2020 Vision E-Book

Tim Burt

• Herausgeber: Elliott & Thompson
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 376

Veröffentlichungsjahr: 2015

Beschreibung

What will be the shape of global business in five years time? 2020 Vision delivers cutting-edge insights from twenty industry leaders, sharing their current strategies and future plans to cope with the challenges presented in the twenty-first century.In2020 Vision leading chairmen and senior executives of major multinationals set out their vision of what their markets, companies and strategy will look like in 2020, and how they will prepare for and adapt to long-term change in the face of new technology, globalisation, intense competition, decreasing security and maturing markets.The contributors are all prominent figures in their industries. Between them they represent a diverse cross-section of the business world, in terms of geography, gender and industry, from sectors including advertising, education, healthcare, law, technology and retail.Here are insights from those operating at the top of their game, whose decisions affect not just global business, but all of our lives. They might not all agree about where we are going, but their combined perspectives afford a depth of analysis that makes this essential reading for both present and future leaders.

Leseprobe

CONTENTS

Introduction

1. Sir Martin Sorrell, WPP

2. Mark Schwab, Star Alliance

3. Li Shufu, Zhejiang Geely Holding Group

4. Kasper Rorsted, Henkel

5. Enrique Zambrano, Proeza

6. Ashish J. Thakkar, Mara Group

7. Linda Zecher, Houghton Mifflin Harcourt

8. Roberto Quarta, Smith & Nephew

9. Martha Lane Fox, Go ON UK

10. Jacob Wallenberg, Investor AB

11. Eduardo Leite, Baker & McKenzie

12. Beth Comstock, GE

13. Jac Nasser, BHP Billiton

14. Lucian Grainge, Universal Music Group

15. Lord Rothermere, Daily Mail and General Trust

16. Tadashi Yanai, Fast Retailing

17. Andrew Sukawaty, Inmarsat

18. Ingar Skaug, J. Lauritzen and DFDS

19. Augie Fabela, VimpelCom

20. Emma Marcegaglia, Eni and BusinessEurope

Conclusion

Index

INTRODUCTION

In the second decade of the twenty-first century, there is a common refrain among the world’s business leaders. From agriculture to mining, automobiles to telecommunications, industrialists say they have witnessed more upheaval in the past five years than at almost any other time since their companies were founded.

The pace of change has accelerated following the global financial crisis of 2008–09; the subsequent bank bailouts; a series of environmental and natural disasters; bloody and dangerous regional conflicts; regime change in North Africa; conflict in the Caucasus; and geo-political tensions from the western frontier of Russia to the eastern shores of China. Further rapid transformation is expected by 2020 as macro-economic events force companies to rethink their business models. This will have major implications for international trade, sourcing raw materials, manufacturing, employment, supply chains, regulations, pricing and consumption habits.

The corporate world of 2020 could look very different. Among global markets, the balance of power is likely to have shifted further to the high-growth economies of China and India, as well as the rising economic powers of Mexico, Indonesia, Nigeria and Turkey, among others. New technologies, digital communications, increasing environmental regulation, commodity shortages and decisions on fiscal and monetary policy will alter the way companies operate, potentially transforming their financial performance. Layered on to that, social and economic trends such as urban migration, changing social mobility and volatile consumer confidence could fundamentally alter the rules of supply and demand.

Companies are both nervous and optimistic about the uncertain road ahead. This book seeks to capture their anxieties and ambitions. In the following pages, business leaders from twenty different companies in twenty industries reveal their strategic objectives and market expectations for this era of change. Their views are relevant because each company is a leading indicator of economic activity, geographic expansion or changing consumer habits. Their business successes and failures reflect broader demand for goods and services. Their investment decisions symbolise the mood of the wider global economy. These activities – covered in this book – include advertising, aviation, automobiles, communications, consumer goods, education, energy, engineering, entertainment, food production, healthcare, institutional investing, legal services, marketing, media, mining, retailing, satellites, shipping and technology.

The cross-section is also geographic. Companies from Africa, Asia, Latin America, Russia and China are represented – along with those from the traditional business centres of Western Europe and North America. Those agreeing to take part include third-generation dynastic leaders of family-controlled companies, start-up entrepreneurs, women who broke through the corporate glass ceiling and people who joined large corporations on the factory floor and rose over decades to the top.

The wide-range of individuals and companies contributing to 2020 Vision have one thing in common. They were all generous with their views and their time. It was an education to meet them.

In 2020 Vision, some of the chairmen and chief executives are long-term acquaintances, dating back to when I was a correspondent at the Financial Times from the late 1980s into the new millennium. Others have been clients in my current role as a strategic communications adviser, frequently expressing anxiety and frustration about the sort of news reports that I once filed. Those anxieties have intensified partly due to the disposable nature of modern journalism, where stories now have a brief shelf life and investors are less interested in long-term vision than short-term returns. Their concerns also reflect the rise of shareholder activism, more aggressive regulation and the shortening life expectancy of chairmen and CEOs at publicly listed companies.

In the following twenty chapters, men and women from more than a dozen countries give candid assessments of the forces that will reshape their industries by the end of the decade. Together, the participant companies generate annual revenues of more than half a trillion dollars. Collectively, they directly employ more than 1.4 million people, and sustain the jobs of millions more in the wider supply chain. These companies also operate in almost every country in the industrialised world. Most of them are traded on stock markets; some are privately owned; others are partnerships. Many of the companies are large, mature players in their sectors. Others are newcomers, relative minnows on the corporate stage.

I would like to thank each chairman, chief executive, president and director for their time and patience. Our meetings took place in Brussels, Chicago, Cologne, Frankfurt, London, Los Angeles, Milan, New York, Oslo, Rome, Shanghai, Stockholm and Tokyo. We met in boardrooms and subsidiary offices, at overseas affiliates, in hotels and in the homes of those who have contributed.

They would not have participated at all were it not for the efforts and persuasive skills of Terri Behrik and Joel Parsons at BHP Billiton, Richard Smith at DMGT, Aldo Liguori at Fast Retailing, Lorna Montalvo at GE, Lars Witteck at Henkel, Emma Doherty at Houghton Mifflin Harcourt, Chris McLaughlin at Inmarsat, Beatrice Bondy at Investor, Christian Klick at Star Alliance, Charles Reynolds at Smith & Nephew, Will Tanous at Universal Music, Bobby Leach at VimpelCom, Chris Wade at WPP and Victor Young, Xiaolin Yuan and Ashley Sutcliffe at Zhejiang Geely. Countless others opened doors and checked facts, including Nick Coward, Alex Geiser, Anthony Silverman, Philip Gawith, Osvald Bjelland, Anthony Gordon Lennox, Richard Holloway, Julian Hanson-Smith, Ben Ullmann and Ian Limbach. They have been tolerant of questioning when it has been misinformed, and ready to correct basic errors. Any inaccuracies in the ensuing copy are mine alone.

My colleagues at StockWell, the London-based strategic communications firm, have been enormously supportive, as have all those at the publisher Elliott & Thompson. Olivia Bays, my editor, has been endlessly patient with numerous changes and delays. The entire enterprise would not have been possible without the hard work of my colleagues Alison Griffiths and particularly Juliet Snow, both of whom transcribed hours of conversations with accuracy and amazing good humour. Kate Heighes, Andrew Tosh and Nathan Minsberg at StockWell also helped with research. At the start of each chapter, I have compiled basic financial metrics and data on each company, accompanied by a short biography of the participating business leaders. The financial data is drawn from the 2013 and 2014 reported or forecast numbers for each company. The revenues have been translated from relevant local currencies into US dollars where necessary. At companies where profit margins have been impacted by significant accounting charges or non-operating items, I have relied on earnings before interest, tax, depreciation and amortisation. Any mistakes or factual errors are mine alone.

As with my last book, Dark Art: The Changing Face of Public Relations, my wife Helen has provided honest and tough advice. She has the best counsel on work–life balance that anyone could wish for. She says: ‘Think twice before doing it again.’

ADVERTISING

Sir Martin Sorrell, WPP

Annual revenues: $16.7 billion

Operating profit margin: 15.1%

Number of employees: 179,000 including associates

Number of markets served: 111

Headquarters: London and New York

The British chief executive of the global advertising and marketing services group has been in the role since 1985. In that time WPP has grown to encompass a network of more than 3,000 offices, serving 342 of the Fortune Global 500 companies, every member of the Dow Jones 30 and sixty-eight companies in the NASDAQ 100. Sir Martin, knighted in 2000, is also a non-executive director of Alcoa, the US metals technology and engineering group, and Atlas Topco, the Formula 1 company. He is a board director of the Bloomberg Family Foundation; an advisory board director at Stanhope Capital and Bowmark Capital; and sits on the Executive Committee of the World Economic Forum International Business Council.

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In the first season of Mad Men, mythical client-winner Don Draper tells an agency colleague: ‘Advertising is based on one thing, happiness. And you know what happiness is? Happiness is the smell of a new car. It’s freedom from fear. It’s a billboard on the side of the road that screams reassurance that whatever you are doing is okay.’

Mad Men, of course, was set in an era when ad agencies were selling the American Dream. It was the age of Camelot with Kennedys in the White House – pre-Vietnam, pre-tobacco warnings, pre-recession. The Internet lay far beyond the horizon. In advertising, the laws of supply and demand were fairly predictable. Don Draper and his colleagues created reassuring marketing campaigns for household brands, and placed advertising on their behalf in newspapers and on TV, radio and billboards.

Fast-forward fifty years; the advertising world has been transformed. Data-gathering, behavioural profiling and programmatic bidding are threatening to eclipse the traditional crafts of Madison Avenue. Of the $1 trillion spent each year on global advertising and marketing communications, a growing proportion of ads are now distributed through computer algorithms and consumed on smartphones and tablets. Marketing campaigns are conceived with social networks in mind; audiences are tracked according to their data consumption habits; online exchanges can place ads automatically, driven by search-engine traffic.

At the centre of this industrial transformation sits Sir Martin Sorrell, the long-serving chief executive of WPP. He is the ringmaster of an advertising and marketing services group – spanning advertising, media and data investment, public relations and specialist communications – that comprises hundreds of companies, which, collectively, create and place one in four of all adverts around the world.

During almost thirty years as WPP chief executive, Sorrell has witnessed at first hand the upheaval in advertising and marketing caused – variously – by the onset of the digital age, accelerating globalisation, the emergence of China as an economic super-power, the fall of Soviet communism, several wars and financial crises that have come and gone. Over that time, the marketing group that emerged from the shell of UK manufacturer Wire and Plastic Products has grown rapidly as a result of both acquisition and organic expansion. By the second decade of the twenty-first century, WPP had evolved into a network of more than 3,000 offices employing almost 180,000 people in agencies and associate firms that represent two-thirds of the companies ranked in the Fortune Global 500.

A business at the heart of the creative industries – focused on developing advertising messaging and marketing power to sell all manner of products – is now evolving into a more mathematical, automated enterprise. Compelling ads still demand creative genius. But target audiences are identified increasingly using algorithms, data tracking and network technologies.

‘Don Draper would hardly recognise much of what we do today,’ says Sorrell. ‘In future, there will be more “maths-men” and women than Mad Men in our industry, especially if the medium truly becomes more important than the message.

‘We used to operate under a system where a campaign-planner would come up with the strategy; then we did the creative execution and from that we would distribute it. The creative department and the suits would then direct the media buyers. That is no longer always the case – even though traditional media and marketing disciplines are still critically important. Now we need more scientists, more engineers, more coding as we develop the business.’

Of WPP’s annual revenues, digital marketing, media investment management and data investment management now account for $12 billion of the group’s $16.7 billion total. As a proportion of total billings – the overall fees and commission-based income from clients – more than a third is derived from all forms of new media.

‘The whole game is changing in two ways,’ says Sorrell. ‘Firstly, the skills we need are different. This is where the maths-men come in; we need people who are technologically literate; they are more often scientists compared with the arts pool we fished in before.

‘Secondly, we have to integrate our services much more effectively. Clients are more confused because there are so many service options and the digital market is so fragmented. That creates an opportunity for WPP because clients are turning to us more for advice, and seeking an integrated agency relationship around the world.’

This twin-track reorientation has emerged alongside four strategic priorities at WPP, which Sorrell hopes will enable the group to navigate the current market upheaval successfully and continue expanding to 2020 and beyond.

Those four priorities are, first, to increase the share of revenues derived from new geographic markets and, second, to lift the proportion of sales from digital media still further. Third, the group then wants to expand its presence in data investment management. The company wants to own the means – the technical assets – by which it can gather data, analyse audience sentiment and target advertising on the back of it. And, fourth, WPP wants to achieve what Sorrell calls greater ‘horizontality’. In practice, this lateral thinking involves greater internal co-ordination in two broad areas. First, more clients are relying on unified global teams drawn from across WPP firms. Second, WPP’s country and regional managers are being encouraged to pursue intra-firm co-operation, hiring and acquisition strategies in different parts of the world.

When it comes to geographic markets, WPP expects GDP from new markets to grow from $21 billion to $31 billion by the end of the decade. In order to tap into that growth, Sorrell has set a target to increase the group’s share of revenues from faster-growing markets to 40–45 per cent of the total in 2020, compared with just over 30 per cent in 2013.

‘There are a lot of grey swans, black swans or whatever you want to call them,’ he admits. ‘There is economic uncertainty in the euro-zone, turmoil in the Middle East, a hard or soft landing in some BRIC economies and how to pay off the US debt. In addition, there is the Russian–Ukraine situation and, perennially, Gaza. Add to that the 2014 Hong Kong demonstrations and the Ebola outbreak.’

But he adds: ‘There is some potentially good news coming if an agreement on sanctions (and, from a personal point of view, recognition of Israel) is reached with Iran. If Iran, which is 80 million people, becomes a market that is included in world affairs rather than excluded, that will be good news. The same goes for Cuba. We are seeing countries such as Myanmar open up. There are big growth opportunities in Africa, although it’s very fragmented and markets such as Nigeria are difficult to penetrate. In the Middle East, we’ve seen Saudi Arabia grow very strongly. On China and Asia more broadly, I’m bullish and India could get better under the Modi regime.’

Sorrell thinks and speaks in a broad geo-political sweep because WPP’s clients are focused increasingly on brand marketing and advertising spend in faster-growing markets, whilst working with clients in more mature markets such as Western Europe to tailor ad-spend to maintain their brand share. Given that advertising and marketing spending tend to track GDP growth, there is an expectation that increased exposure to fast-growth markets will offset any slowdown elsewhere.

Alongside new market growth, WPP is focusing its second strategic goal on increasing its exposure to digital and new media. By 2020 the group aims to increase its share of revenues from new media to 40–45 per cent of the total, compared with 35 per cent in 2013. Part of that growth will be derived from increasing Internet usage, with 48 per cent of the world population expected to be online by 2017, compared with 32 per cent in 2013. By the end of the decade, advertisers hope to be able to reach half of the world population through the World Wide Web.

‘The class graduating from Harvard today is probably the first generation that spent its life from the day they popped their head out of the womb with the web, so their behaviour and attitude is bound to be totally different to you or me,’ says Sorrell. ‘We have got to be ready to target them on the devices that they use.’

WPP’s media investment management business, GroupM, predicts that the mobile advertising floodgates are about to open. Half of Facebook’s global advertising revenue is now mobile and Google predicts that 80 per cent of all its traffic will eventually come from that source. In some markets, such as China, mobile advertising could grow even faster. At China Mobile, the country’s dominant wireless network, an estimated 400 million subscribers are already using data-heavy smartphones that lend themselves to online marketing. Such growth underlines why digital media buying has become more important to WPP. To capture mobile and online audiences, WPP has launched new operations such as Xaxis, a subsidiary operation to acquire digital advertising inventory and sell that space on to its clients.

Xaxis has become the world’s largest programmatic media and technology platform, buying more than $800 million of audience-targeted media in thirty-three markets. Programmatic advertising uses automated software and algorithms to allocate advertising to media outlets with relevant space to sell. The business represents part of advertising’s digital future, enabling computers to sell online inventory.

‘An advertiser can buy a certain number of impressions on a website in advance at an agreed price and execute the order by computer,’ according to The Economist in its 2014 advertising and technology report. ‘The rise of real-time bidding [or programmatic buying] is important because it offers a glimpse of how other ad-supported media may change over time.’

Real-time bidding is one of the digital trends prompting WPP to spend around $3 billion of clients’ money each year with Google – a company that Sorrell sometimes calls the ‘frienemy’. Google is a friend in that it is a vital access point for advertisers to reach mass audiences around the world, opening up a giant market to match advertising to search requests. But Google also risks being the enemy because it takes most of the revenue from such search-related advertising, and because it diverts traffic and fees from outlets upon which companies such as WPP previously relied.

Over the next five years, the power of search engines and algorithms is likely to have a growing impact on advertising pricing as more devices such as televisions and even billboards become Internet-enabled. This is because the absolute cost per unit of advertising is much lower online, especially for mobile, in comparison to traditional print or broadcast advertising:

‘The Internet is attractive to advertisers because you could shift a million dollars, notionally, from your TV budget to $100,000 of website spend,’ says Sorrell. ‘Not only did you think you were getting some efficiency gain, but you also got some money to tuck away into profit or some form of spending somewhere else. Because of fragmentation, I think the cost per advertising unit – if such a thing existed – for $100,000 of online spending has got even lower.’

This disequilibrium exposes one of the major challenges for digital media platforms. They are attracting audiences as readers or viewers migrate away from traditional media outlets. But the advertising spend required to reach those audiences remains far below the cost of a printed newspaper page or prime-time TV spot.

What this means is that media platforms are finding it harder to monetise advertising online, even though most of their audiences are now viewing content digitally. This is potentially good news for advertisers who want to reduce the per-viewer cost of placing an ad. But it is bad news for media outlets charging for advertising space, where they are now trying to sell according to total volume reach rather than the quality of the audience they offer.

Until relatively recently, for example, it was possible to buy every piece of advertising space on FT.com for a week for less than the cost of printing a full-page ad in the Financial Times on a single day. This reveals a time-lag in the way advertising is being sold. Big companies are not yet allocating as much of their total advertising spend to digital media as they are to traditional outlets. In the US, for example, the marketing services industry still allocated 23 per cent of its advertising budget to newspapers and magazines, even though consumers spent only 6 per cent of their media attention on those outlets. Free-to-air television is still a major magnet for advertising, and all forms of TV in developed markets are expected to continue to command 40 per cent of ad spending. This seems to indicate that advertising spending may yet continue to be allocated to television as long as it can attract large audiences. It is one reason why spot-advertising rates for event television such as the Super Bowl or European Champions League continue to rise.

But there is no room for complacency among newspaper publishers. They cannot promise the same ‘big-event’ audience as the TV networks, and have already suffered from the print-to-digital shift in three important advertising categories: property, recruitment and classifieds.

The need to interpret all of these trends, and to price advertising and marketing spend accordingly, explains in part why WPP has expanded its focus on data investment. Measurable marketing services – such as data investment management and digital research – are expected to account for a large part of total revenues in the years ahead. Data management will become even more important as advertisers try to harness ‘big data’ about consumer habits. By 2020, the amount of big data per head is expected to reach 5,200 gigabytes, compared to less than 260 gigabytes back in 2011. For the firms that can analyse and interpret such data, there is likely to be significant competitive advantage.

WPP is thus investing significant sums in data management to collect, interpret and combine data. By doing so, it hopes to provide advertisers with the audience measurement tools needed to enhance their marketing return on investment. The largest of those advertisers – the global corporations with huge marketing budgets – increasingly want to harness data analysis, and how it is applied to their media spend, to work with a single client team for all of their advertising and marketing. This trend has shaped the fourth strategic priority for WPP: the growth of ‘horizontality’.

Of WPP’s global business, about a third, or $6 billion of revenue, is now derived from teams from across the business that serve global clients. Among more than forty horizontal client teams, ‘Team Detroit’ manages the global Ford account, drawing on experts from WPP firms such as JWT, Hill + Knowlton and Burson-Marsteller. Similarly, a global team drawn from different firms manages the Colgate account, known as Red Fuse.

‘Clients want the best people working on their business and they don’t care where they come from,’ says Sorrell. ‘I think the way forward is for our people to be running clients not separate firms within our network. It simplifies the client relationship, removes needless duplication and means we can adapt to the demands of procurement officers.’

The WPP chief executive is not particularly enthused by the rising power of procurement departments when it comes to advertising and marketing spend. Since the debt crisis of 2008–10, the finance departments of many large clients have gained the upper hand over marketing directors, which is making companies more risk averse when it comes to advertising spend. That in turn is forcing marketing services groups such as WPP to focus on growth markets, on delivering their exposure to digital media – without ignoring high-value analogue platforms – whilst expanding their data management capabilities, and pursuing clients with multi-disciplinary global teams.

The pressure to achieve economies of scale – both in serving clients and reaching digital audiences – has also raised expectations of consolidation across the advertising industry. In 2014, that trend was highlighted by the aborted merger of Publicis and Omnicom Group (‘POG’, as Sorrell describes it), the US and French rivals. Sorrell believes it was ‘doomed to failure’ because the respective chief executives could not work out a structure for integrating or managing the two marketing giants: ‘They hadn’t really thought it through on a governance and cultural basis, quite apart from even more important issues such as the benefits for clients or benefits for their own people.’

In a people-centric business in 111 countries, WPP’s chief executive sees one of his biggest challenges over the next few years to be identifying, recruiting and retaining the best people to steer his network of firms through the coming ad-market transformation. The period to 2020 is expected to be characterised by further audience fragmentation, in which traditional print and broadcast outlets risk losing their advertising appeal; new devices determine the content and distribution of next-generation marketing; and growth markets attract a greater share of global ad-spending.

‘As we enter this period, success will be determined by having the very best people running your global client teams, and the very best minds working out how to manage the digital transition,’ Sorrell argues. ‘But the problem is that good people are difficult. Still, I’d rather have good people who are argumentative and hard to manage, rather than average people who are easy to deal with.’

He cites Goldman Sachs and McKinsey as examples of firms that nurture and retain top talent. He wants to see WPP build a similar culture, in which everyone is partly rewarded – whether Madison Avenue’s Mad Men or digital maths-men – according to the overall performance of the group in relation to its key performance indicators of digital growth, fast-growing markets and horizontal client management:

‘By 2020, this business will be defined by faster growth markets, more digital, more data and more horizontality,’ he adds. ‘Those are the four things we are focused on. If we succeed, they will help achieve our goal to be the world’s dominant communications services advisor.’

Second opinion: the analysts’ view

For most of its history, the advertising industry has thrived on managing the laws of supply and demand. Successful firms made money by supplying creative campaigns to businesses that had to advertise to drive consumer demand. Agencies also satisfied the demand for revenues via media outlets with a life-dependency linked to the supply of advertising.

The Internet has turned the supply-and-demand equation upside down. In a digital world a potentially limitless amount of ad-space exists. As a result, the advertising cost-per-user is declining. In print media, advertising prices have fallen in line with circulation decline. Large companies, the bedrock of advertising, can now create and distribute their own marketing materials. Automated or programmatic buying is accounting for a growing proportion of ad spending.

The upheaval poses a major challenge for all advertising and marketing companies, WPP among them. In 2014, Sir Martin Sorrell told analysts: ‘It pays to be paranoid.’ He’s right to be so.

Over the years, WPP has balanced its advertising exposure by expanding in specialist communications, public relations and consultancy. Its global revenue mix has offered a further protection against volatility in any one market, driving organic sales growth that is greater than that of rivals Interpublic, Omnicom and Publicis. All these companies must now navigate the digital transition in such a way that the opportunities outweigh the threats.

WPP, along with its competitors, is building its presence in data investment management. It predicts that almost 20 per cent of all advertising spending will be digital by 2020. Most analysts and investors think that figure could be even higher, so they applaud WPP’s target to lift digital revenues to 40–45 per cent of the total by the end of the decade. Given generally sluggish economic conditions in mature markets, notably Japan and Western Europe, WPP is also right to broaden its exposure to faster-growing markets such as China and Africa.

But the biggest challenge will be whether it can monetise the opaque world of programmatic advertising, which appears set for inexorable growth. This world is becoming more fragmented as players including Google and Facebook attract increasing ad-inventory. They, in turn, are forcing traditional agencies to become even more digital.

The art of acquiring online advertising inventory, combining it with technology data and packaging it as a product to resell is far removed from the creative genius for which advertising types were previously known. But the incentive is clear. Digital is driving advertising demand. As the costs of data collection go down, margins should be enhanced rather than inhibited. If WPP can succeed in enhancing margins in a period of seismic industry change, it may emerge as a winner from the digital revolution.

AIRLINES

Mark Schwab, Star Alliance

Total revenues of member airlines: $170.3 billion

Operating profit margin: N/A

Number of employees: 408,998

Number of markets served: 193

The chief executive of the world’s first and largest airline alliance entered the aviation industry as a manager for Pan American Airways in 1975, joining the company as a junior country executive in Brazil. He started work in Rio de Janeiro after studying Latin American Affairs at the University of Virginia, Charlottesville. His Pan Am role led to postings with Eastern, American Airlines, US Airways and United, one of the founder members of Star. His aviation career means he has spent most of his working life outside the US. At United, he was Senior Vice President Alliances, serving on the management board of Star. He became CEO of Star in 2012, succeeding Jaan Albrecht, currently head of Austrian Airlines.

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By the end of the decade, Mark Schwab hopes to have no white spots and a more unified approach to blankets. For the chief executive of the Star Alliance, white spots and blankets represent two extremes of the challenges facing the world’s first and largest alliance of international airlines. The family of more than two dozen carriers, accounting for a third of all commercial aviation, is seeking to address gaps – or ‘white spots’ – in its network of 22,000 daily flights to 195 countries. On those flights, it is seeking savings through more efficient procurement of everything from kerosene to in-flight linen.

Given the global reach and multinational membership of Star, the airline network is a barometer of the health of air travel, a sector dependent on business and consumer confidence. To maximise the returns on passenger demand, Schwab and his team must ensure that the alliance covers every corner of the globe.

‘Our terminology at Star about where we go to recruit new carriers is to focus on the white spots. You look at a map of the world and identify the markets that we do not fully serve,’ says Schwab. ‘We have one white spot in Russia, and there is not an immediate obvious answer to that one. We addressed another white spot in 2014 with Air India joining Star – we were lacking domestic connectivity and a home base there – and we are now addressing Brazil. We have to rebuild our presence there because it is the fifth-largest domestic aviation market in the world, and represents about 40 per cent of the total Latin American market.’

The white spot in India has been an issue for several years. It was finally solved three years after the 2011 merger and far-reaching restructuring of Air India and Indian Airlines. The Indian carrier was admitted to Star after investing heavily in modernising its fleet and improving its service to customers. Before that investment it could not guarantee the service quality and inter-connectivity for passengers demanded by Star.

Mark Schwab and his team based at Frankfurt Airport hope to deliver efficiency savings among new and existing alliance members over the next five years. Although its members generate billions of dollars a year in revenue from connecting passengers on flights to 1,300 airports, the alliance has not been able to extract the same sort of savings from its federal structure compared with those of airlines that take over smaller rivals or enter into equity-sharing partnerships.

‘The one area that we have been less successful has been delivering more value by joining purchasing activities,’ says Schwab, a forty-year veteran of the aviation industry. ‘We have been successful in purchasing commodities like jet fuel, but less so in purchasing articles that come into close contact with customers. Take blankets; you’d say “well a blanket is a blanket”, but they come in all shapes and sizes, thickness and thinness. You multiply the cost of purchasing across twenty-seven carriers, and that’s a significant variable overhead. All the alliances in our industry are still trying to figure out how to capture more value.’

The Star Alliance, established in 1997, competes with the oneworld alliance dominated by rivals including British Airways and American Airlines, as well as the SkyTeam network led by Air France KLM. Together, the three global alliances account for about 60 per cent of the world’s airline travel, which is expected to grow at 5 per cent each year to 2020.

Schwab tracks that growth against a chart taped to his desk at Star headquarters, where each meeting room is named after a major city served by the alliance. The chart depicts per capita GDP on one axis and airline trips per year on the other.

‘What you see is that below $5,000 per capita GDP there is virtually no air travel,’ he explains. ‘The minute you pass the $5,000-mark, you go to one trip per year and so on. To me, that chart explains why everybody is so interested in China and India. As they cross that mark, with a billion-plus people and the size of their land mass, all of a sudden you are going to end up with air-travel markets that are bigger than the very mature US market.’

Between 2015 and 2020, the largest rise in passenger demand is expected to come from the Asia Pacific region, which industry forecasters expect to expand by more than 6 per cent annually, compared with 2.3 per cent in North America and 3.5 per cent within Europe.

‘In the coming years you will see increased focus on our part to developing markets,’ says Schwab. ‘We may have a couple more members in those geographies that are rapidly growing. I would predict that some carriers may leave and be replaced by other carriers. That’s natural evolution.

‘By 2020 we will be past our twenty-year mark. We will aim to consolidate and maximise revenue opportunities in all the most important markets in the world. And I think we will be providing many more centralised services to cut costs for our carriers. That is something that our members and their CEOs are expecting of us.’

By the end of the current decade, most of the aircraft and several of the airlines that dominated the industry when Schwab first joined Pan Am in the 1970s will be consigned to the history books. The thin margins and high operating costs of the airline industry have long taken their toll on carriers unable to compete. Pan Am, says Schwab, was pushed into bankruptcy by a combination of the financial burden that came with being the launch customer for the original Boeing 747 jumbo jet, the failed attempt to build a domestic network to rival United and American, and the economic slowdown that accompanied the first Gulf War.

While famous flag-carriers failed to survive, their executives had significant value to rivals seeking to expand, Schwab among them. After leaving Pan Am, he subsequently worked at American Airlines on its integration of Eastern Airlines’ network in Latin America, before joining United to run its operations out of London and then US Airways as it expanded into Europe. He re-joined United, spending nine years heading its operations in Japan, before running its alliances department as the carrier embarked on its mega-merger of 2010 with Continental.

When Jaan Albrecht, then CEO of the Star Alliance, was appointed chief executive of Austrian Airlines, Schwab took over at the network. The airline veteran puts the longevity and dominance of alliances down to historic restrictions on cross-border mergers in many parts of the world: ‘That is exactly why the alliances were created. Cross-border mergers were completely non-existent back in the nineties. Mergers are difficult in any industry and particularly hard with airlines. You have got to put labour agreements together, as well as different corporate and operating cultures.

‘Instead, with Star and at the other alliances, a way was found to combine the right networks, build revenues and deliver enormous savings on driving efficiency from things such as unified IT systems. But there is more to be done to secure the full potential of these networks.’

Over the coming years, Schwab sees the potential for more joint ventures between alliance members to drive savings and ticketing revenue from particular routes, such as the United partnership with ANA of Japan on the Pacific route: ‘They’re capturing the next level of value through co-ordination of their pricing activities, their scheduling, and their go-to-market strategies – going to big corporate accounts or travel agents as a unit instead of separate entities.’

He also anticipates a narrowing in the cost differential, at least in the North American market, between legacy US carriers such as United and American and the low-cost carriers (LCCs), including Southwest and Jet Blue. This competitive convergence follows the major restructuring of several US mega-carriers, achieved partly through Chapter 11 bankruptcy proceedings that allowed them to cut labour costs. At the same time, the LCCs have matured and been forced to agree terms and conditions that have inflated their labour costs.

In spite of this cost-convergence, which the Star CEO expects to be replicated in Europe, LCCs have remained outside the alliances. Carriers from Ryanair and easyJet in the UK to Southwest in the US have refused to join or scoffed at the revenue benefits of being affiliated to one of the big three. Schwab attributes their isolationism to a business model that has eschewed two fundamental principles of the alliance world: business class travel and inter-airline connections. ‘Our service offering is incompatible with the LCCs; it just doesn’t work,’ says Schwab. Products such as global connectivity, premier customer traffic, lounges, through check-in on different airlines and priority baggage delivery are a rarity in the LCC market.

But two new phenomena are emerging that may blur the distinction between the LCCs and the full-service airlines. First, the LCCs – even notoriously unfriendly Ryanair – are targeting business travellers with the promise of better service treatment. And low-cost airlines that previously operated only point-to-point routes are beginning to mimic the alliance model of connecting passengers to multiple destinations on their networks.

‘The model is changing from both sides,’ says Schwab. ‘Some LCCs are becoming hybrid carriers by offering more and better services. And legacy carriers are changing their offering, because of cost pressures and the need to compete with the onslaught that is coming at them.’

The big three alliances are trying to respond with cost savings and service improvements, particularly shorter transfer times and better airport facilities. Star regards London Heathrow’s Queen’s Terminal, replacing the decrepit Terminal 2, as a statement of intent about its future customer service approach. All twenty-two Star members that operate out of Heathrow will, for the first time, be based at the same terminal. Schwab was first shown conceptual drawings of the new terminal by Heathrow’s airport operator in 1998 – sixteen years before it eventually opened. ‘What frustrates us is when airports go out and hire one of the big architectural firms to design them a pretty building but without thinking about the customer experience in connecting from one airline to another,’ he says. Schwab believes airlines should be heavily involved in terminal design to ensure shorter connections, better lounges and easier check-in procedures.

‘Any time we hear about a new airport or a new terminal project anywhere in our network of 1,300 cities, we get on a plane as quickly as we can to talk to the airport company to encourage them to consider connection services.’

In future, Star would like to see greater co-ordination among airports on border formalities. Of the complaints from passengers, government controls and lengthy passport queues are among the most frequent calls for change. Schwab describes a global standard for passport processing and managing border entry as an enormous opportunity for the industry, adding: ‘I think alliances can help and will help find standards and solutions.’

Although there have been few new airports built in Europe or North America in the past generation, Schwab says that the Asian tiger economies have shown what can be achieved with better airport facilities. In the nine years that he spent leading United’s operations in Japan, the airline moved to new airports or new terminal buildings in thirteen of the fifteen cities it served in the region. Whilst the planners dithered over Heathrow’s Terminal 5 and other European infrastructural projects, new airports or terminals were opened in Beijing, Shanghai, Tokyo, Seoul, Taipei, Bangkok and Singapore, among others.

At the same time, mega-hubs sprang up in the Middle East Gulf States, posing a new and major challenge to legacy European airports in particular. But Star has declined to invite any of the powerful new Gulf carriers such as Emirates or Etihad to join its club because Schwab thinks the benefits would flow one way only: ‘The reason we are not recruiting a Gulf carrier to join Star is because we don’t need to. Our carriers already provide services to every country in the Gulf region, so we wouldn’t actually add anything to our network. The other principle behind Star is that every member brings a strong and attractive home market for other members to access. What would you define as the home market of Dubai or Doha? It’s a tiny domestic market. We see a big advantage for them, accessing our 200 million frequent fliers. But in return we would get a commercial imbalance.’

So Star is responding by focusing on route networks that promise mutual benefit to its members. China could be a major test bed for such future co-operation. In 2013, EVA Air of Taiwan joined Star, complementing a line-up of airlines that includes Shenzhen Airlines and Air China.

‘Ten years ago, there was not a single flight between the PRC and Taiwan. If you wanted to get there you would have to go via Hong Kong, Seoul or Tokyo. Right now they are operating 500 flights a week across the straits. Both governments are looking to triple that in coming years.’

Such growth is a symptom of the predicted expansion in inter-Asian air travel by 2020. US demand is expected to grow relatively slowly while Europe is expected to see continued expansion of low-cost short-haul traffic, with an increasing shift towards what Schwab calls ‘hybridisation’ among airlines. Latin America is forecast to show double-digit expansion in some countries. Africa is the exception to the trend. Poor or under-invested airport infrastructure is holding back the continent’s air travel industry. Given the deep-seated economic challenges and other pressing investment priorities in many African nations, the continent’s commercial aviation industry could take decades to modernise fully.

Where growth exists, Star hopes to capitalise on it with greater coordination between its member airlines, which are divided into tiers depending on their size and contributions to shared synergies. Drawing its inspiration from astronomy, each tier is named after a different constellation, separating the mega-carriers – the largest of which has a thousand aircraft – from the airline minnows. The smallest airline in Star has just fifteen planes.

Whatever their size, the Star CEO says the alliance must deliver both higher revenue synergies and greater cost savings wherever possible. He aims to do this through greater co-development of alliance strategies, greater use of passenger data information and by building a series of tools – especially in IT – to become more cost-efficient.

In a crisis, the alliance is expected to work swiftly to minimise the impact on passengers. Over the course of its history, three Star carriers have gone bust: Varig of Brazil, Ansett of Australia and Spanair of Spain. Others have been heavily restructured, such as SAS of Scandinavia and United, following bankruptcy protection. Schwab says Star is not a safety net for underperforming carriers, and will not bail out those facing problems. But the alliance does attempt to protect passenger interests. If one carrier faces major disruption – as a result of industrial action or technical problems – passengers can be re-routed or offered alternative flights with other member airlines.

In the medium term, Star aims to increase its flight network, benefits to frequent fliers and service efficiencies, driven mainly by air traffic growth in emerging markets. But it warns that it cannot change the travelling experience on its own, particularly when airlines depend upon airport infrastructure or fragmented air traffic control systems that – in Europe at least – require reform. That is why Star is among the airline groups urging European policymakers to create a ‘single European sky’ that combines continued investment in infrastructure on the ground and in the air to keep up with global industry standards.