#569 Controlling bei der Fraport-Gruppe – CFO Prof. Dr. Matthias Zieschang im Gespräch (1/2)

Yes, good day Mr. Blum. Thank you very much for taking the time again and giving us insight into the Fraport Group. Last time, some of our podcast listeners heard the episode and contacted us, impressed by how you managed the situation and with what clarity and decisiveness you acted. Now, of course, we don't want to repeat the podcast today, but I think it makes sense if you first give a brief overview of Fraport, the business areas, and the group portfolio, because not everyone listened to our last podcast, and I think it's important to get back into the topic.

Gladly. We are an international airport operator, and our business model is organizationally divided into four business areas. First, the aviation business area here in Frankfurt, which involves the operation and maintenance of airport infrastructure, i.e., providing everything necessary for airlines to take off and land. The second business area, also at the Frankfurt location, is the so-called non-aviation business, which includes retail and real estate, i.e., the sale of goods in stores, which is very high-priced and high-margin, and related to that, real estate, renting office buildings but also special properties like hangars, halls, logistics halls, etc. The third is the personnel-intensive business area of ground handling, which covers everything related to baggage and other services around the aircraft, from refueling to fresh water supply and cleaning, but especially handling baggage. And beyond that, as I said, we are an international airport operator; besides Frankfurt, we have 27 other international airport investments, which are included in the fourth business area called international investments.

The trend looks very positive. You mentioned the numbers. We have recovered very strongly after the pandemic. This is simply because people want to travel. Flying has almost become a basic need for people. Historically, flying has also become cheaper in real terms, meaning that now almost all segments of the population can travel by plane. After the pandemic, this desire is unbroken. We also have the phenomenon that if you divide customers into private travelers on one side and business travelers on the other, private travelers have recovered much faster. We are just below 2019 levels, sometimes even above for some destinations. This shows that tourists or those visiting relatives and friends are flying again at the same level despite significantly higher ticket prices than before Corona. We are only lagging behind on the business traveler side, where we are at about 60 to 65 percent of the 2019 pre-crisis level. Recovery here will take much longer, and we may never fully reach the old level for business travel because we have learned to work from home, maybe even come to like it, and video conferencing plays a role, as does the CO2 discussion in companies. But despite this slower ramp-up in business travel, we assume that going forward, private travelers will overcompensate, with the result that we will be back at the old level in Frankfurt by 2025 or 2026 at the latest, and in our international business, we will generally be above the old level because outside Frankfurt we have almost no business travelers, so the positive trend of private travelers fully takes effect.

Yes, of course, first and foremost is the pandemic issue, but we were surprised by that, and it could theoretically, not just theoretically but practically, come back. But those are certainly not the big ones you mentioned. The additional risks beyond that are generally two that currently hang over the aviation industry. One is the topic of a possible or perhaps already factual recession, given that statistically, flying is highly correlated with the development of gross domestic product. Conversely, if there is a recession, it always leaves certain traces in passenger numbers. The good thing is we all know recessions last 12 to 24 months, then it goes up again, so if it were to occur, it would be a temporary risk. Another risk that I think is higher and harder to assess is inflation. We know the trends: inflation reduces purchasing power, and ultimately purchasing power is the basis for being able to pay for air travel. So if inflation proves to be more persistent than expected, it could certainly have an impact on flying behavior, especially among lower income groups, because they suffer primarily from loss of purchasing power. Everything above the median income might take note, sadly or not, but still fly. But there is a certain danger depending on the persistence of current inflationary trends.

That was of course also about speed and responsiveness. In order to survive the crisis independently, we had to make drastic cuts, especially on the personnel side. We massively reduced staff. Now we have the volume increase again, so we need to add staff again, so to speak, and that is not so easy given the labor market. So it is important to quickly and purposefully get the personnel resources back on site to enable the airlines to ramp up volumes quickly from a capacity perspective. We managed that quite well. Last summer, 2022, there were some bumps, and some passengers suffered. In 2023, it worked much better, and by summer 2024 at the latest, we will have reached full capacity and process quality. So the strategy is simply to be able to quickly ramp capacity down in a crisis and, conversely, to ramp production up just as quickly when demand picks up again. That is ultimately the key to success.

Yes, you described it well. Nothing was happening anymore. The beginning of March 2020 was still normal, and by the end of March everything was no longer normal. 98 percent of passenger volumes were gone. The remaining 2 percent were repatriation flights by the federal government to collect the remaining German citizens worldwide with special flights, and that was it. So an unprecedented situation: no more revenue, but initially full expenses. It was all about survival. We mastered that simply by entering the crisis with very high liquidity, 50 percent of revenue, meaning we had a runway of half a year based on existing liquidity. We almost doubled that within four weeks. That was the first measure to survive the first year. In parallel, we massively reduced the cash outflow, using only the three levers: personnel costs, material costs, and investments. We managed to massively reduce all three levers in the shortest possible time, so that although we still had a large cash burn, we significantly reduced expenses compared to the initial situation. Then, as expected, traffic picked up slightly, and we saved ourselves upward in stages. It worked excellently.

You have to see it in two parts. First, the plan, which we didn't have initially but developed in the shortest time. In retrospect, it was the right plan. That was correct, and even in hindsight, we would not have done that plan differently from today's perspective. But the plan is one thing; the execution of the plan is another. Here, we brought costs down as planned, and we reduced the workforce exactly as planned. But we made a procedural mistake. I deliberately say procedural because it had nothing to do with the planning. We achieved exactly the target numbers we had set ourselves: a strong reduction, especially in personnel-intensive areas, specifically ground handling services. And we did all that without layoffs, but socially responsibly with severance packages, expiration of fixed-term contracts, etc., also very smartly with the works council and unions. The clear plan was, knowing or believing that air traffic would recover, to keep those with the most experience and highest qualifications, and let go of those who were newest with the lowest qualification levels, or induce them to leave with severance. So the plan was good. In execution, however, for various reasons, unfortunately a large number of employees left the company who had a lot of experience and had proven themselves in highly complex tasks. When we later ramped up, we were able to recruit new employees relatively well in terms of quantity, but of course we no longer had the qualification level we needed temporarily. The operational problems we had to record in 2022 during the strong ramp-up were not due to quantity, but simply to the very slow upskilling, because you cannot bring experience into the team overnight. So there were procedural mistakes that happened, but overall, it was a very good performance. And yes, it shows that you have to follow everything exactly in detail, but that's a minor issue. From today's perspective, we are happy to be among the one-third of aviation participants that survived independently, and not among the two-thirds that either went bankrupt or had to be rescued by state aid.

The company or the group has changed strongly for the better, simply based on the fact that today we still have about 5,000 fewer employees here at the site than before. That's a good quarter less, even though we are almost back to pre-Corona levels in terms of volume. So we have higher productivity and higher flexibility. We also reduced very strongly, even disproportionately, in administrative areas. That was forced, not voluntary. If you had asked employees back then, they would have all rejected this program. It was pushed through with a bit of force, but it made the company leaner, more flexible, and faster. Our decision-making processes are much faster after the crisis than before. Culturally, Corona caused a shock because before there was a culture of invulnerability. I always use the example of Siegfried in the Nibelungen saga: no matter what happens, invulnerable, immortal. Then we experienced the situation of standing so close to the abyss. That was a bit of an impossibility for all of us. This near-death experience naturally has an effect on those who went through it, and that's a good thing because what we learned is that such a catastrophe can come again, probably not a pandemic, but maybe something completely different. So the awareness that you are not invulnerable is good for a culture because it shows the necessity to be able to react quickly and stringently to new things at any time.

Rather the opposite has occurred and happened. Before the crisis, air traffic, meaning airports and airlines, was characterized by decisions always taking a very long time. There were many coordination processes, many concerns, everything always took longer. Infrastructure is something long-term and sustainable, and so were the decision-making processes to some extent. Many were involved, taken along, and in the end a compromise was found, also between the system partners. Then the crisis came. We did the opposite of what we had done before. We developed a plan in a flash, and in terms of leadership, we no longer carried out this involvement; that wouldn't have worked. Instead, I would say management by objectives, as Peter F. Drucker said: clear goal with the clear requirement to implement it immediately, and no longer discuss the goal. That was the key to success, and that continues now. So as a lesson learned, we have learned to stay in this mode. It won't always work as perfectly as in the crisis because the framework conditions were such that everyone knew something had to happen immediately. But our decisions are faster, processes are shorter, and we lead directly, no more looping, coordinating, and participation. So the leadership culture and style have changed sustainably, and that is good and right. That's one point. The second point is the experience, the near-death experience, that you can only survive if a similar crisis occurs again by working with maximum flexibility and speed, and by making cost blocks highly variable so that you can ramp them down at any time and then ramp them up again.