The airline
industry didn’t start as a free market. It became so overtime due to its liberalisation.
Thus the industry carries a legacy from the past which is now slowly correcting
by the crumbling of old structures and a rebirth. New business models
substitute the hitherto established. New companies challenge and surpass old
ones. New route maps are being drawn more accordingly to what the market
desires. And eventually, new connection hubs will replace the old ones.
In Spain a
particular tale of two cities lingers throughout time like a soap opera with
Iberia, the former flagship carrier, as the main villain. With the announced
restructuring of the company, there will be cuts in the loss-making routes.
Let’s retain that concept: loss-making routes, lots of them. Iberia does lose
money in some routes. And it does so in order to support its long haul
connectivity and further does so with the help of the Spanish state which helps
the connectivity of Iberia via the subsidy of AirNostrum, its regional partner.
Let’s go
back in time and let’s imagine the airline industry sprung as a totally free
market industry. With the manipulative hands of the state out of the picture
one would imagine a growing number of flights drawing lines upon the globe.
Drawn by the market. Driven by demand. Pretty much as the low-cost carriers
today operate.
If one
observe the maps created by those non-connecting airlines one can observe the
crowding of lines in few particular nodes of the network. Those are what I call
natural hubs. Those the market would choose. Those hubs backpackers choose
using two low cost flights and a couple of idle hours on the terminal.
The longer
the airline industry stands as free market the more the route maps will move
and reshape themselves towards that abstract ideal market-designed route map.
The trouble of Iberia is that its unique and main operating hub of Barajas is
not a natural hub. Barcelona’s El Prat is.
Iberia
makes money on its long-haul operations out of which it subsidizes its
short-haul operations after the market destroyed its profitability
progressively since the monopoly was gone. The pyramid is upside down. Not
ideal.
In 2004 a
new airline, Vueling, tapped that unexploited natural hub of Barcelona. Aware
of the danger and after a huge expansion of Vueling Iberia created Clickair in
order to co-opt Vueling’s growth replicating its route map and eventually achieving
the surrender of the former Vueling shareholders and forcing the merger of both
companies into a new Vueling of which Iberia owned 45%.
But alas! Due
to the original merger agreement Vueling kept some autonomy and despite
rendering some suspiciously non-interesting and odd short haul services for
Iberia in Madrid, Vueling kept growing. And growing. And being profitable. And
started connecting travellers.
In the mean
time Iberia finds itself in IAG. With its core shareholders group broke. With a
broke state which if it’s finally rescued we’ll have to see if it can keep
subsidising AirNostrum and hence Iberia’s connectivity. With Madrid’s passenger
volume descending at double digits rate.
Amidst the
turmoil in Madrid Willie Walsh announces the intended takeover of Vueling at
the outrageously low price of seven euro per share. A day later a huge cut in
Iberia in order to rationalize its numbers which also mean a huge redundancy numbers
for its privileged staff.
Madrid goes
nuts. Talks of national interest and perfidious albion re-emerge from history
shattering the liberal make up of a very reactionary face.
If Walsh
achieves the takeover (We’ll see at what price) it can go two ways. Either
Vueling is merged with Iberia Express cancelling its expansion plans and
blocking its potential, taking over the Madrid redistribution routes and
sinking its results into mediocrity subsidizing the current model or Iberia
Express might run a much smaller profitable-routes-only operation in Madrid and
Iberia starts to service the huge potential in long haul there is between El
Prat and Africa and El Prat and South America.
If it’s the
second, we’ll find an IAG with a BA which has dusted itself off, turned
profitable and located in the natural hub of London and an unleashed Vueling
which can continue growing at double-digit rates, profitably, during years to
come and located in another natural hub.
We’ll have
to see the first moves of Walsh. If we see an inclination towards the second,
buy IAG shares. Lots of them.
