IAG Breakup - Winners & Losers
Forcing BA & IAG to part ways would harm consumers all over Europe
Earlier this week Michael O’Leary, the ebullient billionaire boss of famously stingy Irish mega-airline Ryanair, made remarks about London-based British Airways (BA) and their Spanish parent International Consolidated Airlines Group (IAG).
He reckons that Lufthansa of Cologne and Air France of Paris are “really gunning for” IAG and “there is clearly a bashing up going on there at the European Commission, with the French and Germany looking for the break-up of IAG” due to rules constraining foreign ownership of non-European airlines, a framework common to many countries not just the EU.
Chief O’Leary’s beef is that big airline groups carrying the flag of an EU member state lobby their governments and the European Commission for protection and handouts not available to others, like Ryanair, who have to survive by their business acumen alone, which in Ryanair’s case is formidable but fairly-earned. He clearly does not care much for Lufthansa moaning about operating empty flights to keep their favourable (and largely inherited) airport take-off and landing slots, saying earlier this year:
The solution to Lufthansa's "ghost flights" problem is a simple one - just sell these seats to consumers. If Lufthansa really needs to operate these flights (solely to prevent the release of these slots to competitor airlines), then they should be required to sell these seats to the public at low fares.
The German and EU public have already bailed out Lufthansa with billions of State Aid to Lufthansa and their subsidiaries [so] Lufthansa should release the seats on these flights for sale at low fares to reward the German and European taxpayers who have subsidized it with billions of Euros.
Lufthansa loves crying crocodile tears about the environment when doing everything possible to protect its slots. Slots are the way it blocks competition and limits choice.
No doubt Chief O’Leary has similar thoughts about the €4 billion bailout handed over to Air France.
So here is the interesting question – is Chief O’Leary actually worried about the breakup of IAG itself? Or is he more concerned that separating BA from the Iberia family will make other European airlines stronger competitors for him? Who would win and lose from breaking up IAG? Read on to find out…
What is IAG?
IAG is a holding company that owns seven large aviation brands:
Aer Lingus: The airline of the Celtic world, based in Dublin and home carrier of current IATA Director General Willie Walsh.
Avios Group Limited: One of the world’s leading loyalty arms – may be more valuable than the actual airlines (see article).
British Airways: The largest airline in the group, based in London and responsible for the world’s first flat bed seats in both first and business class (see article).
IAG Cargo: Hubbed in Dublin, London and Madrid, using the belly capacity of the other airlines as well as their own fleet.
Iberia: The airline of Spain, based in Madrid, has enjoyed something of a brand resurgence under IAG.
Level: IAG’s low-cost longhaul airline, established to compete with now defunct Norwegian longhaul – I have not flown it, my friends who have said it was not pleasant.
Vueling: The groovy funky airline based in fabulous Barcelona, a beautiful city on almost everyone’s bucket list.
I am not entirely sure how many Air Operator Certificates (AOC)* they hold. Level does not have it’s own and operates under Iberia’s.
There are various subsidiaries and affiliates like Iberia Express, BA CityFlyer, Aer Lingus UK and Aer Lingus Regional. At least some of these are descended from the old bmi British Midland and may (or may not) still hold the related AOCs. Since this discussion is about commercials, who owns which AOC is not particularly relevant, except in the case of IAG Cargo (more on this later).
* AOC are authorisations to operate airline services granted by a national regulator and signify that a carrier meets high safety standards. When a carrier first starts operating the regulator will also want to make sure that the business is sufficiently capitalised.
Unlike in some parts of the world, getting an AOC in Europe is the easy bit for anyone who can pull together the necessary cash and a management team – no ‘tricks’ are necessary, just robust and rigorous safety compliance.
How do IAG’s brands complement each other?
Each airline is quite distinctive. In IAG’s first years, their investor day presentations referred to the benefits of aircraft commonality, allowing aircraft with the same, seats, galleys and lavatories to be operated wherever the group might need them most. In practice this does not seem to have happened.
The brands have retained their identity over time and each passenger experience is still quite different, with unique interior colour schemes, seats, uniforms and catering at each brand.
There are likely to be advantages behind the scenes – procurement for aircraft parts and galley equipment for example. All the groups’ passenger airlines operate single-aisle Airbus 320s that each use the same components, offering great economies of scale and bargaining power when it comes to buying the right kit.
However I believe that to truly understand IAG’s brand positioning beyond the frills we need to look at their networks. Level and Vueling are not particularly relevant for what I have to say as their networks are much more independent of BA’s than Iberia’s or Aer Lingus’s are. Level is not supposed to abstract revenue from any of the three full-service airlines because it is meant to target market segments who will not otherwise fly with IAG.
I have prepared some maps based on my best recollection of their pre-COVID operations – BA have terminated their Abu Dhabi and Osaka services for example but give them time, I think it unlikely they will never fly to these cities again.
There might be one or two missing or the odd airport code mis-specified – if you spot something odd please let me know – minor quibbles with maps do not change my points.
Aer Lingus is of course present everywhere in Ireland, British Airways is found all across the United Kingdom and Iberia flies to many places in Spain. All the airlines fly to the standard major European cities. The map below shows where Aer Lingus and Iberia both fly – major cities, capitals and important business centres.
(The blue dots at Moscow and Reykjavik are to frame the map so it is easy to read)
Most of Aer Lingus’s traffic on these routes will be business and leisure travel originating or turning around in Ireland.
The map below shows where in Europe Aer Lingus flies but Iberia does not. The Irish carrier links the UK and Ireland, which have close business links as well as a common travel area. But Aer Lingus also flies north-south a lot, taking Irish holiday makers to sunnier climes.
Iberia’s shorthaul network is much more extensive across European, Mediterranean and African cities, as shown in the map below. My assessment is that IAG use BA and Aer Lingus as a double-team, with Irish passengers who want to use IAG and not Ryanair invited to fly British Airways via London on most routes. Iberia on the other hand is too far south for a London connection to be viable, and so requires a larger shorthaul network.
(Gran Canaria not shown for map framing)
IAG’s longhaul network powerhouse
It is on longhaul where IAG really pulls it’s weight, with a strong and compelling network across the world. The map on the left below show where all three airlines fly on longhaul.
Meanwhile the map on the right shows longhaul routes operated by both Aer Lingus and British Airways. My gut feel is that the Aer Lingus longhaul network exists for two reasons. First to carry passengers from Ireland to the United States, as there are strong links between the two countries and so strong demand. But Ireland itself is probably too small to sustain Aer Lingus.
The second reason is that I reckon that Aer Lingus also has a place in IAG’s strategy to price discriminate. Anecdotally from more than ten years looking at these things I often see Aer Lingus prices from the UK as lower than BA’s and rarely the other way round.
I believe that IAG uses their different airline brands as a form of price discrimination, taking the passengers with highest willingness to pay on British Airways and letting Aer Lingus compete for those who are more price sensitive. I have seen similar pricing behaviour for travel from mainland Europe mainly being cheaper on Iberia via Madrid than on BA via London.
The two maps below show the destinations of Aer Lingus and Iberia that they do not share with an IAG partner. Bradley International Airport (BDL) in Connecticut is presumably a significant Irish-American gateway with strong links locally to the mother country to support demand for a longhaul service – I know nothing about it personally.
Notice how strong Iberia is in Central & South America. I think it is fair to say that IAG wants Iberia to be their main airline for passengers travelling to, from or through Latin America. BA flies to more cities on the US west coast (seven) than they do in the whole of South America (five, see maps below) and generally I see fares much more expensive on BA to Rio, Sao Paolo or Santiago than they are on Iberia – once again IAG is using their airlines to price discriminate.
Breaking up IAG – impact on each stakeholder
If Lufthansa and Air France were to have their way and Chief O’Leary’s suspicions are well-founded, BA would be expelled from IAG. What would the impact be on each stakeholder? First the easy ones:
Level: No impact due to minimal network overlap and that there is no revenue abstraction with other IAG airlines.
Vueling: Minimal impact due to Vueling’s focus on shorthaul to and from Barcelona – there might be a tiny effect from BA and Vueling not selling flights on each other’s websites.
For the three airlines most impacted by the change, I reckon:
Aer Lingus: Since Aer Lingus is not a member of oneworld their longhaul network’s survival would have to rely on a special prorate agreement with BA or other airlines. Perhaps Lufthansa or Air France-KLM would welcome them into their fold. Although shorthaul would probably survive, it is likely that at least some of their longhaul services would become uneconomic and be curtailed.
British Airways: Powered by fortress London Heathrow, I doubt we would see any meaningful change to BA’s network or products. They would most likely sign a special prorate agreement with Iberia granting BA access to their latin american network at good prices and Iberia access to BA’s north american network and the eastern hemisphere at good prices too. BA would be unliklely to leave oneworld.
Iberia: Also unlikely to leave oneworld, Iberia would no doubt sign up with BA and share traffic through the alliance in the short term. But north america is a lucrative and tempting market – I think that Iberia would pull away some capacity from latin america and compete more with BA on the northern routes.
Figuring out what would happen to the two other IAG brands is a little more tricky.
Avios Group Limited: At first glance no impact, since it is not an airline. However would either BA or Iberia stop using Avios? It is hard to say, but if Avios had to choose whether it wanted to be focused on the UK, especially London, or Spain I bet it would choose London as BA is a larger airline and the British economy is larger too, leading to higher revenue from co-branded credit cards (see article).
IAG Cargo: This is a tough one. IAG Cargo has big bases at London, Madrid and Dublin. My guess is that it depends to some extent on who owns the AOCs for the freighters. If the AOCs are split across BA and Iberia the freighters will revert to their AOC holder but if they are owned in one IAG Cargo AOC they might be split 50/50. Maybe either BA or Iberia would buy freighters from the other.
Irish consumers: Unlikley to enjoy any price reductions, Irish consumers may find that they are subject to higher prices and lower frequencies on both shorthaul and longhaul – overall, Irish consumers would lose out.
British consumers: Without Aer Lingus to absorb the lowest fare passengers and with less demand to put through to Iberia, British consumers may be overall winners, experiencing lower prices on some routes at some times of the year as BA introduces more lower fares on more flights to attract segments that would otherwise go to Aer Lingus or Iberia – overall, British consumers might be winners.
Spanish consumers: If Iberia decides to move capacity away from latin america to north america, Spanish consumers would likely enjoy a small price reduction on a few well-served routes and both significant price increases and fewer flights across much of Iberia’s existing longhaul network; if Avios were to leave Spain another programme may not be as good, harming consumers and business even in non-aviation sectors – overall, Spanish consumers would be big losers.
Other European consumers: IAG currently have a network set up for good price discrimination – break this up and the lowest fares will likely disappear so the average consumer can probably expect to pay a little more – European consumers overall will be losers.
Cargo consumers: Without IAG Cargo, freight forwarders will have less flexibility and have to work harder to achieve the same results - cargo consumers will be the losers, suffering higher prices and/or slower services.
Lufthansa and Air France: Constraining IAG’s powerful longhaul network will be a boon for Lufthansa and Air France, who will be subject to less competition on their most lucrative routes.
Ryanair: If Lufthansa and Air France do achieve higher revenues on their longhaul sectors following an IAG breakup, they can use this to subsidise their poorly performing shorthaul sectors to the cost of Ryanair – no wonder Chief O’Leary is worried – as a major shareholder of Ryanair he has a large personal stake to lose, something which will not be of concern to most managers at Air France, Lufthansa and the European Commission.
Breaking up IAG would be harmful for consumers all over Europe. Paradoxically, Ryanair who do not even operate on the relevant routes have the most to lose and British consumers who are not even in the EU would probably be the biggest winners. The European Commission would be daft to even consider it.
oliver AT ransonpricing DOT com
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