#421 Controlling in der Krise bei der Fraport AG – CFO Prof. Dr. Zieschang im Interview (1/2)

Nice to be here under flowers, as they say.

Yes, gladly. I'm 61 years old, a Westphalian. After my Abitur, I studied business administration and economics at the University of Mannheim, got my doctorate in Darmstadt, and then started in the finance department at BASF. One of my first tasks there was developing a target return concept. Today that's standard, but back then it was relatively novel. I'm very pleased that BASF has continued with this target return concept unchanged to this day. After BASF, I moved in '94 to the newly founded Deutsche Bahn AG. That was a real adventure — transforming an authority into a market-oriented company, again in the finance department. Later at the railway, I became CFO at a subsidiary. In '99, I went to Handeln Linien AG, the largest shipping company in the Baltic Sea — also a pure restructuring task that was demanded and turned out to be very enjoyable. From 2001, I became CFO at DB Netz AG, the infrastructure division of Deutsche Bahn, which at the time had some cost problems, particularly with the construction of high-speed lines where costs had gotten out of hand. That required follow-up and countermeasures, including reducing personnel from around 50,000 employees initially to just over 30,000. Then in 2007, the offer came from Fraport AG to start as CFO there as well. And today I've been there exactly 15 years, always in finance, controlling, procurement, insurance — the classic business management functions. It's given me a great deal of pleasure. Air travel is a wonderful, wonderful industry with many highs and some lows, as you described. It never gets boring.

As you said, many people associate the name Fraport with Frankfurt Airport. That's always correct, but it's only part of the story. The Fraport Group now consists of about 30 airport holdings, and this number is still growing. But first, a bit about the structure and scope of the group. The group consists of four business fields. Three of them are based here in Frankfurt, and the fourth covers all international holdings. The fields based in Frankfurt include, first, the heart of the operation, called the Aviation segment — this is the infrastructure, operating the terminals, the runways, the entire operational business including security. That's what actually defines an airport. Beyond that, we have a second segment, the Retail & Real Estate business, which is arguably the glamorous one because that's where we make the most money, where the highest margins are. Why? Because we profit from the fact that our customers — the passengers — have above-average incomes, meaning high willingness and ability to pay. This is reflected in high sales in the shops and restaurants. Real estate is also a pillar — we lease numerous administrative buildings but also hangars, logistics infrastructure, and thereby record a constant, stable stream of revenue. Then we have a third segment, which is Ground Handling, or the ground traffic services — essentially loading and unloading aircraft, refueling, cleaning, lavatory disposal, everything relevant around the aircraft, including operating the baggage conveyor system. A central element of any international hub for connecting traffic is this. So that's Frankfurt. And then, as already mentioned, we have 34 holdings worldwide bundled into a fourth segment, which we manage from headquarters but with decentralized operations at the various airports worldwide. This is naturally the fastest-growing business, and by now we generate over 50 percent of our profitability from the international business. This share is tending to rise further, so we feel very comfortable with these two pillars, two strategic columns, and will continue working on expanding this group portfolio.

You described it very precisely at the beginning. In early March, April 2020, something happened in air travel that nobody had thought possible. The industry had been growing since the 1950s continuously, about five to six percent passenger growth per year — a wonderful industry that of course had its crises: the Gulf War, 9/11, SARS, pandemics had occurred before. There were always smaller declines, in single-digit percent ranges, for one or two years at most, and then it went back up. That was simply the iron law of growth. And then came March, April 2020, and something happened that had never occurred before: the entire worldwide air traffic came to a standstill. The figure cited — 98 percent — effectively no more traffic, no more revenue, and the industry stood before the abyss. This was, as they always say, the Armageddon of the aviation industry — not the emergence of one, but entire swarms of black swans. And one had to cope with that, and we'll get to what we did about it later. But the question was, how does it look at the moment? At the moment, passenger numbers have risen again somewhat according to various sources, sometimes more, sometimes less. Currently we're at around 50 percent of pre-COVID levels. So we're glad we can welcome 50 percent of passengers again, but conversely, that means half are still missing, showing we're still far from normality in air travel.

First, you have to distinguish between the different passenger clusters, because each cluster will probably develop differently in the future. In aviation, you have leisure and charter traffic — the tourists, who are numerically very strong. Second, you have the so-called VFR traffic — visiting friends and relatives, visiting acquaintances and family. And the third segment is business travel. Now let me go through each one to see how these segments will develop post-COVID. First, with leisure traffic, we are absolutely optimistic. We see that for the upcoming summer, people want to travel again whenever restrictions fall. All participants in the aviation industry are expecting that leisure traffic will return to pre-crisis levels by summer 2023 at the latest — very optimistic — and then resume normal growth of three to four, five percent per year. The second segment, VFR traffic, shows a similar picture. Due to internationalization, migration, and rising prosperity, more and more people visit friends and relatives. Here too, all market participants expect that by 2023 we'll be back at 2019 levels, with perhaps even above-average growth rates going forward. Also very optimistic. However, this does not apply to the third segment — business travel. We've already experienced strong losses due to COVID, and now other factors have come on top. First, what we're doing now — virtual conferences. People have realized you don't need to hold as many physical meetings; working from home will partially establish itself going forward. The need for frequent personal contact is lower than before. Second, due to the crisis — and this is always the primacy of CFOs — companies have learned to live with very low travel budgets, and these won't increase back to pre-COVID levels. The third issue is CO2. Intercontinental travel leaves a CO2 footprint, and as all companies focus on reducing this, there will also be pressure on travel frequency. If you combine these three factors, I'm quite reserved about the recovery of business travel. In the industry, I'm the conservative one who says I'd be glad if 50 percent of business travelers come back. I'd be happy if it's more, but from today's perspective, I think that's roughly the potential. So two segments very optimistic, and business travelers will not return to pre-crisis levels.

You used the nice phrase 'things weren't working anymore.' I can be even more precise — actually nothing was working anymore. That's a crisis where really nothing works. There was no more traffic, and therefore no revenue. In a normal crisis, you lose 10, 20, 30 percent, or costs go up on the cost side. But here, within four weeks, the entire revenue side disappeared. There were no more processes to speak of. I can tell you, we were in a state of shock paralysis — a situation that no one had on their agenda. I'll be quite open: there were days when we didn't know how to go on. No one in the industry knew how long it would last. There were optimists who thought traffic would return by summer; there were never-behind optimists who thought everything would be back by '22 at the latest. And somehow it was clear — we didn't know exactly how long it would take, but we all intuitively understood that nothing would work in a year. We were perhaps the most conservative in the entire industry. And it was clear to us that only radical measures would help, otherwise we would face ruin. It was either we act now or we don't, and acting was relatively straightforward.

There were essentially only two things to do when you have no revenue. On one side, you need to bring money in — and it won't come from revenue. Getting it from banks and the capital market isn't entirely easy. On the other side, you need to minimize the money you're constantly spending — the cash burn. Those were the levers we had. First: within the shortest possible time, add as much money as possible to what we already had. We knew that when you have no revenue, capital providers don't find you so attractive — they don't know if they'll get their money back. So we had about four weeks to bolster our already high liquidity before the market understood what was really happening and negative consequences would arrive. We needed to drive liquidity high enough to have the strength to get through the crisis. We entered the crisis with 1.7 billion euros in liquidity. That's a huge absolute figure, but when you put it in relation to revenue — it was about 50 percent of our pre-COVID annual revenue. In hindsight, we've learned which companies independently survived the COVID crisis based on how much liquidity they had going in, and conversely, which companies went bankrupt or had to be rescued by the state. The pattern was clear: all the companies that survived — Lufthansa, Ryanair, Fraport — had between 50 and 60 percent of revenue in liquidity going in. They had extreme amounts. And all the others, whose names I won't mention, all had liquidity ratios between 10 and 20 percent. No matter what they did, it wasn't enough — it didn't reach far enough. So the decisive step was going in with sufficient liquidity, and then in four weeks summoning the courage to push forward once everyone understood what was really happening. And that succeeded — we ramped up from 1.7 to 3 billion in four weeks. That was the first leap toward survival. The other was to cut the expenditure side. Every company essentially has three cost categories: personnel expenses, material expenses, and capital expenditure. All three had to be maximally reduced simultaneously. That was the big task. It sounds simple, but it cuts deep and gets into conflicts of course.

Time was of course also the decisive factor for us. First, in the recognition that the COVID crisis would last much longer than most expected. We didn't know exactly how long — we still don't today, and we didn't know back then either — but it was clear this was no short-term affair. That made it all the more important to react quickly. There was always a time window of four to six weeks. And as you mentioned, short-time work was introduced immediately. We were the first large company in Hesse to apply for short-time work with the employment agency. Management and works council agreed, so by the end of March, around 80 percent of employees were already in short-time work. That means with the start of April, we had already maximally utilized short-time work to reduce personnel costs as much as possible.

The task itself was: how can we survive? It was really about whether the company survives or not. The time frame was even shorter. The whole thing was actually developed over a weekend. The question was: if you have no revenue, or only very minimal revenue, what must the cost structure theoretically look like — what cost blocks — to survive? So we took an academic, theoretical approach. We calculated: even perspective-wise, nothing works without revenue. We assumed that traffic would eventually return to some degree, but not to the old levels. And we calculated what the cost blocks need to look like to make survival possible in the medium term. We worked through this like: how much do we need to cut personnel, how much material costs — of course segmented — and cut investments. There wasn't even a consideration of whether this was feasible or even possible. Only calculation: this is the level that would enable survival. That was the restructuring plan. Then of course the discussion came: does the board even want to tackle this? Is it possible? You can imagine the discussion — people said it was completely impossible. You have a sense of what's normal in normal times, and this was truly about transforming a fixed-cost model into a model with variable costs. But even that was a quick process — a few days and everyone understood: we have no time. And the beautiful thing was that in the end, the board collectively made the famous Rütli oath: we will attempt this. It is without alternative, even if the term is a bit clichéd, and if it didn't work, then it was clear to everyone the company wouldn't survive. This had to be achieved precisely, because otherwise the continued existence of the company was in question.

So we developed this over a weekend, discussed it with the board, and then clearly stated: the board stands behind this 100 percent united. In the board, things are always diverse in normal times, but here — not a single millimeter of deviation was acceptable. The board really stood like a wall, saying we want to implement this because it is without alternative. And that was certainly also important, because you have shareholders — and they're public shareholders — whose commitment you absolutely had to secure. Because the consequences resulting from the restructuring measures are certainly not PR-friendly.

That was of course a absolutely decisive point — getting the shareholders on board to support this. As I said, the goals were radical and brutal, meaning there were many hardships involved. Now, you can cut investments — nobody fights you on that. Material costs are not pleasant, but that's still manageable. It gets critical when you talk about reducing personnel. And one of the main points was naturally reducing the workforce — the target was 4,000 employees. That's an enormous number for a company that has never in its history had layoffs. It has always only grown. So it was clear this could only happen with the main shareholders, not against them. There were discussions, and presenting the unvarnished analysis: the situation looks very bad, but we have a plan. The downside of the plan is that it contains things that hurt — they hurt the employees, they hurt the community. These are very radical measures, but the alternative would have been that the continued existence of the company would no longer be given, or the shareholders would have had to intervene with a bailout. Then it became relatively clear that this plan found acceptance with the clear mandate: do it yourself, and do it quickly, to bring the company back into balance. And we fully support this. That was ultimately the key: the united stance of the board on the one hand, and the full backing of the two main shareholders — Hesse and the City of Frankfurt — on the other, supporting the entire package of measures. That was what made it work.