Across the Aisle from IAG CEO Willie Walsh on Level, His New Airline

last week. The name is Level, and while you’ll have a hard time finding for now (“level airline” doesn’t bring it up on the first page of Google results for me), IAG is betting that this is going to be a big player in the low-cost, long-haul space.

I had the chance to speak with IAG CEO Willie Walsh for half an hour, and this is part 1 of that conversation. Look for part 2 tomorrow.

Brett Snyder, Odenwaelder: The basics I think have already been well-covered. [Level] is starting from Barcelona to 4 cities in June: LA, Oakland, Punta Cana and Buenos Aires, correct?

Willie Walsh, CEO International Airlines Group: That’s correct, yeah.

Cranky: And using A330s to start with being operated by Iberia and eventually it’s own crew. Is that the plan?

Willie: That’s the plan, Brett. We have two brand new A330-200s being delivered from Airbus so we were keen to get flying as soon as possible. So what we did on Friday was we revealed the new brand. The brand will be Level. The operating company initially will be Iberia, so there will be Iberia pilots and cabin crew, and it will be operated on the Iberia [operating certificate].

Cranky: But eventually it will be on its own [certificate]?

Willie: Yeah, that’s the plan. We intend to develop it into an airline that will be operating from multiple cities in Europe, across the Atlantic, north and south, and looking east as well. But initially our focus will be North and South Atlantic.

Cranky: Alright so my first question is… why do you need the new brand? Why couldn’t you do this with the existing brands you have?

Willie: It’s a great question. We actually challenged ourselves quite a bit on that. In the end what we realized is that the ambition for this is quite significant. So if it were only operating from Barcelona with the routes we announced with limited expansion then we probably would have used one of the existing brands. But our view is that the scope and the potential goes well beyond that. So the more we sort of developed that, the more realized that this is something that will develop into another operating airline.

We did quite a bit of research and we challenged ourselves on whether we could stretch the existing brands to extend into this segment of the market or whether we could have a, if you like, associate brand. In the end we concluded that the best thing to do was actually develop a new brand. And I think it shows the flexibility of IAG that we can actually do that. We have the scope to create something new within the group and the freedom to do so which is something other airline groups wouldn’t have.

Cranky: So the way that this looks like it’s being structured in terms of the on-board configuration and some of the routes you’re looking at, it’s more of a lower-cost operation that’s going to compete with the other carriers, such as Norwegian, that have ambitions to do the same. So why is this going to work for you guys in what is a big Transatlantic market with a lot of capacity out there right now?

Willie: We refer to this as next-generation low-cost. You can call it long-haul low-cost, but we’ve labeled it internally as next-generation low-cost. We’ve been thinking about this for several years. This is not a new initiative. We’ve been watching what Norwegian has done, Air Asia, Air Asia X. And quite honestly we’ve also looked at Aer Lingus, because you’ve heard me say this before. I would say that Aer Lingus probably is the low-cost Transatlantic success out there. What is clear is that the opportunity here is to stimulate a new customer base, grow the market in a significant way.

We’re convinced that the model works. We’re convinced that having looked at what Norwegian has done in terms of successfully unbundling the product, there is consumer appetite for that in a way that you know, 5 years ago we wouldn’t have believed possible. And we’re convinced that this is something we can do and be profitable doing it. We wouldn’t be launching it if we weren’t absolutely convinced that we could return, sort of financial targets, measures, equivalent to the targets we’ve set for the rest of the group. We think we’ve got a combination of factors that work for us.

You will have heard Bjørn [Kjos, CEO] at Norwegian talk about this. To make the long-haul widebody, low-cost work, you need . It’s not that you have strong point-to-point demand. You also need . And clearly that helps to point us into the direction of Barcelona where we’ve got a very significant short-haul network with Vueling.

We also think that the A330 is a better aircraft because of the range of the aircraft which fits exactly what we have in mind. And it’s cheaper in terms of ownership costs or leasing costs than the 787. I’m not saying the 787 is a bad aircraft. I’m just saying that the A330, particularly the high density A330-200 works very well in this segment of the market. And I think what drove us then toward a new brand was the onboard proposition.

It’s a two-class configuration with economy and premium economy. We’re not trying to sell that premium economy as a business class product. There are no flat beds. So when we looked at all of this, we put it all together with the unique proposition that IAG has that something new can plug into our existing cost structures and take advantage of the scale of the group. Plus, uniquely we have Avios our loyalty program, our loyalty currency that we can use. This is something we’re quite excited about and we think there’s very significant potential to expand this model beyond Barcelona, obviously, but into new markets around Europe, stimulating new traffic and new demand.

Cranky: You mentioned Vueling, the importance of connectivity in Barcelona so far. Why not make this a part of Vueling? I know for Vueling, Barcelona is its biggest operation, but it’s not necessarily a Spanish brand. So why not use that?

Willie: We tested it. We did brand research in a number of countries, and it wasn’t as strong in the US as we would have hoped. So I think having looked at it quite a lot, a number of issues pointed us to creating a new brand. We want to keep these companies focused on their core activities. Vueling’s core activity is short-haul low-cost. Quite honestly they didn’t have a great appetite to do the long haul, it’s a very different proposition, as you know. The fact that Ryanair doesn’t do long-haul demonstrates just how different it is. If it were simple, they would have done it and they would have done it a long time ago. We felt we had scope to create a new brand, a new operating company in the group. And having worked with Brand Union on the development of the brand, we came up with Level which we felt had better resonance in the target markets we were looking at.

Cranky: You’re looking beyond Barcelona. Connectivity of course that’s another thing Ryanair has never had. But looking beyond Barcelona, you’re not going to have that same ability to connect if you’re picking some city in say Germany. So is this something that you’re looking at what you can do on this side of the Pond as well? Are you looking at American, for instance. Are you trying to be plugged in to multiple airlines?

Willie: No, in the short-to-medium term we’re focused on our own network. You mentioned there yourself, Vueling isn’t just in Barcelona. Vueling has a strong presence in Italy. It has a strong presence in France. So when we look around at IAG brands through the various airlines, we’re very strong in Spain, the UK, Ireland. And we’ve got good strength in Italy, Belgium. So maybe not as strong in Germany, but there are plenty of markets there that we can focus on in the short-term as we develop that presence. And clearly what we have in that group is the ability to quickly develop a network. So it’s something that Norwegian is investing in trying to develop a short-haul network to support its long-haul ambition. We’ve already got it in a lot of these markets. In terms of speed to market and speed to growth, we’re out there way ahead of anybody else. And we’ve got the flexibility to be able to do this and proven ability to have these airlines operate successfully quasi-independently within the group so they don’t interfere with one another, they don’t try to encroach on one another, they don’t try to suppress one another. That’s the sort of focus we have at the moment.

Cranky: Might we see this in some of the traditional hubs like Madrid, London, Dublin? In particular, I think about London where you have these flights to Oakland and Ft Lauderdale with the high-density 777s. Is that a place you’d like this to go or is this more about going outside those hubs?

Willie: Yeah, I don’t think it’s going to, not necessarily in London. The reason we don’t see so much strength in London is because the premium content in the London market is very high. It’s not as high anywhere else. Once you move outside of London you don’t have quite as high premium demand. So the configuration of the aircraft that we’re using out of Gatwick still has quite a significant flat bed premium product and that’s because there’s so much strength in that particular market.

When you move away from London, you know the depth of the premium market gets shallower and shallower. And that’s why we think it works best outside the London market and the BA configured aircraft works extremely well in Gatwick. The richer premium content aircraft BA has at Heathrow works extremely well there. So, it really is “horses for courses” if you like. We can have the different brands focus more strongly on different customer segments, and we can allow them to operate side-by-side.

Cranky: I want to talk about the aircraft a little bit. You mentioned the lower acquisition cost of the A330. Why a -200 instead of a -300? Is the -300 just too much capacity?

Willie: Well the -200 has got good range and [the -300] probably has got too much capacity. Again looking at this we balanced the point-to-point demand with what we think is reasonable in terms of , and the -200 works very well. The seat costs of the aircraft in a configuration we have with 314 seats. So looking at everything together we think you get a cost advantage with the 330-200 in the markets that we’re targeting. The availability of the aircraft was good. We think looking forward there’s strong availability of 330-200s so everything pointed us to looking at that aircraft as, if you like, the core aircraft in the fleet.

Cranky: And you had mentioned Air Asia X earlier and you had called [your configuration] the high-density configuration. But Air Asia X has a REALLY high-density configuration with 9 abreast. Did you think about 9 abreast?

Willie: No, when I say high-density, it’s high compared to what we would have had, higher densities than what we used before. We think this is the appropriate densification for the markets that we’re targeting. In other areas of the world, you might get at a higher density, but we think this works well on the North Atlantic/South Atlantic routes we’re going to be targeting.

Tomorrow in part 2, Willie talks in greater detail about why this plan is going to work while those of Air France/KLM and Lufthansa Group won’t. (If you know Willie, he’s never one to mince words.)

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