Rising budget tide: Alitalia unbundles, IAG launches budget long-haul

Courtesy Getty Images

YET another legacy airline is going budget. Italian flag carrier Alitalia will adopt the unbundling model of budget carriers by charging for what will now be considered perks – seat selection, luggage and in-flight meals and drinks. This will be implemented for flights of four hours or less.

Alitalia CEO Cramer Ball said the airline had “absolutely no alternative” but to follow suit, coming soon after British Airways started charging for meals. He said: “If we can’t compete throughout Italy and Europe against low-cost carriers, then we lose air travellers that connect into intercontinental flights.”

Ryanair, EasyJet, Norwegian Air Shuttle, WOW Air, Eurowings (owned by Lufthansa) and Vueling (owned by International Airlines Group – IAG – which also owns British Airways, Iberia and Aer Lingus) are among the budget carriers viewed as close competitors.

Unbundling is not new even among legacy airlines. US carriers such as Delta Air Lines and United Airlines are already offering “basic economy” whose low fare does not come with cabin baggage allowance and seat selection, and holders of such tickets will be boarded last.

Courtesy IAG

In the wake of the rising budget tide, IAG announces its decision to launch a long-haul budget carrier – Level – to complement Veuling’s short-haul. Level, which becomes the fifth brand within the group, will be based in Barcelona with flights to the Americas that include destinations such as Los Angeles, Oakland, Buenos Aires and Punta Cana.

IAG chief executive Willie Walsh said: “Barcelona is Vueling’s home base and this will allow customers to connect from Vueling’s extensive European network onto Level’s long-haul flights.”

Clearly, legacy airlines can no longer hide behind their pride of providing a service that is safe from the aggression of budget carriers. It is up to the consumers to decide, whether the extra dollars charged justify the perceived better standards. In today’s price-sensitive market, the bottom-line counts, and legacy airlines unbunding the fare package will make an easier comparison.

They will be faced with the challenge to convince the travellers of that something extra over and above price that they will continue to provide but which budget carriers may not have the capability or capacity to offer, such as mileage perks, compensation for flight delays and product shortcomings, ease of booking, schedule flexibility, and after-sale customer attention.

Many budget carriers, for example, do not have adequate Plan B when a flight is cancelled or delayed, and your chances of getting out of that situation soonest is better with legacy airlines in light of their frequency, connections and codeshare arrangements.

Things are getting better for Economy travel

Courtesy Getty Images

American Airlines is not going to let rival Delta Air Lines go it alone in bringing back free meals for their flights. (See Delta Air Lines ups the ante, reintroducing free meals in Economy, 19 Feb 2017) However, American will for a start reinstate the freebie only two domestic routes – New York to Los Angeles and New York to San Francisco. Nevertheless it is an indication of how the competition is heating up, and how the game has come a full circle. It is only to be expected that United Airlines (and others) will follow suit.

In the end, it is not a matter of the meals but one of being ahead in the game, doing something different. Interestingly, across the pond in Europe, British Airways (BA) is doing away with free meals and has announced plans to add more seats in Economy, thus reducing the pitch. (See British Airways is becoming more “budget” than Ryanair, 7 Mar 2017) Here the critical question is whether BA is a leader or a follower in the European context, although it appears it is somewhat of a Johnny-Come-Lately and what Delta and American are doing may force it to re-think its strategy.

At no time than now is coach travel getting more attention from the airlines, which understandably have been paying lots more attention to the premium product because of the higher yield. (See Cathay’s loss is a sign of the times, 16 Mar 2017) And that’s good news for the majority of travellers.

British Airways is becoming more “budget” than Ryanair

Courtesy Getty Images

NOT too long ago, British Airways (BA) did away with complimentary meals on short flights. (See No more free meals for BA short haul, Jan 16, 2017) Now, in yet another move to operate like a budget carrier, it is squeezing in more seats in its planes and that means less legroom.

According to some media reports, BA seat space will be the same as budget carrier Easyjet, even less than Ryanair.

A BA spokesman said the initiative would keep the fare low. But, of course, that’s to be expected. Air travellers will do better to recognise the new BA as belonging to the same category of low end operators when they are booking flights. And, sadly for BA, it can only mean it is facing tough competition.

BA’s partner airlines – Iberia, Vueling and Aer Lingus – under the International Airlines Group (IAG) are also offering the same seat space.

And, if you’re thinking of complaining about any aspect of BA’s service, think again. There is a £25 fee. If it makes you feel any better, that applies to Easyjet as well. Just don’t make the mistake of expecting more from a legacy-but-no-longer-full-service airline!

No more free meals for BA short haul

BA4 courtesy BA.jpg

Courtesy British Airways

British Airways (BA) will stop catering complimentary meals on domestic and short-haul flights. Passengers may avail themselves of food and drink supplied by supermarket chain Marks & Spencer at a cost, and we all know that such meals don’t come cheap.

BA said the decision was made to cut costs, and this naturally was not well received by its customers. It is coming at a time when BA is making record profits compared to its regional competitors, picking up a trend set by North American carriers although ironically some of them such as Delta Air Lines are considering re-introducing meals as the competition intensifies.

The question is: Will BA lower its airfare as a consequence? Increasingly airlines are adopting the no-frill model to boost their coffers with ancillary revenue which has been rising significantly in recent years. But that is at the risk of losing the differentiation that makes full-service airlines a conscious choice of travellers who are prepared to foot more for it. It is good news otherwise for low-cost operators such as Ryanair, Norwegian Air Shuttle and Wow Air.

BA is testing the ground. Its success will depend on how strong it is as a trendsetter, and its understanding of the compliance of the travelling public, however prone they are to complaining. Right now, BA has muscled itself into an extensive network of airlines under the International Airlines Group (IAG) that also owns Iberia, Vueling and Aer Lingus. Time will tell.

Air New Zealand leads the pack

Courtesy Air New Zealand

Courtesy Air New Zealand

Air New Zealand is the world’s best airline according to AirlineRatings.com based on criteria that include fleet age, safety, profitability and leadership in innovation for passenger comfort. The agency’s Airline Excellence Awards program which lists the winning airlines is endorsed by the International Civil Aviation Organization.

Many travellers would recognize ANZ for its attention-grabbing in-flight safety video that takes them into Middle Earth, the kind of out-of-the-aircraft features that a few other airlines have tried to imitate but fared only poorly. AirlineRatings.com Editor-in-Chief Geoffrey Thomas said: “Air New Zealand came out number one in virtually all of our audit criteria, which is an exceptional performance.” The airline was favoured for its record-breaking financial performance, award-winning in-flight innovations, operational safety, environmental leadership and motivation of its staff.

Skycouch: Picture courtesy Air New Zealand

Skycouch: Picture courtesy Air New Zealand

But, of course, there are surveys and there are surveys that publish their own lists of favourites. Some airlines such as Singapore Airlines (SIA) and Cathay Pacific have a ubiquitous presence, and there also notable absences. This is where it is most telling, bearing in mind that the ranking is dependent on several factors such as the excellence-defining criteria and the population surveyed.

The other nine airlines ranked behind ANZ in the top ten list by AirlineRatings.com are in descending order: Qantas, SIA, Cathay, Virgin Atlantic, British Airways (BA), Etihad, All Nippon Airways, EVA Air and Lufthansa.

It is interesting to note that the top two airlines come from the remote Southwest Pacific. Qantas has in recent years been working on upgrading its product offerings, winning accolades for catering and airport lounges. Not surprisingly, innovation along with good service seem to be the driving winning streak going down the list – SIA and Cathay for their premium economy and revamped business classes, Virgin for its cabin ambience and friendly crew, BA for its leadership in in-flight entertainment, and Etihad for its equally impressive service in front and at the back of the aircraft.

Notable absences in the list are US carriers (no surprise there) and two of the big three Middle-East carriers (Emirates and Qatar).

Many survey rankings are skewed by the weight they place on service in the premium classes. However, Mr Thomas of AirlineRatings.com said: “We are looking for leadership and airlines that innovate to make a real difference to the passenger experience particularly in economy class.” Considering that the majority of travellers are seated in coach, it is time that airlines crowned with the halo of excellence pay more attention at the back of the aircraft, for this may well make the difference as the competition intensifies. And, it is where the differentiation becomes even more challenging. Perhaps too, this could be the reason why Emirates and Qatar, known for their lavish premium service, did not make it to the top ten of the list.

Airlines brace for the hard times of a troubled Europe

Two British Airways aircraft, with British Airways plane taking off in background.

Two British Airways aircraft, with British Airways plane taking off in background.

IT is easy to blame Brexit. International Airlines Group (IAG) which owns British Airways (BA) and EU carriers Iberia, Vueling and Aer Lingus, says the weak pound has caused its operating profits for Q2 (Apr to Jun) to fall below forecasts, even the number (€555m) (USD618m) is higher than a year ago ((€530m). The weak pound has cost the airline €148m.

But, of course, BA is a key contributor to IAG’s bottom line. IAG is not too upbeat about the immediate future as it “continued to experience a weaker trading environment in our UK point-of-sale business, which represents around one third of total revenue.”

The situation is definitely not helped and in fact made worse by the slew of terror attacks across the continent. Other European airlines such as Air France-KLM and Lufthansa are also under a lot of pressure to keep the numbers up, warning that travellers would avoid coming to popular destinations in their home countries.

Air France-KLM reported a 5% dip in revenue for Q2 to €6.22bn. The airline said: “The global context in 2016 remains highly uncertain… resulting in an increasing pressure on unit revenues and a special concern about France as a destination.”

So the problem is not entirely Brexit. And as the pound weakens and reduces purchasing power, and so too as travellers stay away from popular tourist destinations across Europe, the paradox is that airlines will be persuaded to reduce fares to shore up the demand for seats.

Ryanair CEO Michael O’Leary, referring to recent bombings, said: “Airlines have to respond with lower prices to keep people flying.” This will at the same time exert pressure on rival airlines to similarly take the same course. Mr O’Leary predicted average fares to fall approximately 7% this year.

Fortunately the continuing low fuel prices are working in the airlines’ favour although many are already complaining about the need to lower prices. So don’t expect the fuel surcharge to come down.

Optimism and more good news

IT’s been a long time coming, the optimism and good news that the industry badly misses as more airlines report better, even record, performances as fuel prices show no certainty of bottoming out. From Chicago to London, Singapore and Sydney, the mood is celebratory.

American carriers were the first to celebrate. The US big three– American Airlines, United Airlines and Delta Air Lines – all reported record recovery last year, and are reintroducing snacks on domestic services (instead of lowering the fuel surcharge) as a way of giving back to their customers. (As the price of crude oil plummets, fuel surcharge holds sway, Jan 23 2016)

This article takes a look at four major airlines in three other different regions (Australia, Europe and Asia) that recently posted their report cards, and see how they measure up to the mood.

Courtesy Bloomberg

Courtesy Bloomberg

Qantas

The good run continues with Australian flag carrier Qantas’ record performance for the first half of its current financial year (Jun-Dec 2015). The airline reported an underlying profit before tax of A$921 million (US$685 million), which is A$554 million more than last year’s first half. Revenue was up 5 per cent. Chief executive officer Alan Joyce announced that every part of the Qantas Group contributed strongly to the result, with record profits reported by Qantas Domestic and the Jetstar Group.

Qantas Domestic reported earnings of A$387 million, compared to A$227 million last year, maintaining a strong market share of 80 per cent. The Jetstar Group’s earnings were A$262 million, compared to A$81 million last year. Revenue for the Australian market went up 10 per cent, and for the first time, Jetstar Japan contributed positively to the profit of the Asian network since its start-up in 2012.

Qantas International which used to be the bleeding arm of the Qantas Group reported earnings of A$279 million, compared to $59 million last year. This was its best performance since before the global financial crisis. The airline has benefitted from the weak Australian dollar which has helped boost inbound tourism for Australia. Qantas’ cornerstone alliance partnership with Emirates, American Airlines and China Eastern has strategically strengthened its global network, overcoming an apparent geographical disadvantage of its home base in a far corner of the world.

All this, Mr Joyce would be the first to tell anyone, is not a matter of luck or necessarily a given in today’s more favourable economic climate. He said: “This record result reflects a stronger, leaner, more agile Qantas. Without a focus on revenue, costs and balance sheet strength, today’s result would not have been possible. Both globally and domestically, the aviation industry is intensely competitive. That’s why it’s so important that we maintain our cost discipline, invest to grow revenue, and continue innovating with new ventures and technology.”

Give credit where it’s due. Sceptics may finally admit that Mr Joyce’s “transformation program” is not only bearing fruit but producing a good crop and reshaping Qantas into a more agile and innovative business. “Our transformation program has allowed us to save significant costs,” said Mr Joyce. “It’s never been a simple cost cutting agenda.”

Qantas expects to increase domestic capacity by 2 per cent, international by 9 per cent and Jetstar International by 12 per cent in the second half, averaging 5 per cent for the full year for the Group.

Courtesy Bloomberg

Courtesy Bloomberg

International Airlines Group

At the other end of the Kangaroo route is the unmatched success of the International Airlines Group (IAG) of which British Airways is a partner along with Iberia, Vueling and, more recently, Aer Lingus. IAG’s profits increased by almost 65 per cent to €1.8bn (US$1.98 billion) in 2015, which IAG chief Willie Walsh said had “undoubtedly been a good year”. The Group carried 88.3 million passengers last year, an increase of 14 per cent, overtaking Lufthansa to become second only to Air France-KLM in Europe.

In very much the same way that Mr Joyce was able to turn round the loss-making international division of Qantas, Mr Walsh could pride himself as the man who steered Iberia into profitability following its merger with BA in 2011. The Spanish carrier underwent a painful restructuring but it has paid off. . Unlike Qantas which prefers commercial alliances, IAG adopts a more aggressive strategy of acquisitions. The consortium of BA, Iberia and Aer Lingus stands the Group in good stead to grow trans-Atlantic traffic which forms the largest part of its business.

IAG expects similar growth next year, targeting an operating profit of €3.2bn

Courtesy Airbus

Courtesy Airbus

Singapore Airlines

In Asia
, Singapore Airlines (SIA) Group reported a third quarter (Oct-Dec 2015) profit of S$275 million (US$200 million), 35 per cent higher than that of last year’s third quarter. However Group revenue declined by 4 per cent to S3.9 billion because of lower passenger yields and the continuing lacklustre performance of its cargo operations. Parent airline SIA faces stiff competition from Middle East carriers, and its subsidiaries SilkAir, Scoot and Tigerair are not spared the rivalry from regional budget carriers. Still it is good news that falling oil prices had resulted in a reduction of the fuel costs by S$354 million, a drop of more than 40 per cent.

Characteristically diffident and not as confident as either Qantas or BA, SIA said it expects travel demand to remain volatile, citing the increased competition and the pressure that it will continue to exert on yields and loads. But all three airline groups have experienced increased loads, driven by discounted fares as a result of of intense competition and made possible by the lower fuel costs. According to International Air Transport Association (IATA), breakeven load factors are highest in Europe because of low yields from the open competition and high regulatory costs, yet the region is achieving the second highest load factor after North America and generating solid growth.

It is going to be a rosier 2016. IATA forecast air travel to grow 6.9 per cent, the best since 2010 and well above the 5.5 per cent of the past 20 years. Demand is fueled by stronger economic growth and made attractive by lower fares. It is unlikely that the oil price will rise and airlines may even expect smaller fuel bills, making up 20 per cent of an airline’s total operating costs compared to what it used to be at 40 per cent. This will be further enhanced by the acquisition of new aircraft that are more fuel efficient.

In this connection, SIA has something to crow about as it took delivery last week of the first of 63 Airbus A350 firm orders after a long wait of 10 years. The first tranche of ten aircraft which it hopes to take complete delivery by the end of the year have a seat configuration of 42 business, 24 premium economy and 187 economy. An ultra-long range version of the model will be used to resume SIA’s non-stop services from Singapore to Los Angeles and New York in 2017. The modified A350 is said to be more fuel efficient than the A340 previously used. It will be configured premium-bias.

SIA chief executive officer Goh Choon Phong said: “The A350 will be a game-changer for us, allowing for flights to more long-haul destinations on a non-stop basis, which will help us boost our network competitiveness and further develop the important Singapore hub.”

Opinions are divided as to whether SIA has moved a little too slowly and as a result is playing catch up when once it used to lead the field. By all indications of the good times finally rolling back for the industry, it is not too late to leapfrog the competition to make up for lost time. SIA is banking on the rejuvenation of the demand for premium travel, the product it has always been reputed for.

The IATA forecast points to weak markets in South America and Africa – two regions that are of little interest to SIA – but continuing robust growth for North America which has been a key market for SIA since it commenced operations thereBut the competition will be tough, particularly from Middle East carriers tapping traffic in Asia-Pacific and redirecting it through their Gulf hubs. Already United Airlines has announced its launch of a non-stop flight between San Francisco and Singapore in June this year, ahead of SIA. (United Airliens steals a march on Singapore Airlines, Feb 15 2016)

According to IATA, consumers will see a substantial increase in the value they derive from air transport this year. Indeed, air travellers will benefit from the optimism as airlines become more inclined to improve their product, and the increased competition will likely see the airlines introducing more creature comforts beyond the snacks and peanuts. Qantas for one is upgrading its airport lounge at London Heathrow as part of a program to create a flagship global lounge at important destinations started three years ago. Hong Kong, Singapore and Los Angeles are already enjoying the new facility. Qantas is also developing across its domestic network an industry-leading wi-fi service that has the ability to deliver the same speeds in flight that people expect on the ground.

Mr Joyce said: “Our record performance is the platform to keep investing in the experiences that matter to our customers and take Qantas’ service to new levels.”

Courtesy Airbus

Courtesy Airbus

Thai Airways International

Positive signs of the times are best presented by the performance of Thai Airways which posted a quarterly profit of 5.1 billion (US$141.7 million) baht ending Dec 31, 2015 reversing a loss-making trend. This compared to a 6.4 billion baht a year ago, and softened the full year’s loss to 13.05 billion baht, 16 per cent lower than 15.57 billion baht last year, partly attributed to a decrease in fuel costs of 20 per cent. The airline introduced a program “to stop the bleeding” last year aimed at introducing cost-saving measures, cutting unprofitable routes and down-sizing the fleet.

Plagued by political problems at home and safety concerns based on the findings of the International Civil Aviation Organization (ICAO), Thai Airways has been struggling to stay afloat amidst increased competition from regional carriers. It is to be expected that stronger-muscled airlines such as Qantas, British Airways and SIA are likely to rise faster with improved economic conditions, but when things are beginning to look up for the more troubled carriers while noting that in good times as in bad the fortunes of various airlines can be widely diverse, the industry can at last be a little more confidently optimistic.