In conversation with Vueling CEO Alex Cruz

This article appears in the April edition of Airline Leader, CAPA's airline management magazine. Go to www.airlineleader.com to download the full edition.

In Feb-2011, Vueling's fleet expansion plans for the year once again rose, to embrace another 14 aircraft, which, with retirements, will take the aggregate to 47 by the end of the year. Spain's leading home-grown lowcost airline has bases at Barcelona El Prat and Madrid-Barajas Airports, operating its fleet of 36 A320 aircraft on domestic and regional services in Spain and across Europe.

For its personable CEO, Alex Cruz, there are no rules that define how an LCC must operate. His attitude is that the airline needs to be in the "traditional" market, but with much lower costs. Sounds good, but not so easy to implement. However, Vueling, after enjoying some torrid times prior to merging with Iberia's subsidiary Clickair in 2008, is now 46% Iberiaowned, well entrenched and looking "carefully yet firmly " at expanding to new bases in Europe.

But Vueling's biggest asset and differentiator lies in its alliance with Iberia - and through it to the new BA-IB's International Airlines Group. Here Mr Cruz recites the Jetstar precedent. Vueling is picking up a larger proportion of the legacy airline's intra-European feeder traffic - part of the "traditional" element - while operating off a considerably lower cost base. In the quarter to 30-Sep-2010, Vueling reported a cost per ASK of EUR5.25 cents, well below Iberia's EUR7.54 cents per ASK (containing a large proportion of less expensive long-haul operations). Using Vueling as a short-haul surrogate looks an easy choice.

With Iberia establishing El Prat as a long-haul hub for its Latin American services from summer 2011 (complete with antitrust immunity to fly in partnership with British Airways and American Airlines over its Miami hub), Vueling would appear to be sitting on real upside potential in connecting traffic flows. And, as Iberia's pilots frown on the flag carrier's suggestions of starting up a new wholly owned short/long-haul subsidiary, Vueling's role (along with the regional Air Nostrum) takes on an even greater value.

It gets better. At Iberia's invitation, five of Vueling's new aircraft are to be based at Madrid-Barajas Airport, under a Feb-2010 agreement with Iberia for the LCC to also assume part of the parent airline's connecting and short-haul operations there for "at least" eight months.

But it would be wrong to think Vueling is having it all its own way. One new challenge has been Ryanair's assault on Vueling's base at Barcelona's El Prat Airport, having previously focussed on Barcelona Girona and Barcelona Reus. Here, Mr Cruz isn't prepared to take a backward step, asserting that "we already have low fares". We asked him a few questions.

CAPA: How are you responding to Ryanair's new push into Spain?

We knew [Ryanair] was coming, so we took a long time to prepare prior to their arrival. When they confirmed their arrival, we had our planned evening meeting to update our plans and we went home satisfied that we were not in any panic. More targetted campaigns on overlapped routes, an increasingly better business product, very few downward fare changes (we already have low fares) and continuous monitoring have probably been some of the actions that we have been taking. Oh, all that while we were lowering our cost base. Lowest costs always win.

Can Vueling be a beneficiary of the IB-BA merger (and how)?

We have a very successful relationship with Iberia and we draw substantial (and remunerated) benefit from some of the commercial agreements, like the IB sales channel and the frequent flyer programme. I am sure that we will continue to look for ways to strengthen our win-win relationships, both with Iberia and its partners.

IB is talking in terms of focussing on long-haul. In Dec-2010, you announced a Barcelona connection for some of IB's Americas routes. The European full service airlines have a major cost problem in competing on short-haul with Ryanair, easyJet and the regional LCCs. Does Vueling offer the BA-IB (and AA) combination a special opportunity to feed their longhaul operations cost effectively? Is that something that could give the oneworld group a home advantage - as well as being very good for Vueling?

We have been seeing the evolution of Jetstar and we very much believe that we have the right foundation to follow in similar steps. From the start, we knew that we would not be shorthaul fundamentalists and that we would continue to break outstanding product myths which would bring us straight into the traditional airline world, but at a fraction of the cost base. Assigned and blocked middle seats, flexible fares, a worldwide frequent flyer system, all-points distribution, connecting flights, etc have all been mastered by Vueling while retaining cost leadership. This combination of business-approved product with our cost base and flexibility must surely be interesting to any carrier that does not have it.

What are your plans for hub expansion? With new bases opening in Amsterdam and Toulouse, do you see Vueling becoming more of a pan-European carrier?

Barcelona is our main hub and will continue to be for the foreseeable time. We are planning to continue adding destinations and frequencies to strengthen the connection proposition, including new routes and nearly 900,000 additional seats this summer (2011). At the same time, Vueling is now prepared to make careful, yet firm, incursions into Europe - the Toulouse and Amsterdam bases are indeed part of that strategy and we hope that trend will continue over the coming years.

How have you dealt with the expansion of high-speed rail in Spain and elsewhere. Is there room for coordination or is it simply competition?

We are not overly concerned for two reasons: 1) we don't have a lot of overlap with the train - only the BarcelonaMadrid route is affected; and 2) ever since the high-speed train arrived on that route, we have increased significantly the number of flights, up to 13 daily at the moment. We believe that the combination of price, punctuality and fare flexibility make it a tremendously competitive proposition even to train travellers.

Do you see the Vueling model evolving much further? And, if so, in what ways?

At Vueling, we have proved time and again that it is possible to be a verylow-cost profitable carrier and at the same time continue to evolve its model. Particular areas of focus for this year are likely to be continuous business product enhancements and more partnerships with other airlines.

Are you interested in the A320neo, CSeries or any of the other next- generation narrowbodies/regional jets?

Yes.

How do you see the company's media, advertising and social media strategy evolving? Is social media a revenue generator for you?

Vueling is a natural major online player; its award-winning website continues to lead in conversion rates in the industry. And social media has not escaped us. We have a solid strategy in place, with some incredible recent achievements, including a four-fold increase in Facebook fans in three days, and media-recognised customer service during disruptions (thousands of Twitter flight rebookings during weather and ATC problems in 4Q2010). But revenues are revenues and the next step of this strategy will only be conceived if we are able to define and actively measure what this Web 2.0 presence means in terms of income. We are modelling all the activity of the recent months and we will make further investment decisions based on that.

Alex Cruz today carries the aura of a happy man. As a keen strategist, he will be highly aware of his airline's tasty partnership opportunities. They give Vueling a seat at the table of any European network airline whose shorthaul cost profiles make competition against LCCs prohibitive. But the greatest potential for intra-European feeder operations will be in offering connections to the new International Airlines Group. Navigating the union carriers will be more difficult.