Overcoming the threat of low cost carriers:
The effects of partnerships and imitation
Iberia airline business case
Anuroopa Kataria (6126391) Universiteit van Amsterdam
MSc Business Studies - Strategy track Supervisor: Drs. J.G. de Wit
Abstract
As a response to the increasing threat of low cost rivals on short haul markets that jeopardize
the hub & spoke system, full service airlines attempted to capture this threat by forming
partnerships with these competitors or imitating them. The implemented strategies are aimed
at lowering the high cost structure of full service airlines for short haul operations, to similar
cost structures of the low cost rivals. Simultaneously, full service airlines are required to
maintain the connectivity of their hub & spoke system as part of their competitive position.
The aim of this study is therefore to examine the actual effectiveness of strategies of
partnership and imitation regarding cost reduction and connectivity by analysing Iberia airline
that implemented the dual strategic action of imitation and acquisition. The airline formed a
partnership by acquiring low cost airline Vueling and applied the strategy of imitation by
developing low cost subsidiary Iberia Express. The analysis is based on Iberia’s annual
reports, OAG data of Iberia’s route schedule and reports of CAPA. The results indicate that
subsidiary Iberia Express indeed contributes to a lower cost structure on the short haul
operations of Iberia as well as improved connectivity for Iberia’s network system. Vueling on
the other hand, expands Iberia’s network with an intra-European network on hub Barcelona. The operations do not interfere with the hub & spoke system of Iberia in Madrid, so Vueling
does not affect the connectivity of Iberia’s hub & spoke system. In this way, Iberia controls
the low cost competition both in Madrid and Barcelona and therefore accomplishes a successful implementation of both the acquisition strategy and imitation strategy.
TABLE OF CONTENTS
I. Introduction 4
II. Changing business models 6
III. Dynamic capability view 9
IV. Partnerships & Imitation 12
4.1 Non-equity based partnership: alliances 12
4.2 Equity-based partnership: acquisitions 15
4.3 Imitation: airline within an airline 17
V. Iberia airline business case 19
VI. Summary & research question 22
VII. Research methodology 24
7.1 Research design: case study 24
7.2 Research instruments and procedures 24
VIII. Results 26
8.1 Costs 26
8.1.1 Operating performance & CASK 26
8.1.2 Passenger number & share 30
8.1.3 Labour costs 32
8.2. Connectivity 37
8.2.1 Total number of flights 37
8.2.2 Types of flights 38
8.2.3 Top ten routes 39
8.2.4 Substitution and expansion of Iberia’s route network 40
8.2.5 Hub & spoke system of Madrid 42
8.2.6 Hub & spoke system of Barcelona 47
IX. Discussion 50
9.1 Imitation: Iberia Express 50
9.2 Partnership: Vueling 53
9.3 Limitation and future research 54
X. Conclusion 55
XI. References 57
XII. Appendix 1: list of figures and tables 64
I. Introduction
A threatening announcement in the Financial Times at the end of last year reads: ‘Europe’s airline distinction blurs as strategies merge‘ (Barber, 2013). What has happened since the 1980’s, when liberalization emerged in the European airline industry? In short, it led to changing business models (Vlaar et al., 2005). Before this period, only two types of players
operated in the industry: legacy and charter airlines. Nowadays there are charter carriers,
leisure carriers, hybrid carriers, low cost carriers and full service carriers (Klophaus et al.,
2012; Wensveen and Leick, 2009; Doganis, 2001; Alderighi et al., 2005). Obviously,
competition increased massively, especially for full service airlines. On one hand, their
long-haul routes suffered from competition due to the increasing numbers of airlines with a
hub-and-spoke system and because of the rise of Gulf carriers (Graham, 2009; O’Connel, 2011;
De Wit, 2013). On the other hand, short-haul routes of full service airlines suffered from the
growth of low cost carriers; over the years, these airlines have gained market share of 47%
(Doganis 2001; Alderighi et al., 2005; CAPA, 2013). As a result, the hub & spoke system
with connections between short-haul and long haul routes came into jeopardy. Full service
airlines experienced difficulties managing the competition of the low cost players because
their cost structure goes far beyond the cost structure of low cost airlines (Dennis, 2007).
Consequently, full service airlines were forced to lower their cost structure for short haul
operations in order to improve their competitive position and trying to obstruct the jeopardy
of their network system. As a first attempt, full service airlines developed low cost
subsidiaries, also known as airline within an airline concept (Morrell, 2005). KLM for
example, tried to survive in the market with low cost airline Buzz while British Airways
developed the airlines GO. Both of them were unable to make the strategy successful. They
had difficulties managing a completely different business model, opposite of their own core
Later on, additional forms of cooperation such as acquiring existing low cost carriers were
implemented (Lenartowisz et al., 2013). In 2009 Lufthansa, for example, acquired the low
cost market leader in Germany; Germanwings (CAPA, 2013). Recently, full service airlines
are considering the possibility of forming alliances with low cost carriers. Airline alliances ‘SkyTeam’ and ‘Star Alliance’ want to offer a partnership platform for low cost carriers (CAPA, 2013). In this way, full service airlines can cooperate with low cost airlines through
code sharing and other non-equity forms of cooperation (Oum and Zhang, 1996; Das and
Teng, 2000).
Whereas previous literature focuses on the threat phenomenon that full service airlines
experienced after the liberalization and imply diverse strategies of cooperation and imitation,
little evidence exists regarding the actual effects of these strategies with regards to cost
reduction and connectivity in the hub-and-spoke system. Therefore, the aim of this research is
to analyse effects of partnerships and imitation on the possibility of cost reduction and
improvements of connectivity of the hub-and-spoke system. The study contributes to the
existing literature with an analysis of effective responses of full service airlines to the threats
of low cost carriers as well as giving new insights to airline managers for future strategic
actions they should take in order to transform the competitive threat of low cost carriers into a
permanent opportunity.
The structure of the paper is as follows: first an overview of the existing literature on
the changes in business models is outlined, after which the theoretical framework and
research design of the business case will be examined. Next, the results of the analysis will be
presented and discussed and finally, the conclusion will be provided, including the limitations
II. Changing business models
This section goes in-depth in the developments after the liberalization that has led to the
successful low cost carriers on one hand and the threatened full service carriers on the
other.The deregulation in 1983 caused new opportunities for European carriers to compete on
international markets and other markets that were closed before (Oum et al., 1995; Doganis,
2001). For flag carriers as well as charter airlines, reacting to this situation meant
reconsidering and innovating their business models (Chesbrough & Rosenbloom, 2002).
Chesbrough & Rosenbloom (2002) characterize a business model as being comparable to a
marketing strategy; it is a ‘plan of action’ how to sell and target a product, eventually to make money. It comprises of a framework representing airlines’ corporate core competences, value
chain activities, assets and capabilities (Daft & Albers, 2011). The flag carriers started to offer
high frequency flights on routes that generated huge amount of traffic, while minimizing
frequency on routes with a small amount of traffic (Oum et al., 1995). Destinations with
minimized route frequencies became attainable with indirect flights via the high frequency
routes; connecting on specific primary, base airports of the airlines (hubs). In this way, the
hub and spoke system emerged. The target customers are widespread: from quality conscious
passengers to price conscious passengers and from business passengers to leisure passengers.
Therefore, the value propositions for passengers are also prevalent with different travel
services based on different seat classes and booking classes. Free food and beverages; the
offer of frequent flyer programs with access to business lounges and privileged sky-priority
handling are examples of such value propositions. The assets that are required to carry out the
value propositions include multiple aircraft types (with relative low utilization rates), complex
fare system with different booking codes through yield management and most importantly
large number of personnel (Wensveen and Leick, 2009; Vlaar et al., 2005). So, the high costs
same way, delivering high service raises the costs of maintenance and overhaul; passenger
services expenses, flight operation costs and mostly personnel costs, both ground staff as
flying staff (Doganis, 2006). Full service airlines also face the responsibilities of long-term
contracts with a network of stakeholders, including various suppliers, which have to be
carefully managed, because these airlines are serving several markets (Pels, 2008). Overall,
the competitive strategy is centred on differentiation by offering high service and transfers
through connecting flights.
Former charter airlines took another approach in changing their business models as a
response to the opportunities that occurred after liberalization. Part of charter airlines
developed in leisure airlines with seasonal and occasional low-priced flights. Another part
continued with the original model but with a solid product of inclusive tour trips or reversely
a seat-only product, without holiday accommodation. So these two types of airlines operated
according to irregular route schedules with low services but indeed at primary airports
(Papatheodorou and Lei, 2006). Another part of charter airlines transformed in low cost
airlines and together with new players that entered the industry carrying out a low cost
business model as well, a new type of airline emerged (Papatheodorou and Lei, 2006). The
target market of these airlines is the price-conscious market, mainly OD passengers
(origin-destination) that fly from one point to another on short-haul routes between secondary airports
(IATA, 2011). This system does not require as much costs as the system of full service
airlines due to the lower airport charges of secondary airports and lower operational ground
expenses of a no-frill concept with unbundled services. This refers to no seat assignment,
single classes and pay services on board such as food and beverages (Doganis, 2006; Pels,
2008; Vlaar et al., 2005). The value chain activities to maintain this point-to-point system
with minimal service are thus not that widespread as full service airlines. The assets that are
simple, online booking services with early and late booking structures and a small number of
personnel with non-unionized workforces (Doganis, 2001; Wensveen and Leick, 2009; IATA,
2011). This leads to low maintenance and overhaul costs as well as flight operation costs; low
passenger service expenses and low personnel costs (Doganis, 2006). Furthermore, the lack of
long-term contracts allows choosing or considerably stopping to serve particular markets
based on the significant profitability of the route, namely destinations and airports, (IATA,
2011). Figure 1 gives an overview of the cost difference per ASK (Available Seat Kilometres:
measure for an airline’s capacity to transport passengers) for several low cost airlines
compared to network airlines in the European market. It is important to note that this figure is
from a report in 2006, which is 8 years old, but after this period no reports are published on
this matter.
Figure 1 Cost difference per ASK for low cost airlines and network airlines
Source: IATA Report 2006 Airline cost performance
Overall, the main players in the airline industry changed from legacy and charter airlines to
full service airlines with an expensive hub & spoke system and a decreased competitive
position on one hand and low cost airlines with an inexpensive point-to-point system and a
III. Dynamic capability view: sensing, seizing and reconfigurations
In order for full service airlines to survive in times of rapidly changing environments, as they
need to improve their competitive position compared to the low cost rivals, they are required
to develop sufficient market orientation skills; the ability to anticipate, react to, and capitalize
on business environment changes (Martin-Consuegra & Esteban, 2007). This refers to
dynamic capabilities: the ability to integrate, build and reconcile internal and external
competences to address the rapidly changing environment (Teece et al., 1997). The dynamic
capability view argues that capabilities can be homogeneous, substitutable and imitable
because the path dependency matters more because there are multiple paths to the same
dynamic capability. Differences between firms and so the differences in competitive position
are thus based on the ability to learn from mistakes due to the speed of learning to be able to
implement and codify the learning experiences into formal procedures and routines in an
effective way (Collis & Montgomery, 2008; Nelson, 1991; Joyce et al., 2003; Eisenhardt and
Martin, 2000). Examples of dynamic capabilities are strategic and organizational processes,
product development routines, exit routines, strategic decision-making capabilities and forms
of cooperation (Eisenhardt and Martin, 2000).
Developing dynamic capabilities to survive in the rapidly changing environment as
mentioned above, will make it able for firms to shape their own business environment to get
ahead of competitors. This goes according to three steps: sensing opportunities or threats,
seizing by capturing the opportunities or threats and reconfiguring the seized opportunities or
threats. The first step of sensing implies using entrepreneurial skills to discover opportunities
in the market and benefit from information sources, which include the top management team
but also employees down the line, customers and especially suppliers who are also supplying
competitors. Firms should also scan the environment through analytic processes and monitor
the opportunity to anticipate to the customer need for simple, low cost airline services with
short routes from one destination to another (CAPA, 2013). Consequently, full service airlines
sensed the threat of the increasing power these low cost airlines got, changing the lifestyle and
behaviours of passengers, as can be concluded from figure 2 that shows the increased market
share of low cost airlines over the years in different continents in the period of 2000 to
2006 (Wensveen and Leick, 2009).
Figure 2 Market share of low cost airlines between 2000-2006
Source: IATA Report 2006 Airline cost performance
Losing competition on these short-haul routes means cancelling non-viable short haul routes
that also feeder the long haul operations. This also means the loss of passengers that transfer
from short-haul routes to other short- or long-haul routes and thereby endangering the
break-even load factors in the network system. In this way, these airlines sensed the opportunity, or
even the need, to overcome the competitive threat by reducing its cost, with the aim of
advancing the competitive strategy of low cost leadership (O’Connell, 2007; Dennis, 2007). After identifying the opportunity or threat, it is important to seize or capture it. During
airlines implied restructurings that could lower their cost structure. A decision had to be made
as to which strategic action was most applicable to realize cost reduction (Teece, 2007). These
strategic actions refer to the various forms of cooperation and the imitation strategy that are
mentioned in the introduction in section 1. In general partnerships vary from discrete,
short-term contracts to complete mergers of two or more firms. Partners participate in joint
operations with the aim of improving competitiveness and overall performance (Morrish and
Hamilton, 2002). There are several reasons that lead to strategic partnerships but the most
important is to get access or acquire resources that a firm is not able to develop on its own.
For airlines it is important to get access of new markets and routes in which the airline does
not operate (Rothaermel and Hill, 2005). Other than that, strategic partnerships reduce
uncertainty in a dynamic environment, which allows quick adaptation (Das and Teng, 2000).
Nevertheless, working with another firm can be risky because a firm may lose competitive
advantage at the cost of forming a partnership and conflicts may arise when combining the
firms, both in personal and cultural dimensions, as well as operational processes (Das and
Teng, 2000). In the following sections, the partnerships between low cost carrier and full
service airlines as well as the imitation strategy will be examined in more detail.
As a last step of shaping the business environment, firms have to consider
reconfigurations of their implemented strategy and continuously manage threats in order to
maintain the competitiveness. This includes threats of imitation of (potential) competitors and
continuous realignment of integrating and combining all their learning experiences from the
past. The reconfiguration step does not necessarily mean radical changes, because building on
earlier experiences enables to implement incremental changes without taking too much risk
(Teece, 2007). Full service airlines should thus evaluate the implemented forms of
IV. Partnerships & imitation
The previous section examined existing literature on the developments of changing business
models in the airline industry and the process of full service airlines to shape their business
environment according to the dynamic capability view. In this section, the specific dynamic
capabilities of forms of cooperation and imitation will be examined, as already briefly
mentioned in previous sections. The focus is on the possibilities of full service airlines to
work together with low cost airlines.
4.1 Non-equity based intercontinental partnerships: alliances
Non-equity partnerships signify partnerships without input of equity and therefore, without
complete or shared ownership of assets or an entity (Das and Teng, 2000). Every partner
manages its resources independently and each party performs its individual tasks, so there is
little integration (Das en Teng, 2000; Dyer et al., 2004). The airlines seek to increase
ownership in the global market by expanding their route network. Within national borders
mergers and complete take-overs are allowed, but this is often restricted for cross border
partnerships due to governmental regulations for foreign ownership and effective control
clauses in bilateral air service agreements between the states involved. If an airline of a state
market gets more than 49% ownership of an airline that is registered in another state, other
states for which the airline has traffic rights to operate routes to and from those states can
dispute these traffic rights since these no longer belong to a carrier that is owned and
controlled by the state in which it was registered. In this way, airlines are somewhat forced to
engage in alliances with airlines of other foreign markets to overcome the government
regulations and entry & investment barriers (Agusdinata and De Klein, 2002). An alliance
ownership. It gives them the opportunity to provide their service and consequently improve
their brand image across the global market. (Agusdinata and De Klein, 2002).
Code sharing is a common form of full service carriers to operate in alliances in order
to expand their global network. The booking can be done by several cooperating airlines, but
the flight is operated by only one of the airlines. Code sharing airlines have different flight
numbers and designation codes, but it concerns the similar flight from the same departure city
to the same destination at the same time (Oum and Zhang, 1996). In this way, the network of
the cooperating airlines grows while not having to invest in new routes and to enter a new
region (Morrish and Hamilton, 2002). However, code sharing does require process
integrations in order to support product and service alignment between the partners. The
reservation, booking and check-in systems and services have to be similar, as well as frequent
flyer recognition and baggage handling services. Consequently the investments could become
very costly (CAPA, 2012). However, in the long run joint production of full service airlines
can reduce costs: the flight operating costs, personnel costs and the maintenance and overhaul
costs decline due to shared business lounges; shared transfer desks, self-service machines,
aircraft and joint ground staff (baggage handling, catering, ground staff at the gate)
(Contractor and Lorange, 2002). The three global airline alliances of full service airlines are:
SkyTeam, Star Alliance and One world. Low cost airlines partners of these airlines only
concern subsidiaries and affiliates of full service airline members, thus no independent low
cost airlines are involved as full members in an airline alliance yet. Although, alliances in the
sense of bilateral relationship agreements do exists between low cost airlines and full service
airlines. As an example, Air France-KLM can sell seats on the Australian low cost airline
Jetstar. However, sometimes these domestic markets, such as Australia, are inaccessible for
foreign airlines. A European airline, such as Air France-KLM is not allowed to transport
2013). Still an agreement between an low cost airline operating in an domestic market and a
full service airline operating in intercontinental markets results in expansion of network,
especially for the full service airline that is restricted to operate in the domestic market
(CAPA, 2011). The Brazilian low cost airline GOL even got a step further by establishing
bilateral relationships with: Delta Airlines, Aeromexico, Air France-KLM, Iberia and Qatar
Airways, which increased its international network massively. Unlike code sharing
agreements between alliance members, domestic low cost airlines and full service airlines do
not require process integration but also do not benefit from joint production in the long run.
For low cost airlines this will not be advantageous for their low cost structure anyhow
(CAPA, 2011; CAPA 2013).
Since full service airlines increasingly feel the threat of low cost airlines, alliances
‘Star Alliance’ and ‘SkyTeam’ want to go beyond the bilateral relationships by considering the option to incorporate the low cost competitors as a mean to reduce competition and
improve coverage in key markets (CAPA, 2013). SkyTeam wants to offer members to
affiliate and partner with selected low cost airline through a hybrid partnership platform.
Potential candidates concern independent low cost airlines that do not have agreements with
their domestic full service airlines yet, such as the Brazilian low cost GOL and are willing to
form an agreement with one of the full service alliance member that operates in the particular
domestic market (CAPA, 2012; CAPA 2013). However, SkyTeam and Star Alliance
members do not agree with this strategic action. According to them, partnering with low cost airlines will damage the image and alliance’s offering (CAPA, 2013). It is also not fair in their opinion that the low cost airlines can also benefit from the partnership without being
required to invest in the partnership and operate according to the regulations of membership.
They argue that low cost airlines should only be incorporated if they completely meet the
relationships with individual members (CAPA, 2013). Since this type of partnership:
alliances between full service airlines and low cost airlines, is still a topic of discussion and
not yet fully implemented, alliances will not be included in the analysis of this study.
Nevertheless it is considered on of the most important forms of cooperation in the airline
industry, as explained above.
4.2 Equity-based partnership: acquisitions
Equity based partnerships are characterized by firms seeking growth and strengthen the
relationship with stakeholders and customers, as well as providing access to new assets and
acquiring more market power (Joyce et al., 2003). This partnership is risky, expensive and
often appears to be more simplistic than it actually is because it involves the take-over or
combination of equity, including ownership rights (Dyer et al., 2004). Firms that decide to
acquire another business do not always take into consideration the path dependency and the
deeply rooted culture. This may cause conflict during the alignment; such as anti-trust issues
and increasing coordination costs (Dyer et al., 2004). As a form of equity based partnership,
firms can engage in a joint venture in which all the parties contribute their own equity to
develop a new entity and assets. Therefore, every party has ownership of the entity, and they
share all the expenses, earnings and resources. Lufthansa and Turkish Airlines are an example
of two full service airlines that create a joint venture in 2009: low cost airline SunExpress.
This airline operates point-to-point flights between Europe and Turkey (CAPA, 2013). If the
level of competition is high in the industry due to many rivals, a complete take-over is most
beneficial. KLM for example, acquired low cost airline Transavia in 1999 (KLM.COM).
Similarly, Lufthansa decided to take full ownership of low cost airline Germanwings in 2009,
as was mentioned in the introduction. It has to be noted that complete take-overs of airlines
regulations of taking full ownership in foreign airlines (Dyer et al., 2004). In result, airlines
often acquire only part of another airline at first. So, to a smaller extent, regarding the input of
equity and level of ownership, minority equity partnerships also exist between airlines. Full
service airline Etihad airways for instance attempted to increase traffic to its hub Abu Dhabi
with low cost carrier Air Berlin (Etihad.com). Lufthansa on the other hand, wanted to enhance
its international market position in 2007 by acquiring a small part of US’ low cost airline
JetBlue that operates on hub JFK New York (CAPA, 2008). With such minority acquisition,
the parent firm is intended to work closely together and execute tasks through an iterative
knowledge-sharing process. Full service airlines that obtain a low cost airline gain the aircraft
and maintenance equipment but this is not relevant because full service airlines already own a
wide variety of aircraft. However, airlines lack employees with low wages and inexpensive
maintenance and overhaul equipment as well as skills of short turnaround processes, so these
are indeed an essential resource they intend to gain in order to realize cost reductions on short
haul operations (Dyer et al., 2004). Though, full service airlines need to take into
consideration that it will be difficult to integrate the well-developed point-to-point route
schedule with the existing hub-and-spoke route schedule in order to substitute the lower cost
operations of the acquired airline with their expensive operations. This means that the
connectivity between the acquired and operating routes requires serious deliberation between
the low cost airline route schedules on one hand, and the full service airline route schedules
on the other hand. It could lead to increasing coordination costs (Malighetti et al., 2008).
In conclusion, due to the highly competitive environment that full service airlines
faced, some decided to acquire one of their low cost competitors. Mainly to gain cheap
personnel and lower other operating costs, by substituting an unbundled service business
model and point-to-point route schedule with their own expensive system. Although the
already existing route schedule of the acquired airline in the already existing route schedule of
the parent full service airline, which affects the connectivity of the hub-and-spoke system
4.3 Imitation: Airline within an airline
Another strategy that full service airlines have been conducting as a response to the increasing
threat of low cost airlines is the creation of a subsidiary low cost airline. As mentioned in the
introduction both KLM and British Airways failed to succeed with their low cost subsidiary.
From sixty-seven airlines that applied this strategy in the market, there are twenty-seven that
failed, so it appears to be a difficult strategy to accomplish (Pearson and Merkert, 2014).
Table 1 gives an overview of various unsuccessful European airline subsidiaries.
Table 1 Failed European subsidiary airlines
Country Airline Airline ownership Start date End date
UK Buzz 100% by KLM 2000 2004
UK Go Fly (GO) 100% by British Airways 1998 2003
UK MyTravelLite 100% by MyTravel 2002 2003
UK Thomsonfly 100% by Thompson 2005 2008
UK Bmibaby 100% by IAG 2002 2012
Sweden Snowflake 100% by SAS 2002 2004
Finland FlyNordic 100% by Finnair 2004 2008
Germany HLX 100% by Hapag-Lloyd 2002 2007
Netherlands Basiq Air 100% by Transavia 2000 2005
Netherlands V-Bird 100% by Dutchbird 2003 2004
Poland Centralwings 100% by LOT 2004 2009
Italy Volareweb 100% by Alitalia 2008 2009
Source: Pearson and Merkert (2014)
It is very difficult for incumbent full service airlines to develop a low cost airline because
such airlines have a completely different strategy. It requires a whole new way of thinking
differently of their focus on the network system serving the international market based on
labour agreements and eventually these agreements turn out to be similar to the labour
agreements of the parent airline that still does not lead to cost reduction at the end.
Furthermore, the subsidiary airline makes use of expensive facilities of the parent airline, such
as maintenance equipment, which also makes it difficult to develop a low cost structure for
the subsidiary airline. Moreover, wages of the managers of the parent airline also derive high
costs (Pels, 2008; Pearson and Merkert, 2014; Gillen and Gados, 2008). Pearson and Merket
(2014) however, do provide criteria for a subsidiary airline to succeed. First of all, parent
airlines should not develop a subsidiary simply to help reduce costs and losses by shifting the
routes that create decreasing revenues onto low-cost subsidiaries. On the contrary, parent
airlines should have a clear purpose and goal for the subsidiary airline with a structured
direction, separate from the issues and goals of the parent airline. Low cost subsidiaries often
fail to become profitable because of poorly defined strategies and the lack of decisive
leadership (Pearson and Merkert, 2014; Gillen and Gados, 2008). Furthermore, subsidiary
airlines are expected to catch up on their late market entrance compared to the first movers
such as easyJet and Ryanair. These airlines had the time to promote themselves as the ones
offering low cost tickets for the first time; this enhanced their brand image. Subsidiary airlines
may succeed in targeting un-served or under served routes and cities. So a pro-active
approach of the management team is certainly necessary, although subsidiary airlines can
benefit from the brand image of their parent airline (Pearson and Merkert, 2014; Gillen and
Gados, 2008). However, the link between the parent company and subsidiary should be
flexible, not suffering from excessive management control from the parent airline. This will
otherwise reduce the ability to adapt to internal en external rapid changes, and it slows downs
the decision-making process.
Most often existing resources of the parent airline are restructured to low cost
lowered, or new employees have to get hired with new labour agreements, Besides that,
parent airlines are able to use their own aircraft on the short-haul routes. (Gillen and Gados,
2008; Dennis, 2007). If the labour agreements and other operation assets are well restructured,
the parent airline does benefit from cost reductions, due to substitution of their short haul
operations to the low cost subsidiary with lower unit costs as was discussed in the changing
business model section 2. Unlike acquiring an existing low cost airline, subsidiary airlines do
not have a well-defined route schedule that has to be integrated into already existing
route-schedule. The parent airline can develop a new route schedule that is based on the already
existing one for substitutions. This is advantageous for the connectivity and coordination
costs of the operating hub-and-spoke system of the parent airline (Malighetti et al., 2008).
In conclusion, full service airlines that decide to develop a subsidiary low cost airline to
overcome competition need to be aware of various drawbacks. However, restructuring the
existing, expensive assets into cheap assets including lower-waged personnel and equipment
for delivering unbundled services, leads to lower cost structures for short haul operations. In
this sense, developing subsidiary low cost airlines that substitutes short haul operations, yield
lower costs for full service airlines (Pearson and Merkert, 2014; Gillen and Gados, 2008;
Dennis, 2007). The connectivity of the hub-and-spoke system will also improve because there
is no requirement for integration between separate route schedules, which gives the parent
airline the ability to considerably anticipate on distortions in the route schedule (Malighetti et
al., 2008).
V. Iberia airline case
In this section the developments of the business case Iberia are examined. Iberia is the leading
airline in Spain, and the main carrier in transfers between Spain and Latin America since its
intercontinental flights are conducted (Iairgroup.com, 2014; Grupo.iberia.es, 2014). The
airline also serves as a member of One World Alliance since 2004. Since 2007, Iberia
suffered from huge losses: from 2007 to 2012 Iberia has an accumulated loss of more that 1.1
billion euros, with the worst result in 2009 with an operating loss of almost 500 million euro’s
(CAPA, 2014). Figure 3 shows the decline in operating performance of Iberia over the years
2005 to 2013.
Figure 3 Iberia revenue and operating results from 2005 to 2013 in million Euro’s
Source: CAPA
During this period, the economic crisis hit Spain, but Iberia’s poor management could not
manage the increasing competition in the airline market anyhow. Iberia’s cost base on short
haul routes has been uncompetitive for years in comparison to low cost airlines such as
Ryanair and easyJet that also operate on the Spanish market. Besides that, the poorly
managed fleet coordination and route network with low utilization did not help either (CAPA,
2014). Iberia’s competitive position got even worse by the increased competition on its long haul network of Latin America. Instead of making profits as usual for full service carrier on
long haul routes, Iberia struggled to compete with rivals such as Latam Airline Group, a
merger between Brazilian and Chilean Airlines (Parker et al., 2012).
As an approach to overcome the competition and compensate the losses, Iberia had the
intention to merge with British Airways and American Airlines in 2008, with the aim to align
fares, routes and schedules. However, US government obstructed the merge. Nevertheless, in
2010 the European Union approved the merge between British Airways and Iberia, with the
creation of International Airlines Group while American Airlines, Iberia and British Airways
also got approval to operate a Joint Business Agreement on transatlantic flights
(Iairgroup.com, 2014; Grupo.iberia.es, 2014, CAPA, 2014). In both of these cases, the airlines
continued to operate independently under their own current brand.
In 2011, Iberia continued to carry out actions against the increasing competition,
especially on their short haul operations. The airline acquired the Spanish low cost carrier
Vueling. This airline was created in 2004 and has its base at Barcelona El-Prat Airport. In
2009, Vueling made the decision to merge with its Spanish rival Clickair under the name
Vueling. As a result, it evolved into the second largest Spanish airline. Currently, Vueling is
the largest airline at Barcelona (Iairgroup.com, 2014; Grupo.iberia.es, 2014, CAPA, 2014;
Vueling.com, 2014).
Besides the acquisition of low cost airline Vueling, Iberia also decided to imitate the
low cost competitors by developing a subsidiary airline in 2012: Iberia Express. This airline is
designed to provide the hub Madrid with a feeder system that operates according to a lower
costs structure than Iberia had been able to provide in the previous years (CAPA, 2013).
Iberia also developed Iberia Express because the airline was aware that it required drastic
internal changes, to solve the poorly managed operations. Therefore, Iberia developed the
so-called Transformation Plan for restructuring in 2012 (CAPA, 2013; CAPA, 2014). However,
substitute part of Iberia’s operations, so that Iberia could focus on putting the plan into
practice. In this study the effects of Vueling and Iberia Express on Iberia’s route network and
the cost structure will be analysed.
VI. Summary & research question
Overall, the differences between the business models of full service airlines and low cost
airlines that emerged after the deregulation is essentially based on the difference in
competitive strategy: differentiation vs. low cost leader. Full service airlines compete with
high quality service of their hub and spoke system, requiring investment in costly resources,
while low cost airlines make use of cheap resources in order to carry out a low cost leadership
strategy on point-to-point routes. (Wensveen and Leick, 2009; Vlaar et al., 2005; Doganis,
2001). Acknowledging the shift of customer preferences towards less expensive flights
instead of high quality service on short-haul routes and resulting in the increasing growth of
low cost airlines, full service airlines sensed the pressure to lower their expenses (O’Connell,
2007; Dennis, 2007; Wensveen and Leick, 2009). Iberia had an even stronger urge to lower its
expenses because of its uncompetitive cost base for years (Parker et al., 2012). So the
increasing growth of low cost competitors made it even worse for the already threatened
Iberia. As a response to the rapidly changing environment, full service airlines seized threats
by cooperating with the low cost competitors or even started to imitate them. Iberia seized the
threat by doing both: cooperating with the competitor by acquiring Vueling and imitating the
competitor by developing subsidiary airline Iberia Express. These strategic approaches
necessarily need to be consistent with the hub and spoke system in terms of connectivity
between the low cost short-haul operations and the transfer with long-haul operations on the
hubs. Otherwise, the hub and spoke system will suffer, despite the strategic actions taken. In
23 integration of Vueling’s route network and also the substituted or new routes of Iberia Express needed to be managed well otherwise Iberia’s route network operations would be
even worse (Malighetti et al., 2008).
As mentioned in the introduction: previous literature focuses on the threat
phenomenon occurring in the airlines industry and implying various strategic moves to
manage the threat but little evidence exists regarding the actual effectiveness of these
innovative strategies. In this case: Has Iberia indeed accomplished cost reduction? And are
the low cost operations on the short-haul routes well connected with the other short- and
long-haul operations on the hubs Madrid and Barcelona? This means that there is a lack of insight
of the final step in shaping the business environment: analysing reconfigurations of the seized
opportunities and threats (Teece, 2007). Therefore, the aim of this study is to close this gap in
order to complete the process of shaping the business environment of full service airlines by
evaluating the seized threats of Iberia in cooperating with Vueling and imitating the
competitors with Iberia Express. The analysis will be based on the following research
question:
‘ What can European full service carriers learn from the dual strategic actions (imitation and acquisition) taken by Iberia in order to manage the increasing threat of low cost carriers, that may undermine their total hub & spoke system?’
This research question will be analysed along the lines of two dimensions in performance:
cost and connectivity. Figure 4 reflects the conceptual design of the empirical analysis.
Figure 4 Theoretical framework
Iberia
Iberia express
-
VII. Research methodology
7.1 Research design: case study
The case study approach is used to illuminate a decision, why it was taken, how it was
implemented and with what results (Yin, 2009). It is possible to go in depth a real-life
situation in order to apply an exploratory study. In this case the effect of Iberia Express and
Vueling on Iberia (Yin, 2009). Iberia itself concerns a single case study, but the two different
strategies of Iberia that will be examined are twofold, although the results of these specific
case studies are not generalizable. Still, the explicit case of Iberia is selected because it is
unique for a full service airline to apply and manage two distinct strategies of low cost
competition at once. Besides that, Iberia Express is one of the few European low cost
subsidiary airlines that still operate in the industry nowadays. Furthermore, is it also
interesting to research the underlying reason for Iberia to choose an acquisition of a low cost
airline that has its home base at another airport (Barcelona) than Iberia’s home base (Madrid). The interaction, complementarity and/or substitution of these two strategies are the focus to
this study.
7.2 Research instruments and analysis
As mentioned in section 6, two main units of analyses of Iberia will be compared: the cost
structures and the route network structures. The study is identified as a holistic case study
because numerous variables of the units of analysis will be examined. The first unit of
analysis, cost structure, will be based on secondary data of annual reports of IAG and reports
of the Centre for Aviation (CAPA). It has to be noted that a disadvantage of secondary data is
that the initial purpose of the data deflects the purpose of using the data for this study. This
of operating revenues and costs will be gathered, which will contain figures of 2011, 2012
and 2013. This will outline the developments in performance and development in cost
reduction for Iberia. So the data of the annual reports will be compared to each other to
identify changes. From the CAPA reports, data of financial variables such as ASK (available
seat kilometre) CASK (costs per available seat kilometre) and RASK (revenue per available
seat kilometre) will be gathered to support the data in the annual reports. This will reinforce
the results on changes in Iberia’s performance and cost structure and the changes between
operating figures of Iberia and Iberia Express and it enables to some degree a certain level of
triangulation with regard to the data. Also, data on passengers’ shares and market shares of
Iberia, Vueling and Iberia Express will be collected to look at the effects of substitution and
complementarity of routes. The final section particularly focuses on the labour costs of all
three airlines because that is a huge pitfall for Iberia, as mentioned in the previous section. Reports of CAPA contain figures from 2005 to 2012, to get a broader view of Iberia’s changes over the years and particular effects of Iberia Express and Vueling.
The tests of connectivity will be based on primary data of the Official Airlines Guide
database, which signifies primary, unbiased information. This database clearly presents the
routes, departure and arrival times, flight types, frequencies, distance, seats, flight numbers
and operating days of all the flights of operating carriers per year. From this database, data
will be gathered for Iberia of the year 2011 and compared to data of 2014 to consider the
subsequent effects of the two airlines on Iberia over the years. These two years will be
analysed in Excel by creating various pivot tables in order to gather specific data. This will
make it possible to make conclusions about changes in the route network of Iberia, and to
VIII. Results
The following section starts with the analysis of the cost structure developments of Iberia
over the years. After that, results of analysis of Iberia’s hub and spoke system in Madrid and
Vueling’s operations in Barcelona will be outlined.
8.1 Costs
This section gives an overview of the operating performance and cost structure developments
of Iberia over the years 2011, 2012 and 2013. On 10 May 2012 Iberia announced the
implementation of its so called Transformation Plan to restore competitiveness and
profitability, as was mentioned in business case section 5. This plan particularly included
changes in the management structure, capacity cuts and reduction of costs, especially labour
costs. The number of managers that reported directly to the CEO was reduced from 11 to 9.
Additionally a new unit for human resources, safety and corporate social responsibility was
created with the aim of reaching labour agreements to improve productivity (CAPA, 2013).
The effects of the implementation of this restructuring plan will be analysed based on figures
of 2013.
8.1.1 Operating performance & CASK
The overview of operating performance of Iberia is outlined in table 2. The table shows that
the revenues keep declining. One of the reasons is the financial crisis in Spain and the
difficult competitive position of Iberia, as mentioned in business case section 5. This
obviously results in a decrease in the number of passengers especially transfer passengers. In reference to this, the ASK (Available Seat Kilometre), that measures an airline’s capacity to transport passengers, decreased by 3,4%.
Table 2 Operating performance of Iberia from 2011 to 2013 Iberia (€ million) 2011 Higher/ (lower) 2012 Higher/ (lower) 2013 ASKs 63.042 (3,4)% 60.925 (14,0)% 52,429
Seat factor (per cent) 81.3 0,2 pts 81.5 (2,4) pts 79.1 Passenger revenue 3.645 0,8% 3.675 (12,9)% 3.200 Cargo revenue 338 (8,3)% 310 (15,8)% 261 Other revenues 889 (3,7)% 856 (9,7)% 773 Total revenues 4.872 (0,6)% 4.841 (12,5)% 4.234
Fuel, oil costs and emission charges 1.333 14,9% 1.531 (20,7)% 1.214 Employee costs 1.373 (2,4)% 1.340 (14,3)% 1.149 Supplier costs 1.766 4,2% 1.840 (13,4)% 1.593 EBITDAR 400 (67,5)% 130 113,8 % 278 Ownership costs 498 (3,4)% 481 (7,7)% 444 Operating profit/(loss) before exceptional items (98) (258,2)% (351) (52,7)% (166) Passenger yield (€ cent/RPK) 7.11 4,1% 7.40 4,2% 7.71 Unit passenger revenue (€ cent/ASK) 5.78 4,3% 6.03 1,2% 6.11
Total unit revenue (€ cent/ASK)
7.73 2,8% 7.95 1,6% 8.08
Fuel unit cost (€ cent/ASK)
2.11 19,0% 2.51 (77)% 2.32
Non-Fuel unit costs (€ cent/ASK)
5.77 4,2% 6.01 12% 6.08
Total unit cost (€ cent/ASK)
7.88 8,1% 8.52 (1,5)% 8.40
Source: Annual report IAG 2011, 2012 and 201
In contrast, the costs figures do improve, especially the employee costs keep declining. In this
sense, the realization of cost reduction is visible in the 3 years. This is due to employee
restructuring provision of 268 million euro’s and aircraft restructuring provisions of 47 million euro’s, which will be explained in more detail in the following sections (CAPA, 2014). Although the reduction in costs exceeds the fall in revenues, the operating performance
still shows losses, which means that the cost reductions are still insufficient. The total unit
revenue per ASK keeps increasing, due to the decrease in ASK and the decrease in revenue.
In addition, this signifies the increased short haul operations: less distance flown and fewer
seats due to smaller aircraft besides cuts in long haul operations. The following analysis on the changes in Iberia’s route network should conclude if the increased short haul operations are indeed due to the additional operations of Iberia Express and Vueling.
The total unit costs per ASK first increased but then a decline occurred, which is also
caused by the decrease in ASK and first an increase in costs, after which the costs and ASK
decreased simultaneously. As stated in section 4: the substitution of Iberia Express’ and
Vueling’s short haul operations could also have been accountable for the decline in costs
because of lower cost structure of their operations in comparison to Iberia’s short haul operations. In particular employee costs. However, further analysis will support or reject this
assumption. The Revenue Per Available Seat Kilometre (RASK) decreased by 6% since
2007. Again the poor performance of Iberia is confirmed. The Costs Per Available Seat
Kilometre (CASK) however confirms the increased cost reduction with a decrease of 3%.
Figure 5 shows an overview of RAKS and CASK of Iberia from 2005 to 2013 (CAPA 2014).
Figure 5 Iberia RASK and CASK from 2005 to 2013
The CASK of Iberia Express are 40% below Iberia’s CASK, which confirms that the lower
cost operations of Iberia Express improve the cost structure of the core operations of Iberia, if
operations of Iberia are substituted by Iberia Express. Figure 6 shows the unit costs, based on
CAKS, of Iberia, Iberia Express and Vueling. Iberia Express has similar unit costs as Vueling
and easyJet and twice as low as Iberia. The cost advantages compared to Iberia are mainly
based on labour terms and conditions and higher seat density because the two airlines have a
similar level of service, same airports and same aircraft (CAPA, 2014).
Overall, based on table 2 and figure 5 and 6, the conclusion can be made that with
substitution, subsidiary airline Iberia Express provides great cost reductions without affecting
the revenues for Iberia. Even more, the revenues seem to decrease less after Iberia Express
and Vueling are added to Iberia’s network, which indicates that the sales of both airlines also compensate the loss in sales of Iberia.
Figure 6 Unit costs per ASK
8.1.2 Passenger numbers and shares
Figure 7 shows that from 2010 to 2012 Iberia deals with declining passenger numbers: up to 5
million. Iberia Express however reported 2.8 million passengers starting from the launch in
March 2012 up till March 2013. For Vueling, the passenger numbers reached almost 15
million in this period (CAPA, 2013).
Figure 7 passenger numbers from 2010 to 2012 ( x1000 passengers)
Source: CAPA
One of the consequences of the capacity cuts of Iberia based on the Transformation Plan, was
a decline in share of passengers in Spain from 12% to 8% in 2013. However, Iberia Express
increased the share with 2%, while Vueling increased its share from 8% to 9% in 2013
(CAPA, 2013). This means that the total loss of 4 % share of passengers is partly substituted by Iberia Express’ increase and Vueling’s increase. Figure 8 shows the share of passengers for airlines in Spain in 2012 and 2013. An accumulative share of passengers for Iberia, Iberia
Express and Vueling of 19% in 2013 indicates that together they exceed Ryan air’s share: the largest competitor in Spain. Iberia’s increased share also makes it more difficult for other
well as indirectly puts a safeguard on hub Madrid by keeping competitors from entering the
market.
Figure 8 Share of passengers in Spain from January to April 2012 and 2013
Source: CAPA
Regarding its passenger share on the hub Madrid, as outlined in figure 9, Iberia lost
9% of its share of passengers in 2011 due to the strong low cost competition of low cost
carriers in Madrid. In 2012 the share in Madrid declined to 40% but this was compensated
with the 5% share of Iberia Express. In 2013 the share of Iberia Express went up to 8% due to
the capacity cuts of competitors such as easyJet that closed 24 routes from Madrid because of
increased airport charges. So the passenger share figures could confirm that Iberia benefits
from Iberia Express by substitution of short haul operations at hub Madrid and Spain in
Figure 9 Share of passengers per airline in Madrid from 2005 to 2012
Source: CAPA
8.1.3 Labour costs
As already mentioned in airline business case section 5: one of the main problems of Iberia
was the low productivity compared to the salary levels. As figure 10 shows that in 2012 30% of Iberia’s revenue went to labour costs. Apart from SAS Group this is the highest percentage of all the airlines included in the analysis.
Figure 10 Labour costs as percentage of revenue in 2012 per European airline
In result, Iberia has the third most costly employees on average in 2012. The average
employee costs per employee among the European airlines, outlined in figure 11, is 69,000 euro’s.
Figure 11 Employee costs per employee in 2012 for European airlines
Source: CAPA
Regarding labour productivity, Iberia is one of the lowest performing airlines, although they
spend a large proportion of their revenue on labour. Labour productivity is calculated with the
total available tonne kilometres per employee that includes both passenger and cargo traffic.
Combining the employee costs per employee with ATK per employee results in
employee cost per ATK, outlined in figure 12. This indicates how much one employee has to
be paid to produce one unit of traffic. In this case, Vueling performs well, with 5,39 euro
cents per ATK, while Iberia is the third weakest airlines with 21,35 euro cent per ATK,
considering the weighted average of 13.58 euro cents. The improvement of costs would
therefore be from 21,35 euro’s to 5,39 euro’s: a saving of 15,96 euro’s, for Vueling’s substitution on short haul operations. This also confirms that Iberia’s cost structure improves
Figure 12 Employee costs per ATK in 2012 for European airlines
Source: CAPA
The sum of the three rankings of the labour cost as a percentage of revenue of figure 10, the
employee cost per employee of figure 11 and the employee costs per ATK of figure 12 that
are outlined above, including rankings of the revenue per employee and operating profit per
employee for the European airlines, resulted in a total ranking for the productive labour force
of the 19 airlines, as outlined in figure 13. As a low cost airline, Vueling manages to be in a
top 3 position, better than easyJet. Iberia however, is ranked as to having the lowest
Figure 13 Overall labour productivity ranking of European airlines in 2012
Source: CAPA
To solve this labour problem, Iberia was forced to negotiate with unions and with the creation
of Iberia Express Iberia was able to focus on this problem (CAPA, 2014). Initially the unions
did not agree with the changes in the Transformation plan: 4500 headcount reduction, pay
cuts of 25% to 35% and a 15% capacity reduction in 2013, including productivity
improvement. As a response, Iberia redefined its originally proposed reductions by offering
3147 headcount reductions and pay cuts of 11% for ground staff and 25% for cabin crews.
However, the unions still did not agree and called strike actions in January 2013 to protest
against the proposed cuts. The strike of 5 days included a total of 1384 cancelled flights and
supposedly 15 million euros for refunds and re-bookings. Eventually, in February 2014 Iberia
reached an agreement with the pilot union SEPLA for the permanent structural changes. But it
was appointed that before the actual implementations, productivity measures have to be done,
including the increase of flying hours similar to the most efficient competitors of Iberia.
Parties agreed the 14% salary cut but the additional 4% cut has not been confirmed. The
will be linked to the profitability of Iberia with a maximum of 3,5%. Additionally a new
structure of pay scales is developed and new caps in seniority scales will reduce long-term
seniority driven wage inflation. Next to that, the agreement allows an extension of a voluntary
redundancy plan for pilots, which up to now includes 258 pilots. This extension will enhance
the flexibility and efficiency of Iberia: pilots are able to transfer between Iberia Express and
the mainline operation without changes in the pay structure and conditions. The mainline
pilots that transfer to Iberia Express will receive a one-off compensation payment. In essence:
Iberia will benefit from the flexibility to grow operations of both Iberia itself and Iberia
Express, on its short-haul network and deploy pilots between the two (CAPA, 2014). Figure
14 shows an overview of the cost reductions due to the new labour agreements.
Figure 14 New labour agreement salary progressions of pilots
Source: CAPA
The agreement with the cabin crew also implies improved productivity, by increased flying
hours, more duty days and new working practices for short haul. Similar to the pilots, a 14%
till 2015. Also, possible extensions for a voluntary redundancy plan beyond the 627 cuts are
an option. For ground staff, an agreement is yet to be reached, for which now negotiations are held (CAPA, 2014).
8.2 Connectivity
The connectivity of the hub and spoke system of Iberia will be analysed as following: first an
overview will be given of the total number of routes and the type of flights (domestic,
intra-European, intercontinental). Also the top ten routes of these categories will be given, in order
to examine the stability in Iberia’s route schedules over four years, including subsequent substitutions and expansions of Iberia’s routes by Vueling and Iberia Express. After that,
results of analysing the hub & spoke system of Madrid and Barcelona will be outlined.
8.2.1 Total number of routes
Table 3 shows an overview of the total number of routes, which is based on the frequencies of
total number of airport-pairs. The routes include all domestic, intra-European and
intercontinental routes. In the following section, a further distinction between the types of
flights will be made.
Table 3 Total number of routes per airline per year
2011 2012 2013 2014
Iberia 1268 1000 631 712
Iberia express - 109 157 134
Vueling 699 919 1416 1745
Total 1937 2028 2204 2591
As the table outlines, Iberia has been downsizing its network by eliminating almost 50% of its
flights. In 2014, there is a slight increase, which could be the result of the restructurings of the
Transformation Plan. In contrast, Vueling keeps increasing massively: the number of flights
doubled in four years. Iberia Express shows a slight increase in its first year and a slight decrease in the second year. Overall Iberia Express’ number of flights is consistent throughout the years.
8.2.2 Types of flights (Domestic, Intercontinental, Intra-European)
Table 4 provides an overview of the total number of frequencies per flight type, for the three
airlines, per year. The flight types concern domestic flights in Spain & the Canary Islands,
intra-European flights within Europe, North Africa and the Middle East and intercontinental
flights from Europe (and thus North Africa & the Middle East) to Asia, North- and South
America and South Africa.
Table 4 Total number of flights per type
Source: OAG database
Domestic Intercontinental Intra-European
Iberia Vueling
Iberia
Express Iberia Iberia Vueling
Iberia Express 2011 621 356 - 211 436 313 - 2012 446 426 101 197 357 493 8 2013 242 554 133 139 250 862 24 2014 260 666 94 157 295 1079 40
Regarding intercontinental flights, Iberia mostly operates to South America, North African
and Middle East countries. As for the intra-European countries besides Spain and the Canary
Islands, Iberia operates mostly in Italy, France, Germany, United Kingdom, Netherlands,
Belgium, Portugal and Switzerland. Vueling only operates domestic flights, intra-European
flights within Europe and intra-European flights between the Middle East and North Africa,
which are considered medium haul flights.
In the previous analysis, the conclusion was made that Iberia has been downsizing its
route network up to 50%. This analysis shows that the reduction of flights is applicable for
every flight type. Iberia cut most of its domestic operations and intra-European flights. To a
smaller extent, the intercontinental route network declined. The small increase in 2014 that
was presented in the previous analysis is mostly visible in intra-European operations.
Vueling’s massive increase in its route network is explained by both domestic and
intra-European flights. Iberia Express’ domestic operations are somewhat stable over the years. Its
intra-European flights however, increase significantly. So while Iberia cuts most of its
domestic flights, Iberia Express operates mostly domestic flights. Iberia’s cut in
European flights can also be linked to Iberia Express’ and also Vueling’s increase in
intra-European flights. However, the analysis of substitution and expansion in section 8.2.4 will
confirm or reject the assumption that Iberia Express and Vueling indeed substitute Iberia’s
cutbacks in domestic and intra-European operations or expand the route network.
8.2.3 Top ten routes
In this analysis the top ten routes of Iberia and consequent changes over four years time are
examined in order to look at the stability of the route network, despite the drastic downsizing.
