ch-aviation interview: Martin Isler, VP and COO Luxair

Luxair is the national carrier of Luxembourg, a wealthy country in the heart of Europe that is known for its international financial market and as well as for being one of four cities hosting European Union institutions alongside Brussels, Frankfurt and Strasbourg.
For many years, the carrier has focussed on operating with small capacity and high fares but has been forced to adapt its strategy due to changes in the European airline market. ch-aviation´s Thomas Jaeger had a quick chat with Martin Isler about ongoing changes and challenges. Isler, who is Swiss like Jaeger, is Luxair’s Executive Vice President Airline and Accountable Manager at Luxair.

Learn about Luxair on ch-avation:

Many independent regional carriers have vanished in recent years while Luxair is still around. How have you managed to survive while others have not?

Though it may be a regional carrier in terms of structure, Luxair is closer to a traditional flag carrier. We operate in a very particular niche market – Luxembourg which despite being small, is actually a quite wealthy country. To add to that, parts of Germany, France and Belgium also fall within the confines of its direct catchment area.

As a more traditional airline, our development philosophy is therefore more conservative with our focus primarily on generating enough capital reserves – with success.

Furthermore, Luxair is not only an airline but a platform as well. Aside from the mainline carrier, we also have an in-house tour operator. In addition, a large majority of our employees are also involved in the cargo handling sector at Luxembourg-Findel, one of the world’s most important cargo hubs.

Two Bombardier Q400 and one Embraer 145 on the ramp at dawn – Copyright: Luxair

As a traditional carrier, Luxair has significant cost overheads. How can a relatively small airline sustain such high costs?

Cost overheads are definitely one of our more critical problem areas. They are quite high, especially those related to flight operations. But they aren’t only a legacy issue, but also a result of legal requirements. While we currently operate seventeen aircraft, if you look at the size of our administration, we should easily be able to handle fifty. Unfortunately, it is impossible to reduce our existing costs due to the aforementioned legal obligations.

As a result of all of this, we have had to focus on growth. A few years back, we relied heavily on flying a few monopoly routes with very high yields. But today, we have revised that strategy and are now focussed on providing cheaper fares albeit with greater capacity.

This shift was brought on, in part, by the arrival of Low Cost Carriers here in Luxembourg. A good example is our London City route. We used to fly there three times daily with an Embraer 135 before we took delivery of our first three Q400s as replacements.

Given the Q400’s greater capacity, it would then have made sense to reduce the route’s daily frequency to just two daily flights. But instead, we added a fourth daily frequency. Within a year, the Q400‘s load factor had surpassed that of the ERJ-135 and today, we now fly on the route seven times a day. Similar developments have occurred on other routes.

In comparison to the budget airlines, we still have the advantage of being able to add more frequencies as and when demand dictates. So while our yields have decreased by a total of 12% over the past four years, our passenger numbers have grown 14% year-on-year.

Lufthansa has recently become a competitor after previously being a very close partner and shareholder. What impact has this had on your business?

Following Lufthansa’s decision to terminate its cooperation agreement with us, we were forced to close our Frankfurt route as 95% of all travellers there were connecting passengers. Regarding our Munich service, we were actually in competition [with Lufthansa] before as we had both plied the route. The only difference there is that now, that competition has become a lot more intense.

In the greater scheme of things, it has always been our strategy to partner with as many carriers as possible. We are always open to cooperate with anyone willing to cooperate with us. This has been, and will continue to be, our ethos.

So while we have lost Lufthansa as a partner, we still have many others like Air France, Austrian, LOT and hopefully, SAS before long. In fact, we’ve noticed that our passenger flow dynamics have changed in the months that followed the end of our relationship with Lufthansa. For instance, we now have many more customers that choose to fly with us to Paris CDG and from there, onward with Air France.

Boeing B737-800 taking off – Copyright: Luxair

How do you plan your schedule? Is drawing connecting traffic via your Luxembourg hub a priority?

Basically, we are a point-to-point carrier and that is how we build our schedule for most routes. Some destinations we serve are interesting in terms of onward connections and there we obviously try to time our flights to ensure smooth as well as competitive transfer options.

But the number of passengers connecting in Luxembourg is almost non-existent. If there are any, it is usually just by random chance. That said, we currently have no plans to turn Luxembourg into any kind of transfer hub.

LOT and Flybe are new carriers to Luxembourg. Low-cost carriers are also adding many new flights. Where do you think that sudden interest in the Luxembourg market has sprung from?

Over the past couple of years, the Luxembourg market has experienced a significant growth spurt that has continued to this day. This has resulted in Findel becoming one of the fastest growing airports in Europe. There are several factors at play here. One of them is obviously that we have changed our strategy towards lower fares and higher capacity. With the resultant growth in demand, other carriers have been curious to see what the market is like and have thus launched their own respective services here. So it seems that unlike now, in the past, the Luxembourg market was completely misunderstood and therefore underexploited.

You also operate scheduled services within Germany and last year, you ran charter flights from France to various leisure destinations. Are you planning to expand abroad?

Well it is very important to distinguish between scheduled services and leisure charters here.

Our scheduled division works on offering the best possible connections out of Luxembourg. Currently, we fly domestically in Germany from Saarbrücken to Hamburg but Saarbrücken is actually only a brief stop on our flights from Luxembourg to Hamburg. We previously also did this with flights to Munich and Berlin but have since dropped it on both routes. It has nothing to do with strategy and it is not growing, as you can see. It was just an opportunity we took advantage of.

Luxair Tours, our tour operator, is a completely different ball game. They have their own product and actually exclusively plan their operations around our four B737-800s and two B737-700s. We also use the -700s from time to time on our mainline flights to Madrid or Portugal.

So almost six aircraft at your disposal means having a lot of capacity on your hands and that means that on occasion, Luxair Tours charters out the aircraft like they did in France last year. This summer, there won’t be any really noteworthy business in France.

An airline having such a large tour operator arm like you is something rather unique in Europe…

Luxair Tours primarily focuses on traditional package tourism and has no overlaps with our scheduled business.

But the B737s present us with difficulties. As I explained earlier, they are actually a kind of separate fleet but there are some routes where they make sense for us, like Madrid. It has, for a long time, been difficult to deploy the B737 on scheduled flights as Luxair Tours manages them and our scheduled operations do not have high demand for them. But there are some Luxair Tour flights where the number of flight-only (rather than as part of a package) tickets sold outnumber those including package deals. In situations like these, we have to be prudent about how to proceed in the future.

But there is one thing that is very important for us; Luxair is an airline that offers a very high quality of service, even on leisure flights. For the LuxairTours destinations, we serve hot meals, alcohol and so on and local customers love that aspect of our product. In fact, many make it a point of flying with us when heading off on their holidays.

So we have made it a priority to retain that quality of product and appeal to customers as in the long run, it secures their return business as well as profits.

Boeing B737-700 parked on ramp in the morning – Copyright: Luxair

Your B737 fleet suffers from seasonality problems in particular. How do you deal with that?

It’s a problem, of course. The B737 fleet makes a lot of money for eight to ten weeks in summer, but for the rest of the year it is a zero-sum game or worse yet, a loss. To try circumvent this problem, we use the winter months to undertake major maintenance and so on but obviously there is still the issue of having a lot of surplus capacity.

You are one of the very few remaining airlines operating regional jets with 50 seats. Has it become a more pleasant ordeal now that fuel prices have come down?

Fortunately for us, we’re only going to keep our Embraer ERJ-145s around until October. They are from an era that has long gone and it is not only fuel prices that have killed them off. It also has low capacity and very high costs per seat. In our network, it actually made some sense to use them on flights to Geneva; a route with high yields but little demand. They were also well suited for some longer routes where the slower speed of the Q400 proved problematic.

But it wasn’t only heavy overheads that gave us problems with the ERJ-145, it was also yield management. It is nearly impossible to generate sufficient returns in such a harsh and competitive environment. You can only sell some promo seats but that’s about it, you need seats sold at high fares after that.

Besides all of the above, the aircraft also no longer fits into our daily business plans anymore. The two ERJ-145s average sixteen years of age and will soon require major engine and landing gear overhauls as well as a structural inspection. Given those added costly expenses, it simply makes no sense to keep them in service.

So while the final ERJ-145 flight was actually planned for May, the writing off of one of our Q400s forced us to delay that date to October.

Bombardier Q400 LX-LGF – Copyright: Luxair

Can we expect any further changes to your fleet in the near future?

Yes, you can. Our fleet will soon consist of ten Q400s, two B737-700s and four B737-800s. We are planning to take delivery of several new regional jets with a capacity above the Q400’s between 2018 and 2020. They are going to not only increase our capacity, but also replace some of our older Q400s and the two B737-700s from 2020 onwards.

Back in 2012 we began looking into newer and larger regional jets as possible replacements for the Embraer aircraft but could not find any suitable options. Either the aircraft offered were too expensive or outdated. With so many new regional jets on the market right now, it now should be easy to find a good one. But they have just come too late to replace the ERJ145 so taking the additional Q400s as an interim solution turned out to be the best option for us going forward.

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