Vueling order puts pressure on Iberia

After taking full control of low-cost carrier Vueling in April, IAG — the holding company created by the merger of Iberia and British Airways — announced on Wednesday that it was earmarking 120 jetliners from a new multibillion-dollar order for up to 220 Airbus A320 single-aisle aircraft for the Barcelona-based firm. The move reflects the importance of Vueling to IAG in meeting its goal of double-digit growth over the next two years.

It is also a clear signal to Ryanair and Easyjet that IAG intends to carve out a larger share of the low-cost market, as well as a new way to pressure Iberia into speeding up a restructuring plan that involves over 3,000 layoffs and starting to make money. IAG’s message has been that growing with Iberia meant losing money; its shopping spree at Boeing and Airbus seems to be saying that growing with Vueling will mean bigger profits.

“These new aircraft will enable Vueling to continue that expansion and replace some of its older fleet with modern, fuel-efficient aircraft, leading to further unit-cost reductions,” IAG Chief Executive Willie Walsh said Wednesday in a statement announcing the plane order.

IAG has fought hard to compete with low-cost carriers in Europe, especially in Spain, where Ryanair and Easyjet have taken the lion’s share of the market for low-price business and vacation travel from Iberia amid high fuel prices and a sickly economy.

IAG has cut half-year losses following restructuring at the loss-making Spanish carrier. The holding company reported a reduced operating loss of 33 million euros for the half year to June 30 against a loss of 253 million euros in the same period a year earlier before exceptional items.

The group swung back into the black with a second-quarter operating profit of 245 million euros compared to a loss of four million euros. A reduction in fuel costs and improved passenger revenues — with total revenue up 2.1 percent in the six months to 8.7 billion euros — helped boost the results.

The 62 jetliners cost 4.8 billion euros, way above the 200 million-euro valuation IAG put on the company

In 2011, IAG ordered eight Airbus 330s for Iberia’s long-haul fleet, with an option to buy eight more. In April, it ordered 18 Airbus 350s, with options to buy another 18. It also ordered 18 Boeing 787s for British Airways’ long-haul routes. It has said new purchases for Iberia will depend on the speed of the restructuring program.

Vueling is the clear winner here. After a two-year wait, it has finally acquired the new aircraft it needs to expand its routes. The 62 jetliners cost 4.8 billion euros, a figure way above the 200 million-euro valuation IAG put on the company when it launched its takeover bid last November. For the last two years Vueling has been looking for ways to renew its aging fleet. It never imagined it would have 120 new planes at its disposal.

The announcement comes at a particularly difficult time for Vueling. This month has seen a number of mechanical problems with its planes — 100 passengers were left stranded at Dubrovnik airport last weekend — and it is now being investigated by the Public Works Ministry.

Vueling was set up 10 years ago, and has grown to around a quarter of the size of Iberia, both in terms of turnover and the number of passengers it carries per kilometer. This is why the company itself had doubts about joining IAG, particularly after Iberia, which already controlled 45 percent of Vueling, set up its own low-cost carrier, Iberia Express.

IAG took full control of Vueling in April, and has committed to expanding the airline’s business. IAG said it expected to boost capacity for the group by 5.2 percent this year, with Vueling’s capacity rising by 2.4 percent.

Vueling flies to more than 100 destinations in Europe and North Africa. Industry data provider Absolute Aviation Advantage ranks it fourth among the top 10 low-cost carriers in Europe, based on its market share of seven percent.

Álex Cruz, who took over as president of Vueling last week, replacing former Popular Party Industry Minister Josep Piqué, seems to have won over IAG’s CEO Willy Walsh. Cruz believes Vueling’s profitability will mean that Walsh, a man who understands the low-cost sector, will respect the company’s identity, rather than incorporating it into either of the two flag carriers. The growth potential that the new aircraft give Vueling would seem to support the idea it may emerge as the group’s short-haul carrier.