Iberia, Vueling and IAG (continued...)

By the way, to clarify, my previous article was motivated by this piece on the FT that points towards IAG using Vueling to cover most of Iberia's short-haul network...

It makes sense on paper, but Iberia's unions have an agreement with the company that prevents Vueling from flying little more than a few routes out of Madrid...this adds to an already very tense labour situation at the Spanish flag carrier.

Vueling taking over Iberia's network?...not so easy...

  Too close for comfort

The more details that emerge of IAG's plans for Iberia, the closer we get to the scenario anticipated in this blog a few months ago (and see also this other post).

Why create a low cost carrier from scratch when you already have one in-house?

It would make sense for IAG (and British Airways) to roll out the Vueling brand across all of Iberia's short haul network...but it won't be easy: there are labour agreements in place whose purpose is to prevent exactly this from happening...so brace for more industrial turbulence on its way!

(Translation: I would check the industrial action calendar before booking any flight with Iberia in the coming months!)

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...

Highlights of the Farnborough Air Show

Like every other year, the small Farnborough airfield has become the meeting point for aviation professionals and enthusiasts for around the World. This was not my first visit to the Farnborough Air Show, been here in 2006, when I could first admire the majestic (and quiet!) Airbus A380, and the 2008 edition, when the smaller size of the flying and static displays was an unmistakable sign that the economy was already in trouble.

This time, however, I was able to see Farnborough from an entirely new angle, a professional angle, since I had the chance to experience the air show working together with the  colleagues of the Flightglobal team.

Flightglobal’s chalet at the show was in a privileged position, overlooking the runway, and it had a perfect view of the flight display.  As you might imagine, I did not pass the opportunity to do some planespotting. I must say this year, besides the always spectacular to watch, military jets, the highlight for me was the Boeing 787, an aircraft that I “met” for the first time. Qatar Airways brought its newly delivered Dreamliner and  it did not disappoint. It is a beautiful plane, elegant and very quiet...I can’t wait to fly on it!

But the Boeing 787 was not the only “first” at the show, the Superjet was also there, looking good in Aeroflot livery.

And not exactly a new plane, but I also found quite interesting this Embraer 190 in the bright colours of the Ukrainian carrier Aerosvit.

On the business side of the show, most of the attention was focused on the 737 Max vs. Airbus A320 Neo, with Boeing having the upper hand this time, as it secured 225 firm orders, including those for the 737 Max from United Airlines and leasing companies ALC and ALAFCO, whereas arch-rival Airbus managed to secure only 54 firm orders.

But how long is this dupolistic dominance of the narrow-body market going to last? 

One of the things I personally found more interesting of this show is the performance of the "alternative" manufacturers (by alternative I mean those that are neither of the big two).

It is particularly noticeable the apparent consolidation of Bombardier's CSeries programme, that managed to secure several new orders for its CS300 and has attracted the interest also of AirAsia.  Other up-start narrow-body programmes have also generated some interesting news during the show, like Misubishi Aircraft securing 100 additional orders for its MRJ from SkyWest and Comac reaching an agreeement with IAG for the further development of the C-919.

A different story is Irkut's MC-21 programme, that is still generating considerable doubts, not least of them its final branding (for a start, there is not even a consensus among industry observers: should it be pronnounced as “C” or as “S” as it would be if respecting the Russian pronunciation of the cyrillic "C"?). 

These alternative narrow-body programmes face an uphill battle but if they manage to hold their ground we are almost guaranteed to have very interesting air shows in years to come! 

Oh! and almost forgot!...in future air shows I would expect to see more of these too!

Vueling's CEO outlines some key points about the future of the airline

Mr.Cruz speaking. The event was chaired by renowned historian Paul Preston (foreground)

A few days ago I had the chance to attend a presentation by Vueling's CEO, Alex Cruz, at the London School of Economics (organized by the Spanish Chamber of Commerce of Great Britain and LSE Enterprise). It's been a few days already (traveling and other work have prevented me from posting more often lately!) but I guess most of what he says remains valid.

Here are some of the points he touched:

-Vueling has a really competitive cost structure, at a unit cost per ask of €4.18 it compares favourably to Easyjet's €4.36, and even better with regards to other competitors such as Air Berlin, although still some way off cost-leader Ryanair, at €2.22.

-Vueling is unique among low cost carriers in that it participates in two frequent flier programmes: its own, Punto, and IAG's Avios.

-Mr. Cruz explained how when they set up Clickair, an Iberia subsidiary that later merged with Vueling, they followed the textbook examples (Ryanair) of what a low cost carrier should do and should not do, but after some time in the business they started challenging some of this "established" knowledge and experiment with things such as assigned seats or connecting flights, that have yielded satisfactory results so far.

-Vueling is continuing to pursue its hybridisation strategy, with the aim of attracting business customers (the recently launched Vueling Pass goes in this direction)

-They aim to strengthen cooperation with other carriers within Oneworld, such as BA and LAN, to support its growing, although still small, connecting traffic via its Barcelona base.

-Regarding network, and asked by the audience about the long-haul plans some airlines have announced (for example, Norwegian) Mr. Cruz stated that their intention is to continue flying only to cities that are no more than a 4-hour flight away from Barcelona (they do not like hotel expenses!). He still sees new opportunities within this geography, though, for example in Eastern Europe and Russia, maybe even some destinations in Africa.

-Regarding fleet, the aim is to reach 100 aircraft as quickly as possible, since this would provide the scale required to remain competitive. Vueling is likely to remain a single aircraft-type operator for now, although they have considered different options, including Boeing and Bombardier.

-To conclude, one thing that keeps him awake: the risk of the company growing to the point that it loses its personality, its dynamism and freshness...

Still some way to go, I think....

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!

What's really new with the new Iberia Express?

Time to maneuver for Iberia

The answer is: very little!

For those readers that might not be familiar with the whole story, Spain's flag carrier Iberia, now part of the IAG Group, is starting a new low cost airline that is to take over most short -haul routes from its parent company, so that what's left of Iberia can concentrate on the long-haul, primarily its most important market: the links between Spain and South America.

This move is due to the need to lower costs, forced by the strong competition Iberia is facing at its own hub by low cost carriers (Ryanair is already number one airline in Spain!).

A new airline in Spain then? hardly...well at least from the point of view of passengers (if you are an Iberia pilot, this is another matter). From the informations that are being made public, Iberia Express product is not going to be significantly different from that Iberia currently offers on short-haul routes:

Same aircraft, as Iberia Express is going to use Iberia's current A320-family fleet

Same route network as Iberia Express will be progressively taking over some of Iberia's domestic and, at a later stage, European routes (while possibly Iberia proper might keep some key European routes with heavy business traffic such as those from Madrid to London Heathrow and Barcelona).

Same level of service: while it is still not sure whether Iberia Express will offer single-class service or provide some sort of premium service, for those flying economy there are possibly going to be any noticeable differences, since Iberia has long been a no-frills carrier when it comes to economy class on short-haul routes.

I also assume the new airline will use the same commercial channels than Iberia and that you will also be able to buy connection flights and multi-leg flight itineraries, after all one of its major roles would be to feed Iberia's long-haul, and Iberia's American network would not be viable without its large proportion of connecting passengers.

Why go all the way and create a new airline then?

It's primarily a legal and labour relations matter...as IAG chariman Fernando Vazquez explained at a recent conference at the London School iof Economics, Spanish labour laws made almost impossible to change the labour relations framework within the company, so it was easier to start an entirely new entity and transfer its assets to it. Of course this has not gone down well with Iberia's unions that have resorted to a protracted industrial action campaign.

IAG's CEO, Willie Walsh, seems unimpressed, as he is well aware that Iberia is IAG's underperforming leg (while BA made €592M in 2011, Iberia lost €61M.) and can ill afford to keep its high-cost structure if it wants to survive and be around in the long-term.

Iberia is not alone in this move, Air France is also trying to cut costs the same way, although its efforts have focused on French provincial cities that had limited Air France service, rather than in its own hub.

It is not the first time Iberia enters the low cost market, it already did it with Clickair, a low cost it started to compete with then-startup Vueling in Barcelona (with whom it later merged) and in the last few years through its shareholding in vueling, but these were projects with a life of their own...we'll see how it works when applied to its own brand...

By the way, for those of you that are into planespotting, here is a picture of what looks like Iberia Express' first aircraft, there is no consensus as to whether this is the final livery or not, though!

Iberia wants you to Fly Around the World with its new Facebook game

Gamification is the word of the moment in social media and airlines are starting to experiment with it. Spanish flag-carrier Iberia, now part of the IAG Group, is the latest airline to experiment with this channel in order to generate buzz and follower engagement.

Iberia has just launched "Flying Around the World", a Facebook game here users can accumulate "hours of flight" by answering questions related to the airline and its products and services, the goal is to accumulate these hours of flight, you start as a co-pilot on short haul flights and become "Long-haul Pilot" (Comandante de largo radio), you can answer up to five questions per day and each correct answer gives you "flying hours".

Each question is labeled as a "flight", for example to complete a Madrid-Milan flight I had to answer how Iberia's last minute discounted online booking service is called (answer "Los que Corren, Vuelan" ("those that run, get to fly"). Iberia will be progressively adding new flight sectors over time,as the goal is to keep users engaged. As any good social media "trap", you get extra points for liking Iberia's Facebook page and leaving them your email (not that they hadn't it already!).

The more "zones (Europe, Latin America, etc.) you complete, the more chances you have to win in the draw that takes place at the end of the contest (15th December). Iberia will throw in "special" sectors to cover from time to time, as a chance to accumulate more "flight hours".

The prize? You guessed it!
4 free flights for the select few to any of the 24 long-haul destinations on Iberia's network (or "Avios" Iberia's, and IAG's, frequent flier "currency")

I was playing around with it a little bit, an, although the mechanics of the game are not particularly revolutionary, it is a nicely executed project that makes for some good light entertainment while you recall the extent of Iberia's network...I'll let you know in case I win!

Highlights of the annual Airneth conference (III): "the airline industry is structurally unstable"

The title of this post refers to the words of Rigas Doganis, author of Flying Off Course, possibly the most-read book on the airline industry to date (a revised and updated fourth edition that has just been released!)


Flying Off Course is the reference book about the airline industry

Mr.Doganis was one of the speakers at the Airneth conference and there he outlined his vision of the future of the airline industry. A future that passes necessarily through further consolidation, something that will have serious implications for several European hubs.

• The largest network airlines (all 9 largest airlines by capacity all had losses last year!) will focus on long-haul operations at large hubs and contract out the feeder services

• Smaller regional airlines will focus on their niche business-oriented traffic

• Mid-sized traditional network carriers have a bleak future ahead!

• Low cost carriers will increase their dominance of short haul European routes and will see some additional consolidation until only 3 or 4 will be left (Michael O'Leary has also been anticipating such an scenario, although he does not spare any fellow low cost carrier!).

• Charter airlines will have to concentrate on long-haul leisure destinations as the LCCs take more of the short-haul holiday market.

Next, it was the turn of Nigel Dennis, of the University of Westminster Transport Studies Group, that presented a fascinating analysis of the different levels of competition each major airline alliance is facing at its own hub and presented some evidence of how this is affecting pricing on key routes (Easyjet competing on a given route could result in flag-carrier prices up to three times higher!). When comparing the competitive position of the three main airline alliances, it turned out that Oneworld, and in particular, IAG (that includes both British Airways and Iberia) is under much stronger pressure from low cost carrier at its own hubs (London and Madrid) than its counterparts at Star Alliance and SkyTeam.

This is something that was also noted by Jan Veldhuis, of The Netherlands Institute for Policy Analysis (KiM), in his presentation, as he remarked that, whereas Skyteam has increased its dominance at both CDG and AMS, Oneworld is loosening its grip on LHR.

And low cost carriers have often been mentioned throughout the conference...but, how do you define a low cost carrier?

Richard Klophaus presented a method to evaluate how "low cost" a carrier is, based on a set of 14 criteria, such as fleet homogeneity or use of major airports. Although he admitted the algorithm might need some refinement it provided an objective way to classify different airlines and the results were not always coincident with popular perception or even the airline's own marketing message. for example in a scale of 0 (no low cost) to 1 (pure low cost airline), Ryanair scored 1, whereas airlines traditionally that market themselves as "low cost", such as Vueling or Aer Lingus got 0.53, which means that they are, in reality half-way between a low cost airline and a network carrier.


Aer Lingus: not as low cost as it pretends...