Local conflict: Spanish low-cost airlines

Spain is becoming the focus of a low-fares invasion. How do local carriers plan to repel invaders?

This year saw Spain emerge as a magnet for low-cost airlines. The usual suspects, easyJet and Ryanair, have boosted their presence in the market and turned up the pressure on Spanish newcomers Click­air and Vueling, as well as on the country's more established legacy carriers.

Perhaps most notably, Iberia planned ahead and reacted by teaming up with four partners to launch Barcelona El Prat-based Clickair, which began operations at the beginning of October and has taken over a number of the Spanish flag carrier's former routes. But, while Clickair has set out an aggressive and confident business plan, which envisages the start-up eventually featuring among Europe's top four budget operators, rival low-cost airlines are overtly critical of the new entrant.

© Vueling

In characteristically no-nonsense style, Ryanair chief executive Michael O'Leary dismisses Clickair as "just another rubbish attempt by a high-fares airline to set up a low-fares airline". Carlos Muñoz, chief executive of Barcelona-based carrier Vueling, is slightly more polite, but equally as dismissive, of his new rival. "We welcome Clickair to an already competitive market, but although a new competitor would normally be bad news because of extra capacity on our routes, Clickair is purely substituting capacity from Iberia," he says. Muñoz even goes as far as to say that the arrival of Clickair has been beneficial to Vueling because it has meant that Vueling's biggest rival, Iberia, has pulled out of many of its Barcelona routes. He points out that Iberia's market share in Barcelona has fallen to 27.3% this year from 43.7% in 2004. In comparison, Vueling puts its own Barcelona market share at almost 10%.

© Clickair

"Iberia has lost its shirt," notes Muñoz. "Clickair was put in place because Iberia was not well-equipped to compete, but we actually prefer to compete with Clickair." He adds that Vueling has seen an increase in bookings since the launch of Clickair, with former Iberia passengers switching their allegiance to the two-and-a-half year old carrier rather than opting to fly with a new and unknown operator.

Adding his voice to this argument, easyJet regional manager for Southern Europe Arnaldo Muñoz says: "Clickair doesn't have anything new. They are replacing Iberia on routes and they are too conditioned by Iberia, which means their growth will be questionable."

But, despite the criticism levelled at his airline, Clickair chief executive Alex Cruz insists that he only agrees to take on routes formerly operated by Iberia if he believes there is a sound business case for doing so. Cruz is also confident the carrier can attain a cost base similar to that of Ryanair by January 2007, which will put it in a position to compete head-to-head with the Irish carrier.

© Spanair

"Our main competitor is cost - if we don't have this under control, we can't compete," says Cruz. "I'm not particularly concerned about Ryanair. We will have the same cost base, but a way superior product, and we are going to be much better."

Choice offering

Cruz's primary focus will be on keeping costs as low as possible, but at the same time providing passengers with choice. This will include offering a "no-frills" service with the option for passengers to purchase extra frills, such as preferential boarding, should they choose to do so.

"We see ourselves as a third-generation low-cost carrier because we will focus on cost as well as choice, whereas hardly anyone else is focusing on choice," he notes. "The second-generation guys will be squeezed quite hard, both by the nationals and by us."

Both Ryanair and easyJet are expanding fast in Spain. In October Ryanair unveiled plans to make Madrid Barajas airport its 18th European base, following in the footsteps of easyJet, which two months earlier named the capital city airport as its 17th European base.

The Irish budget carrier also announced that in 2007 it will open 17 new routes from Girona, about 100km (60 miles) from Barcelona. O'Leary sees "huge potential" in the Spanish market, and insists that Ryanair is "the only real low-fares airline" in Spain.

However, this boast falls on deaf ears at easyJet and Vueling, both of which believe that serving primary airports gives them a certain advantage over Ryanair's reliance on secondary airports, with the exception of Madrid Barajas. EasyJet's Muñoz says: "There is room for two big models in Spain - that which serves secondary airports and that which serves primary."

Vueling's Muñoz agrees, noting that: "We have a lot of respect for Ryanair, but they seem to have had a limited impact on us and the main difference seems to be the primary/secondary airport factor."

EasyJet's strategy in Spain also differs from Ryanair's in that the UK airline sees great potential in the domestic market, while O'Leary is "not that interested" in internal routes. EasyJet's Muñoz says: "The domestic market in Spain remains extremely profitable and the routes we have announced are only the beginning of our Madrid strategy. New domestic routes will be announced very soon and the domestic market is a very important part of our Madrid portfolio."

Vueling's main business plan remains unaltered, despite the launch of Clickair and the planned expansion of easyJet and Ryanair's Spanish operations. The carrier will end 2006 with a fleet of 16 Airbus A320s, expanding to 25 in 2007, and will open a third base either next year or in 2008. The new base will most likely be outside Spain. Cities under consideration include Amsterdam, Brussels, Milan, Paris and Rome.

So, with Spain's newcomers having laid out their plans for the market, what are the country's other more established carriers doing to ward off the potential threat? Iberia took a piece of the action by investing in Clickair, and has also outlined plans to reduce the number of short- and medium-haul aircraft in its fleet by 17% over the next two years in order to focus on the long-haul market.

But what about Palma de Mallorca-based Spanair? Is the SAS Spanish unit concerned about a potential loss of market share? The simple answer appears to be no, not really. In fact, Spanair chief commercial officer Rafael Aragones has great confidence in the carrier's ability to eventually dominate the domestic market through a combination of its appeal to business passengers and the domestic demise of Iberia.

"We foresee that Spanair will overtake Iberia as the domestic leader because we are the only airline in Europe that is able to compete in the business market and also against the low-cost carriers," he says.

Aragones concedes that Spanair only accounts for 1% of international market share in Spain, but notes that the carrier compensates for this through its 23% share of the domestic market. Spanair recently unveiled plans to accelerate its growth at Barcelona El Prat and make the Catalunyan airport a hub, a move precipitated by Iberia's decision to transfer much of its Barcelona capacity to Clickair and regional feeder Air Nostrum.

"We are accelerating our Barcelona expansion plans because we see a weakness in Iberia's move to split its business model into two brands, and we see a higher potential than anticipated in the Barcelona market," he says. "We are perceived as the only airline in Spain offering a differentiated product, and 40% of our passengers are business passengers who require service on board, frequent-flyer programmes and connectivity to other Star Alliance carriers."

Business focus

The potential for rivalry from Clickair's plans to attract business passengers by offering extra frills does not seem to worry Aragones too much. "Clickair will try for business passengers, but they are a long way from reaching that. They have high ambition, but we are heavily geared to business passengers and will make life difficult for the low-cost carriers."

As far as who will emerge as the survivors in Spain, opinion appears to be somewhat divided. EasyJet's Muñoz believes the low-cost market remains underdeveloped and budget airlines will emerge as the least threatened. "The low-cost carriers are not the ones that should be scared. As soon as more companies come in, some airlines will be forced to leave, but low-cost carriers will be sustainable," he says.

But Clickair's Cruz notes that, while there is significant room for growth in the Spanish market, he "wouldn't be surprised if we saw some consolidation of middle-tier low-cost carriers in the next two to three years". Such a prospect can be predicted for not only Spain, but the UK and Germany too.

Read the original Doug Parker letter to Gerald Grinstein, and Gerald's reply, relating to the US Airways bid for Delta on our blogs.

Source: Airline Business