Vueling chief executive Alex Cruz could be forgiven for hoping for a quiet summer. Since leading the launch of Barcelona budget carrier Clickair in 2006, which merged with Vueling last year, there has been no such thing as a summer siesta for one of the industry's newest and most thoughtful airline heads. "The first summer we created the airline, the second we added 20 aircraft, the third we had oil at $148 per barrel, and the next it was merging the airlines," says Cruz. "Every year there is something. We hope this summer will not be about an Icelandic volcano."Certainly Cruz and Vueling are eyeing consolidation, this year at least, after confounding popular wisdom by merging two loss-making carriers into a profitable one. Vueling made a net profit of €27.8 million ($35.5 million) in 2009, and, with an improved first quarter on a pro-forma basis already in the bag, expects to increase this in 2010. "We made a profit and achieved a merger that made sense," says Cruz. "We went from two smallish airlines, with the same aircraft type, same base, competing with each other, into one which is medium sized, has a presence in more bases, more than 100 routes and still has a very good position on the cost structure and is getting better. So we are convinced the merger has been the right step to address what was probably an over-capacity issue among two fairly recently born players."
Vueling was established by investors led by Inversiones Hemisferio in 2004, operating from Barcelona's El Prat airport using Airbus A320s. Clickair's origins date to 2006 when Iberia teamed with Spanish investors to overhaul its Barcelona operations. It was at this point Cruz entered the story. After a 10-year career with AMR Corp, first in Dallas then in London, he started working as an airline consultant. He was working with Accenture when Iberia began formulating Clickair. "We had spent a lot of time on which airline babies worked and which didn't. At the time very few had worked," he says. They began working on the project, and ultimately Cruz took on initial management of the airline. Within months Clickair was born and rapidly ramped its fleet of A320s to more than 20, operating from bases including Barcelona, Bilbao and Seville.
But rocketing fuel prices and intense competition between the two at Barcelona ultimately saw both struggle. Expansion ambitions were halted and capacity, first at Vueling and then Clickair, clawed back. Tentative talks between the respective shareholders began in 2008, terms were agreed by the summer and the following July the merger was completed.
"There was a clear understanding about what both airlines were bringing to the picture," says Cruz. "From Clickair you had a new airline that had been completely obsessed on cost and punctuality. From Vueling you had an airline with a very powerful brand in its core markets, in Spain, Italy and Paris, which had been trading on the internet for five years and had a very strong online team.
THE IBERIA FACTOR
Iberia remains the key shareholder following the Clickair/Vueling merger, with the single largest stake at 45%, and Cruz backs the carrier's approach to low-cost daughter carriers. "They did it the right way: we are the only airline baby in the world that is listed on the stock market that has less than 50% ownership by the major airline. In fact we are probably not an airline baby," he says. "It's probably been one of the keys to success, the fact that they [Iberia] made an effort from the very beginning to keep a distance."
Now Iberia's attentions have turned to overhauling its Madrid short-haul operations, where it is in the process of creating a new short-haul operation to feed its long-haul services. Cruz believes there is no conflict with Vueling, which has a limited presence and aspirations for Madrid, where it is only the seventh largest operator. "At this particular point in time we don't see a conflict because it's Madrid," says Cruz.
"And I think that is exactly how it works," he says. "We have a number of people from the Clickair camp who have brought experience of their operations and cost base and we also have a lot of people from Vueling who are experts on how to continue managing that brand, particularly in the online world. A year on...the cost-consciousness is now very well adopted by the Vueling people and the Clickair people truly understand the value of the Vueling brand. I think we've reached that point, and it is where we need to be, where everybody believes in each other's contributions, and it's no longer about Vueling people and Clickair people."
Alongside the €35 million in revenue/cost synergies the merger is on target to yield this year, the new Vueling was given a head start by efforts to tackle overcapacity prior to the merger. Vueling cut its fleet by seven to 17 and Clickair by eight to 18, meaning the merged carrier began life with 35 aircraft. "That made a huge difference, because that was the big adjustment in capacity which had to take place," says Cruz. "Both airlines did it on their own, because they both felt either they did it or they would not even make it to merge with anybody." Similarly, he cites European Commission approval in January 2009 which meant the two carriers could begin talking and the competitive intensity eased. "These were probably the main factors, but we must also give credit to the team which executed the merger on time," he adds.
"This is the year for consolidation and we must prove to ourselves that we are getting it right. Next year, I hope, will be a year of expansion and growth," Cruz says. "Definitely the objective is to consolidate ourselves in Spain. We are very likely to be the second largest airline in Spain this year in terms of passengers flown. We have a very strong presence in our home hub of Barcelona and at several other airports. We need to think about what small additional steps we need to take to consolidate that position and that may mean a little bit more capacity in some of those hubs where we already have a presence. But probably the time has come to start thinking about life outside Spain. We haven't spent a lot of time thinking what those options are, but it would seem to me the natural markets for us to grow are those where today the Vueling brand is strong. For us those are Italy, Benelux and France. I think we will eventually come out of Spain. It makes sense, but we will do it smartly."
Yet ironically for a merger born from overcapacity, the new Vueling enters this summer with heightened competition from both easyJet and, in particular, Spanair. The latter, bought by Catalan investors last year, is launching 11 new routes from Barcelona this year. Cruz says there has been a sense of déjà vu recently in weekly commercial meetings. "The [former] Vueling team say they've been there before. But there is also a sense that, and I think this is one of the great advantages of learning from past experiences, the commercial team that comes from Vueling openly feel they underestimated the potential damage the new entrant Clickair would do to them. I think everybody is very conscious that under no circumstances will we underestimate [new competition] this time."
Cruz does not think there is overcapacity yet in Barcelona, but in the long term much will hinge on Spanair's intentions and whether Ryanair emerges as a direct competitor at El Prat, which already operates at two nearby airports. "There is the potential for overcapacity," Cruz acknowledges. "If they [Ryanair] come to Barcelona, then we are ready for them, but the game will surely change. But who is best ready to compete with them? Certainly it is ourselves, with the strength and market share we have. So we will not be running around like a headless chicken." On the Spanair front, he says it is difficult to make any medium- to long-term conclusions, as Spanair remains early in its new approach to Barcelona. "This year they have opened up a number of new routes that are traditional Vueling/Clickair routes, so we are going to be head-to-head on some of those," he says. "We will have to see who does better and who reports profits at the end of this year."
Fundamental to Clickair was its low-cost base and Cruz is determined this will remain central in the merged entity. He believes it has so far managed to bring this element across; costs per ASK in the first quarter excluding fuel were 7% lower at €4.27 cents and its full year target is to be able to report a CASK of below €4 cents. "The numbers say we will end up with under €4 cents per ASK, excluding fuel. That puts us in a slightly better position than easyJet, which is where we need to be," he says. "We try to lead by example, so we've introduced initiatives where, for example, everyone's variable pay this year will have a percentage associated with our objectives of getting our costs per ASK under €4 cents. That sends a really strong message: everyone is working towards these targets.
"There isn't anything that isn't under consideration for reducing costs," he adds. "That means from our building, to the way we manage the brand, to how many photocopiers we have. It is the only way."
But all this is before fuel. Rocketing fuel prices were largely far harder for low-cost carriers to ride out than the economic crisis, "Ninety [dollars per barrel] is the mental barrier we all have in our heads as when things get a bit sticky," says Cruz, speaking as the steadily rising crude oil price touched $88 a barrel. "I'm not worried short term. The fact we have a low cost base is on its own a strong asset," he stresses, but points to the issue low-fare operators face. "We are in a segment of the market that doesn't have a lot of elasticity on fares; you can't just start charging €50 where we were charging €40."
The competitive battle is also far from a clear cut low-cost battle. Spanair is a Star Alliance carrier, easyJet has been tapping trading down business passengers, while Cruz says a high of 40% of Vueling passengers in the first quarter declared themselves business travellers. "This is pretty huge for an airline like us, but it does make sense as we have some routes with high frequencies. We are unable to measure it, but feel there is a trading down effect. Last year was terrible for Spain from a financial perspective and yet we managed to reach our targets. One of the reasons has to be there was trading down. At the same time I don't think it is a temporary effect."
Cruz says Vueling will continue its strong presence in business sales channels and will look at improvements appealing to business passengers. "That may be punctuality, it may be some flexibility options, better seat options at the front of the aircraft," he says. "We are not afraid of imitating old world practices, so long as we can do them under our cost base." Indeed Cruz insists nothing is off-limits simply in order to stick to a rigid low-cost carrier dogma. "Why not evolve it? We want to continue evolving in a way that gives us a better product and that makes sense, and we may do it in ingenious ways but with a low cost-base."
Vueling has been among the leaders in ancillary revenues. Cruz is determined to retain an edge and use technology where possible. "We are going to continue adding mostly online sales-related ancillaries, but for us this and next year, the next frontier in ancillaries is to take it into the GDS world, because we bundle the ancillaries into fares in the GDS." Vueling ancillary revenues have been down since the merger at €0.61 per ASK in the first quarter of 2010, but this reflects a doubling to almost a third in the number of fares booking through the higher paying GDS channels. Vueling estimates, adjusting for this impact, it has kept ancillaries at a comparable level. "It looks like Sabre, Amadeus, Travelport are finally beginning to roll out the ability to sell these ancillaries through the GDS channel and that will be very good for us because we already know how to trade with those ancillaries and it will make all channels have access to those ancillaries."
Cruz wants Vueling to assume leadership in utilising the smartphone environment, in particular the ability for people to pay with a touch of a button. "Nobody is using the mobile phone to trade. We would love to take the lead in the marketplace worldwide in making the phone a trading device," he says. To start it is preparing its finance department to handle many micro-payments. "We need to be able to reach out to our customers and give them lots of options in a non-invasive way. There is now a technology that allows it, there are payment platforms, the only thing we need is the development and the will. We certainly have the will. I think there is still a lot of ancillary revenue that can be made from things that are useful to the customer."
Cruz is also passionate about the potential of personalisation on the web, making it easier for frequent travellers to make repeat bookings. "If I can buy a book in two clicks, why can't I buy the same trip in one click? Why do I need to go back in and do these different steps, if I just want to repeat the trip and it is in the same fare bracket?" he asks. "We have already enabled phase one. Our web page already has some features that recognise who you are and we put different content on the screen depending on who you are. But, before the summer, we will release a 'MyVueling' set of features which is going to be very powerful. The intent is to allow frequent travellers to make bookings very fast by having the preferences made, knowing that all the information related to Vueling is in a single place. It will be quite powerful."
This ability to evolve will be a key area of development as Cruz looks to navigate Vueling through the challenges ahead. And he believes there is room for different approaches to prosper within the competitive short-haul European segment as long as the fundamentals are in place. "We know short-haul travel has changed entirely. The universal common concept of short-haul travel is that it has to be cheap and has to be operated by someone with a very low-cost structure," he says. "From there on I think the market is open to interpretation on how it's being done."