By Rhys Jones
LONDON, Sept 17 European airlines will have to
cut costs at existing short-haul businesses to compete with
budget airlines or struggle to stay aloft, IAG boss Willie Walsh
So-called legacy carriers such as IAG, Lufthansa
and Air France-KLM are cutting jobs, renegotiating
staff contracts and dropping uncompetitive routes to get costs
on a par with budget carriers, such as market leaders Ryanair
They are also replacing older, fuel-thirsty planes and
streamlining back-office operations.
"We're focused on reducing out cost base and making our
short-haul business more efficient ... those that don't will
struggle to survive," Walsh said on the sidelines of the World
Low Cost Airlines Congress in London on Tuesday.
"We have Vueling and I think every airline should aim to
have an independent low cost arm."
In current cut-throat market conditions, even some of the
budget airlines are finding it tough. Ryanair earlier this month
warned it could its miss annual profit target due to lower
demand across Europe. Fast-growing budget carrier Norwegian Air
also said revenue per passenger fell in August, partly
due to competition.
British Airways and Iberia parent IAG bought Spanish
discount carrier Vueling for $180 million in April to help stem
losses in Spain, where Iberia's short-haul business has been hit
by competition from low-cost airlines and high-speed trains.
British Airways previously tried to run a low-cost airline,
Go, alongside its mainline carrier but sold it to private equity
group 3i in 2001 after it under-performed.
"There was a lot of management interference in Go and it
started cannibalising BA to some extent so we have left Vueling
as a separate, independent airline," said Walsh.
"Alex Cruz (Vueling CEO) is running Vueling the way he
always has and we're not changing his business model."
IAG, Europe's third-biggest airline by market value, has
spent almost $1 billion to lower the cost base at Iberia and
also set up Iberia Express last year to operate short-haul
routes from Madrid to feed into Iberia's long-haul network.
"Costs at Iberia Express, excluding fuel, are 40 percent
lower than they were at Iberia's short-haul business," said
Walsh. "To compete you need a lower cost base, it's simple."
In August, IAG said Iberia, Europe's biggest carrier to
Latin America, had started to turn the corner, despite reporting
a loss of 35 million euros in the three months to June 30.
Earlier this year, Air France-KLM formed a new French
regional airline unit called Hop! to respond to competition from
low-cost rivals, while Lufthansa is transferring its domestic
and European non-hub flights to its low-cost arm Germanwings.
Recent research from KPMG shows it costs a low-cost carrier
$12,000 less to operate a return service between London and Rome
than it does for the average legacy airline.
"The concept of customer loyalty to a brand is becoming
obsolete as the service now being offered by low cost and legacy
carriers is more or less the same," said James Stamp, a partner
at KPMG's Global Aviation Team. "Price has become the key factor
for customers when it comes to choosing a short haul flight."
IAG's Walsh also said he would not shirk from taking on
unions opposed to reforms at Iberia but that there was no
agreement yet with Spanish pilots' union Sepla. He said in June
that more than 3,000 job cuts were just the beginning.
Walsh said IAG was unlikely to take part in any more
European airline consolidation and sees more interesting
opportunities outside Europe.