Over the last decade, Europe’s big three airline groups, IAG (owner of British Airways/Iberia), Air France/KLM, and Lufthansa Group, have all been in much better shape than their American counterparts. While US airlines floundered and filed for bankruptcy, they grew and became stronger. But now, the tables are turned as a variety of different things are conspiring to make life very difficult for the European legacies. So far, the response has been the same failed strategies we’ve seen before on this side of the Pond.

One of the biggest problems these airlines face are their own governments. As much as I complain about the state of the US government’s approach to air travel, Europe is much, much worse. Some of this is on the macro level with the European Union’s much criticized carbon trading scheme. Some, however, is country-specific.

The poster-child for terrible government policy is the United Kingdom. Not only has the country levied some of the harshest taxes ever seen in aviation (the UK Air Passenger Duty is now approaching £100 on some tickets), but it fundamentally refuses to add capacity in London where it is needed most. Discussions around a new runway at Heathrow or a new airport way out in the Thames estuary remain just that – all talk and no action. We won’t see any sort of capacity increase there for decades, and the country has already begun to suffer the effects.

Bad government policy isn’t unique to the UK. Germany has begun to stab itself in the heart with airport curfews. The biggest impact is felt in Frankfurt, where night flights have stuck a dagger in the air cargo market. (In the first three months of this year, air cargo at Frankfurt dropped more than 10 percent.) There is also over-taxation there and in most other European countries.

Fighting Low Cost Carriers With Familiar Strategies
This wouldn’t be an issue if there were no competition, but of course, there is plenty. For flights within Europe, low cost carriers have only grown stronger. Though they deal with the same governmental issues, they have operating costs far lower than the legacy airlines and they can profit with much lower fares. Does this sound familiar? It should, because it’s what happened in the US.

You’ll recall that over the last decade or two, US airlines tried all sorts of things to become competitive. They opted for “airline-within-an-airline” low cost carriers that all were complete failures. They’ve looked at b-scale wages over the years. They’ve had aggressive cost cutting campaigns. In the end, it was only Chapter 11 bankruptcy that allowed them to become more competitive. European airlines don’t have such a convenient option.

Instead, they are trying the same tactics that didn’t work in the US. IAG has started a low cost carrier in Spain called Iberia Express. Nothing is different except that the wages are lower so it’s a cheaper operation to run. Iberia employees are angry and striking, but it hasn’t stopped the airline from pushing forward. In Germany, Lufthansa has started to turn over more short haul flying to its low cost subsidiary Germanwings. Most of Stuttgart flights, for example, are now flown by Germanwings instead of Lufthansa. The French are also plotting a strategy to shift short haul flights to a low cost carrier.

The shorter distances within Europe as compared to the US make this an even more pronounced problem since people on shorter flights care less about the difference in amenities. For most legacy airlines, however, they can take solace in the fact that in the long haul world, they are still king.

Trouble in the Gulf
Traditional low cost airlines have tried and failed many times on long haul routes. The most recent was Air Asia X which canceled all of its European services. That has been the saving grace for American carriers, which have made major efforts to shift the balance away from domestic flying toward long haul. This is good for European airlines because they have traditionally had more long haul flying than short haul as compared to the US carriers.

But there’s a big problem in Europe: the Gulf carriers.

A whole host of airlines in the Middle East have sprung up with luxury service combined with lower fares. The pack is led my Emirates, which still is planning on filling about 100 A380s a day in addition to its massive fleet of 777s. Etihad in Abu Dhabi along with Qatar Airways in Doha and even Turkish in Istanbul have flooded Europe with cheap capacity thanks to lower costs.

This has created major headaches for European airline flying to Asia and Africa. While Emirates and the like don’t fly the routes nonstop, they have good, fast connections that draw away a ton of traffic. Lufthansa alone has seen this erode profits to the point where it has pulled flights to Hyderabad, Kolkata, and Guanghzou. Nanjing, Chennai, and Bangkok are now on the chopping block.

While European airlines had been relying on government intervention to keep these big guys out, that won’t work forever. At the Phoenix Aviation Symposium in March, IAG chief Willie Walsh said that he was downright jealous of the Middle Eastern carriers because they have governments that believe in the importance of aviation for economic growth. They help the airlines and provide good taxation environments to help them grow.

And grow they have. Emirates has six daily flights from Heathrow to Dubai (4 on A380s) and two daily 777s out of Gatwick. But even more importantly, Emirates flies to smaller cities like Newcastle, Glasgow, and Birmingham, providing better flight options than even BA can offer to those folks.

That leaves the European airlines in a good position only to the Americas. No low cost carrier has found a way to make that work (though many more will try and fail). But in the US, they have formed joint ventures with their American counterparts. American carriers are much more likely to take on upgrades and lower fare traffic. That puts pressure on the European carriers and their often superior options when the revenues end up being shared.

Problems are Easy, Solutions are Hard
This post has been easy for me to write because I just talk about the problems and don’t have to come up with solutions. That’s the hardest part of all and it’s what the European legacy carriers struggle with every day. If I knew what to do, I’m sure I’d be a rich man.

Does that means there’s no solution? Of course not. But it’s not a simple problem to solve. These airlines see tremendous pressure in nearly all parts of their business. With the governments not interested in budging on their terrible policies and labor not seeing the reality of the cost problem, it’s going to be tough to make much progress.

It’s almost official. British Airways will close on its purchase of bmi in short order. Will it be good or bad for travel in the UK?

Earlier this month, British Airways introduced Avios, a new name for miles. Now if you’re a member of the BA Executive Club or Iberia Plus, you will earn Avios when you fly, use a credit card, etc. In other words, it’s a shared currency that can be used across airlines under the same ownership. There has been a lot of criticism about redemption levels, but on the bright side, a new elite tier was introduced. I spoke with Simon Talling-Smith, Executive Vice-President, The Americas at British Airways to talk about this and more, including the dreaded fuel surcharge.

Cranky: Let’s talk about some of the changes. It looks like on the elite side, it’s the new tier?

Simon Talling-Smith: Exactly right. We’ve launched a new Bronze tier. Really, a lot of the benefits customers accrued started at our Silver level. We knew there was a big segment of active customers who were not making that Silver level but we still wanted to have a more engaged relationship. So we’ve introduced this Bronze tier. It allows people to enter at half the points of the Silver tier. It gives them substantial benefits like First Class check-in, a better chance to do seat selection, and a 25 percent uplift on Avios when they fly.

Cranky: Can you explain how the tier points work? I see for Bronze, it’s 300 tier points to qualify.

Simon: We distinguish between qualifying points and earn and burn mileage. The qualifying points are our tier points and those are earned by flying, pretty much only by flying. And they accrue over a period of a year and that qualifies you for a level in the Executive Club. Then the following year you need to attain a certain amount of miles to retain that level, but it’s easier for retention than to initially earn it.

Cranky: If I’m new to BA, what kind of flying do I need to do to get 300 tier points?

Simon: A lot of ways to do that.

Cranky: Ok, so I’m in the US and I’ll likely be going over to the UK.

Simon: It’s probably only a couple of Business Class flights per year that will get you into Bronze.

Cranky: I assume part of the motivation for creating this tier was to help align better with American?

Simon: Yeah, both American and Iberia both offer that extra tier. And of course oneworld as a whole has a name for it; it’s Ruby.

Cranky: Beyond elite, earning has not changed, is that correct? If I fly from LA to London I still earn the same?

Simon: Yes.

Cranky: But redemption has changed fairly dramatically.

Simon: Redemption has changed in terms of redeeming your Avios points. Instead of having quite crude and large zones that we carved the network up into, there’s a finer level of segmentation now so different flights may have different redemption levels. It’s not as granular as mileage pricing, but there are are a number of different levels. We have quite a cool map-based calculator to help people.

Cranky: There’s no award chart, right? It’s more opaque than that. You have to put in where you want to go and it’ll spit out how many points.

Simon: Yeah, what we’ve done is basically create nine zones in the world.

Cranky: So why isn’t there an award chart? I was thinking it was much more complex than that.

Simon: The problem is that it’s fairly easy to do that when you’re just flying BA, but as soon as you start to include partners, it starts to get a bit more complicated. So when we wrestled with doing a straightforward redemption table, it became quite unwieldly.

Cranky: If it’s BA, you get up to one connection and it’s journey based, but on partners, it’s leg by leg.

Simon: Exactly.

Cranky: There’s been a fair bit of criticism about what’s being considered a devaluation. I think the claim was that the cost of redemption would go down on most itineraries, but that was really just online BA itineraries to and from London. How much attention do you pay to the criticism, and are you looking at making tweaks?

Simon: I’ve read some of the same feedback on FlyerTalk and we’ve been quite active in that space in responding to questions in there. And to some extent, communicating in the world of frequent fliers is a bit complicated with all the rules. When you communicate change, it’s important to stay close to the customer. In particular we did clarify that statement. It’s something like 97% of online journeys with BA are the same or better.

Cranky: Yeah, that’s what it was.

Simon: And then once you start to add partners it gets more complicated. But of course because some of the online journeys are better, you can get situations where online plus partner is still better than it was before. It’s pretty complex, but yes, we are getting a lot of feedback especially from specific groups of people who are focused on partner jounreys and we’re doing our best to follow up with them.

Cranky: So have you identified areas where you said, “maybe we should make a little change”?

Simon: I haven’t done that yet. It’s a little bit early. With a change of this scale, you need to find out what turns out to be frequent significant issues and then start working on them. But at the moment, it’s so early into the change that I think it would be just a little bit too soon to start making the tweaks. We may well make some tweaks, but it’ll be further down the road.

Cranky: But you are paying attention.

Simon: Yeah, we watch FlyerTalk, we’re completely on top of the tweets, we have an active presence on FlyerTalk where people are engaged. So we take all of that, that whole space of blogs and more generic social media very seriously because that’s where people are talking about our brand and we need to be very responsive.

Cranky: Can you talk about what spurred the change to the redemption scheme? I mean, I understand the change to Avios to try to get a shared currency, but in terms of changing the way the redemptions work. What was the thought process?

Simon: I think again sort of opportunity to react to a bit of feedback that we’ve been accruing over years since we last made a change. Customers had been saying “the scheme you’ve got is a bit unwieldy.” Of course a lot of people’s feedback and critique comes down to whether they perceive the number of miles they pay on a journey to be fair or not. And if you have a more granular level of charges, then you’re always going to have a more fair selection. That’s because you have very big regions and the shortest in the region and longest in the region are the same price and people ask why. That’s a big driver.

Cranky: The differentiation between partner awards and BA awards, was that an issue of aligning your incurred costs with mileage spend?

Simon: That was very simple. We have individual exchange arrangements with all those partners, so to some extent when people start flying on partner networks we have to recognize the rules and structure of that partner’s program as well.

Cranky: But you’re not differentiating redemption values by partner at this point, right?

Simon: That’s right.

Cranky: I think that’s all I have, but if you do start looking at changes, I’d love to see the fuel surcharge dropped.

Simon: Yeah, if you could just lean on those guys at OPEC to reduce the barrel price, we’ll be dropping the fuel surcharge quickly.

Cranky: I’m sure that’s something you hear a lot of.

Simon: All I can tell you is that not only does the fuel surchrge not cover the cost of fuel but it doesn’t cover the increase in the cost of fuel.

Cranky: Right, but if it’s a redemption ticket, it’s a question of whether people earned the right to not pay that. We could probably discuss this as a scholarly level.

Simon: The basic math is that if the fuel price goes up so that we end up paying $100 more to carry someone across the Atlantic, the surcharge allows us to recover some of that but it’s not $100. We have to recover that from somewhere else. We don’t want to take that out of any part of the customer experience. We don’t have to have lower quality food or anything else. So that leaves us in the uncomfortable position of having to surcharge while the fuel prices are so high.

Cranky: Did I miss anything?

Simon: I guess the other thing to say is that the relaunch is part of a much bigger program of investment. We’ve said it’s about 5 billion pounds including everything from lounges to service experience to the aircraft themselves to technology. We’re into a very big investment at BA and we see that going on for a number of years.

To learn more about Avios, visit British Airways online.

Last night, I attended the launch of Iberia’s new flight from LA to Madrid. This has been hailed as a product of the joint venture between British Airways/Iberia (now under the same ownership) and American Airlines. Is that really true? Yes and no, I think. It’s confusing.

One of the things that bothers me about joint ventures in general is that they are given a lot more credit than they’re actually due. The basic joint venture idea is that airlines come together to create a single business where all decisions are made to benefit the greater good and information flows freely. The participating airlines pool the money and then split it up, so it doesn’t matter which airline is actually flying the passenger. With rules against foreign ownership in place in the US, this kind of cooperation is the closest that US airlines can get to merging with a foreign airline.

In this case, we see the airlines saying that the joint venture has “increased the travel options available to clients of all three airlines, with more frequencies and more destinations, as well as better connections across all three networks.” But how much of this is achievable without a joint venture from a customer perspective?

Airlines can and do codeshare without a joint venture all the time, as you all well know. So the connectivity aspect isn’t something that requires a joint venture. Similarly, frequent flier cooperation has nothing to do with the joint venture. Some people believe that American and British Airways were not able to offer miles on each other’s Transatlantic flights because the feds wouldn’t approve the joint venture for a long time. They might have wanted you to believe that, but it’s not true. It was a business decision. So what exactly does a joint venture do?

Most importantly, it allows for schedule and fare coordination. Before, Iberia could start the flight to LAX, but it wouldn’t be able to strategize with American about which markets had the best connecting opportunities and adjust schedules accordingly. Now, since they share all information, American might find that it’s worth it to shift a flight to, say San Diego by half an hour because there are a ton of people flying that route and the airlines might be losing out to competitors with better schedules.

It has also allowed the airlines to cooperate on routes where they previously competed. Look at the New York to London market and its “shuttle” service. The two airlines have now aligned their flight times so that they complement each other instead of compete. Granted, they still operate from different terminals at JFK, so it’s not an easy shuttle service as you would hope, but it’s a step. And it’s a step that’s only really going to happen because of the joint venture.

Fares can also be discussed at will. So there can be much better route analyses in order to determine where the best place is to put that A340 Iberia is now sending to LA. Maybe Iberia with its own data would have decided that another flight to Chicago made sense. But after looking at the data, the combined information showed that everyone in the joint venture would be better off with the flight to LA. I don’t know if that’s true at all, but it shows how it could work.

So for the airlines, it’s all about the pseudo-merger over the Atlantic. They can now look at the data as one, though with some of the large cultural differences, it’s hard to get everyone on the same page when it comes to taking action. Still, the possibility is there and it can be good in terms of better schedules and more flights.

Can it be bad? Of course. Before, you still had BA, Iberia, and American competing for passengers over the water. Sure, they codeshared with each other, but the airline that flew the passenger got the money so there was incentive. Now, there are fewer competitors in the market since BA/Iberia/American act as one (as do Delta/Air France/KLM and Lufthansa/United/Air Canada.) In the end, the belief is that this will still be better for consumers, at least, that’s why the feds decided to approve it.

What do you think?

Last week, American and its joint venture partners British Airways and Iberia were here in Southern California to pitch the benefits of the joint venture to the region. The airlines are launching a lot of new service here in the next month, and they say the joint venture is a big reason why. I, however, was more interested in how the airlines were going to deal with their sometimes large product differences. The result? There doesn’t seem to be much concern about that.

As you probably know, BA and Iberia are now co-owned by the same umbrella company so they are slowly beginning to act more like one airline these days. All of these airlines have been in the oneworld alliance together for a long time, but it’s only in the last year that they’ve been granted antitrust immunity to effectively operate as one airline over the Atlantic. This is something that Delta/Air France (including Northwest/KLM) and United/Lufthansa have had for a long time so these guys are playing catch up. And they were in LA to spread the gospel about how great this is going to be.

Some of the point here is to promote new service. Iberia starts its nonstop from LA to Madrid soon, BA is adding San Diego to London again, and American is adding a bunch of regional jet flying around the Western US. Oh, and LA to Shanghai too. With the increasingly tightened cooperation, it had me wondering about the onboard experience. Did they think that it was an issue that the experiences could be so different on the airplane? The answer was no.

We need to look no further than the offerings in LA to see that there is a stark difference, even in coach. Iberia, for example, has no powerports and only overhead video screens on its flight to Madrid. American’s London flight has looping movies in each seat with scattered cigarette-lighter style powerports. BA has full audio/video on demand and no powerports. Meanwhile, BA has a premium economy section that the others do not have. And the business class experiences are very different as well. BA has a full flat bed while Iberia and American have different angled lie flat seats. And Iberia doesn’t have a First Class while the others do. And yet, you wouldn’t know a difference existed if you book online at the airline website. Here’s a shot from BA’s:

As you can see, you know the name of the airline that’s operating the flight but that’s about it. If you click on the class of service, it just gives a vague description of what you get on BA in those classes and not the other airlines. You can go to the more robust descriptions on the BA website and there are links to American and Iberia from there, but this assumes that people think in advance to ask if there’s a difference. One solution would be to work toward a combined product standard, but they don’t like that idea.

Jose Maria Alvarado, General Manager of the US and Canada for Iberia said, “I don’t think the passenger wants the same cookie cutter service.”

I think there’s a big difference between having similar product offerings and offering “cookie cutter” service. But let’s assume he’s right and that everyone loves each of these airlines for the differences they offer. Shouldn’t they at least be making a greater effort to describe product differences in the booking process?

Kevin Burns, Regional Director of Western USA and Canada for BA said that “to bias the decision process isn’t to our benefit.” Again, there’s a wide gap between informing the customer of the options and biasing the decision process. My hopes aren’t high that we’ll see this change anytime soon.

This isn’t a problem that only these airlines face. Every airline entering into a joint venture or any close business cooperation has to learn to either eliminate the differences or do a better job of explaining them. I wish more airlines would focus on this, especially as they get tighter and tighter with their partners.