The rise of airline hybrids in Europe

Posted in Blog
By Ian McPartlan
Managing Consultant

After suffering years of losses on domestic and regional networks, Europe’s big three full service air carriers are extending their networks by introducing hybrid, or low-cost carriers, for their short haul flights. This is a dramatic change that will reshape the competitive landscape in Europe and significantly affect both corporate travel buyers and their TMCs.

It’s no secret that all of Europe’s big legacy carriers have cost saving programs in place to help curtail long-standing losses on their short haul business. Examples include, SCORE (Lufthansa), Transform 2015 (Air France-KLM) or simply Transformation (Iberia). All three of these turnaround plans are trying to off-load their domestic and regional operations, while retaining a level of integration with their parent carrier.

How are they doing it?

As has been widely reported, Lufthansa is taking a phased approach to transfer all of its domestic and regional European services that do not operate to/from Frankfurt or Munich to its low-cost carrier Germanwings. With 52 aircraft moving across from the Lufthansa fleet, Germanwings plans to carry 16 million passengers a year, a not insignificant 20% of Lufthansa passenger volume.  Germanwings unit costs, while still significantly higher than the pure low-cost European carriers, are around 20% lower than Lufthansa’s equivalent short haul unit costs.

Meanwhile Air France has combined three of its regional subsidiary airlines to form Hop!, which will operate 30% of Air France’s domestic and regional services. Unlike Germanwings, Hop! will also operate services to and from its parent carrier hubs in Paris. And over at International Airlines Group (IAG), British Airways and Iberia have completed the full acquisition of Vueling, their low-cost carrier based in Barcelona. Together with Iberia Express, IAG now has extensive low-cost carrier operations at both its Madrid and Barcelona hubs.

The common theme of all these new ventures is a strategy to reduce liabilities and losses, compete with pure low-cost carrier operators, and still retain a level of service and network integrity with the subsidiary carrier. The positioning of new bundled fare products highlights this strategy. For Germanwings ‘Basic’ (budget) fares are their pure low-cost concept – with catering, baggage and seating as additional charge options. The ‘Smart’ (standard) fare is a conventional economy fare product – changes for a fee, reserved seating, checked bag, snack catering and frequent flyer miles are included, while the ‘Best’ (comfort) fare are similar to business class type fares with preferred seating, lounge access, and priority check-in/boarding. Over at Hop!, the fare concept is very similar with Basic, Basic Plus and Maxi Flex, while Vueling opts for Basic, Optima and Excellence. You see the trend.

How will it affect me?

The arrival of these hybrid carriers presents some challenges for buyers and their TMCs. While you may see lower fares on some routes, it is by no means a certainty. With discrepancies between the web and GDS (Germanwings basic fares are only available on the website), fare bundling and optional pay for extras, identifying the true lowest logical fare can be more challenging and potentially more costly. You may need to adjust current contracts and check how the changes will affect your targets and volume-based incentives. Consider your approach and sourcing strategies as the things you are used to with the legacy carriers – structured discounting and incentives, account management support and interaction – will be limited or even absent with the hybrid carriers.

The new hybrid carriers in Europe mark a significant structural change in the market. If this change proves successful, we predict that the carriers will extend to business-focused routes to bring more traffic to the parent carrier hubs. As you may recall, in the U.S., the ‘airline within an airline’ hybrid model failed to take off for the legacy carriers. But the European carriers have refined the approach by taking existing but separately managed subsidiary carriers with a genuine and pre-established lower operating cost base. The outcome has the potential to be somewhat different too.

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