IAG’s long-haul, low-cost carrier Level is to get its own air operator’s certificate (AOC) and will increase its fleet to eight aircraft by 2026 under growth plans disclosed at the airline group’s Capital Markets Day on 21 November.
The growth of the Barcelona-based long-haul operation forms part IAG’s near-term strategic aim of generating annual operating profits of over €1.5 billion ($1.7 billion) from its Spanish operations, itself supporting the group’s wider medium-term aim of delivering an operating margin of 12-15%.
IAG launched Level in 2017, amid a flurry of activity in the emerging long-haul, low-cost segment, using Iberia’s AOC.
”We wanted to do something very fast and that’s the reason we launched the company based on Iberia’s AOC,” explained IAG chief executive Luis Gallego, speaking during the Capital Markets Day. ”The understanding was that was not the future, but we wanted to have a quick response to the market. We said at the time we will launch a new AOC, because we need to be efficient in all areas in the company and we see an opportunity at Barcelona.
However, those plans were put on hold when the pandemic hit.
”Now we are going to come back to the plan that we had before, which is a long-haul, low-cost AOC to fly from Barcelona and maybe not only from Barcelona in the future,” he says, noting ”we can have other opportunities”.
Having scaled back operations during Covid, Level is now operating five A330-200s and IAG plans to increase this to eight by 2026.
The low-cost unit currently serves five cities in the USA – Boston, Los Angeles, Miami, New York and San Francisco – as well as Buenos Aires and Santiago in Chile. Level capacity for 2023 as a whole will be around a third higher than pre-Covid ASKs in 2019.
Iberia chief executive Fernando Candela says: “There have been some examples of airlines attempting to operate this model, but most of them have been unsuccessful. However, the same cannot be said about Level.
”Level is generating a double-digit profit margin and there are some keys behind the success of the operation, not only the competitive cost base, but also one of the group advantages is IAG’s extensive presence in Barcelona,” he says, noting that around a fifth of Level’s feed comes Vueling short-haul flying into Barcelona.
IAG PONDERING SHORT-HAUL AOC
Prior to the pandemic Level had expanded with A330 operations from Paris Orly and short-haul flights using A320 family jets in Austria under the Level Europe operation. Both operations were curtailed when the pandemic hit.
Alongside establishing a new AOC for Level in Barcelona, Gallego says IAG is considering establishing another AOC for short-haul operations in Europe.
“We had a short-haul operation in Austria before Covid. We could fly also in that past short-haul with a Vueling AOC, but we decided to have a new AOC because we thought it was the right cost structure and right for our customers to have another AOC,” says Gallego.
“That’s something we are considering now, to have another European short-haul AOC that we can develop in some markets in Europe,” he says. However, Gallego says it will wait until its Air Europa deal is complete and then evaluate its AOC and brand requirements. “So we prefer to wait until we decide brands, AOC, where we put the aircraft. And that’s the reason we want to have the flexibility.”
GROWING SPANISH BUSINESS
Both expanding Level out of Barcelona and the potential addition of Air Europa to the group – a deal IAG hopes to complete by the fourth quarter of next year – form part of the group’s ambitions to further develop its Spanish businesses.
IAG’s near-term strategic aim of delivering operating profits of more than €1.5 billion from its Spanish operations though does not include Air Europa. It is based on its existing Spanish operations of Vueling, Iberia and Level – all of which have recovered swiftly from the pandemic – and on the opportunity the group sees to further develop its presence on Latin American routes.
“We are going to have new opportunities with the deliveries of the A350 and also the A321XLR,” says Gallego. ”And Brazil remains a market to develop for us.”
Iberia’s Candela adds: “[The] A350 means we have recovered pre-Covid capacity with less planes, increasing utilisation and improving our unit cost. We took the conscious decision to recover capacity quicker than our competitors, increasing our market share and having a much stronger position than we had pre-Covid.
”The arrival of the A321XLR will bring a huge opportunity for the operation out of Madrid and the next phase of growth in Latin America without additional large widebodies. It will not only allow us to build frequencies, but also to open new destinations and to allocate more capacity to Latin America.”
He adds: “Growth will be a combination of organic growth, growth through partnerships and also inorganic growth through the acquisition of Air Europa.”
IAG turned its attentions in 2019 to Air Europa after regulators in Chile blocked a planned joint venture with then-Oneworld partner LATAM Airlines. “For that reason, we put the focus on Air Europa. That is something we continued to try to do, even with Covid in the middle, because we consider it is the right thing to develop the Madrid hub,” says Gallego.
He also says that TAP Air Portugal, reprivatisation plans for which were formally agreed in September, remains an opportunity IAG is considering to further develop in the market.
”Brazil is a market where there is a huge potential, and we don’t have a lot of capacity there,” says Gallego. “So we consider that TAP can be a complementary option to this deal with Air Europa in order to have access to an important market like Brazil.
“We consider in the same way that in the north we have a dual hub strategy with Dublin and London to fly North Atlantic, we can have that dual hub strategy to fly to Latin America from the Iberian peninsula. I think that is an opportunity.”