IAG to bid for Vueling?

To bid or not to bid?

The news was out this evening that IAG is considering a bid for the share of Vueling it does not yet control (here is the official communication on the website of the Spanish stock-market regulator).

We will have to wait until Friday to know the details, but it makes sense...IAG is heading to an attrition war with Iberia's unions over the creation of its new low cost subsidiary, Iberia Express (and after this week's court ruling, there is no solution in sight anytime soon). The "new" carrier is IAG's attempt to stem losses at Iberia, particularly in the short and medium haul network.

And while Iberia is in turmoil, and as I already noted here a few days ago, Vueling (that is 40% owned by Iberia) appears to be in good shape. Such an irony, because Vueling is already exploiting successfully the sort of hybrid model that Iberia Express was trying to bring to Iberia's short and medium haul network!

What next then? 

As I said, it's early to say, the offer has not even been formalized, but things are getting interesting...

Could Vueling take progressively take over the Iberia Express project while Iberia focuses on the long-haul routes? After all, Iberia already had a "sister" company until the 90s, Aviaco, that was doing most of the domestic flights in Spain.

This option might not be good news for Barcelona airport, since there might be a risk, if Vueling "becomes Iberia" that the carrier will shift its focus away from its current base, where a major expansion is currently under way (or alternatively that it will split its fleet and network between Barcelona and Madrid).

Could the goal be merely financial, to consolidated the profitable Vueling operation in the not-so-good Iberia's accounts?

Is IAG planning to keep it as it is now, a stand-alone operation, while trying to extract more synergies and know-how from Vueling's experience in running a successful low-cost (or we should better say "hybrid") operation?

Let's wait until Friday to see whether anything new comes out of Iberia's results presentation!

Iberia and Vueling on diverging flight paths

I just read an article on a Spanish news portal (in Spanish, "Iberia tenemos un problema"-"Iberia, we've got a problem") that warns about the difficult situation Spanish carrier Iberia is currently in.

Nothing that I had not brought up on this blog before: see my article of just a few days ago ("IAG's Spanish problem, Iberia Express and Vueling").

There are not many successful cases of network carriers creating spinning-off profitable low cost airlines, as noted recently by industry blogger Cranky Flier, not to mention the adverse effect it could have on your brand.

In Iberia's case, the problems are compounded by ongoing labour litigation that could take away all the labour cost reductions achieved with the creation of Iberia Express, its new low cost subsidiary...

Going through turbulence...

The ironical thing here is that, while this happens, Vueling, an airline that is 40% owned by Iberia, seems to be going from strength to strength, and it is actually "upgrading" its brand and services and recently announcing a major fleet and network expansion at its Barcelona base (although some Vueling frequent fliers tell me that the carrier has still some way to go in terms of reliability and customer service in order to shake off the "low cost" label completely).

An interesting case of business-fiction prospective would be the situation where Vueling ends up taking over Iberia's short and medium haul operations...seems quite far fetched at present, but about a decade ago we saw former regional operator Crossair taking over its bankrupt parent, the once mighty Swissair and more recently Austrian Airlines corporate structure being gradually folded under Tyrolean Airways (although keeping its brand).

IAG's Spanish problem, Iberia Express and Vueling

The future does not look bright for Iberia. IAG latest financial results showed that the Spanish flag carrier has become a drag on the the group's financial performance. IAG's CEO, Willie Walsh has already warned that tough measures must be taken...

And what now seems inevitable is that Iberia's short and medium haul network will be progressively taken over by Iberia Express, the vehicle that IAG has chosen to get rid of the existing labour relations framework at Iberia. For Iberia's customers the change to Iberia Express should not be a big change...for now...because, Iberia Express might have been helpful in taming some structural cost issues within the company (Iberia Express is already profitable), however, it can do little against the huge exogenous pressures currently affecting the Spanish air travel market, like the deep economic crisis and the strong competition from other low cost carriers (among the major European markets, is possibly the one where LCCs enjoy a larger marjet share).

So it is not unlikely that, while keeping some network carrier features, most important of all, feeding Iberia's long-haul network, or what's left of it, Iberia Express, and the rest of the airline, might have to undergo a process of "low-costization".

Curiosly enough Iberia is the major shareholder of another Spanish low cost, and one that is profitable: Vueling. The Barcelona-based carrier is actually on an opposite path: whereas Iberia might end up trading-down, Vueling is trading-up and offering more and more extras to its passengers, in a drive to attract business customers.

Will Vueling and Iberia (Express) end up occupying the same market space?

If this happens, will the two brands be kept? In theory, there is no need to, despite its shareholding Vueling is an independent company and it has its hub at Barcelona, whereas Iberia Express is based at Madrid. However, it is not unthinkable that Vueling becomes more operationally entangled with Oneworld's operations in Spain as it starts to codeshare more and more, take on feeding operations, etc. Will there be a temptation to consolidate Vueling and what's left of Iberia in a big low cost operation? Who would then have the strongest brand? and right structure and "mind-set" to operate as a low cost?  an strengthened Vueling or a "downgraded" Iberia?

Of course, the most likely outcome is that nothing of this might actually end up happening, but "what if" scenarios are always entertaining...

Best aviation and airline books for the summer

Many of us take advantage of the summer holidays to slow down a bit and catch up with readings. Although it is not the most prolific literary genre out there, I thought it would be a good idea to put together a short list of books about the airline business that I have enjoyed and can recommend.

I actually have a longer list of aviation and airline books I would like to read as soon as I find the time, so hopefully I will be able to update this list soon. In the meantime, I hope you enjoy this one!

 
1) Flying Off Course: Airline economics and marketing, 4th Edition
by Rigas Doganis

This is the latest, updated, edition of what is, by all accounts, the book I would recommend for anyone willing to understand the basics of the airline business. If you know of any other book that fulfills this mission better, please let me know!

Ryanair: How a Small Irish Airline Conquered Europe
by Siobhan Creaton

This is a short book that explains the roots of Ryanair, the role of Michael O'Leary in completely revamping the business model of what used to be a struggling small Irish airline to make it Europe's low cost champion. Besides the purely airline-related part of the story, it also provides a vivid picture of the personality of the Irish airline's larger-than-life CEO.

EasyJet: The Story of Britain's Biggest Low-cost Airline
by Lois Jones

This book is similar to the previous one, although maybe less focused on the caracther of Stelios than the Ryanair book is about O'Leary. It makes an interesting read not only for aviation enthusiasts but also for anyone interested in reading case studies of how marketing and operational innovation can disrupt industries.

Overall I must say that, although these books are a nice read, I was expecting to find many more high quality books about such a fascinating industry. If you have any suggestions, do not hesitate to share them here!

UPDATE: more on aircraft storage

UPDATE: following my recent post about Spanair and Malev aircraft paying up to €2,500 for temporary storage at Irish airport, I got a message from Pablo, a reader of this blog, letting me know that it is cheaper to park aircraft at Palma de Mallorca airport (PMI).

So, all airlines expecting to go bankrupt in the coming months, please take note!

What happened to all those Spanair and Malev aircraft?

 When it comes to financial stability, the airline industry has a terrible reputation (and track record!). We had a reminder early this year with the disappearance of Spanair and Malev.

But, have you wondered where do all these aircraft go when an airline goes bust?

I did, and The Sun (I know! not my top source of aviation knowledge though..) has provided part of the answer. At least 24 ex-Spanair and ex-Malev planes made their way to Ireland to be stored at Dublin and Sannon airports (while they await their final destination, that in most cases will very likely be the Arizona desert).

In the meantime, Dublin Airport Authority benefits nicely from providin this sort of long-term parking facility (€2,500 per aircraft per day). Other to benefit have been airlines loking to expand their fleet, since this glut in aircraft supply might have lowered leasing costs up to 25%.

The Sun's article was written in March though, it would be interesting to learn where all these planes, except the 9 Spanair A320s that went to Vueling, have finally ended up...any clues?

Bye, bye BMI...

I have not flown BMI very often, but I must say every time I did, on its routes from LHR to Moscow and Norway, I had a really great on-board experience. I also liked the look of its aircraft, in their colourful liveries, and was nice to have one more alternative to fly from London...but, unfortunately, a good product is not always synonymous with profitability.

BMI and its employees, however, will avoid the fate of the likes of Spanair and Malev as the airline has been acquired by British Airways, not the worst possible outcome...in any case, it is time to say:

Bye, bye BMI, you will be missed!

British Airways to be soon owned by...the Spanish state?

One of the side-effects of the economic and financial turmoil in Spain might be none other than British Airways falling back into government hands...but in the hands of the Spanish state this time!

How's that?

The main shareholder of British Airways' parent company, International Airlines Group (IAG) is non other than Bankia, formerly Cajamadrid (Madrid's savings bank before the latest reform of the Spanish financial system), with over 12% of IAG's capital (a vestige of the times when Cajamadrid was one of Iberia's main shareholders). The fact is that Bankia is in deep financial trouble, so deep that all points towards a bail out and nationalization by the Spanish government, who would then, through the back door, control 12% of IAG...

But before you start fretting about a new Spanish Armada taking over the British flag carrier, have a look at IAG's consolidated accounts and you will see that British Airways is bringing in all of IAG's profit  (is losing less money than Iberia)...so, whatever happens, I would expect Willie Walsh to remain firmly in command!

Spanair's difficult year

A Spanair A320 on the tarmac at Barcelona airport

From this blog I follow very closely the evolution of Spanair, as Barcelona (BCN) is one of my favourite airports and its future is inextricably linked to the future of Spanair.

Why? because Spanair is at the center of an experiment: the attempt to establish from scratch a hub-and-spoke operation in a mature market with strong presence of low-cost carriers. The reasons for this are both political and economic. Barcelona is one of Europe's main airports (one of the top ten, in close competition with Rome-Fiumicino) however, it has never been a hub, neither has it had its own flag carrier.

Although Barcelona and Catalonia have traditionally been the main tourist destination and the more export oriented economic center in Spain, during the period when most European countries developed their own flag carriers, Spain was a heavily centralised country and Iberia always focused on Madrid-Barajas, with Barcelona acting as a sort of secondary mini-hub for European flights. The result has been that today Barcelona is possibly the European airport with the lowest proportion of intercontinental traffic with regards to total traffic in Europe. This situation is, obviously, a source of concern in Barcelona, as the lack of long-haul connections can become a major weakness in the era of global business.

Iberia's decision to hand over its European flights at BCN to its low-cost subsidiary Clickair, that subsequently merged with Vueling, and the increasing share that low-cost airlines have been acquiring at BCN, added salt to the injury.

No wonder then that, as soon Spanair, an airline with a history of losses but with the second largest network in Spain, was put on sale, a consortium led by the Catalan governement took over. The aim was to make of BCN a hub and consolidate a full-service hub-and-spoke operation out of Barcelona, in coordination with Spanair's Star Alliance partners. SAS would remain as a strategic partner with 20% of the capital.

Easier said than done. If consolidated flag carriers are having a hard time in their established markets, Spanair's challenges looked daunting...and, indeed, the numbers the company has just presented are deep in the red. It lost €186 million, of which €120 million are an oeprational loss. This is 55% above what was expected by the airline. However, it is true that this is an improvement over the €218.3M. loss of the previous year, and last quarter it managed to book a modest profit of €5 million.

The company is keeping the goal of becoming profitable in 2012, despite the short term reality that it has needed a fresh injection of capital from a company owned by the Catalan government in order to keep it afloat.

This money should keep Spanair flying for a period of time, but is unlikely to facilitate the development of the sort of intercontinental hub that remains the raison-d'être of Spanair and the ultimate justification of all this public support.

Mexicana's bankruptcy and the quickly-adapting Mexican air travel market

Picture: Wikipedia

Mexico's second-largest carrier, Mexicana de Aviación, went bankrupt last August, however, the market moved in quickly to fill the void. Mexico's air traffic did not even register the loss of such a large operator. On one hand a number of new international routes were opened, mainly between the US and Canada and several Mexican destinations. Domestically, the spare demand has been absorbed by local operators, flag carrier Aeroméxico (a Sky Team partner) and Mexican low-cost airlines such as Volaris, Interjet and Viva Aerobus, that reported increasing load factors and market share.

As this article points out, this was possibly a case of excess capacity that has now wiped out. The speed with which the market adapts to the new situation highlights the dynamism of the air travel sector and its capacity to adapt to supply and demand factors and, in my opinion, strengthens the case for limiting government subsidies to loss-making airlines.

In any case, despite there are people willing to defy the new market equilibrium: a reborn Mexicana, under new management, plans to start operations in January. The new Mexicana will be smaller, it has rehired 30% of the previous staff, and operate a fleet of 20 aircraft. Half of its routes will be to international destinations, and, if everything goes well, the plan is to increase the fleet to 30 aircraft during the year and hire the remaining 70% of the staff of the original company.

This is certainly a bold move, since it might bring back excess capacity, but will possibly be good for Mexican air travellers, as the new Mexicana will have to work hard to regain its place under the sun and this possibly means lower fares...

George Soros invests in Flybe as the British regional airline readies its expansion plans

Pointing upwards! (Picture: Wikipedia)

What is the fastest way to become a millionaire? Start as a billionaire and invest in an airline....! but it looks like billionaire George Soros would rather disagree!

Well, true, a £7M. investment in Flybe is not even pocket money for the famous tycoon (it will buy him around 3.4% of the company), however I find it significant that such an experienced and powerful investor, that managed to sink the pound sterling in 1992, is backing Flybe at this time, when ambitious expansion plans are under way at the British regional airline. Flybe has just floated in the stockmarket and plans to use the proceeds of the flotation to double its fleet and possibly open new bases in Europe or acquire another regional airline, another sign of confidence in the future, is that Flybe's current owners are not planning to cash their money in, at least not in the short term.

There is no lack of examples to support the old joke about the dubious profitability of airline investment (even Warren Buffett got caught on this one!), however, it is remarkable how Flybe has been able to build its niche business in a market strongly dominated by behemoths like Ryanair, Easyjet and BA, or I should say, precisely by being able to exploit the markets gaps these airlines were leaving: as opposed to BA and its Heathrow focus, Flybe has an extensive regional network, as opposed to Ryanair and Easyjet, Flybe caters mainly to the business traveller...will it be able to replicate its business model in the continent? in any case, it looks like we are going to get used to hearing about Flybe more often, as the British regional champion is onto something big!