Airline mergers within Europe have gone very differently from how they’ve proceeded in the US. As we all know, in Europe, the merged brands tend to keep their pre-merger identities in one form or another. There is just an overall group structure at the top keeping things together. The originator of that model for airlines is looking to change the way it works.
The International Airlines Group — better known by its acronym IAG — was formed originally by the merger of the UK’s British Airways and Spain’s Iberia. It has grown significantly since that time through acquisitions (Aer Lingus and Vueling plus the pending Air Europa deal) as well as homegrown operations (Iberia Express and LEVEL). Today it has three business segments:
- Full Service – British Airways and Iberia
- Value – Aer Lingus, Iberia Express, and (if the merger is approved) Air Europa)
- Low Cost – Vueling and LEVEL
With this structure, IAG has easily become the best run legacy airline group in Europe, but it isn’t resting on its laurels. It sees opportunity to consolidate power with the group that may not exist there today.
There was a large volume of fascinating information in IAG’s Capital Markets Day presentation from earlier this month, — I’d recommend scrolling through to get a sense of how the group views the world — but there on page 12, something stood out to me. Under the headline “IAG believe there are opportunities to unlock next level synergies with an evolution of the model,” the company posted this chart:
IAG created this model for its airlines back in the day, but now it is thinking it is missing out on an opportunity to consolidate functions. Let’s talk about each of these five categories.
Customer and Product
Today the customer experience at each airline is handled by that airline, or in this parlance, operating company (OpCo), but IAG thinks there’s room to move that. Specifically, the company defines “hybrid” as being “Central group direction but enacted by the OpCos.”
I take that to mean that the products will be determined at a corporate level. The seats, meal service plan, etc, will all be consistent across carriers in each segment. (That means BA and Iberia might be the same, but obviously — er, maybe not so obviously the way BA short-haul has evolved — that would differ from Vueling.)
The implementation would presumably be a little different. Maybe the food would vary to fit the local preferences, for example. Each OpCo could add its local flair. But I assume this to mean that the basic architecture would be the same across all brands.
To me the most interesting aspect here is that “brand and marketing piece.” I suppose this would be like a Carl’s Jr/Hardee’s thing where it’s basically the same, but the name is different. This is where my mind begins to wander…
Come on, you know you love it. But I digress.
Commercial
It’s interesting that today pricing is still done at the OpCo level when so much of the business overlaps. I would think that British Airways and Iberia should be pricing together, for example. It sounds like IAG wants to move this entirely to the group level, and I would agree that makes sense.
Loyalty is another area that makes sense. I’ve never quite understand why IAG keeps its airlines separate. They all use Avios as their currency, but they continue to run their own individual programs like Executive Club and Iberia Plus. They have different rates, rules, and partners. If there’s a partner with one IAG carrier, it should be a partner to all. There has to be a better way to run this from a group level, but I’m sure there are also valid reasons for keeping some of these separate or it would have been merged already.
Sales and distribution should be the same. It sounds like this is already a hybrid, but IAG should have a single point of contact at each agency/company for its clients. There is no reason to keep these apart. You can have specialists in different geographic areas or market segments, but requiring clients to go to different places for different issues at different airlines ends up being frustrating when they should work well together.
Network and Strategy
IAG wants to move network planning from the OpCo level up to a hybrid. I’m actually surprised the company doesn’t want to move this to the group level. After all, you can have specialists in different areas that all work for the group. They can optimize how you schedule.
For fleet planning, this already was a hybrid, but it’ll move up to the group. This seems to have already happened. No individual airline should be placing orders and negotiating. IAG should handle it. We already saw this with the 737 MAX which will be in the same configuration but split between British Airways and Vueling. The more airplanes can easily be moved around, the better it is… but don’t go too far. I thought BA was full service while Vueling was low cost? Apparently that’s related to the service, not the hard product.
Operations and Corporate
I’ve combined these two areas, because IAG effectively believes that it is where it needs to be except possibly in trying to look at talent from a higher group level. But the operations and crews do need to be at the airline level, because of different rules and regulations by country. Once (if) the UK leaves Europe, then there’s no doubt that BA will have to run differently than Iberia from an operational point of view. There are also traffic rights and other issues that may be tied to the individual country.
Overall, this is just IAG lurching toward a true merger, or as close as it thinks it can get to one. Of course, a true merger like we see in the US is off the table when you have such varied types of operations. That diversity at IAG does make me wonder if the customer/product/commercial areas may go too far.
19 comments on “IAG Looks to Consolidate Power At the Top”
I like the logo family. Don’t let Patrick Smith see it, though–he has strong feelings about the Generic Meaningless Swoosh Thing.
The “swoosh thing” is OK for BA, since it’s (allegedly) just a modern update of the “speedmarque”. But I don’t think IAG should use it group-wide.
However, it may be worth it just to see Patrick Smith have a coronary thrombosis. (I kid, I like Smith. Now as well-known imbecile Christopher Elliott…)
It will be interesting to see how Delta does this, sense they don’t have full equity agreements but only partial ones.
It is an interesting question. My sense is that Delta’s strategy is slightly different. It looks to be more about boosting Delta (TechOps contracts, destinations for US based fliers / US hubs, meaningful sky miles earning / redemption) than trying to optimize profitability across all the pieces and growing the other airlines in their own right. If the other airlines run like Delta clones, with Delta contracts, Delta money, and Delta experts, then they will produce a financial return for themselves and even more for Delta, but will not necessarily be one big combined family.
I also see this as Delta’s response to SkyTeam which has long been the worst of the 3 alliances. Coverage in key areas like Asia has been weak, and AF/KLM in Europe has been sub-optimal. For Delta to have a strategy of being a premium carrier — they need premium partners who can be well-run and follow the rules and agreements (I’m sure Delta paid out tons of miles / compensation for partner shortcomings over the years).
Additionally, in many cases, these investments are relatively small. Virgin 49% stake was only $350 million — the list price of one a350. So while Delta has to invest time and likely more money, they also got a screaming deal to add a ton of service to LHR overnight with one less competitor and no need to buy new planes. Virgin isn’t joining Skyteam or sky miles. The restructured route network focuses on US-Delta gateways. Virgin’s IT platform now runs on top of Delta’s (ever notice the nearly identical mobile apps?) — but they aren’t the same instance — it is a copy not an extension. Delta gets TechOps contracts from their investments. So there is a lot here, but I think it boosts Delta more than optimizes across…
Interesting. One thing I believe that many BA loyalists will disagree with is that BA is listed by you as “Full Service”. It really isn’t, as intra-Europe has been stripped down to low cost: no differentiation in seat pitch or width between economy and “first”, no meal or even drink service in economy unless you pay. It is of course great for IAG that they have two very “captive” markets in the UK and Spain, but over time it will be interesting to see if Lufthansa Group and Air France-KLM succumb to this lowest common denominator (like AA/DL/UA are doing) or if IAG’s strategy will prove costly over time.
I agree with you, but don’t blame Cranky! That’s IAG’s own description of their market position.
I agree with both of you. BA short haul is definitely no longer ‘full service’.
I fly with Lufthansa now specifically because it’s not been stripped down, I’m prepared to pay a little bit more to enjoy the experience. BA, to me, are now worse than EasyJet and only slightly preferable to Ryanair!
You took the shamrock off the Aer Lingus logo! What a sacrilege!
Good article Cranky – as usual!
Thanks!
Re 737s: it’s pretty easy to imagine BA’s narrow body fleet being shared with Vueling given their current sardine configuration (including no distinct J seats).
Pretty much the same at Iberia Express.
“ I’ve never quite understand why IAG keeps its airlines separate. They all use Avios as their currency, but they continue to run their own individual programs like Executive Club and Iberia Plus. They have different rates, rules, and partners. If there’s a partner with one IAG carrier, it should be a partner to all.“
I think the loyalty thing with different Avios accounts is probably confusing to customers as well.
However, how is the partner thing going to work with OneWorld? Vueling (etc) is presumably not going to join OneWorld and offering benefits according to OneWorld rules.
I think LH has a similar mess at its hands with EuroWings, which isn’t part of *A, but offers some limited benefits to UA (*A?) elites, for example. I am reminded of flyertalk threads where UA flyers are confused what rules/benefits apply to Eurowings flights (and to make it more confusing, operated by Sunwings).
Regarding Vueling, Level & Aer Lingus and oneworld, there is always the oneworld connect platform. Affiliation, without full membership. On a side note, AA should be pursuing oneworld connect opportunities in Latin America since the loss of LATAM.
But does that standardize loyalty from a customer perspective? Or from IAG’s operating perspective?
Oliver – Well, it could be broken up into two programs. Have an Aer Lingus/BA/Iberia/Iberia Express/Air Europa program and a Vueling/LEVEL program.
IAG is copying the cruise line model. RCL owns Royal Caribbean Intl, Celebrity, Azamara, and has a joint venture with TUI. Each of the brands has it’s own identity and RM, but a lot of things like building ships, catering, etc, is done at RCL level.
I’m guessing that one of the main reasons IAG keeps its constituent airlines separate is that they operate in three individual, sovereign nations; The United Kingdom, The Republic of Ireland (as opposed to Ulster, aka Northern Ireland, which is part of the U.K.), and Spain. The same is true of AirFrance/KLM and Lufthansa group. Separate nations, separate regulations, separate airlines.
Delta’s situation is different because its partnerships are joint ventures, not full-blown mergers. There’s a big difference. As an aside, it’s quite possible that Delta’s 49% stake in Virgin Atlantic wasn’t nearly as valuable when Singapore Airlines owned it. I’m guessing that Virgin Atlantic’s joint venture with Delta produces far more value (if for no other reason than geography) than any joint venture with Singapore could have. But of course, that’s just a guess.
It looks like IAG has taken the “airline within an airline” concept to a whole different level. Maybe the idea didn’t work in the past because they were mostly half-hearted attempts to cut costs in the short run. Just a guess.
Obviously, I understand the idea of consolidating functions to reduce overlap, redundancy and cost. That’s one of the main benefits of mergers and consolidations. But I’m guessing there’ll be a bit of fine-tuning along the way. It’ll be interesting to see how all of this looks going forward.
Noah,
As oft as it is repeated, Skyteam is the number 2 alliance in just about every region as measured by ASMs. Star is first and oneworld is third. Feel free to pull the data for yourself. Delta is also the largest airline across the Atlantic and its joint venture partners and Virgin Atlantic keep Delta in that position. Across the Pacific, Delta and Korean are the 2nd and 3rd largest airlines so it isn’t hard to see, despite what some believe, that Skyteam is the 2nd largest transpacific alliance as well as #2 within Asia. United was first of the big US3 to start acquiring major international assets with its acquisition of the Pan Am Pacific network in 1985, they have repeated that in other regions, and that has allowed them to pick some of the most prominent airlines when Star was founded. Delta’s equity investments have largely been to put Delta in the #1 or #2 position in the regions/countries where its partner and Delta serve.
Delta’s beef with Skyteam is that there are still huge differences in the quality of service between carriers and that individual carriers have been free to pick and choose the level of participation and connectivity (electronic and service-wise) which creates a hodge podge of carriers. The reality is that all of the alliances have that characteristic but Delta simply is saying that the status quo isn’t acceptable and is coming up w/ its own solutions to fix the problem, largely through its own equity arrangements with carriers that build the network and service levels it wants – not a finished product but more harmonized than a lot of alliances. And, of course, Delta sits on the board of its equity carriers and many including Gol and Virgin Atlantic are better run businesses than they were when Delta invested in them.
And let’s also not forget that all of the world’s major airlines are for-profit businesses. Delta is right now the most profitable airline in the world and has the cash to build the world it wants – something no one else has been able to do with anywhere near the level of success Delta has had. There may be something appealing about saying you serve Hong Kong – but airlines left and right are cutting service and reporting falling profits in the market right now. Delta saw weakness in the market over a year ago – UA reported it as well – and Delta pulled out of HKG. The situation there will stabilize and Delta will be back at some point but there is no prize for investors in sticking it out in markets that don’t make money. That is just one example but Delta has been more aggressive than any other global airline in ending the traditional mindset of serving markets for status or keeping service levels that are not profitable – and Delta’s financials show it.
As for IAG, they are following the same model of other European airlines of having multiple brands and service levels; US airlines ditched that model after the airline within an airline model. Europe is still a very diverse market and there are significant limitations on the ability of companies to work as a truly integrated company across the continent while that is much easier to do in the USA.
And finally, as has been discussed in other recent CF articles, IAG is much more dominant in its major markets than other US and European airlines. They can afford to have a less unified product and also offer lower levels of service (as some have noted) because they have a dominant position. Where it makes sense to be unified because it saves costs and provides better negotiating power with suppliers, they will act as one company – but that doesn’t mean the consumer product will be unified for years if even and for many reasons.
I was waiting patiently with fingers cross for some coverage and commentary on IAGs recent Investor Day Presentation. I hope this is the first of several notes on EU3 (IAG, AF-KLM, Luft) vs US3 and ME3.
To further whet your interest, AirFranceKLM recently had an excellent Investor Day Presentation too that is worth of coverage and commentary across Fleet Strategy (AF=AB, KLM=Boeing) and especially The Dutch Social Model vs The French Social Model.
Keep up the GREAT work!
actually i love the multi color variants of the “swish” proposed by @Cranky. Too bad IAG won’t listen and continue retaining some of their more hideous branding subsidiaries.
Personally I still don’t see how the Spanish authorities would actually approve a merger that places Iberia Vueling LEVEL *and* AirEuropa all under one single roof.
LH gained domestic share from Air Berlin only in the wake of the latter’s liquidation and the ops got chopped up among the bidders, whereas IAG is trying to create an effective monopoly in Spain when none existed before.
In terms of existing synergy I thought it would be easier path if IAG bought out Finnair instead of AirEuropa, but I’m no Willie Walsh so whom am i to judge