Spanish low-cost carrier (LCC) Vueling had every reason to fail when it started operating in 2004. While still in its infancy, the global financial crisis hit and oil prices spiked to an all-time high. In addition, the carrier faced competition from Spanair at its El Prat airport hub and later from Clickair, another Spanish budget airline.
Yet today the airline is the third largest LCC in Europe after Ryanair and Easyjet, carrying nearly 15 million passengers in 2012. In a year that saw Spanair, Hungarian flag carrier Malév, and a string of other European airlines go bust, Vueling tripled its operating income from 2011 to $37m.
Vueling got off to an inauspicious start. Its first years were spent fighting financial difficulties and reshuffling its boardroom. The breakthrough came in 2009 when Vueling merged with Clickair, its closest competitor. “It gave the combined entity scale, significant revenue and cost synergies,” says Cathy Buyck, European correspondent for Aviation Week, a publication specialising in commercial air transport and airline strategies.
According to Ms Buyck, the merger brought together two different business philosophies. Clickair had a very strong emphasis on keeping costs low, while Vueling's emphasis was on customer satisfaction. “Those two elements make the DNA of the current Vueling, a hard-core approach to lower unit costs while trying to provide passengers with a certain level of service,” says Ms Buyck.
Alex Cruz, Clickair’s founding chief executive and the current chief executive at Vueling, says that at the beginning Clickair was following other LCCs, “from charging extra for baggage to [experiencing] tense relationships with stakeholders". With the merger, which saw two seemingly opposite airline models come together, a chance to change that approach presented itself. Now, by offering premium services, such as frequent flyer programmes and interlining services, Vueling, according to Mr Cruz, “breaks every commandment of the LCC bible”.
To have the luxury of providing premium service, Vueling had to look to make savings elsewhere in its business model. “You do not see my directors here with me. Why? Because it costs money and I think I can handle [a meeting by] myself,” Mr Cruz explains during a get-together with journalists in London.
The company goes far in its attempts to be lean and mean. It outsources its call-centre operations and does not employ staff at airports. And the staff it does employ earn significantly less than their counterparts working for other airlines. According to estimates by Credit Suisse, labour costs at Vueling make up only 13% of operating expenses, while at Iberia, Spanish flag-carrier and Vueling’s parent company, they are 35%.
Despite this frugal approach, Vueling appears to be living up to its 'Love the way you fly' slogan by providing extra, chargeable services and perks. “Unlike most LCCs, Vueling offers a premium cabin and has launched significant marketing efforts to attract higher yielding business travellers,” says Shashank Nigam, chief executive of airline consultancy SimpliFlying. “The target market is clearly the business travellers who are looking for value for money.”
To increase its presence in the business travel market, Vueling has implemented a hybrid model, whereby tickets are sold online and through travel agencies. Again, this is a method often shunned by LCCs. “Unlike other [carriers], we sell [tickets] through travel agencies. We believe that most of the business traffic comes through such sales,” says Mr Cruz, who estimates that 46% of all Vueling tickets are currently sold this way. Travel agency sales are also a canny way to increase profit margins. “In the case of tickets sold by a travel agency, all perks are included. More cost-sensitive customers can go online and avoid paying for the extras,” says Mr Cruz.
But given that UK LCC Easyjet is pursuing the same market segment, will Vueling stay lean and mean? Market experts give it a thumbs up. “Vueling is filling the void left by Spanair very well. And given its close alliance with Iberia, it has very good long-term prospects,” says Mr Nigam.
“Vueling is profitable because it has very low unit costs and is focused on lowering costs even more while finding innovative ways to increase revenues and traffic,” adds Ms Buyck, who highlights that such an approach distinguishes Vueling from struggling traditional carriers.
Mr Cruz tells fDi that he also believes being flexible and cost driven is what makes Vueling more effective than airlines with much longer traditions in the industry.
That flexibility may be soon be put to the test, however. Executives at International Airlines Group (IAG), the holding company formed through the merger of British Airways with Iberia, which owns a 46% stake in Vueling, confirmed at the end of 2012 that they were considering taking full ownership of Vueling. The acquisition by IAG could curb Vueling’s independence, but its chief executive remains bullish. “IAG is not interested in interfering in the ways we run the company. If there is a transaction to be made, it is with the understanding of what Vueling stands for,” says Mr Cruz.