Iberia Express

Iberia: a new hammer can crack an old nut, but sometimes the new ones taste better

Following Luis Gallego’s promotion in Mar-2013 from CEO of Iberia Express to be CEO of Iberia, changes to Iberia’s management structure had been anticipated. On 10-May-2012, Iberia announced changes aimed at better implementing its Transformation Plan and restoring competitiveness and profitability to the carrier. While it is often worth taking a new hammer to crack an old nut, IAG has simultaneously been squirreling away some tastier new ones.

Based on comments at CAPA’s Airlines in Transition conference by Willie Walsh, CEO of Iberia’s parent IAG, that Iberia Express has ex fuel unit costs 40% lower than Iberia’s, we estimate that its CASK is similar to those of easyJet and Vueling. Mr Walsh also said that it is better to restructure what you have than to start something new. However, given fierce resistance to change at Iberia, he has given himself a good deal more leverage by establishing Iberia Express and also by taking over Vueling. Iberia Express has even helped the group to grow its passenger share in Madrid this year.

Airlines in Transition part 3: How full service airlines are reshaping models to be more competitive

Over the past three decades, airline industry profits followed a fairly consistent cyclical pattern until the turn of the twenty-first century, which has so far seen seven loss-making years. If 2013 reports a profit, as forecast by IATA, the industry will have had four years of positive results (2010 to 2013). Nevertheless, profits are insufficient to cover the cost of capital and full service carriers still face critical challenges.

The global economy is still weak, fuel prices remain high, LCCs are undermining the legacy carriers’ short-haul markets and the rapid expansion of Gulf carriers is having an impact on their long-haul markets. In our third report on CAPA’s Airlines in Transition conference, we look at how FSCs are responding to these challenges.

Iberia strikes: the challenge to one of Europe’s least productive workforces

Strikes carried out by Iberia employees in protest against the job cuts proposed under the airline’s Transformation Plan again highlight the divide between labour and management. With cumulative losses of EUR862million from the start of 2009 to Sep-2012, management had to act to restore profitability in the face of intense competitive pressure. We have extended our recent analysis of European airline labour productivity and found that Iberia has one of the least productive workforces.

Strike action could be costing Iberia as much as EUR1 million per day in operating profit impact, underlining the need to find a resolution. Coming on top of previous disputes about the establishment of Iberia Express, the gap between executives and employees may now be too great. If it cannot be closed, Iberia’s parent IAG has Vueling waiting in the wings to take on a bigger role.

Meanwhile, Ryanair, easyJet and Air Europa will be enjoying every minute of watching the strikes deliver more passengers to them.

IAG vows it will take legacy out of Iberia as losses deepen

International Airlines Group (IAG) is drafting a comprehensive restructuring plan for Iberia that will include short-term downsizing, network reshaping to deliver higher unit revenues and a re-evaluation of all aspects of the business. Job cuts will be an inevitable consequence of the overhaul. Efforts to address the Spanish carrier’s uncompetitive cost structure are not new and date from before the merger with British Airways (BA) in Jan-2011, but results have been insufficient and losses are spiraling out of control as the economic crisis in Spain worsens and the onslaught of LCCs persists.

While Iberia’s pilots continue to fight change other legacy carriers are restructuring and this is threatening Iberia’s leadership position in the Europe-Latin American market. The doubling of the departure taxes at Iberia’s main Madrid and Barcelona bases since 01-Jul-2012 is putting salt on the wound and diminishing the airline’s appeal.

Finnair’s new short-haul model has to be ‘ruthlessly’ low-cost, says CEO Vehviläinen

This is the year of Europe’s legacy carriers finally addressing their unsustainably unprofitable short-haul networks, and the answers so far have primarily been to strip costs out of existing models to make the carriers competitive against low-cost rivals. But Finnair’s decision to outsource its short-haul flying to a joint-venture partner suggests hybrid models can only achieve so much savings, while the structure of legacy carriers has inherent higher costs that cannot be taken out. Starting afresh becomes another, better, solution.

And a tabula rasa today in Europe, or at least Scandinavia, cannot be used to launch a hybrid carrier, Finnair CEO Mika Vehviläinen tells CAPA. Rather, when Finnair’s new short-haul operation commences in 1H2013, it must be “ruthlessly” low-cost, Mr Vehviläinen said. Yet this poses quandaries for Finnair’s business model of efficiently linking Europe with Asia as long-haul passengers, premium in particular, will be subject to LCC-style service on onward connections.

Conversely, lower-cost feeder flights could make Finnair’s long-haul services more price competitive.

Iberia Express launches as Europe’s latest salvo to bring short-haul model to profitability

New carrier Iberia Express has launched services despite its website not launching until later this week, and even then bookings will be accepted for travel only as early as 10-Apr-2012. The unusual arrangement is indicative of what Iberia Express is: a wholly-owned subsidiary of Iberia that will replace some of mainline Iberia’s short- and medium-haul routes. In its initial weeks it is taking over flights sold as Iberia, but passenger perceptions will be few; service is almost identical to Iberia – but with staff employed at market rates, drastically cutting costs.

Iberia for some years now has been in dispute with its over-paid staff – some of its short-haul pilots earn more than British Airways’ long-haul pilots – a problem that has compounded Iberia’s short-haul network which faces intense competition from low-cost carriers amidst rising fuel prices. The struggle of a European legacy carrier’s traditional short-haul network is not unique to Iberia and across the continent many alternative models are being explored, with none yet to emerge as successful and resistant to challenges.