Iberia and the future of the airline industry

Rosario Silva. Professor. IE Business School

11 January 2013

Spanish airlines are being forced to adapt by competition from low cost airlines on short and medium distance flights, and Asian airlines for long-haul flights. 

The European airline industry has undergone a transformation since its liberalization. Europe is the world region in which the so-called low cost airlines have secured the largest market share. Their strong growth in recent years (the number of passengers transported by Ryanair and Easyjet went up in 2010 by 9% and 13% respectively) is proof of the fact that the segment has not yet reached maturity and will probably expand further, which means that we can expect to see these airlines capture the lion’s share of the growth forecast in Europe. Moreover, the appearance of large Asian low-cost airlines like Air Asia, which have managed to develop a long-haul flight market, may serve to kick start similar lines of action among their European counterparts, which will pose a considerable threat to traditional airlines’ more profitable lines of business.

The growth in demand in the Asia-Pacific region and the congestion that plagues European airports may result in another challenge for Europe’s airline sector. There is now growing competition from Middle Eastern airports which have a greater capacity for growth and a good geographic location (halfway between Europe and Asia for serving as hubs for traffic coming from Europe, Africa and America, bound for Asia. Dubai has, for example, an airport with a capacity for 75 million passengers and is building another equipped to serve 120 million passenger (double Heathrow’s capacity). The rapid growth of efficient airlines in this region, like that of Emirates, would seem to indicate that traditional European airlines are facing tougher competition on long-haul routes with the greatest growth potential.

Over the years Europe’s traditional airlines have adapted by means of mergers and acquisitions, alliances and successive restructuring. Iberia began its restructuring process under the management of Xabier de Irala. Since the end of the nineties there have been more changes in the composition of the network focusing on long-haul flights, mainly to Latin America, cutting under-used routes, and transferring domestic flights to regional airline Air Nostrum. Those years also saw a reduction in operating and commercial costs through the renewal and standardization of the fleet and entry into the OneWorld alliance.

At the beginning of the twenty-first century Iberia was a profitable private company with a leading position in the Europe and Latin America markets. However, it encountered serious problems when competing in the European market due to the intense rivalry of new, low-cost competitors which were growing fast in the Spanish market. Although it had made efforts to become more efficient, its cost per Available Seat Kilometer (ASK) in 2005 was still double that of low-cost rivals like Ryanair. The cost of personnel is where new airlines have gained the greatest advantage, due to lower salaries and greater productivity. Iberia’s past as a public sector company meant it had acquired a series of commitments that had become very difficult to revoke, as shown by the continuous labor disputes it has experienced. The entry into the segment of low-cost airlines through a stake in Clickair did not solve the problem of competitiveness on short and mid-distance flights, which play a key role in keeping long-haul flights operating well. Given the difficulties involved in reducing costs, it seems reasonable to create a new company (Iberia Express) to operate these routes in similar conditions to those of its competitors.

As we have seen, Iberia’s challenge is not only in terms of short and medium-distance flights, but also for the shift in demand for long-haul flights toward Asia, and the entry of highly efficient competitors in all markets.  The merger of Iberia with British Airways therefore forms part of a drive for growth and efficiency in long-haul flights.

The low profitability of European airlines and the air sector in general on a global level, having only managed to achieve positive results for a total of three years in the last decade, doubtlessly means that there is a need to make greater cuts. The restructuring recently announced by Iberia follows cuts made by other major airlines like Lufthansa. The more interested governments become in having efficient airlines operating in their territories, and the less concerned they are about the provenance of ownership of said airlines, the more possibility there will be of seeing changes in regulations to permit a greater integration of airlines and their conversion to multinationals that make a profit, free of costly past commitments.

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