Overcoming the threat of low cost carriers:

The effects of partnerships and imitation

Iberia airline business case

Anuroopa Kataria (6126391) Universiteit van Amsterdam MSc Business Studies - Strategy track Supervisor: Drs. J.G. de Wit 11 July 2014 Abstract

As a response to the increasing threat of low cost rivals on short haul markets that jeopardize the hub & spoke system, full service airlines attempted to capture this threat by forming partnerships with these competitors or imitating them. The implemented strategies are aimed at lowering the high cost structure of full service airlines for short haul operations, to similar cost structures of the low cost rivals. Simultaneously, full service airlines are required to maintain the connectivity of their hub & spoke system as part of their competitive position.

The aim of this study is therefore to examine the actual effectiveness of strategies of partnership and imitation regarding cost reduction and connectivity by analysing Iberia airline that implemented the dual strategic action of imitation and acquisition. The airline formed a partnership by acquiring low cost airline Vueling and applied the strategy of imitation by developing low cost subsidiary Iberia Express. The analysis is based on Iberia’s annual reports, OAG data of Iberia’s route schedule and reports of CAPA. The results indicate that subsidiary Iberia Express indeed contributes to a lower cost structure on the short haul operations of Iberia as well as improved connectivity for Iberia’s network system. Vueling on the other hand, expands Iberia’s network with an intra-European network on hub Barcelona.

The operations do not interfere with the hub & spoke system of Iberia in Madrid, so Vueling does not affect the connectivity of Iberia’s hub & spoke system. In this way, Iberia controls the low cost competition both in Madrid and Barcelona and therefore accomplishes a successful implementation of both the acquisition strategy and imitation strategy.

2 TABLE OF CONTENTS

I. Introduction 4 II. Changing business models 6 III. Dynamic capability view 9 IV. Partnerships & Imitation 12 4.1 Non-equity based partnership: alliances 12 4.2 Equity-based partnership: acquisitions 15 4.3 Imitation: airline within an airline 17 V. Iberia airline business case 19 VI. Summary & research question 22 VII. Research methodology 24 7.1 Research design: case study 24 7.2 Research instruments and procedures 24 VIII. Results 26 8.1 Costs 26 8.1.1 Operating performance & CASK 26 8.1.2 Passenger number & share 30 8.1.3 Labour costs 32 8.2. Connectivity 37 8.2.1 Total number of flights 37 8.2.2 Types of flights 38 8.2.3 Top ten routes 39 8.2.4 Substitution and expansion of Iberia’s route network 40 8.2.5 Hub & spoke system of Madrid 42 8.2.6 Hub & spoke system of Barcelona 47 IX. Discussion 50 9.1 Imitation: Iberia Express 50 9.2 Partnership: Vueling 53 9.3 Limitation and future research 54 X. Conclusion 55 XI. References 57 XII. Appendix 1: list of figures and tables 64 XIII. Appendix 2: airport codes 65

3 I. Introduction

A threatening announcement in the Financial Times at the end of last year reads: ‘Europe’s airline distinction blurs as strategies merge‘ (Barber, 2013). What has happened since the

1980’s, when liberalization emerged in the European airline industry? In short, it led to changing business models (Vlaar et al., 2005). Before this period, only two types of players operated in the industry: legacy and charter airlines. Nowadays there are charter carriers, leisure carriers, hybrid carriers, low cost carriers and full service carriers (Klophaus et al.,

2012; Wensveen and Leick, 2009; Doganis, 2001; Alderighi et al., 2005). Obviously, competition increased massively, especially for full service airlines. On one hand, their long- haul routes suffered from competition due to the increasing numbers of airlines with a hub- and-spoke system and because of the rise of Gulf carriers (Graham, 2009; O’Connel, 2011;

De Wit, 2013). On the other hand, short-haul routes of full service airlines suffered from the growth of low cost carriers; over the years, these airlines have gained market share of 47%

(Doganis 2001; Alderighi et al., 2005; CAPA, 2013). As a result, the hub & spoke system with connections between short-haul and long haul routes came into jeopardy. Full service airlines experienced difficulties managing the competition of the low cost players because their cost structure goes far beyond the cost structure of low cost airlines (Dennis, 2007).

Consequently, full service airlines were forced to lower their cost structure for short haul operations in order to improve their competitive position and trying to obstruct the jeopardy of their network system. As a first attempt, full service airlines developed low cost subsidiaries, also known as airline within an airline concept (Morrell, 2005). KLM for example, tried to survive in the market with low cost airline Buzz while British Airways developed the airlines GO. Both of them were unable to make the strategy successful. They had difficulties managing a completely different business model, opposite of their own core ideology, whilst being bound to long-term contracts with suppliers and other external parties.

4 Later on, additional forms of cooperation such as acquiring existing low cost carriers were implemented (Lenartowisz et al., 2013). In 2009 Lufthansa, for example, acquired the low cost market leader in Germany; Germanwings (CAPA, 2013). Recently, full service airlines are considering the possibility of forming alliances with low cost carriers. Airline alliances

‘SkyTeam’ and ‘Star Alliance’ want to offer a partnership platform for low cost carriers

(CAPA, 2013). In this way, full service airlines can cooperate with low cost airlines through code sharing and other non-equity forms of cooperation (Oum and Zhang, 1996; Das and

Teng, 2000).

Whereas previous literature focuses on the threat phenomenon that full service airlines experienced after the liberalization and imply diverse strategies of cooperation and imitation, little evidence exists regarding the actual effects of these strategies with regards to cost reduction and connectivity in the hub-and-spoke system. Therefore, the aim of this research is to analyse effects of partnerships and imitation on the possibility of cost reduction and improvements of connectivity of the hub-and-spoke system. The study contributes to the existing literature with an analysis of effective responses of full service airlines to the threats of low cost carriers as well as giving new insights to airline managers for future strategic actions they should take in order to transform the competitive threat of low cost carriers into a permanent opportunity.

The structure of the paper is as follows: first an overview of the existing literature on the changes in business models is outlined, after which the theoretical framework and research design of the business case will be examined. Next, the results of the analysis will be presented and discussed and finally, the conclusion will be provided, including the limitations and implications for future research.

5 II. Changing business models

This section goes in-depth in the developments after the liberalization that has led to the successful low cost carriers on one hand and the threatened full service carriers on the other.The deregulation in 1983 caused new opportunities for European carriers to compete on international markets and other markets that were closed before (Oum et al., 1995; Doganis,

2001). For flag carriers as well as charter airlines, reacting to this situation meant reconsidering and innovating their business models (Chesbrough & Rosenbloom, 2002).

Chesbrough & Rosenbloom (2002) characterize a business model as being comparable to a marketing strategy; it is a ‘plan of action’ how to sell and target a product, eventually to make money. It comprises of a framework representing airlines’ corporate core competences, value chain activities, assets and capabilities (Daft & Albers, 2011). The flag carriers started to offer high frequency flights on routes that generated huge amount of traffic, while minimizing frequency on routes with a small amount of traffic (Oum et al., 1995). Destinations with minimized route frequencies became attainable with indirect flights via the high frequency routes; connecting on specific primary, base airports of the airlines (hubs). In this way, the hub and spoke system emerged. The target customers are widespread: from quality conscious passengers to price conscious passengers and from business passengers to leisure passengers.

Therefore, the value propositions for passengers are also prevalent with different travel services based on different seat classes and booking classes. Free food and beverages; the offer of frequent flyer programs with access to business lounges and privileged sky-priority handling are examples of such value propositions. The assets that are required to carry out the value propositions include multiple aircraft types (with relative low utilization rates), complex fare system with different booking codes through yield management and most importantly large number of personnel (Wensveen and Leick, 2009; Vlaar et al., 2005). So, the high costs of managing this system are derived from transfers and connections of different planes. In the 6 same way, delivering high service raises the costs of maintenance and overhaul; passenger services expenses, flight operation costs and mostly personnel costs, both ground staff as flying staff (Doganis, 2006). Full service airlines also face the responsibilities of long-term contracts with a network of stakeholders, including various suppliers, which have to be carefully managed, because these airlines are serving several markets (Pels, 2008). Overall, the competitive strategy is centred on differentiation by offering high service and transfers through connecting flights.

Former charter airlines took another approach in changing their business models as a response to the opportunities that occurred after liberalization. Part of charter airlines developed in leisure airlines with seasonal and occasional low-priced flights. Another part continued with the original model but with a solid product of inclusive tour trips or reversely a seat-only product, without holiday accommodation. So these two types of airlines operated according to irregular route schedules with low services but indeed at primary airports

(Papatheodorou and Lei, 2006). Another part of charter airlines transformed in low cost airlines and together with new players that entered the industry carrying out a low cost business model as well, a new type of airline emerged (Papatheodorou and Lei, 2006). The target market of these airlines is the price-conscious market, mainly OD passengers (origin- destination) that fly from one point to another on short-haul routes between secondary airports

(IATA, 2011). This system does not require as much costs as the system of full service airlines due to the lower airport charges of secondary airports and lower operational ground expenses of a no-frill concept with unbundled services. This refers to no seat assignment, single classes and pay services on board such as food and beverages (Doganis, 2006; Pels,

2008; Vlaar et al., 2005). The value chain activities to maintain this point-to-point system with minimal service are thus not that widespread as full service airlines. The assets that are required only include one type of aircraft (with high utilization) with quick turn around time; 7 simple, online booking services with early and late booking structures and a small number of personnel with non-unionized workforces (Doganis, 2001; Wensveen and Leick, 2009; IATA,

2011). This leads to low maintenance and overhaul costs as well as flight operation costs; low passenger service expenses and low personnel costs (Doganis, 2006). Furthermore, the lack of long-term contracts allows choosing or considerably stopping to serve particular markets based on the significant profitability of the route, namely destinations and airports, (IATA,

2011). Figure 1 gives an overview of the cost difference per ASK (Available Seat Kilometres: measure for an airline’s capacity to transport passengers) for several low cost airlines compared to network airlines in the European market. It is important to note that this figure is from a report in 2006, which is 8 years old, but after this period no reports are published on this matter.

Figure 1 Cost difference per ASK for low cost airlines and network airlines

Source: IATA Report 2006 Airline cost performance

Overall, the main players in the airline industry changed from legacy and charter airlines to full service airlines with an expensive hub & spoke system and a decreased competitive position on one hand and low cost airlines with an inexpensive point-to-point system and a good competitive position on the other hand 8 III. Dynamic capability view: sensing, seizing and reconfigurations

In order for full service airlines to survive in times of rapidly changing environments, as they need to improve their competitive position compared to the low cost rivals, they are required to develop sufficient market orientation skills; the ability to anticipate, react to, and capitalize on business environment changes (Martin-Consuegra & Esteban, 2007). This refers to dynamic capabilities: the ability to integrate, build and reconcile internal and external competences to address the rapidly changing environment (Teece et al., 1997). The dynamic capability view argues that capabilities can be homogeneous, substitutable and imitable because the path dependency matters more because there are multiple paths to the same dynamic capability. Differences between firms and so the differences in competitive position are thus based on the ability to learn from mistakes due to the speed of learning to be able to implement and codify the learning experiences into formal procedures and routines in an effective way (Collis & Montgomery, 2008; Nelson, 1991; Joyce et al., 2003; Eisenhardt and

Martin, 2000). Examples of dynamic capabilities are strategic and organizational processes, product development routines, exit routines, strategic decision-making capabilities and forms of cooperation (Eisenhardt and Martin, 2000).

Developing dynamic capabilities to survive in the rapidly changing environment as mentioned above, will make it able for firms to shape their own business environment to get ahead of competitors. This goes according to three steps: sensing opportunities or threats, seizing by capturing the opportunities or threats and reconfiguring the seized opportunities or threats. The first step of sensing implies using entrepreneurial skills to discover opportunities in the market and benefit from information sources, which include the top management team but also employees down the line, customers and especially suppliers who are also supplying competitors. Firms should also scan the environment through analytic processes and monitor consumer needs and preferences (Teece, 2007). In the past, the former charter airlines sensed

9 the opportunity to anticipate to the customer need for simple, low cost airline services with short routes from one destination to another (CAPA, 2013). Consequently, full service airlines sensed the threat of the increasing power these low cost airlines got, changing the lifestyle and behaviours of passengers, as can be concluded from figure 2 that shows the increased market share of low cost airlines over the years in different continents in the period of 2000 to

2006 (Wensveen and Leick, 2009).

Figure 2 Market share of low cost airlines between 2000-2006

Source: IATA Report 2006 Airline cost performance

Losing competition on these short-haul routes means cancelling non-viable short haul routes that also feeder the long haul operations. This also means the loss of passengers that transfer from short-haul routes to other short- or long-haul routes and thereby endangering the break- even load factors in the network system. In this way, these airlines sensed the opportunity, or even the need, to overcome the competitive threat by reducing its cost, with the aim of advancing the competitive strategy of low cost leadership (O’Connell, 2007; Dennis, 2007).

After identifying the opportunity or threat, it is important to seize or capture it. During this step of the process, the business model and value chain activities of the firm need to be reconsidered (Teece, 2007). In the case of full service airlines, seizing the threat of low cost 10 airlines implied restructurings that could lower their cost structure. A decision had to be made as to which strategic action was most applicable to realize cost reduction (Teece, 2007). These strategic actions refer to the various forms of cooperation and the imitation strategy that are mentioned in the introduction in section 1. In general partnerships vary from discrete, short- term contracts to complete mergers of two or more firms. Partners participate in joint operations with the aim of improving competitiveness and overall performance (Morrish and

Hamilton, 2002). There are several reasons that lead to strategic partnerships but the most important is to get access or acquire resources that a firm is not able to develop on its own.

For airlines it is important to get access of new markets and routes in which the airline does not operate (Rothaermel and Hill, 2005). Other than that, strategic partnerships reduce uncertainty in a dynamic environment, which allows quick adaptation (Das and Teng, 2000).

Nevertheless, working with another firm can be risky because a firm may lose competitive advantage at the cost of forming a partnership and conflicts may arise when combining the firms, both in personal and cultural dimensions, as well as operational processes (Das and

Teng, 2000). In the following sections, the partnerships between low cost carrier and full service airlines as well as the imitation strategy will be examined in more detail.

As a last step of shaping the business environment, firms have to consider reconfigurations of their implemented strategy and continuously manage threats in order to maintain the competitiveness. This includes threats of imitation of (potential) competitors and continuous realignment of integrating and combining all their learning experiences from the past. The reconfiguration step does not necessarily mean radical changes, because building on earlier experiences enables to implement incremental changes without taking too much risk

(Teece, 2007). Full service airlines should thus evaluate the implemented forms of cooperation with low cost airlines and the imitation strategy.

11 IV. Partnerships & imitation

The previous section examined existing literature on the developments of changing business models in the airline industry and the process of full service airlines to shape their business environment according to the dynamic capability view. In this section, the specific dynamic capabilities of forms of cooperation and imitation will be examined, as already briefly mentioned in previous sections. The focus is on the possibilities of full service airlines to work together with low cost airlines.

4.1 Non-equity based intercontinental partnerships: alliances

Non-equity partnerships signify partnerships without input of equity and therefore, without complete or shared ownership of assets or an entity (Das and Teng, 2000). Every partner manages its resources independently and each party performs its individual tasks, so there is little integration (Das en Teng, 2000; Dyer et al., 2004). The airlines seek to increase ownership in the global market by expanding their route network. Within national borders mergers and complete take-overs are allowed, but this is often restricted for cross border partnerships due to governmental regulations for foreign ownership and effective control clauses in bilateral air service agreements between the states involved. If an airline of a state market gets more than 49% ownership of an airline that is registered in another state, other states for which the airline has traffic rights to operate routes to and from those states can dispute these traffic rights since these no longer belong to a carrier that is owned and controlled by the state in which it was registered. In this way, airlines are somewhat forced to engage in alliances with airlines of other foreign markets to overcome the government regulations and entry & investment barriers (Agusdinata and De Klein, 2002). An alliance enables that the global network of all the members of an alliance expands, without foreign

12 ownership. It gives them the opportunity to provide their service and consequently improve their brand image across the global market. (Agusdinata and De Klein, 2002).

Code sharing is a common form of full service carriers to operate in alliances in order to expand their global network. The booking can be done by several cooperating airlines, but the flight is operated by only one of the airlines. Code sharing airlines have different flight numbers and designation codes, but it concerns the similar flight from the same departure city to the same destination at the same time (Oum and Zhang, 1996). In this way, the network of the cooperating airlines grows while not having to invest in new routes and to enter a new region (Morrish and Hamilton, 2002). However, code sharing does require process integrations in order to support product and service alignment between the partners. The reservation, booking and check-in systems and services have to be similar, as well as frequent flyer recognition and baggage handling services. Consequently the investments could become very costly (CAPA, 2012). However, in the long run joint production of full service airlines can reduce costs: the flight operating costs, personnel costs and the maintenance and overhaul costs decline due to shared business lounges; shared transfer desks, self-service machines, aircraft and joint ground staff (baggage handling, catering, ground staff at the gate)

(Contractor and Lorange, 2002). The three global airline alliances of full service airlines are:

SkyTeam, Star Alliance and One world. Low cost airlines partners of these airlines only concern subsidiaries and affiliates of full service airline members, thus no independent low cost airlines are involved as full members in an airline alliance yet. Although, alliances in the sense of bilateral relationship agreements do exists between low cost airlines and full service airlines. As an example, Air France-KLM can sell seats on the Australian low cost airline

Jetstar. However, sometimes these domestic markets, such as Australia, are inaccessible for foreign airlines. A European airline, such as Air France-KLM is not allowed to transport payload between two points inside Australia, due to the absence of traffic rights (CAPA,

13 2013). Still an agreement between an low cost airline operating in an domestic market and a full service airline operating in intercontinental markets results in expansion of network, especially for the full service airline that is restricted to operate in the domestic market

(CAPA, 2011). The Brazilian low cost airline GOL even got a step further by establishing bilateral relationships with: Delta Airlines, Aeromexico, Air France-KLM, Iberia and Qatar

Airways, which increased its international network massively. Unlike code sharing agreements between alliance members, domestic low cost airlines and full service airlines do not require process integration but also do not benefit from joint production in the long run.

For low cost airlines this will not be advantageous for their low cost structure anyhow

(CAPA, 2011; CAPA 2013).

Since full service airlines increasingly feel the threat of low cost airlines, alliances

‘Star Alliance’ and ‘SkyTeam’ want to go beyond the bilateral relationships by considering the option to incorporate the low cost competitors as a mean to reduce competition and improve coverage in key markets (CAPA, 2013). SkyTeam wants to offer members to affiliate and partner with selected low cost airline through a hybrid partnership platform.

Potential candidates concern independent low cost airlines that do not have agreements with their domestic full service airlines yet, such as the Brazilian low cost GOL and are willing to form an agreement with one of the full service alliance member that operates in the particular domestic market (CAPA, 2012; CAPA 2013). However, SkyTeam and Star Alliance members do not agree with this strategic action. According to them, partnering with low cost airlines will damage the image and alliance’s offering (CAPA, 2013). It is also not fair in their opinion that the low cost airlines can also benefit from the partnership without being required to invest in the partnership and operate according to the regulations of membership.

They argue that low cost airlines should only be incorporated if they completely meet the requirements of an alliance member. If not, they should engage in simple bilateral

14 relationships with individual members (CAPA, 2013). Since this type of partnership: alliances between full service airlines and low cost airlines, is still a topic of discussion and not yet fully implemented, alliances will not be included in the analysis of this study.

Nevertheless it is considered on of the most important forms of cooperation in the airline industry, as explained above.

4.2 Equity-based partnership: acquisitions

Equity based partnerships are characterized by firms seeking growth and strengthen the relationship with stakeholders and customers, as well as providing access to new assets and acquiring more market power (Joyce et al., 2003). This partnership is risky, expensive and often appears to be more simplistic than it actually is because it involves the take-over or combination of equity, including ownership rights (Dyer et al., 2004). Firms that decide to acquire another business do not always take into consideration the path dependency and the deeply rooted culture. This may cause conflict during the alignment; such as anti-trust issues and increasing coordination costs (Dyer et al., 2004). As a form of equity based partnership, firms can engage in a joint venture in which all the parties contribute their own equity to develop a new entity and assets. Therefore, every party has ownership of the entity, and they share all the expenses, earnings and resources. Lufthansa and Turkish Airlines are an example of two full service airlines that create a joint venture in 2009: low cost airline SunExpress.

This airline operates point-to-point flights between Europe and Turkey (CAPA, 2013). If the level of competition is high in the industry due to many rivals, a complete take-over is most beneficial. KLM for example, acquired low cost airline Transavia in 1999 (KLM.COM).

Similarly, Lufthansa decided to take full ownership of low cost airline Germanwings in 2009, as was mentioned in the introduction. It has to be noted that complete take-overs of airlines that operate outside the European market often get obstructed by the related countries through

15 regulations of taking full ownership in foreign airlines (Dyer et al., 2004). In result, airlines often acquire only part of another airline at first. So, to a smaller extent, regarding the input of equity and level of ownership, minority equity partnerships also exist between airlines. Full service airline Etihad airways for instance attempted to increase traffic to its hub Abu Dhabi with low cost carrier Air Berlin (Etihad.com). Lufthansa on the other hand, wanted to enhance its international market position in 2007 by acquiring a small part of US’ low cost airline

JetBlue that operates on hub JFK New York (CAPA, 2008). With such minority acquisition, the parent firm is intended to work closely together and execute tasks through an iterative knowledge-sharing process. Full service airlines that obtain a low cost airline gain the aircraft and maintenance equipment but this is not relevant because full service airlines already own a wide variety of aircraft. However, airlines lack employees with low wages and inexpensive maintenance and overhaul equipment as well as skills of short turnaround processes, so these are indeed an essential resource they intend to gain in order to realize cost reductions on short haul operations (Dyer et al., 2004). Though, full service airlines need to take into consideration that it will be difficult to integrate the well-developed point-to-point route schedule with the existing hub-and-spoke route schedule in order to substitute the lower cost operations of the acquired airline with their expensive operations. This means that the connectivity between the acquired and operating routes requires serious deliberation between the low cost airline route schedules on one hand, and the full service airline route schedules on the other hand. It could lead to increasing coordination costs (Malighetti et al., 2008).

In conclusion, due to the highly competitive environment that full service airlines faced, some decided to acquire one of their low cost competitors. Mainly to gain cheap personnel and lower other operating costs, by substituting an unbundled service business model and point-to-point route schedule with their own expensive system. Although the substitution is assumed to be difficult to manage because of the necessity to integrate the

16 already existing route schedule of the acquired airline in the already existing route schedule of the parent full service airline, which affects the connectivity of the hub-and-spoke system

4.3 Imitation: Airline within an airline

Another strategy that full service airlines have been conducting as a response to the increasing threat of low cost airlines is the creation of a subsidiary low cost airline. As mentioned in the introduction both KLM and British Airways failed to succeed with their low cost subsidiary.

From sixty-seven airlines that applied this strategy in the market, there are twenty-seven that failed, so it appears to be a difficult strategy to accomplish (Pearson and Merkert, 2014).

Table 1 gives an overview of various unsuccessful European airline subsidiaries.

Table 1 Failed European subsidiary airlines

Country Airline Airline ownership Start date End date UK Buzz 100% by KLM 2000 2004 UK Go Fly (GO) 100% by British Airways 1998 2003 UK MyTravelLite 100% by MyTravel 2002 2003 UK Thomsonfly 100% by Thompson 2005 2008 UK Bmibaby 100% by IAG 2002 2012 Sweden Snowflake 100% by SAS 2002 2004 Finland FlyNordic 100% by Finnair 2004 2008 Germany HLX 100% by Hapag-Lloyd 2002 2007 Netherlands Basiq Air 100% by Transavia 2000 2005 Netherlands V-Bird 100% by Dutchbird 2003 2004 Poland Centralwings 100% by LOT 2004 2009 Italy Volareweb 100% by Alitalia 2008 2009

Source: Pearson and Merkert (2014)

It is very difficult for incumbent full service airlines to develop a low cost airline because such airlines have a completely different strategy. It requires a whole new way of thinking differently of their focus on the network system serving the international market based on extensive services and quality for their customers. In addition, it is often difficult to form new

17 labour agreements and eventually these agreements turn out to be similar to the labour agreements of the parent airline that still does not lead to cost reduction at the end.

Furthermore, the subsidiary airline makes use of expensive facilities of the parent airline, such as maintenance equipment, which also makes it difficult to develop a low cost structure for the subsidiary airline. Moreover, wages of the managers of the parent airline also derive high costs (Pels, 2008; Pearson and Merkert, 2014; Gillen and Gados, 2008). Pearson and Merket

(2014) however, do provide criteria for a subsidiary airline to succeed. First of all, parent airlines should not develop a subsidiary simply to help reduce costs and losses by shifting the routes that create decreasing revenues onto low-cost subsidiaries. On the contrary, parent airlines should have a clear purpose and goal for the subsidiary airline with a structured direction, separate from the issues and goals of the parent airline. Low cost subsidiaries often fail to become profitable because of poorly defined strategies and the lack of decisive leadership (Pearson and Merkert, 2014; Gillen and Gados, 2008). Furthermore, subsidiary airlines are expected to catch up on their late market entrance compared to the first movers such as easyJet and Ryanair. These airlines had the time to promote themselves as the ones offering low cost tickets for the first time; this enhanced their brand image. Subsidiary airlines may succeed in targeting un-served or under served routes and cities. So a pro-active approach of the management team is certainly necessary, although subsidiary airlines can benefit from the brand image of their parent airline (Pearson and Merkert, 2014; Gillen and

Gados, 2008). However, the link between the parent company and subsidiary should be flexible, not suffering from excessive management control from the parent airline. This will otherwise reduce the ability to adapt to internal en external rapid changes, and it slows downs the decision-making process.

Most often existing resources of the parent airline are restructured to low cost resources. This would for example mean that the wages of their existing employees have to be

18 lowered, or new employees have to get hired with new labour agreements, Besides that, parent airlines are able to use their own aircraft on the short-haul routes. (Gillen and Gados,

2008; Dennis, 2007). If the labour agreements and other operation assets are well restructured, the parent airline does benefit from cost reductions, due to substitution of their short haul operations to the low cost subsidiary with lower unit costs as was discussed in the changing business model section 2. Unlike acquiring an existing low cost airline, subsidiary airlines do not have a well-defined route schedule that has to be integrated into already existing route- schedule. The parent airline can develop a new route schedule that is based on the already existing one for substitutions. This is advantageous for the connectivity and coordination costs of the operating hub-and-spoke system of the parent airline (Malighetti et al., 2008).

In conclusion, full service airlines that decide to develop a subsidiary low cost airline to overcome competition need to be aware of various drawbacks. However, restructuring the existing, expensive assets into cheap assets including lower-waged personnel and equipment for delivering unbundled services, leads to lower cost structures for short haul operations. In this sense, developing subsidiary low cost airlines that substitutes short haul operations, yield lower costs for full service airlines (Pearson and Merkert, 2014; Gillen and Gados, 2008;

Dennis, 2007). The connectivity of the hub-and-spoke system will also improve because there is no requirement for integration between separate route schedules, which gives the parent airline the ability to considerably anticipate on distortions in the route schedule (Malighetti et al., 2008).

V. Iberia airline case

In this section the developments of the business case Iberia are examined. Iberia is the leading airline in Spain, and the main carrier in transfers between Spain and Latin America since its launch in 1927. With hub Madrid Barajas Airport, domestic flights, intra-European flights and

19 intercontinental flights are conducted (Iairgroup.com, 2014; Grupo.iberia.es, 2014). The airline also serves as a member of One World Alliance since 2004. Since 2007, Iberia suffered from huge losses: from 2007 to 2012 Iberia has an accumulated loss of more that 1.1 billion euros, with the worst result in 2009 with an operating loss of almost 500 million euro’s

(CAPA, 2014). Figure 3 shows the decline in operating performance of Iberia over the years

2005 to 2013.

Figure 3 Iberia revenue and operating results from 2005 to 2013 in million Euro’s

Source: CAPA

During this period, the economic crisis hit Spain, but Iberia’s poor management could not manage the increasing competition in the airline market anyhow. Iberia’s cost base on short haul routes has been uncompetitive for years in comparison to low cost airlines such as

Ryanair and easyJet that also operate on the Spanish market. Besides that, the poorly managed fleet coordination and route network with low utilization did not help either (CAPA,

2014). Iberia’s competitive position got even worse by the increased competition on its long haul network of Latin America. Instead of making profits as usual for full service carrier on

20 long haul routes, Iberia struggled to compete with rivals such as Latam Airline Group, a merger between Brazilian and Chilean Airlines (Parker et al., 2012).

As an approach to overcome the competition and compensate the losses, Iberia had the intention to merge with British Airways and American Airlines in 2008, with the aim to align fares, routes and schedules. However, US government obstructed the merge. Nevertheless, in

2010 the European Union approved the merge between British Airways and Iberia, with the creation of International Airlines Group while American Airlines, Iberia and British Airways also got approval to operate a Joint Business Agreement on transatlantic flights

(Iairgroup.com, 2014; Grupo.iberia.es, 2014, CAPA, 2014). In both of these cases, the airlines continued to operate independently under their own current brand.

In 2011, Iberia continued to carry out actions against the increasing competition, especially on their short haul operations. The airline acquired the Spanish low cost carrier

Vueling. This airline was created in 2004 and has its base at Barcelona El-Prat Airport. In

2009, Vueling made the decision to merge with its Spanish rival Clickair under the name

Vueling. As a result, it evolved into the second largest Spanish airline. Currently, Vueling is the largest airline at Barcelona (Iairgroup.com, 2014; Grupo.iberia.es, 2014, CAPA, 2014;

Vueling.com, 2014).

Besides the acquisition of low cost airline Vueling, Iberia also decided to imitate the low cost competitors by developing a subsidiary airline in 2012: Iberia Express. This airline is designed to provide the hub Madrid with a feeder system that operates according to a lower costs structure than Iberia had been able to provide in the previous years (CAPA, 2013).

Iberia also developed Iberia Express because the airline was aware that it required drastic internal changes, to solve the poorly managed operations. Therefore, Iberia developed the so- called Transformation Plan for restructuring in 2012 (CAPA, 2013; CAPA, 2014). However, to be in a position to carry out the restructurings, subsidiary Iberia Express was adopted to

21 substitute part of Iberia’s operations, so that Iberia could focus on putting the plan into practice. In this study the effects of Vueling and Iberia Express on Iberia’s route network and the cost structure will be analysed.

VI. Summary & research question

Overall, the differences between the business models of full service airlines and low cost airlines that emerged after the deregulation is essentially based on the difference in competitive strategy: differentiation vs. low cost leader. Full service airlines compete with high quality service of their hub and spoke system, requiring investment in costly resources, while low cost airlines make use of cheap resources in order to carry out a low cost leadership strategy on point-to-point routes. (Wensveen and Leick, 2009; Vlaar et al., 2005; Doganis,

2001). Acknowledging the shift of customer preferences towards less expensive flights instead of high quality service on short-haul routes and resulting in the increasing growth of low cost airlines, full service airlines sensed the pressure to lower their expenses (O’Connell,

2007; Dennis, 2007; Wensveen and Leick, 2009). Iberia had an even stronger urge to lower its expenses because of its uncompetitive cost base for years (Parker et al., 2012). So the increasing growth of low cost competitors made it even worse for the already threatened

Iberia. As a response to the rapidly changing environment, full service airlines seized threats by cooperating with the low cost competitors or even started to imitate them. Iberia seized the threat by doing both: cooperating with the competitor by acquiring Vueling and imitating the competitor by developing subsidiary airline Iberia Express. These strategic approaches necessarily need to be consistent with the hub and spoke system in terms of connectivity between the low cost short-haul operations and the transfer with long-haul operations on the hubs. Otherwise, the hub and spoke system will suffer, despite the strategic actions taken. In the case of Iberia the route network structure was not sufficiently coordinated anyhow, but the

22 integration of Vueling’s route network and also the substituted or new routes of Iberia

Express needed to be managed well otherwise Iberia’s route network operations would be

even worse (Malighetti et al., 2008).

As mentioned in the introduction: previous literature focuses on the threat

phenomenon occurring in the airlines industry and implying various strategic moves to

manage the threat but little evidence exists regarding the actual effectiveness of these

innovative strategies. In this case: Has Iberia indeed accomplished cost reduction? And are

the low cost operations on the short-haul routes well connected with the other short- and long-

haul operations on the hubs Madrid and Barcelona? This means that there is a lack of insight

of the final step in shaping the business environment: analysing reconfigurations of the seized

opportunities and threats (Teece, 2007). Therefore, the aim of this study is to close this gap in

order to complete the process of shaping the business environment of full service airlines by

evaluating the seized threats of Iberia in cooperating with Vueling and imitating the

competitors with Iberia Express. The analysis will be based on the following research

question:

‘ What can European full service carriers learn from the dual strategic actions (imitation and

acquisition) taken by Iberia in order to manage the increasing threat of low cost carriers, that

may undermine their total hub & spoke system?’

This research question will be analysed along the lines of two dimensions in performance:

cost and connectivity. Figure 4 reflects the conceptual design of the empirical analysis.

Figure 4 Theoretical framework

Iberia express Cost structure - Iberia 23 Vueling Connectivity VII. Research methodology

7.1 Research design: case study

The case study approach is used to illuminate a decision, why it was taken, how it was implemented and with what results (Yin, 2009). It is possible to go in depth a real-life situation in order to apply an exploratory study. In this case the effect of Iberia Express and

Vueling on Iberia (Yin, 2009). Iberia itself concerns a single case study, but the two different strategies of Iberia that will be examined are twofold, although the results of these specific case studies are not generalizable. Still, the explicit case of Iberia is selected because it is unique for a full service airline to apply and manage two distinct strategies of low cost competition at once. Besides that, Iberia Express is one of the few European low cost subsidiary airlines that still operate in the industry nowadays. Furthermore, is it also interesting to research the underlying reason for Iberia to choose an acquisition of a low cost airline that has its home base at another airport (Barcelona) than Iberia’s home base (Madrid).

The interaction, complementarity and/or substitution of these two strategies are the focus to this study.

7.2 Research instruments and analysis

As mentioned in section 6, two main units of analyses of Iberia will be compared: the cost structures and the route network structures. The study is identified as a holistic case study because numerous variables of the units of analysis will be examined. The first unit of analysis, cost structure, will be based on secondary data of annual reports of IAG and reports of the Centre for Aviation (CAPA). It has to be noted that a disadvantage of secondary data is that the initial purpose of the data deflects the purpose of using the data for this study. This will be taken into consideration with the interpretation of the data. From the IAG reports, data

24 of operating revenues and costs will be gathered, which will contain figures of 2011, 2012 and 2013. This will outline the developments in performance and development in cost reduction for Iberia. So the data of the annual reports will be compared to each other to identify changes. From the CAPA reports, data of financial variables such as ASK (available seat kilometre) CASK (costs per available seat kilometre) and RASK (revenue per available seat kilometre) will be gathered to support the data in the annual reports. This will reinforce the results on changes in Iberia’s performance and cost structure and the changes between operating figures of Iberia and Iberia Express and it enables to some degree a certain level of triangulation with regard to the data. Also, data on passengers’ shares and market shares of

Iberia, Vueling and Iberia Express will be collected to look at the effects of substitution and complementarity of routes. The final section particularly focuses on the labour costs of all three airlines because that is a huge pitfall for Iberia, as mentioned in the previous section.

Reports of CAPA contain figures from 2005 to 2012, to get a broader view of Iberia’s changes over the years and particular effects of Iberia Express and Vueling.

The tests of connectivity will be based on primary data of the Official Airlines Guide database, which signifies primary, unbiased information. This database clearly presents the routes, departure and arrival times, flight types, frequencies, distance, seats, flight numbers and operating days of all the flights of operating carriers per year. From this database, data will be gathered for Iberia of the year 2011 and compared to data of 2014 to consider the subsequent effects of the two airlines on Iberia over the years. These two years will be analysed in Excel by creating various pivot tables in order to gather specific data. This will make it possible to make conclusions about changes in the route network of Iberia, and to look for complementarities or substitutions.

25 VIII. Results

The following section starts with the analysis of the cost structure developments of Iberia over the years. After that, results of analysis of Iberia’s hub and spoke system in Madrid and

Vueling’s operations in Barcelona will be outlined.

8.1 Costs

This section gives an overview of the operating performance and cost structure developments of Iberia over the years 2011, 2012 and 2013. On 10 May 2012 Iberia announced the implementation of its so called Transformation Plan to restore competitiveness and profitability, as was mentioned in business case section 5. This plan particularly included changes in the management structure, capacity cuts and reduction of costs, especially labour costs. The number of managers that reported directly to the CEO was reduced from 11 to 9.

Additionally a new unit for human resources, safety and corporate social responsibility was created with the aim of reaching labour agreements to improve productivity (CAPA, 2013).

The effects of the implementation of this restructuring plan will be analysed based on figures of 2013.

8.1.1 Operating performance & CASK

The overview of operating performance of Iberia is outlined in table 2. The table shows that the revenues keep declining. One of the reasons is the financial crisis in Spain and the difficult competitive position of Iberia, as mentioned in business case section 5. This obviously results in a decrease in the number of passengers especially transfer passengers. In reference to this, the ASK (Available Seat Kilometre), that measures an airline’s capacity to transport passengers, decreased by 3,4%.

26 Table 2 Operating performance of Iberia from 2011 to 2013

Iberia (€ million) 2011 Higher/ 2012 Higher/ 2013 (lower) (lower) ASKs 63.042 (3,4)% 60.925 (14,0)% 52,429 Seat factor (per 81.3 0,2 pts 81.5 (2,4) pts 79.1 cent) Passenger revenue 3.645 0,8% 3.675 (12,9)% 3.200 Cargo revenue 338 (8,3)% 310 (15,8)% 261 Other revenues 889 (3,7)% 856 (9,7)% 773 Total revenues 4.872 (0,6)% 4.841 (12,5)% 4.234 Fuel, oil costs and 1.333 14,9% 1.531 (20,7)% 1.214 emission charges Employee costs 1.373 (2,4)% 1.340 (14,3)% 1.149 Supplier costs 1.766 4,2% 1.840 (13,4)% 1.593 EBITDAR 400 (67,5)% 130 113,8 % 278 Ownership costs 498 (3,4)% 481 (7,7)% 444 Operating (98) (258,2)% (351) (52,7)% (166) profit/(loss) before exceptional items Passenger yield 7.11 4,1% 7.40 4,2% 7.71 (€ cent/RPK) Unit passenger 5.78 4,3% 6.03 1,2% 6.11 revenue (€ cent/ASK) Total unit revenue 7.73 2,8% 7.95 1,6% 8.08 (€ cent/ASK) Fuel unit cost 2.11 19,0% 2.51 (77)% 2.32 (€ cent/ASK) Non-Fuel unit costs 5.77 4,2% 6.01 12% 6.08 (€ cent/ASK) Total unit cost 7.88 8,1% 8.52 (1,5)% 8.40 (€ cent/ASK)

Source: Annual report IAG 2011, 2012 and 201

In contrast, the costs figures do improve, especially the employee costs keep declining. In this sense, the realization of cost reduction is visible in the 3 years. This is due to employee restructuring provision of 268 million euro’s and aircraft restructuring provisions of 47 million euro’s, which will be explained in more detail in the following sections (CAPA,

2014). Although the reduction in costs exceeds the fall in revenues, the operating performance 27 still shows losses, which means that the cost reductions are still insufficient. The total unit revenue per ASK keeps increasing, due to the decrease in ASK and the decrease in revenue.

In addition, this signifies the increased short haul operations: less distance flown and fewer seats due to smaller aircraft besides cuts in long haul operations. The following analysis on the changes in Iberia’s route network should conclude if the increased short haul operations are indeed due to the additional operations of Iberia Express and Vueling.

The total unit costs per ASK first increased but then a decline occurred, which is also caused by the decrease in ASK and first an increase in costs, after which the costs and ASK decreased simultaneously. As stated in section 4: the substitution of Iberia Express’ and

Vueling’s short haul operations could also have been accountable for the decline in costs because of lower cost structure of their operations in comparison to Iberia’s short haul operations. In particular employee costs. However, further analysis will support or reject this assumption. The Revenue Per Available Seat Kilometre (RASK) decreased by 6% since

2007. Again the poor performance of Iberia is confirmed. The Costs Per Available Seat

Kilometre (CASK) however confirms the increased cost reduction with a decrease of 3%.

Figure 5 shows an overview of RAKS and CASK of Iberia from 2005 to 2013 (CAPA 2014).

Figure 5 Iberia RASK and CASK from 2005 to 2013

Source: CAPA

28 The CASK of Iberia Express are 40% below Iberia’s CASK, which confirms that the lower cost operations of Iberia Express improve the cost structure of the core operations of Iberia, if operations of Iberia are substituted by Iberia Express. Figure 6 shows the unit costs, based on

CAKS, of Iberia, Iberia Express and Vueling. Iberia Express has similar unit costs as Vueling and easyJet and twice as low as Iberia. The cost advantages compared to Iberia are mainly based on labour terms and conditions and higher seat density because the two airlines have a similar level of service, same airports and same aircraft (CAPA, 2014).

Overall, based on table 2 and figure 5 and 6, the conclusion can be made that with substitution, subsidiary airline Iberia Express provides great cost reductions without affecting the revenues for Iberia. Even more, the revenues seem to decrease less after Iberia Express and Vueling are added to Iberia’s network, which indicates that the sales of both airlines also compensate the loss in sales of Iberia.

Figure 6 Unit costs per ASK

Source: CAPA

29 8.1.2 Passenger numbers and shares

Figure 7 shows that from 2010 to 2012 Iberia deals with declining passenger numbers: up to 5 million. Iberia Express however reported 2.8 million passengers starting from the launch in

March 2012 up till March 2013. For Vueling, the passenger numbers reached almost 15 million in this period (CAPA, 2013).

Figure 7 passenger numbers from 2010 to 2012 ( x1000 passengers)

Source: CAPA

One of the consequences of the capacity cuts of Iberia based on the Transformation Plan, was a decline in share of passengers in Spain from 12% to 8% in 2013. However, Iberia Express increased the share with 2%, while Vueling increased its share from 8% to 9% in 2013

(CAPA, 2013). This means that the total loss of 4 % share of passengers is partly substituted by Iberia Express’ increase and Vueling’s increase. Figure 8 shows the share of passengers for airlines in Spain in 2012 and 2013. An accumulative share of passengers for Iberia, Iberia

Express and Vueling of 19% in 2013 indicates that together they exceed Ryan air’s share: the largest competitor in Spain. Iberia’s increased share also makes it more difficult for other competitors to enter the Spanish airline market. This increases the competitive position as

30 well as indirectly puts a safeguard on hub Madrid by keeping competitors from entering the market.

Figure 8 Share of passengers in Spain from January to April 2012 and 2013

Source: CAPA

Regarding its passenger share on the hub Madrid, as outlined in figure 9, Iberia lost

9% of its share of passengers in 2011 due to the strong low cost competition of low cost carriers in Madrid. In 2012 the share in Madrid declined to 40% but this was compensated with the 5% share of Iberia Express. In 2013 the share of Iberia Express went up to 8% due to the capacity cuts of competitors such as easyJet that closed 24 routes from Madrid because of increased airport charges. So the passenger share figures could confirm that Iberia benefits from Iberia Express by substitution of short haul operations at hub Madrid and Spain in general, despite elimination of flights (CAPA, 2013).

31 Figure 9 Share of passengers per airline in Madrid from 2005 to 2012

Source: CAPA

8.1.3 Labour costs

As already mentioned in airline business case section 5: one of the main problems of Iberia was the low productivity compared to the salary levels. As figure 10 shows that in 2012 30% of Iberia’s revenue went to labour costs. Apart from SAS Group this is the highest percentage of all the airlines included in the analysis.

Figure 10 Labour costs as percentage of revenue in 2012 per European airline

Source: CAPA

32 In result, Iberia has the third most costly employees on average in 2012. The average employee costs per employee among the European airlines, outlined in figure 11, is 69,000 euro’s.

Figure 11 Employee costs per employee in 2012 for European airlines

Source: CAPA

Regarding labour productivity, Iberia is one of the lowest performing airlines, although they spend a large proportion of their revenue on labour. Labour productivity is calculated with the total available tonne kilometres per employee that includes both passenger and cargo traffic.

Combining the employee costs per employee with ATK per employee results in employee cost per ATK, outlined in figure 12. This indicates how much one employee has to be paid to produce one unit of traffic. In this case, Vueling performs well, with 5,39 euro cents per ATK, while Iberia is the third weakest airlines with 21,35 euro cent per ATK, considering the weighted average of 13.58 euro cents. The improvement of costs would therefore be from 21,35 euro’s to 5,39 euro’s: a saving of 15,96 euro’s, for Vueling’s substitution on short haul operations. This also confirms that Iberia’s cost structure improves

33

Figure 12 Employee costs per ATK in 2012 for European airlines

Source: CAPA

The sum of the three rankings of the labour cost as a percentage of revenue of figure 10, the employee cost per employee of figure 11 and the employee costs per ATK of figure 12 that are outlined above, including rankings of the revenue per employee and operating profit per employee for the European airlines, resulted in a total ranking for the productive labour force of the 19 airlines, as outlined in figure 13. As a low cost airline, Vueling manages to be in a top 3 position, better than easyJet. Iberia however, is ranked as to having the lowest productive labour force, together with SAS Group.

34 Figure 13 Overall labour productivity ranking of European airlines in 2012

Source: CAPA

To solve this labour problem, Iberia was forced to negotiate with unions and with the creation of Iberia Express Iberia was able to focus on this problem (CAPA, 2014). Initially the unions did not agree with the changes in the Transformation plan: 4500 headcount reduction, pay cuts of 25% to 35% and a 15% capacity reduction in 2013, including productivity improvement. As a response, Iberia redefined its originally proposed reductions by offering

3147 headcount reductions and pay cuts of 11% for ground staff and 25% for cabin crews.

However, the unions still did not agree and called strike actions in January 2013 to protest against the proposed cuts. The strike of 5 days included a total of 1384 cancelled flights and supposedly 15 million euros for refunds and re-bookings. Eventually, in February 2014 Iberia reached an agreement with the pilot union SEPLA for the permanent structural changes. But it was appointed that before the actual implementations, productivity measures have to be done, including the increase of flying hours similar to the most efficient competitors of Iberia.

Parties agreed the 14% salary cut but the additional 4% cut has not been confirmed. The

SEPLA agreement keeps the salaries and allowances frozen up till 2015. After that, the raises

35 will be linked to the profitability of Iberia with a maximum of 3,5%. Additionally a new structure of pay scales is developed and new caps in seniority scales will reduce long-term seniority driven wage inflation. Next to that, the agreement allows an extension of a voluntary redundancy plan for pilots, which up to now includes 258 pilots. This extension will enhance the flexibility and efficiency of Iberia: pilots are able to transfer between Iberia Express and the mainline operation without changes in the pay structure and conditions. The mainline pilots that transfer to Iberia Express will receive a one-off compensation payment. In essence:

Iberia will benefit from the flexibility to grow operations of both Iberia itself and Iberia

Express, on its short-haul network and deploy pilots between the two (CAPA, 2014). Figure

14 shows an overview of the cost reductions due to the new labour agreements.

Figure 14 New labour agreement salary progressions of pilots

Source: CAPA

The agreement with the cabin crew also implies improved productivity, by increased flying hours, more duty days and new working practices for short haul. Similar to the pilots, a 14% salary cut will be implemented, including a 4% cut which is returned and freezing salaries up

36 till 2015. Also, possible extensions for a voluntary redundancy plan beyond the 627 cuts are an option. For ground staff, an agreement is yet to be reached, for which now negotiations are held (CAPA, 2014).

8.2 Connectivity

The connectivity of the hub and spoke system of Iberia will be analysed as following: first an overview will be given of the total number of routes and the type of flights (domestic, intra-

European, intercontinental). Also the top ten routes of these categories will be given, in order to examine the stability in Iberia’s route schedules over four years, including subsequent substitutions and expansions of Iberia’s routes by Vueling and Iberia Express. After that, results of analysing the hub & spoke system of Madrid and Barcelona will be outlined.

8.2.1 Total number of routes

Table 3 shows an overview of the total number of routes, which is based on the frequencies of total number of airport-pairs. The routes include all domestic, intra-European and intercontinental routes. In the following section, a further distinction between the types of flights will be made.

Table 3 Total number of routes per airline per year

2011 2012 2013 2014 Iberia 1268 1000 631 712 Iberia express - 109 157 134 Vueling 699 919 1416 1745 Total 1937 2028 2204 2591 Source: OAG database

37 As the table outlines, Iberia has been downsizing its network by eliminating almost 50% of its flights. In 2014, there is a slight increase, which could be the result of the restructurings of the

Transformation Plan. In contrast, Vueling keeps increasing massively: the number of flights doubled in four years. Iberia Express shows a slight increase in its first year and a slight decrease in the second year. Overall Iberia Express’ number of flights is consistent throughout the years.

8.2.2 Types of flights (Domestic, Intercontinental, Intra-European)

Table 4 provides an overview of the total number of frequencies per flight type, for the three airlines, per year. The flight types concern domestic flights in Spain & the Canary Islands, intra-European flights within Europe, North Africa and the Middle East and intercontinental flights from Europe (and thus North Africa & the Middle East) to Asia, North- and South

America and South Africa.

Table 4 Total number of flights per type

Domestic Intercontinental Intra-European

Iberia Iberia Iberia Vueling Express Iberia Iberia Vueling Express

2011 621 356 - 211 436 313 -

2012 446 426 101 197 357 493 8

2013 242 554 133 139 250 862 24

2014 260 666 94 157 295 1079 40

Source: OAG database

38 Regarding intercontinental flights, Iberia mostly operates to South America, North African and Middle East countries. As for the intra-European countries besides Spain and the Canary

Islands, Iberia operates mostly in Italy, France, Germany, United Kingdom, Netherlands,

Belgium, Portugal and Switzerland. Vueling only operates domestic flights, intra-European flights within Europe and intra-European flights between the Middle East and North Africa, which are considered medium haul flights.

In the previous analysis, the conclusion was made that Iberia has been downsizing its route network up to 50%. This analysis shows that the reduction of flights is applicable for every flight type. Iberia cut most of its domestic operations and intra-European flights. To a smaller extent, the intercontinental route network declined. The small increase in 2014 that was presented in the previous analysis is mostly visible in intra-European operations.

Vueling’s massive increase in its route network is explained by both domestic and intra-

European flights. Iberia Express’ domestic operations are somewhat stable over the years. Its intra-European flights however, increase significantly. So while Iberia cuts most of its domestic flights, Iberia Express operates mostly domestic flights. Iberia’s cut in intra-

European flights can also be linked to Iberia Express’ and also Vueling’s increase in intra-

European flights. However, the analysis of substitution and expansion in section 8.2.4 will confirm or reject the assumption that Iberia Express and Vueling indeed substitute Iberia’s cutbacks in domestic and intra-European operations or expand the route network.

8.2.3 Top ten routes

In this analysis the top ten routes of Iberia and consequent changes over four years time are examined in order to look at the stability of the route network, despite the drastic downsizing.

Table 5 gives an overview of the top 10 routes over a four year time period, based on the total

39 frequency per route. The airport codes are outlined in chapter 13, the second appendix of this study.

Table 5 Top 10 routes of Iberia

2011 2012 2013 2014

MAD-BCN 204 MAD-BCN 175 MAD-BCN 141 MAD-BCN 168 MAD-ORY 62 MAD-LHR 56 MAD-LHR 56 MAD-LHR 56 MAD-LHR 56 MAD-BIO 56 MAD-BIO 47 MAD-BIO 44 MAD-BIO 55 MAD-ORY 55 MAD-ORY 38 MAD-ORY 39 MAD-LIS 39 MAD-LPA 44 MAD-OVD 36 MAD-FCO 35 MAD-LCG 39 MAD-OVD 43 MAD-FCO 32 MAD-OVD 33 MAD-OVD 38 MAD-LCG 39 MAD-LIS 30 MAD-LCG 30 MAD-LPA 38 MAD-LIS 36 MAD-LCG 29 MAD-LIS 28 MAD-SCQ 34 MAD-TFN 35 MAD-BRU 25 MAD-BRU 26 MAD-XRY 33 MAD-FCO 33 MAD-GVA 21 MAD-GVA 21

Source: OAG database

The table indicates that the top ten routes did not change drastically: the route between

Madrid and Barcelona continues to be the most frequent route that is being operated over the years. The figures correspond to the analysis in 8.2.2 that intra-European flights are the most operated type of flights of Iberia. Other that that, the analysis implicates that the elimination and/or substitution of Iberia’s routes is mostly based on flights that are less frequently conducted. So the successful routes are continuing to be operated by Iberia itself.

8.2.4 Substitution and expansion of Iberia’s route network

Table 6 outlines Iberia’s intra-European routes that are substituted by Iberia Express and

Vueling and the additional routes that expanded Iberia’s route network in the period of 2011 to 2014. Iberia Express substituted most of Iberia’s routes compared to Vueling. This confirms that Iberia indeed transferred part of its short haul operations to Iberia Express in order to be in the position to apply the restructurings of the Transformation Plan. The substitution and elimination of domestic flights are not in the context of this research; 40 therefore it is not part of this analysis. The airport codes are outlined in chapter 13, the second appendix of this study.

Table 6 Substituted and additional intra-European routes of Iberia

Iberia Express Vueling

Substitute Additional Substitute Additional

MAD AMS MAD DUB MAD FCO MAD WAW

MAD FRA MAD NAP MAD OTP MAD DUS MAD CDG MAD CPH MAD FLR MAD TXL MAD MLA

MAD ATH

Source: OAG database

The red coloured routes are routes that are not operated by Vueling anymore. The route between Madrid and Milan, which was first substituted by Vueling in 2011, continued to be operated by Iberia. This route even appears in the top 10 routes of Iberia since 2012. So Iberia indeed continues to operate its most frequent routes. Substituted routes of Iberia Express do not appear in the top 10 in 2011 either, which confirms that Iberia eliminated and substituted routes that are less frequently conducted. Vueling expands Iberia’s route network in Madrid to a small extent. The importance of Vueling shows to be its route network in Barcelona, which expands Iberia’s route network extensively.

Overall, from section 8.2.1 to 8.2.4 conclusions can be drawn that with the development of Iberia Express and the acquisition of Vueling, the route network changed for

Iberia at Madrid. Iberia cuts its flights on short-haul routes while subsidiary Iberia Express increasingly operates flights on short-haul routes. This shows that Iberia Express partly intercepts the cutbacks of Iberia on the short-haul routes of hub Madrid. In the analysis of the hub & spoke system of Madrid in section 8.2.5, conclusion can be drawn whether Iberia 41 Express also improves the connectivity of Iberia’s route network with its substituted routes.

Vueling shows to be based mostly on Barcelona. Considering the increased number of flights of Vueling that do not substitute the cutbacks of Iberia, it does however increase the network of Iberia in Spain with Barcelona. In section 8.2.5, the hub & spoke system of Barcelona will be analysed in more detail.

8.2.5 The hub & spoke system of Madrid

In this section, the hub and spoke system of the main hub of Iberia Madrid will be analysed by comparing the network system of 2011 with 2014. This system consists of inbound short haul, intra-European flights to Madrid Barajas, operated by Iberia, Vueling and Iberia Express and outbound intercontinental long haul flight operated by Iberia. The analysis examines the connectivity of the hub & spoke system by looking at the peaks of intra-European flights that arrive at Madrid and peaks of intercontinental flights that depart from Madrid, while taking into consideration the time window of long-haul flights of 50 to 120 minutes to see if these peaks correspond with each other. A maximum of 50 minutes is necessary for short haul routes to transfer baggage, clean the airplane and the security check on board (Bootsma,

1997). In 2011, Iberia operated 239 intercontinental flights that departed from Madrid, while

510 intra-European flights of Iberia and Vueling arrived at Madrid.

Figure 15 and 16 show the peaks of outbound and inbound flights in Madrid in 2011. It is important to note that the time frame that is presented on the x-axis is different for the two types of flights: the time frame of figure 16 starts at 00:10, while the time frame of figure 16 begins at 07:45. This implies that before 07:45 no intra-European short haul flights arrive at

Madrid. Figure 15 shows 4 peaks of outbound long haul flights.

42 Figure 15 and 16 Total number of outbound and inbound flights in Madrid in 2011

Source: OAG database

43 To see if a sufficient number of inbound short haul flights connect with the peaks, the time window of 50 to 120 minutes is applied every 15 minutes within the period of the peak. A comprehensive overview of this analysis is outlined in table 7.

Table 7 The connectivity in Madrid in 2011

2011 Outbound Time Number of Total Peaks widow Inbound [120-50]

1 11:50-12:30 11:50 [9:50-11:00] 99 294 12:05 [10:05-11:15] 92 12:20 [10:20-11:30] 66 12:35 [10:35-11:45] 37

2 12:50-13:00 12:50 [10:50-12:00] 7 13 13:05 [11:05-12:15] 6

3 13:50-14:15 13:50 [11:50-13:00] 19 43 14:05 [12:05-13:15] 12 14:20 [12:50-13:30] 12

4 16:50-17:45 16:50 [14:50-16:00] 61 145 17:05 [15:05-16:15] 30 17:20 [15:20-16:30] 22 17:35 [15:35-16:45] 15 17:50 [15:50-17:00] 17

Source: OAG database

Of the four long haul outbound peaks, there are but two that are sufficiently connected with a high number of short haul inbound flights: the peak of 11:50 -12:30 and 16:50-17:45.

In 2014 157 intercontinental flights operated by Iberia depart from Madrid, while 295 intra-European flights operated by Iberia, Iberia Express and Vueling arrive in Madrid.

Clearly the number of flight operations decreased in comparison to 2011, as already noted in previous analyses. Figure 17 and 18 show the peaks of outbound and inbound flights in

44 Madrid in 2014. In this case, it also has to be noted that the time frame that is presented on the x-axis is different for the two types of flights.

Figure 17 and 18 Total number of outbound and inbound flights in Madrid in 2011

Source: OAG database

45 There continues to be no short haul intra-European flights that arrive before 7:45 in Madrid.

This automatically eliminates connectivity of the first peak shown in figure 16 between

00:10-00:40. Table 8 outlines the connectivity of the remaining long haul peaks in 2014.

Table 8 The connectivity in Madrid in 2014

2014 Outbound Time Number of Total Peaks widow Inbound [120-50]

1 11:20-12:00 11:20 [9:20-10:30] 84 387 11:35 [9:35-10:40] 112 11:50 [9:50-11:00] 99 12:05 [10:05-11:15] 32

2 12:10-12:20 12:10 [10:10-11:20] 85 151 12:25 [10:25-11:35] 66

3 12:40-13:00 12:40 [10:40-11:50] 16 34 12:55 [10:55-12:05] 6 13:10 [11:10-12:20] 12

4 16:50-17:45 16:20 [14:20-15:30] 65 265 16:35 [14:35-15:45] 72 16:50 [14:50-16:00] 61 17:05 [15:05-16:15] 30 17:20 [15:20-16:30] 22 17:35 [15:35-16:45] 15 17:50 [15:50-17:00] 17

Source: OAG database

Of the four long haul outbound peaks, there are three that are sufficiently connected to a high number of short haul inbound flights: the peak of 11:20 -12:00; 12:10-12:20 and 16:50-17:45.

The poorly connected peak in 2011 between 13:50 and 14:15 is eliminated. This means that connectivity of Iberia’s network system indeed improved since 2011. Even though the number of flights decreased, Iberia thus successfully managed the downsizing of the hub & spoke system. In the analysis, in section of 8.2.3 and 8.2.4 the conclusion was made that 46 Iberia eliminated and substituted routes that were less frequently operated. This analysis shows that Iberia also deliberately eliminated flights that were not involved in the peaks and so correctly substitutes flights that do appear in the peaks, to sustain the connectivity. Overall, the pattern of the route network did not change drastically between 2011 and 2014: the highest peaks are still during the day around 12:00 o’clock. However, the time period of the peaks got shorter and more intense, with more long haul flights departing around the same time and due to this centralization a higher number of short haul flights are able to connect.

8.2.6 The hub & spoke system of Barcelona

In this section, the hub and spoke system of Barcelona will be analysed. Vueling expands

Iberia’s route network with hub Barcelona, as section 8.2.2 and 8.2.4 concluded. Also, the number of domestic and intra-European flights doubled between 2011 and 2013 for Vueling, which means an increase for Iberia too. Initially as a low cost operator, Vueling has a point- to-point system without planned connections of flights. Nevertheless, an unpremeditated hub

& spoke system between intra-European flights may have been put into place by Vueling, from which Iberia can benefit even more. So besides the outcome that due to Vueling Iberia’s network operates on two hubs, the result of this analysis will show if Iberia can also profit from an intra-European hub & spoke system in Barcelona that operates parallel to the hub & spoke system in Madrid. The analysis thus examines the connectivity between medium and short haul intra-European flights that arrive and depart in Barcelona in 2014. Figure 19 and 20 indicate the peaks of a total of 591 inbound and 588 outbound intra-European flights in

Barcelona in 2014.

47 Figure 19 and 20 Total inbound and outbound flights in Barcelona in 2014

Source: OAG database

In contrast to the hub & spoke system of Madrid, Barcelona does not show explicit peaks that are centralized around specific time periods, the flight schedule seems to be spread out

48 throughout the day, with a lot of small peaks. This could indicate that there is indeed not a network system for Vueling. Table 9 however, shows the results of an in-depth analysis of 5 outbound peaks that have a frequency of 15 or higher. The time window in this analysis is based on connections of European flights with European flights: from 90 minutes to 40 minutes before the departure time. A minimum of 90 minutes is adopted because beyond this timeframe it is said to be not sufficient for airlines to offer customers connecting flights with such a long transfer time (Bootsma, 1997). However, as mentioned in section 2 of changing business models, low cost airline passengers are price sensitive, which means that the time widow can be extend to a minimum of 120 minutes and a maximum of 40 minutes because these passengers would prefer a less expensive fare even though the transfer time is longer.

Table 9 The connectivity in Barcelona in 2014

2014 Outbound Time Total Time Total peaks window number of window number of [120-40] inbound [90-40] inbound flights flights

1 6:00-7:45 - - - - -

2 10:30-11:00 10:30 [8:30-9:50] 48 [9:00-9:50] 30 10:45 [8:45-10:05] 38 [9:15- 10:05] 30 11:00 [9:00-10:20] 38 [9:30-10:20] 9

3 11:40-12:25 11:40 [9:40-11:00] 18 [10:10-11:00] 12 11:55 [9:55-11:15] 31 [10:25-11:15] 23 12:10 [10:10-11:30] 32 [10:40-11:25] 29 12:25 [10:25-11:45] 47 [10:55-11:40] 43 12:40 [10:40-12:00] 66 [11:10-11:55] 49

4 13:30-13:55 13:30 [11:30-12:50] 67 [12:00-12:50] 31 13:45 [11:45-13:05] 69 [12:15-13:05] 37 14:00 [12:00-13:20] 55 [12:30-13:20] 27

5 16:55-17:20 16:55 [14:55-16:15] 41 [15:25-16:15] 21 17:10 [15:10-16:30] 42 [15:40-16:30] 31 17:25 [15:25-16:45] 39 [15:55-16:45] 36 Source: OAG database

49 The results first of all show that the extension of the time window from 90 minutes to 120 minutes leads to more connecting flights for every peak. Still there is just one peak that benefits from a high number of connections: from 13:30 to 13:55. The first peak has no connections at all while the second and fifth peaks benefit from a moderate number of connections. The third and largest peak only has reliable connections at the end of the time period. Clearly the hub & spoke network of Vueling is unorganized without deliberate connections of inbound and outbound peaks. However, one peak with sufficient connections can be a first stage to a well-developed network system or an alternative assumption might be that low cost passengers are still under estimated in their willingness to self-hubbing. They accept an even larger transfer time than applied in this analysis.

IX. Discussion

The previous sections outlined the results regarding the effects of the acquisition of Vueling and the creation of subsidiary Iberia Express on Iberia’s cost structure and connectivity of

Iberia’s hub & spoke system. This section discusses the results in reference to the possibility to implement dual strategic actions taken by Iberia in order to manage the increasing threat of low cost carriers on their European short-haul routes to obstruct the jeopardy of their hub & spoke system. Overall, the assumption that strategies of partnership and imitation, in specific acquisition and airline within an airline options, are appropriate to overcome the competition corresponds with the findings of this study. First the strategy of imitation will be discussed after which the strategy of partnership will be examined.

9.1 Imitating: Iberia Express

Despite the many full service airlines that were unable to make a low cost subsidiary successful, Iberia took the risk in 2012 and accomplishes to succeed. In accordance with

50 criteria to succeed by Pearson and Merket (2014), Iberia first of all indeed developed a clear purpose for the subsidiary airline in the Transformation Plan of Iberia’s restructurings. Iberia

Express is certainly created to reduce costs and to shift the less profitable routes but with the initial purpose of Iberia to focus on implementing drastic internal changes, which at the end will lead to an improved competitive position. Besides that, Iberia Express does not suffer much from the late market entrance because the airline mostly substitutes Iberia’s routes instead of competing with airlines such as easyJet and Ryanair on new routes. Also, Iberia

Express’ cost structure is sufficiently low, even lower than easyJet. So the subsidiary airline benefits from a good competitive position despite late market entrance. Additionally, Iberia

Express does not suffer from excessive management control from parent airline Iberia because as already mentioned: Iberia mainly focuses on internal restructurings as a core of enhancing its competitive position.

Similar to previous full service carriers that created a subsidiary airline, Iberia transferred its fleet and maintenance equipment to Iberia Express, as well as employees. As a result of negotiations between employee unions, Iberia accomplished salary cuts, flexibility and efficiency in transfers from the parent airline to the subsidiary airline. The employees get an one-off compensation payment if they agree to work for Iberia Express. The consequence of the transfer of resources and cut in salaries is a 40% lower CASK for Iberia Express compared to Iberia and a lower unit cost for Iberia Express compared to low cost competitor easyJet as already mentioned. The more, Iberia Express increases Iberia’s market share in

Spain with 2% and specifically in Madrid with 5%. This means that by applying the strategy of imitation and substituting the short haul operations, Iberia indeed profits from a lower cost structure on its short haul route network, which makes it able to sufficiently manage the competition of the threatening low cost rivals.

The more because the airline also benefited from improved connectivity of the hub &

51 spoke system in Madrid. As Malighetti et al., (2008) implicate, the parent airline Iberia has been able to develop a new route schedule for Iberia Express that was based on its already existing one. Iberia was indeed in the position to use Iberia Express to improve the connectivity of inbound intra-European flights and outbound intercontinental flights. In this way, not only the competitive position on the short haul market improves but also the long haul market with the full service rivals. Due to the deliberate consideration of substitution and elimination of flights Iberia Express intercepts the cutbacks of Iberia on short haul routes of

Madrid. The hub & spoke system is improved with more centralized peaks that are able to connect with a higher number of inbound intra-European flights. Thus, the competitive position of Iberia in the full service airline market also improved due to the implementation of the strategy of imitation.

As a last step in completing Iberia’s business environment with sensing, seizing and thus reconfigurations, the identified gap in the literature is closed. Teece (2007) implies that the strategy of imitation that Iberia seized in order to capture the sensed opportunity of increasing threats of low cost rivals, has to be reconsidered at the end. Due to the success of subsidiary Iberia Express, Iberia has to be aware of potential full service airline competitors who might be considering implementing this strategy as well or again. Furthermore, Iberia should continuously realign the strategy and operations of Iberia Express, besides being focused on the Transformation Plan. The realignments may include the increase of substitutions of short haul intra-European operations during the peaks in the hub operations.

Similarly to the strategy of full service airline competitor Lufthansa that shifted its entire short haul operations to the acquired low cost airline Germanwings. This will further improve

Iberia’s cost structure, connectivity and thus competitive position.

52 9.2 Partnerships: Vueling

Iberia also gained from its subsequent strategy of acquiring Vueling. The airline indeed accomplished growth with an expanded route network in Barcelona and more market power in Spain, as Joyce et al. (2003) argues as a motive for firms to form equity based partnerships.

Vueling increases the share of passengers of Iberia with 8%, thus provides Iberia with a sufficient competitive position in Spain that keeps competitors from entering the market, including hub Madrid. In this way Vueling and Iberia together indirectly obstruct the possibility that new competitors will also threaten Spain’s domestic market. The implication of Dyer et al. (2004) that firms often do not take into account the deeply rooted culture of the acquired airline is not applicable to Vueling. The reason for this is that Vueling’s operations are independently and parallel to Iberia’s operations: integration of the two businesses is only important to a small extent. With the acquisition, Iberia acquired the low cost equipment and low-waged personnel. Vueling’s unit costs correspond with Iberia Express’ unit costs, which implicate a 40% difference with Iberia. In addition, employee costs per ATK (available tonne kilometer) of Vueling are €5,39 while Iberia pays €21,35. This indicates that by applying the strategy of partnership by means of acquisitions, Iberia indeed benefits from a lower cost structure of short haul operations. In this way, Vueling also makes it able to sufficiently manage the competition of the threatening low cost rivals.

Malighetti et al. (2008) implies that in contrast to the route schedule of a subsidiary airline, it is difficult to integrate the route network of any acquired airline with Iberia’s existing route network. However, this does not apply to the case of Vueling because its route schedule in Barcelona does not require integrations with Iberia’s route schedule on Madrid. In this sense, Vueling does not improve or even affect the connectivity of Iberia’s hub & spoke system in Madrid. Still, Vueling improves the network system with an additional hub and

53 even an unpremeditated hub & spoke system with intra-European flights. Iberia’s competitive position on the short-haul market thus improves a lot with the acquired airline Vueling.

The final step of Iberia’s business environment: reconfigurations, imply that Iberia has to manage threats of potential full service airlines that might consider acquiring a low cost rival that operates on another hub instead of their own hub, in order to expand the route network, market power and in this way the competitive position. Furthermore, Iberia continuously has to monitor the growth or maybe decline of Vueling to make sure Vueling is still profitable. In addition, Iberia can help Vueling implement incremental changes in order to create a sufficient hub & spoke system in Barcelona. This will further improve Iberia’s cost structure, connectivity and thus competitive position.

9.3 Limitations and future research

One of the limitations of this research is that only one airline business case is analysed, which makes it unable to generalize the findings for the European airlines industry. Also, the research is limited to the European airlines industry other industries are not taken into consideration could have caused other effects on the connectivity and cost reduction of partnership and imitation. Furthermore, due to the time and limit constraints of the strategic actions that are examined in this study are limited to acquisition and imitation, while there are more forms of cooperation that exist between full service airlines and low cost airlines. Future studies are thus able to incorporate more business cases of other airline industries to examine the different effects of the strategic actions taken by full service airlines. Also, the focus can be extended to more forms of cooperation, such as the new phenomenon of airline alliances between full service airlines and low cost airlines. In addition, additional units of analysis, besides connectivity and cost reduction can be added in order to measure the effectiveness of

54 strategic actions taken by airlines. As an example, studies can incorporate the effects on employees by doing qualitative research.

VII. Conclusion

The aim of this research was to evaluate the effectiveness regarding cost reduction and connectivity of strategic actions that full service airlines have been taken in order to overcome the threat of successful low cost airlines in the European short haul market, which could jeopardize full service airlines’ hub & spoke system. The specific case of this study, Iberia airline, took a dual strategic action: imitation and acquisition. Based on existing literature, the assumption is made that with an acquisition the full service airline gets hold of low-waged employees and inexpensive maintenance and overhaul equipment as well as skills of short turnaround processes, which indeed leads to a lower cost structure of short haul operations, if these operations are substituted by the acquired airline. However, the substitution will affect the connectivity of the hub & spoke system due to the integration of two already existing route schedules. The results showed that by acquiring Vueling, Iberia indeed benefited from cost reduction on short haul operations, although the short haul operations of Vueling were not substituted by Iberia’s operations. Instead Iberia benefits from an additional hub

Barcelona with operations that do not interfere with its own operations in Madrid: Vueling expands Iberia’s short haul route network with a lower cost structure. The competitive position of Iberia increases on one hand in the Spanish market with an increased market share and on the other hand on the short hauls market with operations that have similar cost structures to the low cost rivals. The other strategy of imitation that Iberia and other full service airlines conducted turned out to be very difficult to make the strategy succeed.

However, this study was based on the assumption that a subsidiary airline contributes to both

55 cost reduction of the parent airline’s short haul operations and improvement in connectivity in the hub & spoke system. The first assumption is derived from the notion that parent airlines restructure their own expensive assets into assets such as lower-waged personnel and fewer service assets to deliver unbundled services, while using their own fleet for the subsidiary operations. The second assumption is based on the fact that substitution of the lower-cost operations can be done with a newly developed route schedule that anticipates on distortions of the existing route schedule. Iberia shows that it is indeed possible to make a subsidiary airline successful. Iberia Express experiences a similar cost structure to Vueling and rivals such as easyJet. The substitution of short haul operations that Iberia applied in their route schedule with the subsidiary airline thus provided Iberia cost reductions and in this way an improved competitive position. The more because the substitution of Iberia Express also improved the connectivity of Iberia’s hub & spoke system in Madrid, which also enhanced its position in the long haul market. So, Iberia’s key of the dual strategic action taken is: acquire a low cost rival that provides you an additional hub, while substituting your own operations with a lower cost subsidiary.

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63 XII Appendix 1

1. List of figures and tables

Figure 1 Cost differences per ASK for low cost airlines and network airlines 8

Figure 2 Market share of low cost airlines between 2000-2006 10

Figure 3 Iberia revenue and operating results from 2005 to 2013 in million Euro’s 69 20

Figure 4 Theoretical framework 23

Figure 5 Iberia RASK and CASK from 2005 to 2013 28

Figure 6 Unit costs per ASK 29

Figure 7 passenger numbers from 2010 to 2012 30

Figure 8 Share of passengers in Spain from January to April 2012 and 2013 31

Figure 9 Share of passengers per airline in Madrid from 2005 to 2012 32

Figure 10 Labour costs as percentage of revenue in 2012 per European airline 32

Figure 11 Employee costs per employee in 2012 for European airlines 33

Figure 12 Employee costs per ATK in 2012 for European airlines 34

Figure 13 Overall labour productivity ranking of European airlines in 2012 35

Figure 14 New labour agreement salary progressions of pilots 36

Figure 15 Total number of outbound flights in Madrid in 2011 43

Figure 16 Total number of inbound flights in Madrid in 2011 43

Figure 17 Total number of outbound flights in Madrid in 2014 45

Figure 18 Total number of inbound flights in Madrid in 2014 45

Figure 20 Total number of outbound flights in Barcelona in 2014 48

Figure 21 Total number of inbound flights in Barcelona in 2014 48

64 Table 1 Failed European subsidiary airlines 17

Table 2 Operating performance of Iberia from 2011 to 2013 27

Table 3 Total number of routes per airline per year 37

Table 4 Total number of flights per type 38

Table 5 Top 10 routes of Iberia 39

Table 6 Substituted and additional intra-European routes of Iberia 41

Table 7 The connectivity in Madrid in 2011 44

Table 8 The connectivity in Madrid in 2014 46

Table 9 The connectivity in Barcelona in 2014 49

XIII Appendix 2

Airport code Airport name City MAD Madrid Barajas International Madrid

BCN Barcelona International Airport Barcelona

ORY Paris-Orly Airport Paris

LHR London Heathrow London

BIO Bilbao Airport Bilbao

LIS Lisbon Portela Airport Lisbon

LCG A Coruña Airport Culleredo

OVD Asturias Airport Ranón

LPA Gran Canaria Airport Gran Canaria Island

SCQ Santiago de Compostela Airport Santiago de Compostela

65

XRY Jerez Airport Jerez de la Forntera

TFN Tenerife Norte Airport Tenerife

FCO Leonardo Da Vinci (Fiumicino) Rome International Airport

BRU Brussels Airport Brussels

GVA Geneva Cointrin International Geneva Airport

DUB Dublin Airport Dublin

FRA Frankfurt am Main International Frankfurt-am-Main Airport

DUS Düsseldorf International Airport Düsseldorf

CPH Copenhagen Kastrup Airport Copenhagen

TXL Berlin-Tegel International Berlin Airport

ATH Eleftherios Venizelos Athens International Airport

NAP Nápoli / Capodichino Nápoli International Airport

WAW Warsaw Chopin Airport Warsaw

OTP Henri Coandă International Bucharest Airport

CDG Charles de Gaulle International Paris Airport

FLR Firenze / Peretola Airport Firenze

MLA Luqa Airport Luqa

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