Can Iberia Express take off?

International airlines group (IAG) announced today that it is launching a low cost subsidiary airline Iberia express from summer 2012. This airline is expected to complete in the short and medium haul business against well established low cost carriers such as Easy Jet and Ryan Air. The short and medium haul business of Iberia airlines is making losses for a few years in a row now. This is mainly because Iberia is not cost effective and hence was unable to compete with the price other low cost carriers offer. The solution IAG proposes is to focus on this market segment through a fully owned subsidiary making use of the existing fleet and by recruiting new pilots and crew members at the market rate which is significantly lesser than the rates offered to Iberia airlines crew. However, will this idea help IAG beat its competitors in the short haul business?

Easy Jet, Ryan Air and Iberia airlines use the same hub airport in Madrid. Iberia express will also be using the same airport. Since the budget and the full fare airlines use the same airport, the cost advantage for the low cost airline is fairly limited. Generally, low cost airlines use less congested out of the city airports. From Madrid, for a customer, the difference between flying low cost and full fare is minimal when compared to other cities such as London. Now, Iberia express will also use the same airport. What difference will it make for a normal customer between flying Iberia airlines and Iberia express? With only four A320s, all from exiting Iberia fleet, are used for Iberia express for some of the short haul routes, Iberia may be in danger of cannibalising its main business, the full fare Iberia airlines. If Iberia express takes over all of short haul network, the idea might work better. With the current idea, three airlines belonging to the same group, Iberia airlines, Iberia express and Vueling airlines ( a low cost subsidiary of Iberia airlines), compete in the market. How much ever IAG can work out on the timetable, competing with Easy Jet and Ryan Air as three different airlines may not be effective

Iberia express will fly in a two class structure. No established low cost carrier operate this structure. According to IAG, Iberia express will compete with established low cost carriers. With two class structure, achieving this goal could be difficult. Also, Easy Jet and Ryan Air fly to less congested airports from Madrid. Iberia express, however, flies to congested airports like Iberia airlines does. With this arrangement, Iberia express might not be able to achieve aircraft utilisation as much as other low cost carrier does.

The main cost advantage for IAG with Iberia express is their new recruits. They will be paid significantly lower wages and are expected to be more productive then their peers in Iberia airlines. Spain's labour laws mean that most organisations recruit contract employees who can be easily hired and fired. Spain's youth employment is one of the highest in Europe. In this situation, IAG might recruit contract employees at a very good rate. If this works out well, then they might expand this model at the expense of Iberia airlines' short haul business.

Ryan air and Easy Jet are well established from Madrid. Iberia airlines, with the current plan, will find it very difficult to compete with these low cost giants. However, not taking any action with the ailing short haul business is not a solution as well. The news of Iberia express would have made Iberia's employees more anxious than other low cost carrier's bosses. In the short term, Iberia express should compete with Iberia airlines for a better market share, than competing with other low cost carriers.