IAG plans new low-cost long-haul operation from Barcelona

Barcelona seemingly has a good mix of the ingredients needed for IAG to make this new long haul low cost business work. It is a growing market in terms of demand and passenger flows are dominated by IAG airlines Vueling and Iberia providing a strong connecting feed into the long-haul operation to complement local traffic.

Airline management company International Consolidated Airlines Group (IAG), the parent of British Airways, Iberia, Aer Lingus and Vueling, has confirmed reports that it will launch a new low-cost, long-haul airline operations from Barcelona’s El Prat Airport in summer 2017. The start-up will offer routes into North and South America using an initial fleet of two Airbus A330 aircraft from June next year.

After reports appeared in the Spanish press about the proposed business launch, IAG confirmed in a statement: “Barcelona has become a significant airport hub and we believe that there is a demand for these flights from El Prat." It is believed that the decision has been driven by Norwegian’s plans to open a long-haul base at the Catalonian airport next summer and follows British Airways introducing competing flights to Norwegian in two US markets from London Gatwick in summer 2017.

IAG is understood to be considering a number of markets for the long-haul operation including Los Angeles, San Francisco, Buenos Aires, Santiago de Chile, Havana and Tokyo. Norwegian already has flights to Los Angeles and Oakland on sale from Barcelona, as well as flights to Fort Lauderdale and New York Newark. It could also introduce European link into Argentina and Chile as part of plans to grow its operation into South America.

Barcelona is the host city for the The 23rd World Route Development Forum which will take place at Fira Gran Via, one of Europe's  largest conference venues, between September 23-26, 2017. World Routes is the world’s largest commercial aviation event and the premier business to business aviation conference. The event consistently attracts over 3,000 senior level executives from the world’s airlines, airports, tourist boards, economic development agencies and governments from over 110 countries to discuss air service development opportunities.

IAG chief executive officer, Willie Walsh, confirmed at last month’s World Travel Market in London that he believed long-haul low-cost “will work” as a business model. But, under questioning from industry consultant John Strickland, founder and director of JLS Consulting he said it was important you correctly measure what success is with the generic long-haul low-cost label “meaning nothing”.

“I think success will be a long-haul low-cost airline that exceeds its costs of capital on a sustainable basis. There will be lots of airlines that call themselves long-haul low-cost and never make a penny in the same way there were lots of short-haul low-cost airlines that never made a penny. I measure success by profitability and there are very few that have proven that it works today,” he said.

The IAG boss openly admires what Norwegian is doing for global connectivity and has said its low-fare offer has shown an appetite for flights on markets such as London Gatwick – Fort Lauderdale and London Gatwick – Oakland and influenced British Airways’ own decision to serve these routes.

“I like what Bjørn Kjos [Norwegian’s chief executive officer] has done and I have great admiration for him,” said Walsh. “I think he has yet to crack the profitability bit, but margins are improving and they are generating cash.” A big restriction for the model to succeed on a global scale is that it relies on a “liberal regime”, said Walsh, to be able to access destinations that will be able to maximise the utilisation of aircraft and also “requires feed” to maximise traffic.

“It is a challenging environment to get all the pieces right, but I believe it will work. I believe it is much more difficult to make it work than on short-haul, but there’s reason to believe that in certain areas you can see a model that will be effective,” added Walsh.  

“Barcelona is an ideal start up base for IAG. The city itself has a large local market and very strong seasonal demand through the summer period but more importantly represents a market that IAG know and allows them to test the waters without disrupting the Iberia hub in Madrid. The market profile fits that for a long-haul low cost operation.”

John Grant
Founder and Director of JG Aviation Consultants

Barcelona seemingly has a good mix of these ingredients needed for IAG to make this new business model work. It is a growing market in terms of demand and passenger flows are dominated by IAG airlines Vueling and Iberia providing a strong connecting feed into the long-haul operation to complement local traffic. “Barcelona is an ideal start up base for IAG,” John Grant, founder and director of JG Aviation Consultants told Routesonline.

“The city itself has a large local market and very strong seasonal demand through the summer period but more importantly represents a market that IAG know and allows them to test the waters without disrupting the Iberia hub in Madrid. The market profile fits that for a long-haul low cost operation,” he added.

It is unclear how IAG will facilitate the launch of the new business in just a six month timescale. IAG has said it had not yet decided whether to set up a new airline or use existing resources from its airlines. A new venture and securing a new air operator certificate (AOC) could be a timely and costly exercise and it would seem more likely that it could piggyback on existing resources by operating under a separate brand but with wet-leased aircraft and crew.

With the suggestion of flying A330s then Irish flag carrier Aer Lingus would be an obvious vehicle for the business and Willie Walsh, a former boss of the airline, regularly highlights how it could already be classed as a low-cost operation.

“I would point to Aer Lingus and argue that it [long-haul low-cost] works,” said Walsh. While the airline’s operations from Ireland to North America could maybe be classed as medium-haul rather than long-haul, he noted that its low cost structure makes these routes sustainable. “Just look at what Aer Lingus does on the transatlantic – it is the lowest cost producer of transatlantic flying and it is very profitable.”

It is expected to be a couple more months before IAG provides firm details on the operation in order to ensure at least three month period ahead of launch for sales. Its positive movement into the long-haul low-cost arena follows moves by other legacy European network carriers to address competition from operators such as Norwegian, WestJet and WOW air between Europe and North America and a likely arrival of competition from the East such as AirAsia and Scoot.

“IAG is alone among the legacy groups to have the cost structure and experience in Low Cost operations to make this more likely of success. Further, they have the opportunity to exploit their natural strength in Latin America and the power of Vueling's European network to provide the feed on which such a business model depends.”

John Strickland
Founder and Director, JLS Consulting

Lufthansa has developed both long-haul leisure and long-haul low-cost operations, the latter under the expanding Eurowings brand, while in recent weeks Air France-KLM recently confirmed plans to develop its own operation.

John Strickland told Routesonline that he believed “IAG is alone among the legacy groups” to have the cost structure and experience in low cost operations “to make this more likely” of success. “Further, they have the opportunity to exploit their natural strength in Latin America and the power of Vueling's European network to provide the feed on which such a business model depends,” he added.

IAG currently has a 42.6 per cent share of the departure capacity from Barcelona’s El Prat Airport this winter, according to data from the OAG Schedules Analyser tool. This share is dominated by the short-haul low-cost operations of Vueling (34.1 per cent share), which has its main base at the facility, but also includes the operations of Iberia (6.3 per cent share), British Airways (1.8 per cent share) and Aer Lingus (0.4 per cent share).

This potential feed into any long-haul low-cost operation includes non-stop flights from 105 different markets offering almost four million one-way seats during the schedule period, over 25,000 per day. Barcelona has among the largest low-cost operations in Europe with Ryanair and easyJet the second and third largest operators with 14.9 per cent and 7.4 per cent capacity shares, respectively. In fact schedule data shows that the low-cost share of capacity out of El Prat has grown from just 15.7 per cent in 2006 to a high of 67.5 per cent this year.

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