love this company, they really do. And our challenge has been we have great love from the public and great love from our staff, but also we want to work with other stakeholders, whether that be unions or trade partners or the broader tourism industry to achieve the goals that we have before us.

“That’s the big change in the last couple of years, that we’ve got a much broader set of stakeholder relationships. ” Luxon says those aims are helped by a particularly Kiwi approach to negotiating partnerships.

“When we work with other partners, our Kiwi way of being means that we don’t head up with a huge ego and we are not bombastic. We’re quite relationally and emotionally intelligent and so we are able to be good

It’s not a state-controlled, state-owned or state-directed business at all.

partners to people, understanding what they need and putting ourselves in their shoes, pretty well. ” But at least one Air New Zealand relationship is not without controversy, at least in some circles in Australia – its majority ownership by the New Zealand government.

“The government ownership question is interesting because I think we’ve been presented in Australia somewhat disingenuously, and because the reality is that the New Zealand government owns 53 per cent of the shares that are on the open market. It’s not a state-controlled, state-owned or state-directed business at all. It has a 100 per cent independent board with no government representation on it. ” Luxon doesn’t mention Qantas by name, but the Australian airline sparked a heated debate about government ownership of the three major airline shareholders in Virgin Australia (Air New Zealand plus Singapore Airlines and Etihad) after Virgin’s capital rights raising late last year.

“I’m expected to run this on a completely commercial basis, and, frankly, I wouldn’t be here doing this job if I didn’t feel it was a completely commercial entity,” Luxon states.

Certainly the relationship with Virgin Australia is pitched at extracting maximum commercial advantage for the two airlines.

“We’re working closely together. We do all of Virgin’s short-haul Boeing 737 maintenance in our facility in Christchurch. We’ve got an expertise and competency there, we want to build that into a regional centre of excellence in terms of narrowbody maintenance. There are other opportunities potentially in procurement. For example we share a 777 engine between us. So there are a lot of things, given the geographic proximity of the two businesses that in the back end of our businesses we could collaborate more around.

“So we’ll continue to explore those with them, but, really, on the Tasman alliance, it’s very much around revenue, sales and distribution and the fact that we can activate their sales and distribution network and ours in Australia and they can access ours in New Zealand and you’ve just got that connectivity piece.

“The ownership structure is very separate from the alliance piece and the way that we look at that. And that’s just purely about having an exposure to a large, adjacent, connected market and to domestic Australia, and doing that in a very cost-effective way. ” Certainly the more traffic Air New Zealand can develop from adjacent markets near and far around the Pacific rim, the better it is able to connect New Zealand to the world, which can only help cement its place in the national psyche.

“I think there’s a strong emotional connection [between New Zealanders and Air New Zealand]. I think it more comes from the fact that we have the biggest foreign diaspora [per capita] of any developed country on earth. And so you have people like myself, even our prime minister, who have spent time outside the country and you all arrive at Los Angeles Airport and see a big koru on the tail of the aircraft and you step on board and you feel that you’re home. ”