This will be a pivotal year for Spanair, Spain's fast-growing, charter-cum-scheduled airline. Eleven years old this spring, Spanair started scheduled flights just five years ago, and business has grown in leaps and bounds.
While maintaining its successful tour operation - primarily bringing holidaymakers to Spain's Canary and Balearic islands and mainland destinations from more than 100 points in Europe - privately owned Spanair began making serious inroads into Spain's domestic scheduled market against state-owned flag carrier Iberia. It also began to expand its scheduled route network to Europe and the Americas, with scheduled passengers now outnumbering charter. Last year, Spanair's total traffic passed five million.
The airline has a strong following among tour operators and has won a growing reputation for offering low scheduled fares, especially for business travellers, while providing good value for money.
Although its overall share of the domestic market is just 13%, Spanair now accounts for 20% of passengers on the heavily travelled Madrid-Barcelona corridor and expects its share to rise when its 13 daily round trips increase to 15. It is the second largest carrier on many domestic routes, and beats Iberia on passenger count in two small but important routes - Madrid to Palma on the island of Mallorca, where Spainair is based, and between Barcelona and Las Palmas on Gran Canaria. Both islands are magnets for European tourists.
"Our goal is to have a 25% market share in routes we serve domestically," says Carlos Bravo, Spanair's director-general.
Owned 51% by Spanish travel agency Viajes Marsans and 49% by Scandinavian flag carrier SAS, Spanair has drawn on its ownership ties for expertise and executives to help build its scheduled business while maintaining its successful and profitable charter operation. It has also begun to take advantage of its relationship with Star Alliance member SAS to become something of a "junior partner".
Spanair began codeshare flights with SAS on Madrid-Copenhagen last year and is set to expand its partnership with the carrier this year. It also has a more limited codesharing relationship with Lufthansa on its Madrid-Frankfurt service.
Spanair has been consistently profitable since its inception, and had its best-ever profits of Ps1 billion ($6.5 million) in the financial year ended October 1998. But major challenges will test the carrier this year.
In 1999, Spanair is poised to take on Iberia in more markets, both domestic and international, and will expand its route network by at least seven destinations. It will also add eight aircraft to its fleet of 24 and is planning soon to select new Airbus or Boeing narrowbodies for its future fleet. At the same time, it must ensure its lean infrastructure can accommodate its growth, keeping current passengers happy while attracting new ones.
Flotation plans
If that is not enough in the "to do" column, Bravo says the company owners are giving thought to a share flotation. "The decision to go public is practically taken," he says. "What is not decided is the timing." Existing shareholders would retain 51% of the company in order to maintain European Union citizenship. Despite the expansion, Bravo forecasts a doubling of profits in 1999.
The planned increase in scheduled services stems from the availability of new takeoff and landing slots at previously constrained Madrid Barajas Airport, thanks to the opening of a third runway. The expansion at Madrid allows Spanair to increase flights on existing routes and paves the way for new destinations to be added to last year's 18-city scheduled network.
"We would prefer to have done this expansion at a slower pace, but timing is important," says Bravo. "A carrier has to take advantage now in case the slots are not available in the future."
Spanair's new services will include the opening of five Spanish cities to complete its planned domestic network. Flights from Madrid to Oviedo, Vigo and Alicante began in late February and Seville is being added for the new summer schedules.
Although Spanair seeks to operate at least two, and preferably three, daily round trips on domestic routes, Seville will be served only once a day for connecting traffic because a high-speed train service has cut demand for air travel. Valencia, on Spain's east coast, is slated for service in November, rounding out the internal route plan.
"Domestic Spain continues to be our bread and butter," says scheduled division director Frank Badino. "After Valencia, there will be no new Spanish points."
Flights to Lisbon and Stockholm from Madrid will also start with the summer timetable. Spanair will operate its Stockholm flights on a codesharing basis with SAS, like its Barcelona-Copenhagen flights. "This is our strategy," says Badino, "to go into new markets when we can do so with a strong partner."
Although it has been talking with its independent neighbour Portugalia, so far unsuccessfully, about a codeshare between the Spanish and Portuguese capitals, Spanair will begin two daily round trips without a partner, says Badino. The airline, which plans eventually to add Oporto, hopes the flights from Portugal will bring connecting passengers to its long-haul South American flights to Portuguese-speaking Sao Paulo and Rio de Janeiro.
During 1998, for the first time, Spanair carried more passengers on scheduled flights than on charters. Almost 2.7 million passengers were transported on scheduled flights - up 19% on the year before - which accounted for almost 53% of its total. This year's expansion will tip the balance even further.
According to Badino, Spanair expects to carry more than 3.5 million passengers on scheduled services in 1999 - a 32% increase - while charter traffic remains fairly constant. Because Spanair's domestic scheduled services in 1998 accounted for only 35% of its revenue passenger kilometres, that too will change.
Revenues - up 28% to 74.5 billion pesetas in the last fiscal year - and profits were split fairly evenly between the scheduled and charter divisions, but scheduled services are expected to account for a larger share of both from now on. In 1999, the company is forecasting a 22% gain in scheduled revenues.
Commercial director Ricardo Roda expects charter services to remain stable, providing a solid base for the company. More than 85% of its charter business repeats year after year.
"Until today, we've been a charter company operating some scheduled service," says Ola Ohlsson, director of passenger services. "From 27 March, we become a scheduled company operating a great deal of charter flights."
Another important management task this year is to reverse losses on some key routes, including Madrid to Washington DC, the airline's single US gateway. Spanair also loses money on twice-weekly one-stop flights to Buenos Aires through Rio de Janeiro, twice-weekly nonstops to Sao Paulo and its single daily Madrid-Frankfurt flight. Officials say they generally expect new services to be unprofitable at first, but to become profitable over time.
Star alliance links
For the Madrid-Washington route, launched in November 1998, Spanair officials are hoping for a link-up with Star partner United Airlines. SAS and Lufthansa have lobbied United, which has no service to Spain, to consider a codeshare and frequent flyer partnership on the route. Washington Dulles International Airport is one of United's growing hubs.
Spanair, the only carrier flying between Washington and Spain, has a limited marketing agreement and prorated fares with Atlantic Coast Airlines, the United Express carrier, but needs more substantial US connecting traffic at Dulles to make the route a success.
Spanair officials say a relationship would make sense for United too, allowing it to carry US government traffic that is restricted to US carriers and their codeshare partners and to provide flights throughout Spain for its passengers and Mileage Plus members via Spanair's growing Madrid hub. "United does not serve Spain, but could do without using its own resources," says Bravo. "United is friendly, but we are a low priority for them."
Early this year, Spanair unveiled Spain Plus, a programme offering low fares with hotel accommodation to eight spanish destinations from Washington. It has also upgraded seating and other amenities in its Avant business class, which it offers at full economy fares. Both moves have attracted new customers, but the numbers remain low and the airline is suffering from what Badino describes as "big losses" on the route. "It is looking up. The problem is, it has to look up a lot - and fast."
United signed an initial marketing agreement with Spanair in October, dealing primarily with interline connections and codesharing for cargo. The airline says it will continue to look at "what opportunities make sense in the future".
Craig Jenks, principal at New York-based Airline/Aircraft Projects, thinks a United pairing would add to the transatlantic competitive landscape, particularly with the stake that American Airlines and British Airways are taking in Iberia, linking it to the oneworld alliance. Rather than adding to international consolidation, a United-Spanair link would "legitimise a new competitive art form", says Jenks, where a large transatlantic airline would do a deal with a low-cost maverick at the other end.
"Washington-Madrid is a classic hub-to-hub route, but the hub at one end would be an upstart's hub," says Jenks. Although the one-route relationship is small, he adds, the Star Alliance would be making a case to the European Union and the US Justice Department that it is not interested only in monopoly operations on home turf, but is also willing to develop new competitive options where there are other alliances. Such a step would have an impact on the survival of maverick airlines and would also encourage a trend towards more competition within the alliance structure, says Jenks.
Spanair officials say they will reassess the Washington route in the autumn and will consider dropping it unless a strong US partner can be found. Spanair has interline connections with most US majors but, except for US Airways, no other prorate agreements. If Spanair drops Washington, it could consider New York, Miami or Chicago, officials say.
While going for aggressive expansion, officials are trying to keep costs - low by European standards - in check while adding the necessary infrastructure and staff, which totalled 2,022 last year.
Labour relations are set to change. To hold down wages in the past, Spanair signed up flight attendants on six-, 12- or 18-month contracts. Now it has agreed with the union to hire more permanent staff. To expand its passenger base, Spanair is counting on friendly staff, high travel agency commissions, attractive frequent flyer and other marketing programmes, and a strong service reputation.
How many other small airlines can boast 110 different menus on its flights to take account of the food preferences of the destinations it serves? "We try to adapt to the market," says Ohlsson. In 1999, the airline and its staff will have plenty of opportunities to adapt.
FLEET renewal
Spanair's rapid fleet expansion has so far been based largely around the McDonnell Douglas MD-80 series, together with two longer-range Boeing 767-300ERs. As the airline grows, it is beginning to look at a major fleet renewal over the next five years.
For the immediate future, Spanair will stick with the MD-80, confirming that yet more aircraft should be added to the current 22-strong fleet by the end of this year. Eight further MD-80 series aircraft are planned, allowing the airline to devote 18 MD-80s and the 767s to regular scheduled flights. A further 11 MD-80s will generally be used for charter operations, and the final narrowbody kept as a standby. On weekends, when domestic schedules are reduced, the charter division is boosted with six more narrowbodies.
But Spanair is already looking for a replacement for the MD-80, soon to become a discontinued product line as Boeing presses ahead with rationalisation at Long Beach. Not surprisingly, the airline is being courted strongly for the 45-aircraft order by Airbus, with its A320 family, and Boeing, which is offering 737-700/800s.The airline envisions a package of 15 firm orders, 15 options and 15 rolling options. The first 15 will be purchased with manufacturer-arranged financing, the second 15 with financial leases, and the third through operating leases. Current aircraft, all leased, will be returned as new aircraft arrive. Spanair plans to complete its new fleet by 2004.
Source: Airline Business
