To say that Barcelona El Prat Airport's incumbent carriers Vueling and Spanair were a little concerned when they discovered that Ryanair was planning to set up a base at their home airport would be a gross understatement.

"You probably couldn't publish our initial response," says Spanair strategic planning director Jim Paton, while Vueling chief executive Alex Cruz reminisces about how he immediately assembled a dedicated "Ryanair team" to brainstorm ways of competing with the Irish invader.

"We said all along that on the day the announcement came we would all meet in the conference room at 6pm. We were all there and we were all home by 7.30pm because the plan was already all spelled out," says Cruz.

©All pictures Billypix

Months of rumours had preceded Ryanair's September 2010 entrance into Barcelona's main airport, giving the existing carriers plenty of time to prepare for the battle ahead. And indications suggest that it will prove to be quite a fight.

At this stage, Ryanair appears to be something of a sleeping giant in Barcelona. In the area surrounding the airport there is an abundance of billboards advertising Vueling and Spanair, but not one announcing Ryanair's new presence.

A limited number of Ryanair check-in desks in Terminal 2 subtly indicate that the carrier operates services from the airport. Anita Gackowska, the airport's marketing manager, describes Ryanair's entrance in September as "one of the most low-key airline launches I've ever seen". But this is only the beginning and further growth is planned.

"We started in Barcelona in September with five aircraft and in November we put three additional aircraft in, which should say a lot about our impression of Barcelona," says Ryanair director of new route development Ken O'Toole. "In Madrid we have 14 aircraft and that's a much more competitive market, so this would suggest that there is the possibility for further expansion at Barcelona."

Ryanair aims to carry three million passengers a year from Barcelona, "so we'll go from zero to the number three carrier straight away", says O'Toole. In comparison, Spanair - the number two carrier in terms of market share - has five million seats on offer annually, and has 18 aircraft based at the airport.

Vueling, currently in the top spot, carried 7.2 million passengers from Barcelona between January and October 2009. It has 20 aircraft based at the airport. The carrier has mounted an aggressive campaign to ensure it holds on to its number one position.

Vueling chief executive Alex Cruz keeping a close on Catalonian skies

"We are the only ones who have ever done a specific Ryanair target campaign," says Cruz, outlining the "I love nubes [clouds]" campaign, which focused on highlighting "all the attributes we have that Ryanair doesn't". The carrier also offered Ryanair passengers on competing routes from Barcelona a free return ticket on Vueling.

The brainstorming sessions held by Vueling's Ryanair team threw up such gems as offering flights where smoking was permitted, although this was one of the ideas that did not make the cut. More serious suggestions focused on improving customer service, routes and pricing, business product, and marketing, with an emphasis on boosting online sales. Despite taking such specific, anti-Ryanair actions, Cruz insists that Vueling is not panicking.

"We take Ryanair seriously, obviously, but the best thing is that we haven't been running around in panic mode," he says, adding that the initial impact of Ryanair's arrival at El Prat has been limited. "The results so far, strictly based on load factor comparisons, are not bad at all. We've not seen any out of the ordinary behaviour by their entrance and we're withstanding well the effect."

Cruz is confident that Vueling's strong position in Barcelona will negate the need to become embroiled in the type of fare wars with Ryanair that ensued when the Irish carrier began serving the Canary Islands from Madrid. "Ryanair lowered the price significantly [in this market] and other carriers went berserk and lost all perspective on pricing. Prices went so low that we were a small player in a large fare war with one bully carrier. But here [in Barcelona] we can determine and set prices," he says.

Vueling has been "very selective with our pricing" and has, for instance, lowered fares from €29 ($37.90) to €19 for certain routes on which it competes with Ryanair. Vueling and Ryanair overlap on 12 routes from El Prat, and Cruz says the Spanish carrier tends to compete better on the domestic ones.

But price will not be the determining factor, adds Cruz, because Vueling, unlike its Irish rival, is not a low-cost carrier in the traditional sense. Instead, it finds itself sandwiched between being a full-service airline and a no-frills budget operator, and will need to work on carving out this niche. This will involve focusing on feeding part-owner Iberia's long-haul network, as well as offering connecting services to other airlines.

On the latter point, Vueling is working on creating "a better product for connections", which will involve "significantly" increasing capacity in 2011 on routes it now serves three to four times a day.

The carrier will charge a €5 connecting fee and will offer a 55 minute connecting window. The channels of sale needed to enable it to link to connecting flights "will be fully operational next year", says Cruz. "Next year the trial levers will be fine-tuned and we will begin to connect with other airlines. First will be Iberia to feed their long-haul services to São Paulo and Miami."

Cruz adds that Vueling has received connection requests from "oneworld carriers, non-aligned carriers and, surprisingly, other alliances".

He says: "The idea is to do a couple more carriers next year," although he points out that Vueling does not want "to lean our design and thinking on connecting flights" in a way that would detract from the low-cost side of its business model.

With all this in mind, Cruz believes it should be Spanair that is running scared from Ryanair: "Ryanair intends to kick Spanair out of Barcelona, and if they make a weak competitor even weaker that may be okay for us."

WHY COME TO BARCELONA

Up until recently the biggest threat from Ryanair to carriers based in Barcelona came from its services to secondary Catalonian airports Girona and Reus, both roughly 97km (60 miles) outside the city. This all changed in September 2010 when the Irish budget carrier opened a base at Barcelona El Prat airport, stationed five aircraft there (which soon became eight) and launched 20 new routes from the airport. So why did Ryanair decide to set up camp at Barcelona's main airport? The key reasons, says the carrier's director of new route development Ken O'Toole, were that Barcelona offers a strong market for both inbound and outbound traffic, is relatively unseasonal, has had a significant amount of capacity added with the opening of a second terminal and airport charges are relatively low. "The opportunity in Barcelona we looked at on its own merits - the market potential coupled with a published cost structure which, while not cheap, is cheaper than other primary European airports," says O'Toole. "It is for those reasons that we could consider Barcelona a viable candidate for growth." Barcelona airport's marketing manager, Anita Gackowska, says the charges - which are regulated by law and set by Spanish airports operator Aena - are 47% below the European average and 35% below the world average. She is also keen to point out that no incentives were offered to Ryanair and the carrier receives no special treatment: "We give no incentives to anyone, full stop." Referring to its bases at Girona and Reus, O'Toole says another positive factor in entering Barcelona is that Ryanair was no stranger to the Catalonian market. "We were already the largest carrier in Catalonia so it's not like we were unknown going into this market." Regional threat Local media reports in Spain suggest that Ryanair has threatened to cut services at Girona and Reus due to high charges. O'Toole will not comment directly on Ryanair's plans for the two airports, but he does point to a draft proposal from Aena to stimulate regional airport traffic by reducing costs at regional airports, calling it "a positive step". Ryanair's network from El Prat is evenly split between international and domestic routes with "a slight capacity emphasis on international", says O'Toole. One big unanswered question is whether the carrier will touch the highly competitive Barcelona-Madrid shuttle route, which Gackowska says used to be the busiest route in the world but is now "only the busiest route in Europe". In addition to the numerous airline services between the two cities, there is also a high-speed rail link. Nevertheless, Ryanair has not ruled out joining the fray. "This is a high-capacity, high-frequency route. We sit on the fence but we wouldn't rule ourselves out," says O'Toole. "We can bring a much lower price than any other airline." As far as future growth in Spain goes, Ryanair believes the figures speak for themselves. "Ryanair has grown by 40% in Spain this year [2010], adding six million passengers in total. The airports we operate to have grown by 3%, or four million passengers, in total. So without Ryanair growth these airports would have had negative volume trends," he says. "This is due to the ability of Ryanair to do something no other carrier is capable of."

While Ryanair's O'Toole insists that "we don't target specific airlines", he does not have any kind words to describe Spanair. "The difficulty Spanair has pre-dates the arrival of Ryanair. It has a failed business model and this is represented by the fact that it can't survive without public funding," he says, adding that investments Spanair has received from regional government agencies to date are "just the tip of the iceberg".

However, Spanair's Paton insists the carrier is "here to stay" and its new business plan will see it return to profitability within two years and become "the leading network carrier in Barcelona".

Spanair was acquired from Scandinavia's SAS Group in early 2009 by a group of Catalonian investors for a token fee of €1. Cimalsa and Avancsa, both regional government agencies, own 17.8% and 8.9% of Spanair, respectively. Turismo de Barcelona and Fira de Barcelona - both of which are 50% publicly held - each hold a 13.4% stake. Private investors Catalana d'Iniciatives and Volcat 2009 hold 10.7% and 20.8%, respectively, and SAS continues to hold 11.9% of the airline. The remainder is held by Spanair employees.

The strong local government involvement has led to controversy, with the European Low Fares Airline Association recently complaining that Spanair had breached European Union state aid regulations when Cimalsa was authorised in early November to invest €20 million in the carrier.

But these complaints are dismissed by Paton. "We are by no means a fully publicly funded airline," he says. "There is nothing fundamentally wrong or forbidden under European law in terms of public bodies investing in companies such as ours."

Since its acquisition from SAS, Spanair has been focusing on reducing its cost base, increasing its international network and working towards launching long-haul flights from Barcelona. By this summer, Spanair will operate more than 20 international routes, compared with just five in 2009.

"We've focused on where there's a gap in the market - on trunk routes to major European cities," says Paton. The carrier recently announced new flights to Berlin and Hamburg, where Paton says there is "an opportunity for a full-service offering". North and West Africa will also be a "key area of focus".

But Spanair's principal aim is to begin long-haul services from Barcelona in 2012 and transform the airport into a Star Alliance hub to rival that of oneworld at Madrid Barajas. Its first area of focus will be Latin America.

"Over 600,000 passengers a year travel indirectly from Barcelona to Latin America - it's crying out for direct service," says Paton, adding that Spanair will look towards Asia and "possibly North America" in the second stage of its long-haul development plan. In the meantime, the carrier is keen to encourage its Star Alliance partners to operate long-haul services from Barcelona to which it can add its code.

Iberia's decision to concentrate its hub in Madrid has had a detrimental effect on Barcelona, says Paton, something which Spanair hopes to rectify: "The opportunity we have is to turn Barcelona into the great hub it deserves to be," he says.

In terms of competing with Ryanair, Paton says that Spanair has focused on making its pricing more competitive. While it remains a full-service carrier, Spanair has been taking steps to unbundle certain aspects of its product and move towards a more hybrid model. Spanair's market share has "fallen back slightly" since Ryanair's arrival in Barcelona, but Paton does not seem overly concerned.

"Our market share has declined through the laws of maths but our volumes are unaffected. What Ryanair has done is stimulate additional demand but they haven't taken it away from us," he says.

Spanair competes with Ryanair on 11 routes from Barcelona, most of them domestic, but Paton says that already having had to compete with Vueling has stood the carrier in good stead.

Both Vueling and Spanair are braced for further growth from Ryanair in Barcelona, but neither seems anywhere near ready to roll over and admit defeat. "We're still here, we're still investing in this market and our intention is to be here in 20 years' time," says Paton. Over at Vueling, Cruz has a point to prove: "Our success will be linked to our enthusiasm to prove that there are viable alternatives to short-haul fundamentalism." Ryanair, you've been warned.

Read our cover interview with Vueling boss Alex Cruz from March 2010

Source: Airline Business