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.

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International Airlines Group partnership works

Courtesy British Airways

Courtesy British Airways

The success of International Airlines Group (IAG) in the last two to three years is proof that its strategic partnership works. The group, made up originally of British Airways (BA) and Spanish carrier Iberia and subsequently Vueling which is a budget operator, was joined by Aer Lingus in August this year.

Excluding Aer Lingus, IAG posted a pre-tax profit for Q3 (Jul to Sep) of €1.1bn (US$1.2bn), an increase of 48% from last year. Chief executive Willie Walsh said: “We’re reporting strong quarter results with a positive contribution from all of our airlines.” Encouraged by a better Q3 than Q2, the group is confident that its operating profits for the full year could be as high as €2.3bn, reaffirming its previous forecast of over €2.2bn but looking more optimistically at a higher number. Operating profits for the first nine months were €1.8bn.

Compared to Europe’s largest partnership airline Air France-KLM which continued to report deepening losses (its Q2 loss of €79m was larger than that of €11m a year ago) even as fuel costs held steady in the lower range, IAG on the other hand is gaining new strengths. If the weakening euro has affected Air France-KLM adversely, so has it affected IAG, particularly for BA as the major partner of IAG. But the state of the currency can work both ways, whether positively or negatively, depending on the specific market. In fact Air France-KLM, as does IAG, stands to gain from operations outside continental EU, particularly the United States.

It would be pretentious to suggest that there is a formulaic – even more pretentious of an inherent – magic in the IAG partnership that contributes to its success. Partnerships are forged for several reasons, and not few of them were motivated by political, even personal, reasons. Invariably the investment is almost always about synergy, or premised upon the potential for synergy. The IAG proposal was not without reservations and scepticism among analysts. The merger was completed in January 2011. In its second year, IAG plunged from a profit of €527m to a loss of €997m, prompting chief executive Willie Walsh to admit that it might have been better to delay but not scuttle the marriage as he remained convinced of its benefits.

Walsh said: “This is an important step in the process towards creating one of the world’s global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation.”

Give credit to Walsh for his vision and leadership. As the industry moved into mega alliances, BA too needed to expand and extend beyond its traditional borders, and when the industry not long after was dragged down by a global economic meltdown, the increased pressure of competition in a reduced market demanded an urgent shift to focus on cost efficiency to try and retain market share. Anti-merger Iberia supporters expressed concern that the Spanish carrier would be swallowed up by the larger British carrier. While Walsh reiterated that Ibe5ria would retain its identity, he did not mince his words when he mentioned how Iberia was lagging behind BA and was in a “fight for survival”.

In fact, the circumstances turned out to be a blessing in disguise for Iberia, which was buffered by BA for the stringent cost-cutting measures that followed and whose action was legitimized by the dire straits it found itself rather than risk going bust altogether. It was a good match, both airlines operating few overlapping routes. And as Walsh noted, “It combines BA’s strength position on the mature North Atlantic market with Iberia’s strong position in the fast growing South Atlantic market.” It was a Walsh tour de force, the kind of business intrepidity that Air France-KLM was not prepared to flaunt, perhaps wisely, when faced with the prospect of increasing its stake in the beleaguered Italian carrier Alitalia. The mega frenzy can lead to costly makeovers and adjustments, draining resources of the parent. Clearly IAG was not a passive investment for BA, unlike the lacklustre partnership between Singapore Airline (SIA) and Virgin Atlantic while it lasted before SIA sold it to Delta Air Lines at a loss.

IAG bounced back into profitability in 2013, posting a profit of €227m, which more than tripled a year later to €828m. The question now is how much stronger can IAG get with Aer Lingus coming on board. The Irish flag carrier made an operating profit of €45m from the day it joined IAG.

Courtesy PA

Courtesy PA

It was not surprising that Aer Lingus felt the same initial reservation as Iberia when approached by IAG, but the successful integration of the Spanish carrier did much to allay the concern. Aer Lingus would too retain its independent identity. The good news for IAG was that Aer Lingus was joining as a profitable partner with expanded operations across the Atlantic. Wrenching the Irish carrier from Ryanair in a possible takeover by the budget carrier was a feat for BA through IAG, literally putting a lid on the competition as low-cost carriers across Europe continue to challenge the legacy market. Air France-KLM for one is feeling the pinch.

Adding Aer Lingus to IAG provides numerous opportunities for synergy and extensive connectivity to Ireland (as far as BA is concerned), particularly as landing slots for expansion at London Heathrow become a scarcity. Walsh, a former chief of Aer Lingus, said connecting Heathrow and Dublin would be a priority and assured the continuation of Aer Lingus’ profitable regional routes. The Irish government is cherishing the hope that Dublin would assume new importance as a hub for trans-Atlantic operations.

For Aer Lingus, tapping into the bigger IAG network would help fuel its growth. Internationally, IAG partners would be better positioned to meet the competition from other airlines, particularly Middle East carriers such as Emirates and Etihad Airways. European carriers such as Air France-KLM and Lufthansa are struggling to stave off competition by Gulf carriers, which recently were also criticized by US carriers United, American and Delta of unfair competition supported by state subsidies.

Interestingly, Qatar Airways already has a 10% stake in IAG. Qatar chief executive Akbar Al Baker saw it as “an excellent opportunity to further develop our westwards strategy,” linking the airline with two major European hubs and strong transatlantic networks. Qatar has a strong network eastwards, from the Middle East across India to Asia and Australia, and this largely complements the IAG network. The question now is how much more of IAG will Qatar eventually own as the group, additionally with a strong American Airlines alliance, looks poised to grow stronger.

This article was first published in Aspire Aviation.

International Airlines Group soars

British Airways PlcIT was a week of good news. Following Qantas’ stellar turnaround, the International Airlines Group (IAG) which owns British Airways (BA), Iberia and Vueling posted soaring pre-tax profits of €828 million (US$89.8 million) for the year ending 31 December 2014.

However, while Qantas swings like a yo-yo, plagued by uncertainty of its action in spite of its vaunted transformation programme, BA has demonstrated a steadier course in progressing all three partners towards profitability. (See Qantas’ stellar turnaround: To whom is the credit due? Mar 6, 2015)

IAG’s success was attributed largely to the turnaround of Spanish airline Iberia which IAG CEO Willie Walsh said “remarkable, both financially nd operationally.” Stringent cost-cutting measures that had resulted in 4000 job redundancies since 2011 and the use of more efficient aircraft have worked. The target was for Iberia to break even in 2014, and it had done better than that, posting an operating profit of €50 million, compared with an operating loss of €166 million last year and, as a result, almost doubling IAG’s operating profits to more than €1 billion.

BA posted an operating profit of €1.2 billion compared to last year’s €762 million. Low-cost partner Vueling posted an operating profit of €141 million.

IAG has raised its forecast for 2015 by 20 per cent. However, it said all three airlines in its conglomerate are facing stiff competition, particularly from low-cost carriers, across Europe.

Qatar Airways nets a prized catch, expanding westwards

IT may seem somewhat crazy, but it is definitely not surprising in today’s aviation landscape of fast changing and crisscrossed relationships, some of them making most unlikely bedfellows. The ends justify the means.

Courtesy British Airways

Courtesy British Airways

Qatar Airways has acquired a 10% stake in International Airlines Group (IAG), better known as the owner of British Airways (BA) and Iberia. IAG also owns Spanish budget carrier Vueling. The act of acquisition itself by the cash-rich Middle East carrier does not surprise. Qatar lags behind rival Etihad Airways in this respect; Etihad already owns Alitalia (49%), Air Serbia (49%), Air Serbia (49%), Air Seychelles (40%), Etihad Regional (formerly Darwin Airlines) (33.3%), Air Berlin (29.21%), Jet Airways (24%), Virgin Australia (10%) and Aer Lingus (2.987%).

But coming lately, Qatar has bagged a prized acquisition, considering IAG’s bases at two major European hubs, in particular London Heathrow, and the strong transatlantic networks of BA and Iberia. Qatar chief executive Akbar Al Baker said: “IAG represents an excellent opportunity to further develop our westwards strategy.” It should be a strong partnership. Together, their networks cover Europe, North and South America, Africa, the Middle East, India and Southeast Asia.

In 2013 Qatar became a member of OneWorld, becoming the only one of the big three Gulf carriers to join a global airline alliance. More than an apparent Qatari interest in things British, this was a step forward to forge a closer relationship with BA. Qatar said it may increase its stake in IAG for which it paid £1.15 billion (US$1.73 billion). However, EU regulations have placed a cap on non-EU ownership at 49%.

Courtesy Qatar Airways

Courtesy Qatar Airways

Quite unlike Etihad, which has entered the arena as a white knight in many cases, Qatar is buying into one of Europe’s more profitable outfits. Clearly it is a strategic move. While European carriers are becoming wary of Gulf carriers making inroads in the EU market, the competition is at the same time a race among the big three Middle East carriers themselves- Qatar, Etihad and Emirates Airlines. This has become all the more prominent in recent years as they out-compete each other within their region and seek aggressively to push out their geographical boundaries, leveraging on the success of home bases such as Dubai, Abu Dhabi and Doha as hubs for international traffic connecting Asia Pacific, Europe, Africa and the Americas.

The rivalry for supremacy is clear in a jibe made by Mr Al Baker on the race to top the chart for extreme luxury in the air, something that carriers outside the Gulf are less disposed to think about at the same level. He said: “We always raise the bar for our dear friends around the area to try to copy us.” (The big deal about extreme luxury, Jan 19, 2015)

Courtesy PA

Courtesy PA


The timing could not have been better for Qatar as IAG looks likely to succeed in a new takeover bid of Irish carrier Aer Lingus after two failed attempts previously. This would gain IAG more take-off and landing slots at Heathrow. What is interesting is the composition of Aer Lingus partners, which include Ryanair (29.8%) and Etihad. Any opposition to the deal is likely to come from the Irish government which owns 25% of Aer Lingus, but it may be a price well worth paying for the crucial air links between cities in Ireland and Heathrow as the world’s largest hub (until topped by Dubai recently) and beyond. Ryanair has itself attempted unsuccessfully to take over Aer Lingus and objected vehemently to IAG’s proposal in the past for reasons that are not difficult to see. IAG’s chief executive officer Willie Walsh and Ryanair’s chief Michael O’Leary are not exactly the best of friends. But if money talks, the latest offer of €1.3billion (US$1.47 billion) by IAG may well carry the day.

Airline relationships in today’s industry are more complex, if not blatantly promiscuous. While global alliances offer the broad framework for cooperation, it is not uncommon to find rival airlines connected in some way through a third party. The numerous cross-border codeshare arrangements are testimony to the multi-faceted connections. Less than half the world’s airlines belong to any of the three global alliances: Star (27 members), SkyTeam (20 members), and OneWorld (15 members). Although many major carriers are already members, there are notable exclusions such Virgin Atlantic (although CEO Richard Branson who made an about turn in 2012 announcing Virgin might join one of the alliances soon) and the other two of the big three Gulf carriers Emirates and Etihad. While Aer Lingus itself is unaffiliated, and so are part owners Ryanair and Etihad, IAG’s influence cannot be precluded although it has said Aer Lingus would continue to operate independently.

It is best to adopt a detached view of the business. Alliance membership may but not necessarily suggest a like-mindedness that brings friends to the same table. There is no reason why friends and foes alike may not put their money in a common proposition that will help further their respective positions. OneWorld membership may have eased Qatar’s way into the IAG stable, making it easier for Mr Walsh to be “delighted to have Qatar Airways as a long term supportive shareholder.” Not sure if he would be any less delighted if it had been Emirates or Etihad. But for Qatar, as part owner of IAG which is set to take over Aer Lingus, it is stealing a march on rival Etihad.

This article was first published in Aspire Aviation.

Recovery in Europe will benefit Asia Pacific carriers

IT looks like the good times are finally rolling back. Or so, at least in Europe.

Courtesy British Airways

Courtesy British Airways

The International Airlines Group (IAG) which owns British Airways, Iberia and budget carrier Vueling swings back into the black with a profit of 527m euros (US$728m) in 2013 compared to the loss of 613m euros last year. Mr Walsh said: “In 2013, we strengthened the group by acquiring Vueling, embarking on Iberia’s transformation and enhancing British Airways’ revenue performance.”

Although Iberia incurred a loss, it made “huge progress” according to Mr Walsh. He said: “Recent pay and productivity agreements between Iberia and its pilot and cabin crew unions are key to reducing the airline’s costs further and providing the foundation for profitable growth.”

Courtesy SkyTeam Cargo

Courtesy SkyTeam Cargo

It is also good news for Air France/KLM which posted a profit of 130m euros in 2013, reversing the loss of 1.22bn euros in 2012 attributed to stringent cost and staff reductions. Chief executive Alexandre du Janiac said: “We are clearly benefiting from the successful implementation of new working conditions and of the industrial plans adopted in all our businesses.”

However, things aren’t as rosy in Asia Pacific although Asia is supposed to be the most promising region for growth.

Courtesy Qantas

Courtesy Qantas

Qantas posted a loss of A$252 million (US$225) for the first half-year (Jul-Dec 2013), deepening the loss of A$91 million incurred last year. At the same time it announced axing 5,000 jobs as part of a three-year plan to reduce costs by A$2 billion. (See Qantas’ dismal performance: The Singer or the song, Mar 3, 2013) It looks like the Australian flag carrier is some steps behind Air France/KLM, but in reality it has embarked on a transformation program for some three years now. Qantas continues to struggle to avert what Mr Joyce once referred to as an Australian “tragedy”. He said: “We have already made tough decisions and nobody should doubt that there are more ahead.”

Courtesy Singapore Airlines

Courtesy Singapore Airlines

Singapore Airlines (SIA)’s profit for Q3 (Oct-Dec 2013) plunged 65 per cent from S$142.5m (US$112.4m) to S$50.1m the previous year. Unlike Vueling in the case of IAG, budget carrier Tiger Airlines, of which SIA owns 40 per cent, was a dent in the group’s profit, contributing to a loss of S$40.8m from associated companies. The parent airline’s profit, however, improved S$43m year-on-year, from $87m to S$130m. Looking ahead, SIA continues to be wary of the aggressive competition that it faces. It will be interesting to see how it will fare for the full year ending Mar 31.

One or two birds may not a season make. There is a silver lining in the grey cloud over Asia-Pacific as Europe recovers, especially for long haul carriers that include Qantas and SIA.

Flybe’s bleak future not a good sign for low-cost carriers

WHILE legacy airline British Airways (BA) trumpeted impressive results this past week, Flybe is going down the same path that Ryanair took. (See IAG’s performance augurs well for industry, Nov 12, 2013, and Can Ryanair change to be less macho? Sep 21, 2013.) Interestingly, Flybe is 15-per-cent-owned by the International Airlines Group (IAG), the parent of BA, Iberia and Vueling.

Courtesy Reuters/David Moir

Courtesy Reuters/David Moir


Flybe’s passenger carriage has been flat and profit after tax turned into a loss for the last couple of years (the year ending 31 March). It incurred a loss of GBP6.4m (US$10.3m) in 2012, which deteriorated to GBP 41.8m.

The airline, which is headquartered in Exeter, Devon in England, planned to close six bases and reduce staff numbers. Chief executive Saad Hammad said: “I know that these proposals are creating great personal uncertainty, but they are necessary to secure a long-term future for Flybe.”

Considering how European carriers such as Air France-KLM, Lufthansa and Iberia – are continually taking measures to reduce staff numbers, it points to the redundant weight those carriers are carrying in better times that are incommensurate with increased competition and a changing environment.

If there are any mixed signals from the different performances reported by BA and its less profitable rivals, this may point to a recovery in premium travel and the converse saturation of the low-cost market restricted by the small hinterlands. Flybe planned to close its bases at Aberdeen, Guernsey, Inverness, Isle of Man, Jersey and Newcastle.

So if BA chief Willie Walsh and Ryanair boss Michael O’Leary appeared to be talking at cross purposes, it could be that the two honchos, who are known not to see eye-to-eye on several issues, were operating in different worlds.

IAG’s performance augurs well for industry

WHILE Ryanair paints a gloomy picture of the future of aviation out of London, warning that the market will soften resulting in dip of profits despite expected falls in fares, British Airways (BA) all but dispels that as a myth. BA chief Willie Walsh even went as far as suggesting that it was a publicity ploy adopted by Ryanair chief Michael O’Leary to shape the market to the Irish budget carrier’s advantage.

Courtesy British Airways

Courtesy British Airways


The International Airlines Group (IAG) which owns BA, Iberia and Vueling, turned in a triumphant performance, reporting pre-tax profits of 609m euros (US$680m), an increase of % year-on-year, for the quarter July to September. This was an impressive recovery from the last full year operating loss of 418m euros even though BA was profitable because of the huge loss incurred by its Spanish partner Iberia.

So if any one should doubt BA’s wisdom in merging with Iberia, it is time to realign that thinking. The honour goes to Mr Walsh for his tough hand in restructuring the Spanish carrier, introducing drastic cost-cutting measures that include reducing staff numbers. Profits at Iberia for the July-September quarter rose from 1m euros last year to 74m euros. Indications are that it will be a good turnaround full year for IAG, which reported a pre-tax profit of 103m euros for the first nine months of the current year compared with a loss of 121m euros last year.

Between Ryanair and BA, the interesting question should be what all this augurs for the future of the travel industry.

Mr Walsh said: “The mood across Europe is improving.” He attributed this in particular to the growth of traffic out of London. Indeed, that has long been coming – a prospect that is being monitored closely not only by British carriers but also long haul operators from around the world based as far away from the British hub as Cathay Pacific, Singapore Airlines (SIA) and Qantas. Delta Air Lines which acquired a 49-per-cent stake in Virgin Atlantic would have made a fortuitous investment.

Cathay reported improved performance for European routes last month, singling out London as a star performance. Overall it has been seeing revenue growth staying above the increase in capacity. Cargo is the bugbear, but there are signs that the world economies are improving. Cathay reported that exports out of Europe in particular are growing.

Yet under immediate circumstances, European carriers such as Lufthansa and Air France/KLM are still falling short of expectations and struggling with cost issues. Therein lies the reason why IAG’s performance was all the more impressive, and therein lies the challenge of competition in good and bad times. Both Walsh and O’Leary are visionaries, market movers and risk takers. In their own ways, they are preparing their airlines ahead of time.

What may have favoured BA is the return of the lucrative business class travel, especially for trans-Atlantic flights. The British flag carrier reported an increase of four per cent for premium passengers in October. “That’s all coming out of London,” said Mr Walsh. “The London economy has performed most strongly, and we’re benefiting from that.”

That spells good news for legacy airlines that made most of its money from flying premium travellers before the global economic meltdown. In good times, airlines such as SIA earned more than 40% of its profits from filling up the front end of the aircraft. However, the anticipated recovery has taken a long and painful road. In the interim, airlines such as Cathay and Qantas have introduced new or improved premium economy class products to stimulate the market. Cathay reported loads to Frankfurt, London and Paris exceeding 80%.

IAG’s performance augurs well for the industry. It remains to be seen if this holds true as more airlines post their earnings in the coming weeks.