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.
