Blurring the Low-Cost and Legacy Airline Divide

Richard Maslen April 07, 2011

When the low-cost airlines entered the European market in the mid-1990s they brought a complete change in business philosophy. By keeping their costs to a minimum they aimed to bring low-fares to the travelling public, achieving this by taking away many of the traditional services offered by the full-service carriers. First went the free in-flight service, then the free checked bag allowance; but the legacy carriers were quick to react as they lost traffic to their new rivals. This has caused what we have today, a major blurring of the divide between the low-cost and traditional airlines, with a new hybrid model between the two extremes now being adopted by almost all.

Vueling Airlines Chief Executive, Alex Cruz, has witnessed this first hand during his five years as an airline boss, first at the carrier’s Barcelona-based rival, clickair, then as the head of the combined airlines. He may have been new to running airlines when he first joined clickair in 2006, but he had already built up a strong knowledge of airline operations and economics during a ten-year career with AMR Corp, the parent of American Airlines, in Dallas and London, and latterly as an aviation consultant. When Iberia decided to overhaul its operations at Barcelona’s El Prat Airport and team with local investors to start the new airline, he was not the obvious choice, but in the subsequent years he has emerged as one of the world’s most respected airline bosses.

The fact that he successfully oversaw the merger of loss-making clickair and Vueling into a profitable venture has been well charted, but he is now looking at changing the dynamics of the low-cost / legacy airline relationship; a move that will further blur the divide between the two airlines.

“In the past it was all about ancillary revenues,” he told The HUB. “We were the same as most other airlines in this segment looking at new ways to make a little bit more money, while keeping our costs low.” In fact the airline was renowned for thinking a little differently than most others in the low-cost market who were happy to simply charge customers for anything they could realistically get away with.

“We looked more at the ‘added value’ concept,” acknowledged Alex, “studying products that would enhance our offering at a minimal cost to us but a great benefit to customers. Passengers are always willing to pay a little more for something if it offers true value.” One example of this was introducing a ‘save the fare’ opportunity, where passengers could pay a small charge to hold an airline ticket at the current fare, while they made other arrangements, such as booking accommodation, transfers etc.

Such policies set Vueling apart from most other European low-cost carriers and, as Alex noted, it is now “moving more towards operating as a traditional airline” rather than a budget operator “by growing the scope of our product.” This latest development has seen the airline take on a number of routes from Iberia into its Madrid Barajas hub, which it is operating under the Vueling brand but providing interlining and through-ticketing to other destinations in the Iberia network. This is not actually a new philosophy for the airline as it has been offering transfers between its own flights for a couple of years, a product that Alex describes as offering “a lot of success with very few costs”.

However, the arrangement with Iberia is slightly different as Vueling will not only be flying leisure travellers but premium customers that are connecting on to the national carrier’s expanded long-haul network from Madrid. “It is an interesting step as we now have long-haul Business Class passengers flying a low-cost airline,” said Alex. “We are actually conducting a bit of an experiment and are offering these customers preferential treatment, introducing them individually, providing check-in and boarding benefits and complimentary drinks onboard. In effect we have become a normal airline but with much reduced fixed costs.”

The partnership initially covered a couple of Iberia’s flights from Madrid – Miami and Sao Paulo – but has since been extended and now includes Barcelona, as a result of crewing problems at the flag carrier. As a number of Iberia’s pilots have been promoted to the airline’s expanded long-haul network, it has faced a short-fall in staff to operate its European programme and has turned to Vueling to overcome this problem. “We had heard that there may be a few problems and had geared up for this over the winter,” said Alex. “We had our own recruitment drive to prepare for the summer schedules and extended our requirement so we were prepared to potentially pick up some routes. Therefore, when Iberia came to us we had a long list of pre-screened and pre-cleared staff available.”

On March 1 the airline began operating Iberia’s flights to Madrid from Bucharest and Warsaw and in April added Fuerteventura, Lanzarote and Palma de Mallorca, as well as some of its services from Alicante and Malaga. “It is early days but things seem to be going well,” said Alex who confirmed that the airline is now working to also feed other oneworld alliance members in Madrid, including American Airlines, British Airways, LAN Airlines and Avianca. “We don’t how long this arrangement with Iberia will continue. It is only planned until the end of October but it will give us good experience and the potential to offer the service to others. In fact we have already identified seven major European airports where we could potentially provide feed to the based airline and are hopeful that we could actually get some things set up by August/September time,” added Alex.

Fleet developments

To support this network growth, Vueling has agreed to lease five Airbus A320s from Iberia to provide the short-term capacity to support the schedules. “We are currently in a difficult situation as we have no firm information if this arrangement with Iberia will continue beyond the summer schedules. If it was to continue, then we could go out to the market and source aircraft on better terms,” said Alex. The airline now operates a fleet of over 40 Airbus A320s with ages that range from just three years to half a dozen with around 20 years service.

“This is not an ideal situation," acknowledged Alex. "Looking at our fleet set-up will be the next major step for us.” The airline is considering buying new aircraft and is currently completing a preliminary renewal exercise ahead of the launch of a formal tender in the coming months. “We are at a bit of a disadvantage with our fleet, so we hope we can generate savings by improving efficiency,” said Alex. It is too earlier to say the scale of any potential order; whether the airline will replace its entire fleet or simply just part of it. However, Alex acknowledged that the airline will be seeking proposals from “more than just one manufacturer” and would look to structure a deal with a mix of outright purchases and sale-and-leaseback deals.

London links

One market that would certainly be attractive to Vueling would be London, especially given the common ownership of British Airways (BA) and Iberia. “Of all the hub airports where it would be natural for us to provide the spokes, London Heathrow is certainly the number one. There is a strong potential to connect to BA’s long-haul routes as there is a strong flow of traffic from northwest Spain in particular,” said Alex.

The airline will shortly inaugurate flights to London Heathrow from the northwestern city of Vigo, its fourth link to the UK airport. The Barcelona-based carrier has three slot pairs at Heathrow; one is used for daily rotation to Bilbao, one for a daily service to La Coruña and one for a daily link to Seville. With little opportunity to secure additional slots there, it is to cut its Seville flight to four times per week, using the three additional slot pairs to add the new seasonal link to Vigo, which will likely launch during May.

“We are happy with the performance of all our flights at Heathrow and are committed to continuing service to all three destinations. In fact we would love to add a second daily frequency to Bilbao if we could get the slots,” said Alex. “However, the local authorities have been campaigning for us to resurrect this link from Vigo and we know we can expect good passenger numbers.”

Prior to the merger of Vueling and Clickair, the latter had previously served the Vigo – London market, initially serving Gatwick and then Heathrow, so Alex and his management team have first-hand traffic data on the route.

New European bases

Away from its ‘new’ market opportunity, Barcelona remains the airline’s main focus, but regional bases have now been opened at Bilbao, Malaga, Seville and Valencia, while an expansion outside of Spain has seen aircraft stationed at Amsterdam and Toulouse from April this year. “We are pretty happy with the bookings for these two overseas bases and advanced sales are actually higher than our average sales in Spain. There is always a risk associated with starting flights outside of your home market, but we are happy with the way things are going,” said Alex.

Vueling was already offering flights to Amsterdam from Spain but has added links to Alicante, Palma de Mallorca and Zürich as well as further seasonal links to its home market. At Toulouse Blagnac it has introduced flights to Amsterdam, Barcelona, Ibiza, Malaga, Paris, Prague and Venice. “We could look at further growth at these two bases,” said Alex, “or even potentially another new base in France, but I wouldn’t actually rule out the option of another base or two in other European countries.”

Looking ahead

The ability to think outside of the box is what has set Alex Cruz and Vueling apart from others. “When you have such a tight control over your cost structure it is easier to take make these decisions,” he said. Vueling currently has one of the lowest cost structures in the business with costs per Available Seat Kilometre (ASK) of just €4 cents, second only to Ryanair in Europe. “That is what has enabled us to be where we are today and we may be looking at new opportunities to improve our product and to push the boundaries, but we can only achieve this by keeping control of our costs,” he added.

The aviation marketplace is constantly changing and nobody can prepare for what is around the corner. In the past couple of years we have had the closure of European airspace as a result of the Icelandic volcanic eruption, a major economic slowdown and another spike in fuel costs. In the next year we just might see a low-cost carrier providing Business Class feeder traffic to the transatlantic flights of British Airways from London Heathrow. Alex Cruz acknowledges that not even he would have even considered that on his first day as an airline CEO just five years ago.

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