Iberia’s New Strategy: Will the Regional Subsidiary Work?

After suffering worse-than-expected operating losses last year, Iberia is resting its hopes on the success of its planned merger with British Airways and a strategy to launch a new regional carrier with a fleet of 10 aircraft operating on a lower cost base.

Iberia’s international spokesperson, Consuelo Arias, told Routes News: “The new airline will not be a low-cost model but will offer the same quality service and feed Iberia’s long-haul fleet – allowing passengers to check in to their final destination. It will only operate on routes where Iberia is losing money to the low-cost carriers.”

Announcing record losses last week, Iberia’s CEO, Rafael Sanchez-Lozano, said in a press conference that the new airline is likely to begin operating at the beginning of this year’s winter timetable in November.

He added: “Short-haul is not profitable neither for Iberia nor for other European network carriers but at the same time the Spain–Europe segment is essential for us to feed our long-haul flights. It is really a must to fix this problem if we want to be an efficient carrier.

“We will gradually transfer some of our short-haul routes to the airline and for this we are holding conversations with union representatives to reach a final agreement,” he said.

The carrier is struggling to match the low-cost fares on offer in the Madrid market and reported a 15.7% average yield decline in 2009 across its medium-haul network, also affected by the slump in premium travel.

The fall in yields also reflects the troubles of the Spanish economy, with weakened demand for air travel and leakage to the Madrid–Barcelona high-speed rail link.

Iberia’s Strategy

In recent times Iberia’s short-haul strategy has shifted. It has been changing the network schedule on a monthly basis and looking for new markets during the summer months by substituting year-round flights that have a lower unit revenue with seasonal flights that can show improved yield throughout the season.

Iberia now has a clear focus on building Madrid as its core hub and is leaving Barcelona predominately to the low cost sector and its own low cost subidiary Vueling.

Today, the entity that emerged from the Click–Vueling merger operates under the Vueling brand (Iberia now owns 45% of Vueling). The creation of Vueling has not solved Iberia’s problems in Madrid where, as well as its high operating costs, the carrier has come under increasing competition from budget carriers who are able to undercut Iberia’s legacy fare pricing. Vueling will continue to focus on the Barcelona market, leaving Iberia to plan its new strategy in Madrid.

Iberia Versus the LCCs: Madrid–Europe

While Iberia has lost 6% of its market share of scheduled capacity in the last five years, (Source: Flightbase) the rise of the low-fare carriers is noticeable, with Ryanair now the second largest player in the Madrid Barajas market and easyJet increasing its market share to 5%.

The table below illustrates the current top 10 carriers according to weekly scheduled seat capacity in the Madrid market. Both Ryanair and easyJet are in the top five.

Source: Flightbase March 1-7, 2010

Iberia currently faces direct competition from either easyJet or Ryanair from Madrid to 22 destinations in its European network, which signifies the wider impact on its yields.

The following table shows the top ten Iberia short haul markets in terms of the number of flights operated by low cost competitors.

Flightbase: March 1-7, 2010

These routes could all be options for Iberia’s new regional carrier, as it tries to turn itself around into a more efficient carrier, and return to profits.