What with the collapse of one of its oldest carriers, industrial strife over one of its newest, the return to recession and airport charges on the rise, airlines could be forgiven for thinking it is the pain in Spain that falls mostly on the plane.

The demise of Spanair at the end of January set an ominous tone for the country's airline sector. It has been followed by pilot strikes at Iberia over attempts to overhaul its short-haul business at Madrid through the creation of Iberia Express, deepening concerns over Spain's troubled economy and fears traffic will be hit by increased airport charges - ­notably at the main Madrid and Barcelona airports.

"If you had to say what was the hardest market for us, or probably any carrier at the moment, you would say Spain," noted EasyJet chief executive Carolyn McCall during a recent first half results conference call. "There is an over-capacity in that market and in addition you have [airports operator] AENA putting up charges in an extremely inflated way."

AENA will raise fares across Spanish airports, but particularly at Madrid Barajas and Barcelona El Prat.

"They do compare Madrid with places like Heathrow and Schiphol and Charles de Gaulle and think the charges should be the same," says McCall, whose carrier has a base at Madrid.

The rises are expected to enter service in July, once the country's state budget has been passed. Barcelona-based low-cost carrier Vueling expects the rise to add €10 per passenger at ­Madrid, €9 from Barcelona and €2 across the rest of the network. "If you add €10 on to say five or six million passengers, it's a lot of money," comments Vueling chief ­executive Alex Cruz.

Airlines will look to recover the costs by passing it on to ticket prices, but it remains to be seen how robust demand will be in such a soft climate for leisure travel. "It means prices are going to go up," says Cruz. "We understand why AENA is doing this, but we know increased prices will have an impact on demand."

The boss of another European low-cost carrier, Ryanair, Michael O'Leary, describes the move in typically understated fashion as a "chronically suicidal strategy".

The Irish carrier has grown rapidly across Spain, with bases at eight airports including El Prat, and O'Leary believes hitting air travel will damage tourism at a time the Spanish economy ­desperately needs it.

"We will be reducing capacity in Spain, as will all other airlines," O'Leary says. EasyJet has already taken out about 7% of capacity from Spain in the first half of its financial year, while Willie Walsh - boss of Iberia parent International Airlines Group - also sees capacity being hit. "I believe it will have an impact on the capacity plans of all airlines at Madrid airport. I would not be surprised to see a reduction in capacity, not just at IAG but all carriers, if these charges are increased," he said in May.

AENA says the rises are ­needed as the company needs to recover its cost of service - estimating its fees cover less than two-thirds of the costs of the airport. The operator is also evaluating the future of some of its smaller airports. The company's president, Jose Manuel Vargas, said in May the company would embark on a ­feasibility plan looking at ­rationalising the infrastructure in line with current traffic levels. This in particular is looking at 18 of the smaller airports - those with less than 500,000 passengers. It is a further sign of Spain being caught in the eye of the economic storm in Europe. Unemployment is high, the country is back in recession and has been forced to accept an EU bailout to prop up its banking sector.

"The Spanish market is not good," acknowledges Vueling chief Cruz, noting he expects Spanish domestic demand to be down by 2%, and that discretionary spend in particular is suffering. But for Vueling - which cut losses in the first quarter - the picture is not bleak.

It has been among the airlines to profit from the collapse of Spanair, which shared a Barcelona home with Vueling and Ryanair. First quarter passenger traffic was up nearly a quarter, and it expects to be around 20-25% higher for the full year. "Half of the growth this year is from [the collapse of] Spanair," says Cruz. "The Spanair growth is 90% additional frequencies to existing routes."

While domestic and leisure travel in Spain has suffered, he sees a more robust performance in business and international ­traffic. "The business market is fine," he says, with this segment forming an ­increasingly significant part of the airline's traffic. Similarly, the carrier has been expanding outside of Spain, including operations in Amsterdam, Paris, Toulouse and Rome, meaning it is not dependent on the Spanish market.

"It is a tough environment, but there is a recognition that we have a valid business model and [are] surviving well in a depressed economy," he says.

IAG's Walsh also sees challenges in the Spanish domestic market. "It's not getting any better and I think it will be some time before it does improve," he says. "But we have taken a lot of capacity out of the domestic market, to reflect weakening demand. There is still a lot of demand in Spain."

"I don't think you can say there is too much capacity," he adds. "As the low-cost guys have demonstrated, sometimes you can generate the business by putting capacity in." While British Airways - ­bolstered by the strong London Heathrow market - is holding up well, Iberia's financial performance has dragged. Iberia losses continued to outstrip BA in the first quarter. But attempts to shore-up the Spanish carrier's short-haul operations out of ­Madrid have moved ahead with the launch of Iberia Express.

The new short-haul operation launched in March, using four Airbus A320s operating on e_SDHpdomestic routes to Alicante, ­Malaga, Mallorca and Seville from its Madrid Barajas base. These were followed by international services.

It expects to operate 13 A320s by the end of the year, and three more next year. "We have worked more than two years on this project," says Iberia's chief executive Rafael Sánchez-Lozano.

"Iberia Express is key to Iberia. We have to ensure profitability on short- and medium-[haul] routes," he says. The new carrier aims to save €100 million ($126 million) by 2015. Iberia Express will mainly address domestic routes as parent company Iberia builds on connecting traffic at the Madrid hub.

If the vision was clear the birth was anything but, as Iberia pilots held a series of strikes in a dispute over the creation of the unit. But further strikes were called off after the two sides accepted an arbitration ruling in May. "The reason the pilots were in dispute was over the creation of Iberia ­Express - we've made clear that this is not an issue for negotiation," says Walsh. But he knows more work is needed at the ­Spanish carrier.

"We've made it clear that Iberia Express is part of the solution, but there are other things we have identified that we want to do, including improving the efficiency of Madrid as a hub," he says. "We are looking at fleet ­replacement of the long-haul that will give us better fuel efficiency and lower unit costs."

"We are going to continue to take whatever steps we need to make Iberia more efficient in the future," he adds.

Source: Air Transport Intelligence news