IAG levels up

Courtesy Level

International Airlines Group (IAG) which also owns British Airways, Iberia and Aer Lingus is expanding the scope of its new low-cost carrier Level. Originally intended to be a long-haul budget operator, it will now also offer short-haul services from Austria.

The Europeans may not be aware of how Scoot, set up as a budget carrier by Singapore Airlines (SIA) for the long-haul, soon took on the short-haul as well and ended up assimilating its short-haul budget sibling Tigerair. (See After the merger of Scoot and Tigerair, will it be Singaproe Airlines and SilkAir next? Aug 29, 2017)

While IAG’s move is motivated by the competition with rivals such as Ryanair and EasdyJet, we note that IAG already owns a short-haul bydget carrier namely Vueling which operates out of Barcelona, which is also the springboard for Level’s long-haul. Will this lead to intra-competition? But, of course, there is only so much one may suggest of the comparison between IAG and SIA since Europe is a much bigger arena than Singapore.

In the bigger picture, IAG’s new focus on budget travel yet again testifies to the thriving low-end market and the competition that it poses to legacy airlines. (See Ryanair affirms market for budget travel, May 22, 2018) Level, which commenced operations last year, was intended to check the aggression of other low-cost long-haul operators such as Norwegian Air Shuttle and WowAir. Interestingly, IAG tried but failed to acquire Norwegian, and expanding Level may be a strategy to boost its viability in a wider market, foster brand familiarity and promote intra-connectivity.

IAG chief executive Willie Walsh said: “We are launching this new short-haul subsidiary to provide Austrian consumers with more flight choices across Europe. These flights will be branded as Level to build upon the huge success of our new long-haul low-cost operation.”

Read between the lines.

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EasyJet to shake up market

Courtesy EasyJet

EasyJet “will shake up the market,” said the low-cost carrier’s chief commercial officer Peter Duffy. The airline operating out of London Gatwick has entered into an arrangement with Norwegian Air Shuttle and WestJet to allow booking of connecting flights to Singapore and destinations in North America that include New York, Los Angeles, Orlando and Toronto on its website.

This is another indication of how LCCs are no longer content with just the so-called niche market as they enter into the arena of the big boys. Such connections are usually forged among legacy airlines competing with each other, an advantage compared to stand-alone LCCs confined to point-to-point traffic. So EasyJet’s initiative – said to be the first global airline connections service by a European low fares carrier – is set to change the rules of the game.

Already Norwegian, encouraged by the prospect of an increased number of passengers through the partnership that will help it expand its wings, is talking about the possibility of linking up with Ryanair. EasyJet also said the tripartite arrangement will expand to include more airlines.

The agreement is not completely an LCC club as it includes WestJet, Canada’s second largest airline after Air Canada. This is breaking new ground, challenging the advantage enjoyed by legacy airlines which are supported by subsidiary or joint-venture LCCs, among them Lufthansa/Eurowings, British Airways/Level/Vueling, Qantas/JetStar, and Singapore Airlines/Scoot.

It is interesting how the modus operandi of the LCC keeps evolving, and consumers stand to benefit from the increased competition. For now, EasyJet customers connecting partner flights will have to collect their bags in transit, to be handled via the Gatwick Connects desk in the baggage reclaim area. No reason why this will not improve in time.

Does Air Berlin’s demise signal end of the road for budget carriers?

Courtesy Reuters

Air Berlin is folding up its wings, caused by falling pasxsenger numbers. Last month alone saw a dip of 25 per cent compared to July last year. Its biggest shareholder, Gulf carrier Etihad Airways which owns a 29.2 per cent stake, is not forthcoming with the needed financial support.

Does Air Berlin’s demise signal the end of the road for unaffiliated budget carriers, many of whom are benefitting from the currtent low price of jet fuel? Or that it is at least a forewarning of a more difficult time ahead for them in the continuing battle between them and legacy airlines which are at the same time supported by their own budget offhsoots?

That’s what Ryanair fears, accusing the German government and national carrier Lufthansa of conspiring to carve up Air Berlin. Ryanair said: “This manufactured insolvency is clearly beign set up to allow Lufthansa to take over a debt-free Air Berlin which will be in breach of all known German and EU competition rules.” A Lufthansa-led monopoly, it said, would drive up domestic fares.

How then will the game play out after Air Berlin?

Ryanair’s apprehension as a competitor is real. Air Berlin’s exit will mean a stronger Lufthansa and its budget offshoot Eurowings. Yet already Lufthansa is a dominant player with 76 per cent of its capacity focused on the German market. The Lufthansa Group posted record earnings for the first six months of 2017, increasing revenue by 12.7 per cent to €17 billion and net profit by 56.6 per cent to €672 million. Eurowings and other airlines in the Group including Austrian Airlines, Brussels Airlines and Swiss Interantional Airlines, also posted positive results. So as a group, Lufthansa has quite some msucle to flex in Europe, and the vacuum left by Air Berlin is likely to be filled by Eurowings.

On the other hand, it may be countered that competition is all but dead since airlines such as Ryanair and EasyJet also have access to the German market. However, comparatively, their market share is small; Germany represents only 7 per cent of Ryanair’s capacity and 9 per cent of EasyJet’s. There is possibility that Air berlin’s demise may mean more demand for seats on these carriers, if not opening up the market for more competition. Hence the German government has denied Ryanair’s accusation that it had breached anti-trust rules.

Clearly the competition will intensify, whether it is a battle between legacy airlines and unaffiliated low-cost carriers or one between budget airlines themselves is not any more a matter of note. The competition has levelled, with budget carriers attempting to do more and legacy airlines even adjusting down to match. Legacy airlines including Lufthansa, British Airways and Air France are fighting back, and the old strategy of doing it through a subsidiary equivalent is receivign a revival. Besides Lufthansa, British Airways (as part of the International Airlines Group which is already supported by Spanish low-cost carrier Vueling) has introduced Level, and Air France annoucned plans to launch Joon which, however, it says, is not a low-cost carrier.

The competition does not stay the same for long in the aviation business. Little surprise that Etihad has decided to step back from its acquisition spree.

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.

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.

Brexit gloom overstated for airlines

THE day after the Brexit referendum, it looked like all gloom and doom as the pound plummeted and the global stock market reeled. The share price of British low-cost carrier EasyJet went down 22 per cent. For their discernible dependence on the UK market, Ryanair and the International Airlines Group (IAG, which owns British Airways besides Iberia, Vueling and Aer Lingus) also suffered declines above 20 per cent. Even American carriers across the pond with the exception of domestic operators took a hit.

Reduced profits for the second half of the year are all but certain. IAG said it would not be able to match the 2015 level. EasyJet warned that fares may increase. Ryanair said it will cut back investment in the UK and focus instead on growth in the EU.

The immediate concern was that the weak sterling may mean British holidaymakers will now count their pennies before committing to an overseas vacation. UAE Director-general of the General Civil Aviation Authority, Saif Mohammed Al Suwadi, foresaw a decline of travel from the UK to the Gulf region, and this is not good news for Middle East carriers which are also benefitting from onward travel by the Brits to places in Asia and Australia. But consider what a weaker British pound could do for Britain to attract tourists into the UK. It may be more than just rephrasing the equation, and airlines including Singapore Airlines which fly to British destinations could benefit from the fallout.

So far the world’s reaction seems unduly lopsided in its view of the dire impact on the UK. Doomsayers are mistaken if they were waiting to see the UK punished indefinitely. At least for the airline industry, the gloom has been overstated. In fact, IAG believed that the UK vote to leave the EU would not have a long term material impact on its business. So too Ryanair which reassured its customers that it “will continue to offer the lowest fares in Europe and the UK.” British carrier Monarch Airlines said it is not raising fares and “will continue to remain competitive.”

Courtesy easyJet

Courtesy easyJet

It is easy to blame Brexit as the shock of the unexpected outcome takes its toll. Understandably, low-cost carriers such as EasyJet are more concerned about losing access to the single EU market, which has spurred their growth across a wider region. EasyJet for one has seen its profit increase manifold from GPD22.1m in 2000 to GPD548m in 2015, and its passenger load from 5.8m to 68.6m making it the second largest operator in Europe after Ryanair. Today it boasts a load factor above 90 per cent and operates from 24 bases across Europe. It may be one, being British, to lose the most if new regulations limit its operations or make it difficult for it to access its present markets. In truth, EasyJet is already facing what it described as “extremely challenging” conditions in the past two months with demand being affected by severe weather, airport issues and industrial strikes in France which resulted in flight disruptions.

Despite the harsh warning from EU leaders that Britain cannot expect to enjoy EU privileges post-Brexit, it is hard to believe that Open Skies which has come a long, long way globally will suffer a substantive setback. The UK could still negotiate access to the EU single market a la the model used by non-EU members Norway and Iceland if Britain then joins as a member of the European Economic Area (EEA). It must abide by EU rules but cannot participate in the Union’s decision-making.

The UK could also look at other models such as one adopted by Switzerland, which is not a member of the EEA but the European Free Trade Association, gaining access through a number of bilateral agreements though not for all sectors. Or, the post-Brexit negotiations could knock up a deal specific to the UK. Outside those jurisdictions, peculiar to the airline industry is the number of complex cross-border partnership agreements that have blurred regional lines.

Britain is a large market, so it is in the interest of all parties concerned to negotiate a win-win deal. The silver lining in the dark Brexit cloud is how commercial considerations will prevail over political deliberations. Politically driven regulatory restrictions will do neither the UK nor EU members any favour. It is in their interest to continue keeping the channels open for competition.

The resilience of the business in adjusting to change cannot be underestimated. Many people take comfort that the due process for any change may take up to two years. The real comfort is that implicitly, any change is unlikely to be unduly drastic or disruptive.