Never be fooled into thinking the Spanish market staid, settled or stable. Once a sleeping giant, the Spanish airline industry has become a raging bull and is now ready to charge.
Until recently, Spain's domestic market was safely in Iberia's clutches and lagging behind the rest of Europe in the liberalisation stakes. Yet in the last three years, two Palma de Mallorca-based operators, low cost Air Europa and high quality Spanair, have been wresting away Iberia's hold on the market.
Now, just when the dust seems to be settling and the three carriers' respective market shares stabilising, Iberia is reacting to the new entrants' provocative red flag waving and is launching a counter-attack with reorganised European operations.
Iberia intends to integrate its resources and schedules with its predominantly domestic subsidiary, Aviaco, its charter subsidiary, Viva Air, and its franchisee, Air Nostrum, under one centralised operational holding from 26 October. Iberia's operators in the Canary Islands, Binter Canarias, and in southeast Spain, Binter Mediterraneo, will remain separate.
Despite the competitive elements newly reverberating throughout Spain, the market remains a relative stranger to price competition and fare differentials. Iberia's pricing and yield management director, Felix Garcia Viejobueno, claims that Iberia's fares have dropped by just 0.5 per cent since Air Europa and Spanair appeared on the scene three years ago.
Recent uniform fare increases have now led to legal proceedings by Spain's economy ministry alleging collusion among the three airlines. Ministry investigators are currently analysing information taken from the airlines' offices on 23 April. If Spain's competition court finds the airlines guilty, the airlines would face fines of up to 10 per cent of 1996 revenue.
Logical reaction
The airlines vehemently refute the allegations, claiming that the increases are a logical reaction to competition. ' We're simply a stage behind what's going on in the rest of Europe,' declares Viejobueno.
Spanair was the first to raise prices, announcing 15 per cent increases on 10 April. Iberia increased its domestic tariffs by 3.5 per cent on 25 April, the date on which Air Europa also raised its fares by some 20 per cent.
Juan Saez Elegido, managing director of Air Europa, calls the alleged collusion a 'big misunderstanding for everyone', exacerbated by a new interline agreement signed by the three airlines on 25 April.
Spanair's managing director, Carlos Bravo, claims that the fare increases are a natural response to increasing external costs, namely last year's rising fuel prices, an 8 per cent increase in landing fees, and a reduction in pilots' flying hours.
'At the end of the day, it was impossible to live forever with these prices - the fares in Spain are nearly 40 per cent lower than those in the UK and Germany,' agrees Iberia's network programming director, Manuel Lopez Colmenarejo.
The flag carrier still is grappling with another pricing complaint, filed by the Asociacion Español de Companias Areas (Aeca), which represents Spain's private operators. Aeca claims that Iberia is using part of the government's Pta87 billion (US$609 million) capital injection to fund domestic price cutting.
Iberia is playing down the importance of the complaint, however, stating that it is not a 'critical problem' and is 'losing gas completely'. Commission officials investigating the complaint state that they are 'due to make a decision' on the case soon.
A small decrease
Despite the allegations, Iberia is not providing much evidence of using the funds to reduce its fares. The airline's fares remain some 25-30 per cent higher than Air Europa's and the flag carrier predicts a mere 2.4 per cent decrease in its prices this year.
Iberia has made some progressive steps, however, introducing an additional low fare to its pricing structure earlier this year. 'We are finally adapting fare structures to our needs,' says Colmenarejo. 'This new fare level will allow us more flexibility to deal in the Spanish market,' adds Viejobueno.
In Colmenarejo's opinion, the next price war in Spain will be over the business rather than low-fare customer. 'Our top priority is going to be to keep our high yield customers'. Indeed, Iberia has failed to reduce its business tariffs as 'we need them' but has increased them 'according to market conditions', he says.
The carrier's prime objective for the coming year is to prevent loss of further market share to Air Europa and Spanair. Iberia's former 100 per cent monopoly of the market has been reduced to 74 per cent (including Aviaco's 24 per cent), with Spanair taking 11 per cent and Air Europa 15 per cent.
Iberia's load factors have fallen by 0.4 percentage points and its yields by 3.2 per cent since the emergence of Air Europa and Spanair, claims Viejobueno.
Iberia is confident that its loss of market share will now be just 1-2 percentage points annually. Iberia's confidence in its future domestic strategy is largely related to its moves to pool its resources with those of Aviaco, Air Nostrum and Viva into one central holding company.
Centralised unit
As of 26 October, a management committee, composed of the commercial directors from each company, will allocate the group's fleet, crew and scheduling according to specific daily needs on individual routes. All marketing will be conducted by the centralised unit, which will also receive all passenger revenue.
Although the holding company will manage the operations and businesses, the companies will be kept as legally separate operations.
The reorganisation will involve network retuning. Iberia will gradually drop Viva's charter operations if they prove to be unprofitable, states Colmenarejo. Aviaco will also abandon some low-density routes in Spain, to free aircraft up for use on European routes. Other low-density routes will be handed over to Iberia's franchisee, Air Nostrum.
Frank Wade of consultants SH&E sees the plans as a big improvement, bringing 'greater connectivity, scheduling and network coordination, higher fleet utilisation, and a stronger cost base'.
In the long term, Iberia aims to impose uniform Iberia livery, branding and image throughout the group, even if these are adjusted slightly to suit the different operators' requirements.The unified brand will bring 'significant yield improvements, tremendous brand recognition and cost efficiencies', states Wade, who queries: 'Who outside of Spain has heard of Aviaco?'
For the immediate future, however, Aviaco and Iberia will limit themselves to a codeshare arrangement, starting in July.
The imposition of a uniform Iberia brand will take place in phases, largely because of continuing discussions with unions over contracts and potential problems created by the use of the Iberia code alone.
Iberia maintains that Aviaco pilots are 'quite close' to accepting the higher productivity and lower pay conditions in place at Iberia. Moreover, Fernando Llaca, president of the union for Spanish pilots, Sepla, states that 'pilots are open to discuss anything that may help Iberia compete better in the new liberalised market'.
Wade points out that Iberia is intending to show the unions that the new organisation will incorporate pilots' concerns, offering a 'more dependable crewing schedule that is more closely aligned with the network'. Under the new arrangements, pilots would be paid by the number of block hours they work.
Iberia has started the regrouping of its operations by formalising its franchise deal with Air Nostrum. As of 12 May, all Air Nostrum flights started operating using the Iberia code, livery and branding.
Air Nostrum operates 400 flights a week using 12 Fokker 50s, with two more expected this year. The franchise enables Iberia to 'share the risk of certain routes with a low-cost operator', says Colmenarejo. Iberia may conclude further franchise deals in future, he predicts.
Iberia believes it holds further key playing cards over its domestic competitors - its connecting traffic and its network, created by its dominant position at its Madrid and Barcelona hubs.
More connections
The airline plans to redesign both hubs, with connecting traffic slated to increase by some 20 per cent from October this year. By 1999, Iberia plans to triple the number of flights that connect within 90 minutes.
Viejobueno argues that domestic customers will also gradually move back to Iberia due to its quality service. According to Wade, however, Spanair is currently leading the field and the carrier is perceived by the local Spanish market as the 'high quality domestic airline'.
Spanair's Bravo boasts that the airline is the 'best in terms of the relationship of price and quality. Spanair is not the cheapest nor the biggest, but the best for service'. The airline made a point of announcing an improvement in its level of onboard and ground handling services when it put prices up in April.
Bravo concedes, however, that the increase in fares only roughly cover higher costs and predicts that if the improved service levels fail to attract more passengers, 'there may even be a negative effect on the balance-sheet'.
The airline 'closely watches every cost component' in its charter, scheduled and long-haul business units in a constant battle to keep costs low, says Bravo. Some 45.1 per cent of its flights are scheduled, while the remainder are charter operations.
Domestic operations accounted for 25 per cent of its 1996 turnover of Pta46.9 billion (US$328.9 million), up 8.2 per cent on the previous year. Load factors on scheduled flights were 63 per cent, with 1.5 million passengers carried in 1996.
Future network expansion is subject to available slot capacity at Spanish airports, states Bravo. The airline's current network, including charters, links over 100 airports in Europe, the US and Central America with the Spanish mainland, and the Balearics and Canary Islands. This year, the carrier has launched new scheduled services to London and Copenhagen and, in May, to Varadero and Havana, Cuba.
The network is served by a fleet of 18 McDonnell Douglas MD-83s, two MD-87s and two Boeing 767-300s, with a Boeing 757 expected to join the fleet from October. Scandinavian carrier SAS owns 49 per cent of the company, with the remainder owned by travel company Viajes Marsans.
Low-cost
While Spanair focuses on providing quality services, its fellow Palma-based operator, Air Europa, aims to serve the cost-sensitive sector of the Spanish market.
Wade sees Air Europa as a 'high quality, low cost operator. It's a good network planner with good customer service on board - a formidable competitor to Iberia'. Still, he points out that the airline needs to work on its yield management and scheduling and how to employ its newly acquired cargo capacity.
Saez, formerly president of Aviaco and president of Iberia's air transport group, admits that the only way for Air Europa to maintain its position is to be 'the cheapest in the market'. The carrier keeps its costs low via high employee productivity and aircraft utilisation. Air Europa flies its 11 B737-300/400s more than 10.5 hours per day. The airline's fleet also includes seven B757s and two B767s. Roughly one third of the carrier's business is scheduled.
The airline is family-owned, with 92 per cent in the hands of the Hidalgo family and the remainder held by private investor Gil Herminio. Travel agency Viajes Halcon and tour operator Travelplan, subsidiaries of the same parent company, have been acting as exclusive operators for the group since February 1996.
Turnover is expected to reach Pta90 billion in 1997, with profits projected at Pta1 billion, while load factors range from between 61 and 75 per cent between the winter and summer seasons, says Saez.
Despite its low costs, Saez is keen to stress that Air Europa is not a no frills carrier. Service costs such as full on-board meals 'are not material at the end of the day'. However, its subsidiary, Air Europa Express, is the quintessential 'peanuts' airline, with 'lower costs, faster turnarounds and great potential', says Wade.
The Tenerife-based subsidiary, 50 per cent owned by Air Europa with the remainder held by Canary investors, operates scheduled regional flights around the Canary Islands and the Balearics, linking the mainland at Barcelona, using eight British Aerospace ATPs. The routes are low-density corridors, which would be 'impossible to defend with jet planes', admits Saez.
Saez views Air Europa Express as potentially 'very interesting in the medium term in Spain', particularly in view of the increasing number of high speed trains. 'The only way to breathe life onto these routes is with these kind of planes.' Saez expects the introduction of more high-speed train links to reduce Air Europa's domestic traffic dramatically in the next six years. 'It's practically impossible to compete against them'.
Spanair's Bravo is more optimistic about the future of the Spanish market, predicting that the number of Spanish travellers is still relatively low and the market is a 'growing one'. Bravo sees growth being arrested by the slot constraints at Madrid airport, which have already forced Air Europa Express to shelve plans to fly feeder routes to Madrid with ATPs.
The lack of slot availability, in addition to the difficulties in operating on a profitable basis due to the low fares prevalent in Spain, should deter foreign carriers from entering the fray, declares Bravo.
Share elsewhere
Iberia, meanwhile, sees its future growth as being more focused in Europe and Latin America, despite domestic sales accounting for roughly one third of its total revenue. 'Iberia means to gain market share elsewhere and grow at the market rate of some 6 per cent at home', says Colmenarejo.
While the three carriers' domestic market shares may not alter dramatically from current levels, the addition of more international services should lead to a higher volume of passengers for the trio to fight over.
'Increasingly more operators will fly out from Spain to other European destinations', predicts Colmenarejo. Wade says that the pending Spain-US bilateral agreement will lead to 'more transatlantic frequencies, more passengers within Spain, and more market share for all to divide up'. He makes a similar prediction about traffic from Asia.
The Spanish independents have clearly woken up the domestic aviation market. But if Iberia's restructuring is successful, its ability to feed traffic through its newly reconstructed hubs could prove to be a decisive advantage. The newcomers will then have to work even harder to assure their future independence.
Source: Airline Business
