Last year’s signing of an Open Skies treaty between Israel and Europe may have been good news for passengers, but among local operators, it immediately raised fears of a rapid influx of foreign low-cost competitors. Mindful of the potential for losing market share, Israeli flag carrier El Al began operations under a new low-cost brand, UP, in March. The offshoot launched with a fleet of five repainted B737-800s, taking over from the mainline unit on flights to Berlin, Budapest, Prague, Kiev and Larnaca.

“Those markets are much more oriented towards leisure and VFR traffic,” says Stanley Morais, El Al’s deputy director for international affairs. “That’s why we are launching UP with those destinations. But it’s not a subsidiary, it’s not a separate company. It’s a secondary brand to distinguish the product from the legacy product. The crew are still El Al,” he insists.

That point has been repeatedly stressed to Israeli customers, many of whom fly with El Al because of its unrivalled security reputation. Israel’s unique geopolitical identity makes terrorism an obsession for the flag carrier, spurring precautions such as double cockpit doors, armed marshals and psychological profiling at check-in desks.

Such measures attract a heavy price tag, which is why the Open Skies deal was so strongly opposed by domestic operators. Workers from the country’s three main airlines – also including Arkia and Israir – went on strike last year in an attempt to block the deal. Their concerns were ultimately dismissed, with the Israeli government seeing benefits from increased competition and scope for tourism growth. But they did win concessions such as lifting the State’s security subsidy to 97.5%.

For Israel’s flag carrier, UP marks a crucial experiment into the compatibility of its higher cost structures with the low-cost business model favoured in Europe. The brand has undertones of British Airways’ no-frills venture Go, which tried to defend market share from emerging low-cost rivals in the 1990s.

“Open Skies has pushed us to launch this strategy, but we were planning it for several years before,” explains Einat Yanai, El Al’s marketing director. “The Israeli customer has changed. Not only in the aviation industry, but in general. Israelis are now more knowledgeable, they research more, and they are very sensitive to price.”

There is no question that UP will steer clear of the ultra-low-cost model pioneered by Ryanair, and later Wizz Air. The airline’s basic ticket may be a stripped-down product with all the usual ancillary surcharges for baggage and refreshments. But its ‘Smart’ offering falls within the premium economy category, including a free baggage allowance, lounge access, extra legroom and flexible booking conditions.

Noting that the mainline unit has now ceased flying to the markets served by UP, Yanai stresses El Al has been careful not to alienate higher-yielding passengers who expect “all the ingredients” of a full-service flight. As well as benefiting from premium economy, these passengers can earn and redeem points on El Al’s Matmid Frequent Flyer Club. Benefits will vary according to tier status, ensuring the loyalty scheme remains an “integral element” of UP’s service provision, albeit on a “different value system” from the full-service carrier.

Turning to the route network, Morais says El Al deliberately selected a diverse range of destinations for the launch of UP in order to evaluate different market types. El Al will later decide which other services might be transferred to UP. “We will see if it could be expanded to many of the European routes,” he says, noting that full implementation of Open Skies will not be completed until 2018. “There are also routes which we may consider flying both with UP and El Al,” he adds.

While the flag carrier tinkers with its new brand, more established low-cost operators are already gaining ground. Tel Aviv’s Ben Gurion Airport is today served by the likes of easyJet, Germanwings, Niki, Wizz Air and airBaltic. easyJet is the dominant low-cost carrier, having launched services to Tel Aviv back in 2009. But the signing of the Open Skies treaty precipitated a flurry of route launches, with flights from Rome, Berlin, Milan and London Gatwick all being announced in quick succession.

This summer, easyJet will fly to Israel from eight different European points, including 14 weekly flights from two airports in the UK capital. The airline flew about 330,000 passengers in and out of Tel Aviv last year, and it is targeting more than 500,000 for the coming 12 months. “We’re growing really quickly in Israel,” says Hugh Aitken, easyJet’s UK commercial manager. “This summer alone we’re adding Gatwick, Milan and Berlin, and those three are directly as a result of the Open Skies agreement. There’s a bit of maturing across the existing routes, but the big change for us has been Open Skies.”

In a sign that cheaper airfares are beginning to ignite demand, a survey conducted by easyJet found that one-third of passengers on its Israeli services are visiting the country for the first time. But easyJet too faces stiff competition from other operators. Wizz Air has only been flying to Tel Aviv since December 2012, and yet by this summer the number of points it serves from the city will have ballooned to nine (including Lviv, operated by subsidiary Wizz Air Ukraine).

The most interesting routes to watch may be those plied by more than one low-cost carrier. Budapest and Prague will be served by both UP and Wizz, for example. But El Al’s Yanai downplays talk of a price war for budget tourists. “If Wizz offers a route with a €39 price, we wouldn’t do that,” she says.

Instead, UP will offset its higher cost burden by leveraging the security credentials of El Al, and reaching out to domestic customers that value the brand. “We will be very price-competitive, but we never said that we will be the cheapest company,” Yanai concludes. “We want to be very clear that UP is by El Al, and Israeli customers like to fly with El Al. They feel the most secure with their flag carrier, and they are willing to pay a premium for security.”