Five years ago, when Alex Cruz made his previous appearance on the cover of Airline Business, Vueling looked very different.
Operating a fleet of just under 40 aircraft, back in mid-2010 Vueling was still in the throes of integration with the Iberia part-owned low-cost operation Clickair, as it squared up for a battle at its Barcelona base with local rival Spanair. Fast-forward and the airline is now a wholly owned subsidiary of IAG, flying 90 aircraft – with 100 on its 2015 skyline. Spanair is long gone and Vueling is building a second hub fortress in Rome.
One thing hasn't changed: Cruz is still very much in charge, despite now answering to IAG's formidable chief executive Willie Walsh.
"I don't feel restrained with anything," says Cruz. "I don't think you would go to Vueling and find that there is something that we cannot do."
IAG, which inherited a 45% share of Vueling through its Iberia subsidiary, in 2013 acquired almost the entire remaining 55%.
Speaking to Airline Business in IAG's London offices adjacent to Heathrow airport, Cruz says his parent organisation understands Vueling is operating in a different environment – one that is "much more cut-throat and aggressive" – and supports the airline.
"Willie and the rest of the IAG team value what Vueling does by its contribution," Cruz says. "Is Vueling contributing at the moment? Yes. It's delivering the right ROIC [return on invested capital] and delivering it profitably.
"So from that perspective, there's a sense that 'it's working, so we must continue supporting it as it is... and what else can we do to make it continue working?'"
Both before and after the IAG acquisition Vueling's expansion story has been impressive, with growth averaging around 20% a year. In 2013, revenue increased 28% to €1.4 billion ($1.9 billion). Cruz says that last year the business had its highest annual passenger growth – 25% – and carried just over 20 million passengers. To put that into context, it is around a third more passengers than "big sister" Iberia.
But Cruz warns that signs of impending overcapacity in Europe are prompting a dab on the brakes at Vueling. "The situation in 2016, 2017, 2018, in terms of capacity in Europe, is not looking particularly attractive. There are a lot of aircraft set to be delivered to our LCC peers – Ryanair, EasyJet, and Norwegian – and we don't know how much flexibility they have. So we have to be ready for a situation of overcapacity," he says.
"So we are not going [to continue] to be the leaders again in growth over the next three to four years. We're going to be maturing our network, settling in the markets that we are in."
But do not be fooled if the brake lights glow. Vueling will still have double-digit growth "and we'll be growing more than our IAG sisters British Airways and Iberia", he adds.
Cruz admits that his team wondered whether the IAG acquisition would create challenges for cost control, becoming part of a group of airlines that had not traditionally had cost central to its mindset. But in reality the reverse is true.
"Here in IAG all our conversations start with cost," he says. And the bonus of being part of a major group gives the airline a huge buying power. "We used to buy 100 pens. Now we buy 100,000 pens."
An area where the benefits of "purchasing volume" had an immediate effect was fleet renewal. "We're no longer an airline with 90 aircraft," says Cruz. "From a purchasing perspective, we're an airline with 300 narrowbodied aircraft. Being able to sit down with IAG and decide on the [common] spec of the A320 has a huge impact on price."
Vueling had been in long-running negotiations for 60 A320-family aircraft and 60 options, and the timing of the IAG takeover worked out well. The planned order was expanded to include 100 more commitments for all the group's airlines, of which some will be for Vueling. "So we were extremely happy to be part of IAG at that time," says Cruz.
The new aircraft begin arriving this year and will allow Vueling to transition from a "100% leased" fleet, says Cruz.
IAG's approach to how it manages Vueling is crucial if the low-cost arm is going to succeed where so many low-cost spin-offs within legacy groups have failed, Cruz says. "There is a clear understanding that the model is different; that a lot of the premises that make the model are different; the location is different; the way to address pricing and network management and design, etc, is different."
Cruz says such an attitude requires "a leap of faith" by the parent organisation, which has its origins in the way Iberia managed its involvement in Clickair – where Cruz was chief executive.
"The Iberia team actually let us do whatever the hell we wanted to. It was very difficult for them, but it worked," he says. "With IAG, they do understand that this is different. They are willing to live with the cheekiness and the younger spirit."
With its ultra-competitive cost structure, a key role of Vueling is to deliver IAG profitable growth throughout Europe. But another important task is to pass on its expertise in running a very tight low-cost platform.
Vueling "can be a reference point in some very specific business issues" for other airlines within the group, says Cruz.
"If Vueling does it this way, then why can't we do it this way for what is actually the same type of problem?" he says. The mission, he adds, is for IAG to comprise a group of "extremely agile and competitive airlines".
Cruz says the future of all European short-haul operations is the low operating-cost model. "It's not sustainable to have a one-and-a-half hour operation at three times the cost of a competitor – and this still occurs on some routes," he says.
"The winner will be the 4-4.5 euro cents CASK [cost per available seat-kilometre] – period."
But low-cost does not mean "no-frills", and Vueling was a pioneer of the hybrid operating model towards which the likes of EasyJet and Ryanair are migrating. Cruz says that as Europe's short-haul networks transition, the onboard product will improve rather than deteriorate.
"We've seen the traditional carriers downscaling their product and service portfolio while the low-cost carriers have been increasing it – with Vueling leading the pack. Two years from now, we will probably have a much better premium product than we have today."
The airlines that survive will be "the ones that have the mindset" to operate successfully in the "4c cost environment", Cruz says. "Some carriers are in a metamorphosis now, and competitively we assume that these carriers will change into something different."
To ensure it stays ahead of the game, Vueling has always put a great deal of effort into benchmarking its competitive position with other carriers using what it calls the "premium product index", which looks at 100 different passenger service metrics.
"We track them over time, and we are going to maintain a fixed distance from our peers by releasing product differentiators as we are able to from a cost perspective, and as we need to do in order to remain significantly more advanced from a product perspective."
IAG has another low-cost weapon in its Spanish armoury in the form of Madrid-based Iberia Express, which Cruz describes as "an extremely lean carrier".
"At a time when airlines are struggling with having proper really low-cost subsidiaries, we now have the luxury of having two," he adds.
The Madrid division was created three years ago as IAG looked to tackle the cost base of its domestic operations from the main base of its Spanish arm. Cruz says the airline was born out of the project plan forged with Luis Gallego, his number two at Clickair, who led Iberia Express through its start-up before moving up to run the Spanish flag carrier.
The historical connections mean that there are close ties between the Vueling and Iberia Express staff, with Cruz describing the latter's commercial group as "an emotional extension of the Vueling team".
"These are the people that went out to the pub together every week for years and years, so we get together quite often to discuss what should be the best way to manage a particular region, for example," he says.
But despite these close ties, Cruz is clear that "Vueling is separate and will remain separate, with its own AOC". And the reason why they cannot formalise this already close affiliation is simple, he adds, saying it relates to the union conditions under which the Madrid carrier was created.
"The birth of Iberia Express was around a set of conditions in the labour environment in Iberia, which set out the flexibility it has to be able to operate in relation to the Iberia pilots, and the rules set out in union agreements [for] the flow between the two airlines," he says.
"Vueling still has a huge presence in Spain, but its vocation is to go outside Spain. At this time and given the size of Iberia Express and the [union] agreement, it probably wouldn't make sense to come together."
Cruz concedes that the structure of IAG's Spanish triumvirate of Iberia, Iberia Express and Vueling "must look complex from the outside" but says that internally the relationship is "very natural" because of the history and the personal relationships.
The free rein that Vueling enjoys means that IAG does not have oversight of its network, pricing or fleet strategy, says Cruz. But he explains that ultimately his team will seek the parent's views and approval on any moves. "We do sit together with IAG at the very end and present these plans – mostly because we want to learn," he says.
"There are many markets we fly to where BA or Iberia has previously flown, and frankly we want to know about some of that experience before. So there is co-ordination with IAG from that perspective."
In terms of network development, Cruz says Vueling is committed to growth opportunities at its original home – Barcelona – and expanding the base at Rome's Fiumicino airport that it opened in March 2012. Building a network of bases across Europe is not on the agenda.
"Unlike our peer LCCs, we are not spreading seeds around with one- or two-aircraft bases across Europe. We have one huge base [Barcelona]; then we've got a collection of medium-size bases which have three to five aircraft, mostly in Spain and France – and Brussels. And then we have a huge commitment to build another 'Barcelona', and that is in Rome."
Cruz describes Vueling's plan to "replicate" its Barcelona hub at the Italian capital as "a huge project, which will take us some time to realise".
He says Vueling has nine aircraft serving Rome (for the 2015 summer season) and that this will grow to 14 during the year. The destination count is rising to around 70 destinations, from around 50 currently.
Vueling's unusual name, which originates from the Spanish word vuelo (meaning flight), has been a point of contention within IAG.
During an investor brief last year, IAG boss Willie Walsh commented that "most people don't know how to pronounce it". But he added that Cruz "defends the brand very strongly" and "continues to resist any effort on the part of us heathens who don't understand branding".
Cruz dismisses the pronunciation issue. "It's pronounced 'Voo-el-ing'. You'll still have many people mispronounce it, but frankly that's not how we make our money.
"I don't think anybody's been having any concerns, including Willie, over Vueling's brand, mostly because of its penetration in markets like Brussels, Italy and so on."
The airline market in Spain, and in particular Madrid, has suffered amid the country's economic crisis, but Cruz has not given up on the airline's original home territory. He sees "some" growth opportunities for Vueling but concedes these are not as large as beyond the border.
The country's markets are divided up between IAG's three Spanish arms, with Madrid the domain of Iberia and its Express arm. Cruz sees great opportunities for Vueling's two sister airlines in the Spanish capital as the economy recovers, Iberia Express expands, and the flag carrier emerges lean and mean from its restructuring.
"Iberia is the only major European carrier that has undergone a successful restructuring – which is not finished," he says. "That is going to put Iberia in an unbelievable position from a competitive standpoint."
Vueling continues to grow in Barcelona, where it has pursued a successful formula of "adding about five aircraft per year and 15-20 destinations".
The city is not only a "fantastic origin/destination" market but also serves as a very effective connecting hub, Cruz says. "By the end of this year, we'll reach 140-145 destinations."
As regards growth in the Spanish regions, Cruz points to the country's southern "sun and beach airports" as offering the most opportunities: "airports like Alicante, Malaga, Palma, etc, where we have been developing slowly. We currently have number two or three positions there." He adds that Vueling is already strong in Spain's "northern, colder markets".
So one thing is for certain: Cruz has no intention of abandoning Vueling's core market and principles as it expands its role as IAG's European short-haul workhorse.
Source: Airline Business
