Air New Zealand boss Christopher Luxon: 'We don't lose to Australia at home'

Deputy Editor - Business·NZ Herald·

3 Sep, 2015 09:10 AM11 mins to read

Air NZ CEO Christopher Luxon believes Air NZ can cope with the competition by playing its own game, offering bigger planes and its loyalty scheme. Photo / Ben Fraser

Air New Zealand's senior managers had a quiet dinner at chief financial officer Rob McDonald's house the night the airline announced its biggest-ever profit.

It has become a tradition when the results come out, and this time there was plenty to celebrate, but the informal meal with partners was more a modest night of reflection, says chief executive Christopher Luxon.

Just days later, rival Jetstar fired the latest shot in the increasingly bitter battle over regional New Zealand.

The Qantas-owned airline revealed it will add Nelson, Napier, New Plymouth and Palmerston North to its destinations, taking on Air New Zealand in its own backyard.

While Ansett challenged the incumbent on regional routes in the 1990s, others have since confined themselves to jet routes. Most have failed. But Jetstar is backed by an airline with deep pockets and the challenge comes as Air New Zealand is still copping flak for pulling out of three towns - Kaitaia, Whakatane and Westport.

While Luxon says the low-cost carrier's challenge has been "overblown", it still gets under his skin.

Touching on the All Blacks' "Fortress Eden Park" notion, Luxon says "we don't lose to Australia at home". And speaking the day after announcing the latest result, he went much further.

"We love competition; we're looking forward to it," he said.

"It's good for us and our customers. What I would hate to happen is to see subsidies for deals being done for a big Australian corporate at the expense of the ratepayers of New Zealand."

Luxon said Air New Zealand had spent decades building up regional routes, contributing to airports and other infrastructure and spending tens of millions of dollars every year promoting regional destinations overseas.

"What I don't think is great is someone coming in to cherry-pick and freeload off the back of that. They may well choose to do that. What would not be acceptable is for the good rural ratepayers of New Zealand to be subsidising the wealthy shareholders of Qantas back in Australia — a company that's four times bigger than Air New Zealand."

Luxon believes Air New Zealand can cope with the competition by playing its own game, offering bigger planes and its loyalty scheme, but there's an edge here. Last week, he accused Qantas of launching Jetstar regional services as payback for being challenged in the Australian domestic market by Virgin Australia, an airline 26 per cent owned by Air New Zealand.

"We have to compete for New Zealanders and I make no apologies for wanting to compete," says Luxon, well into his third year at the top of Air New Zealand. The airline is celebrating its 75th anniversary and he says it wants to be around for at least another 75 years.

"We are a small airline in a big world, there's lots of airlines who want to punch us out. We're quite combative, we're quite dogged and we're quite tough."

That's not to say the aggro continues off the field. Luxon says that in his experience, aviation is a very collegial industry.

"I thoroughly enjoy having dinner with [Qantas chief executive] Alan Joyce from time to time. We're able to have a relationship at a civil level, we don't discuss our businesses — and we sure as hang want to go into the marketplace and punch each other out."

One of his senior executives, Cam Wallace, says it's no surprise that Luxon is talking tough. It's who he is.

Luxon's pugilistic spirit was nurtured in the hardball sales environment at Unilever, where he spent 18 years battling other fast moving consumer goods multinationals on both sides of the Atlantic.

"His skills and experience were built up where there is an incredibly competitive environment. We call it being fighting fit," says Wallace, Air New Zealand's chief sales and commercial officer.

Wallace, a 14-year veteran at the airline, says the atmosphere has changed since Luxon's arrival. The chief executive's drive is something he hadn't encountered before.

"I would say that Christopher has an indescribable motivation to win and succeed in the market," says Wallace. "It's unmatched from what I've dealt with historically. You have to get used to the work dynamic because he is running so fast ... "

The airline is on its fastest growth trajectory in modern times, and as Luxon sees it, the trick for his executives is to work like crazy but keep cool.

"On the outside we try to make it look very easy; the reality is that you're like a duck swimming — flat out under water but on the top of it you're trying to look very calm." The airline last week announced a net profit of $327 million in the 12 months to June, up 24 per cent on the same period last year. Its pre-tax normalised earnings were $496 million, up 49 per cent on the previous year.

The day of the profit announcement was a good one to be at Air New Zealand. The 8,000-or-so wage staff who had been there for more than six months got bonuses of $1,400 apiece, in an $11.5-million gift for the good times. That followed a $750 bonus the year before, for what was then a record profit.

Luxon's basic pay over the past year increased from $1.325 million to $1.4 million and his short term incentive went from $1.457 million to $1.540 million.

"We want everybody to participate in the benefits when we do well and when we deliver a superior commercial result," says Luxon.

He was working in the United States and Europe during the depths of the global financial crisis and didn't like what he saw when cases of management greed were exposed.

The average tenure of a NZ chief executive is about 3.2 years, but Luxon says he is he isn't going anywhere.

"What I observed was a lot of very poorly-led businesses with senior management teams that didn't do very well, with very poor results. You need to have ruthless alignment — when the company does well, the CEO and management team does well, but they should also take the pain when it doesn't."

The average tenure of a New Zealand chief executive has been estimated at 3.2 years, but Luxon isn't going anywhere.

"I love this company and I love this job and I can't think of a company that makes as big a difference to New Zealand — I'm here for a while.

"[Succession] is not a big topic of conversation because I'm fairly young in the job age wise (45) and fairly young in experience. CEOs need to be some time in the job because you've got to review the business, invent a new strategy, execute it, secure results and review it again.

"I can't see the end of that cycle now. I feel like I've just started."

While there were reasons for the airline's shares to drop 5.7 per cent in the three days after the profit announcement — including the lack of a special dividend and concern about filling fast-growing capacity — one fund manager says Luxon is doing a good job.

Salt Funds Management managing director Paul Harrison says that when Luxon's predecessor Rob Fyfe handed over the reins, he had big goals for the company.

"He said he would double earnings as he walked out the door, so Luxon was left with a job to do. It was difficult taking over from someone who had the profile of Rob Fyfe but I think he's managed to create his own style and it seems to be working in the organisation."

Harrison says Luxon has been in the right place at the right time. "To a certain extent, some of the results that we've seen is the benefit of commodity prices and the strength of the domestic economy." The key question for Luxon is whether he can contain costs at a time of rapid growth.

"Rob Fyfe was the marketing expert and Luxon is the guy who can take over and manage it — he's been a good manager of the business so far."

Luxon's role on the board of Virgin Australia, 26 per cent owned by Air New Zealand, has been positive, Harrison says. Virgin has been losing money for most of the past five years as it battles for domestic market share with Qantas, which surged back to a massive profit this year. Virgin is stemming big losses and expects to get back into the black over the coming year.

Luxon this year copped criticism from commentators across the Tasman for having a go at Virgin's performance, and last week was choosing his words carefully.

"I think they should be incredibly proud. Being able to take on an 800-pound gorilla in their home market is great."

Air New Zealand is upbeat about financial prospects in the present financial year (as are analysts) despite growing competition and the prospect of more to come.

Luxon is not too concerned about market gyrations and economic uncertainty around the world. The airline has made profits during years when the New Zealand dollar and fuel prices have been extremely low and very high. As he sees it, the real key is doing well, or at least OK, when your competitors aren't.

Looking further ahead, he has a bigger plan involving sustainability, details of which will be revealed this month.

He says the world faces unprecedented challenges: population growth, climate change, water scarcity, food security, inequality and rising youth unemployment.

"The world is volatile, uncertain and ambiguous ... we shouldn't be freaked out about that [but] we can't bury our heads in the sand."

Luxon acknowledges he is in a polluting industry, with aircraft responsible for 2-4 per cent of global emissions. As he see it, that isn't going to change in a hurry. While each new generation plane is about 20 per cent more efficient than the one it replaces, the hoped for biofuel revolution is still some way away.

"We've studied biofuels all around the world and, sadly, what's happened is that of all the biofuel projects that were ideas in 2008 to now; not one of them has come off and there is no scaleable fuel to be used in aviation."

Beyond environmental issues, Luxon's sustainability push is also about the wider benefits of social and economic growth.

While he acknowledges his early teenage ambition to be a businessman was unusual, he is zealous about what commerce can do.

"Business has been very critical in strengthening civil society — sometimes being a businessperson is perceived as being a bad thing, but it is business that has lifted people out of poverty, even in a place like New Zealand.

"What we can do is drive tourism and trade and enterprise," he says. "If Air New Zealand is not thriving and not successful and not on its game, that tourism sector goes pretty quickly and we become some isolated rocks at the bottom of the Pacific Ocean."

Another focus for the airline this year is beefing up its digital power. "We want to disrupt this business. You've got to have the courage to disrupt this business or you will be disrupted."

The global search is on for a chief digital officer who will join Luxon's seven other direct reports and work is already under way, looking to take away "pain points" for the airline's 40,000 passengers a day, with apps, electronic bag tags and new check-in kiosks on the way.

And there is more to learn from disruptive operators such as Uber and Amazon. Senior staff visited Silicon Valley this year and others are being sent to learn from hotel and cruise line companies around the world.

"My observation is that some things in aviation are done really well — capital management and safety — but there is lots to learn from other companies — that's how we're going to be thinking differently."