Q&A: CEO dishes on new European discount airline Level
British Airways’ parent company has decided to directly join the competition in the market for no-frills budget flights between the United States and Europe.
To do that, the company has created Level, a stand-alone discount carrier that began sales last Friday (March 17) on four routes to Barcelona – including two from California. Fares went on sale for as little as $149 one way.
Level will become the fifth airline brand for the International Airlines Group (IAG), whose holdings also include British Airways, Aer Lingus, Iberia and Spanish low-cost carrier Vueling.
BY THE NUMBERS: Level, the new European budget carrier
MAIN STORY: $149 Europe fares? British Air parent rolls out new budget airline
IAG CEO Willie Walsh talked to us for a question-and-answer session about what to expect from the new airline. He touched on everything from Level’s expansion plans to its business strategy and frequent-flier proposition. Read on for the full Q&A between Walsh and Today in the Sky editor Ben Mutzabaugh:
Ben Mutzabaugh: Some in the industry have described Level as IAG’s Norwegian-killer…
Willie Walsh: I can understand why people take that view. It’s much more broad than that.
As you know, I’ve been very supportive of Norwegian in their applications for route licenses and approvals. I’ve made it clear that we will respond to what Norwegian is doing with a competitive response. You could argue this is part of that competitive response, but it’s bigger than that. We believe this is a segment of the market that actually represents a great opportunity for us.
We give credit to Norwegian for trailblazing some of the issues. They’ve clearly demonstrated that the trans-Atlantic product can be unbundled. We’ve been watching this with great interest for a couple of years and we’ve decided to respond in this way.
But our ambition here goes way beyond what we’ve just announced. We’ve made it clear that we think this is a segment that can be competed by IAG profitably. We wouldn’t do it if we didn’t believe we could be profitable. And that we intend to bring Level to other European cities in due course.
IN PICTURES: British Airways parent unveils trans-Atlantic budget airline (Q&A continues below)
Mutzabaugh: What makes IAG think that a new airline brand – the fifth airline brand within the group – is the way to go? What’s the advantage of introducing a new brand for this type of service instead of fitting it in within one of your existing brands?
Walsh: You can stretch the existing brands, to some degree. But we felt that this segment – where we want to compete for people who are clearly very price conscious – is a growth opportunity and therefore justified us looking at new brand.
In the end, I think it’s a measure of our ambition that we see that this something that can be developed into something bigger. And that’s why we went with a completely new brand.
Mutzabaugh: Let’s shift to what customers will actually see. When Level debuts this summer, these will be brand new Airbus A330s where customers will see a completely new brand and livery. Is that right?
Walsh: Absolutely. These are brand new, being delivered to us from Airbus. They will be branded in Level’s livery and the first aircraft will go into service on the first of June when we start flying.
Mutzabaugh: IAG will place a new order for planes in 2018 that will include new planes for Level?
Walsh: We will be looking for additional aircraft. We think A330 is the right aircraft for us. We think a combination of the flexibility of that aircraft – the range of the aircraft and price, which is clearly very important – makes it the right aircraft. In the medium-term – I would term that as our next five to seven years – I don’t see why this couldn’t develop into something with about 30 aircraft.
Mutzabaugh: You’ve mentioned European cities will be added into the mix. How many cities do you expect Level will be flying to by the end of 2018 or 2019? Any way to put perspective on what growth looks like for Level?
IN PICTURES: 30 cool aviation photos (Q&A continues below)
Walsh: To make long-haul, low-cost a success using widebody aircraft, you need feed. You need to have a short-haul network that supports it. That clearly helped us to focus in on Barcelona as our launch city because of Vueling’s presence at Barcelona.
If you look at where we have strength in terms of our short-haul network, we clearly have a strong network in Spain. We have a strong network in the U.K. We have a strong network in Italy and we’re strong in France. Vueling operates to a number of Italian cities. It operates to France. We’ve good a good established Iberia short-haul network and a British Airways short-haul network.
We haven’t given any specific guidance as to where we’re looking at next, but it shouldn’t surprise you that we would focus on cities where we already have a significant presence. And I’m talking outside our core hubs of Madrid and London. I think we’re looking at other European cities outside of those two key hubs that we already have.
Mutzabaugh: Level will participate in the Avios frequent-flier program that IAG members British Airways and Iberia also use. You’ve touted that as a differentiator for Level as compared to other long-haul low-cost carriers. But, will Level customers earn Avios earn them at a discounted rate?
Walsh: (Avios) will be available at all fare classes, but it will be discounted at the cheapest fares. People also will be able redeem their Avios as well. It’s not just about earning, you can use them as well. I think that’s unique propositions that IAG has that others can’t replicate. This is something that sets us apart from anyone else in this segment.
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Mutzabaugh: IAG has said Level sold more than 50,000 tickets during its first day of sales on Friday, March 17?
Walsh: By 5 p.m. Sunday (March 19), we had sold 64,000 tickets. We made a substantial number of low fares available. (The U.S Department of Transportation) requires you to make a minimum of 10% available if you’re advertising them. We went well beyond that in terms of 10%.
We were very aggressive in terms of our pricing, but we weren’t mean in terms of the numbers of seats we made available. The response was incredible. Given that we only went on sale late Friday afternoon and to have sold so many seats by Sunday afternoon was just incredible.
Mutzabaugh: What’s the breakdown for demand? Are you seeing it more on the European side or from the Americas?
Walsh: It was much more evenly split than I would’ve expected. We’ve got quite a lot of traffic out of the U.S. and out of places like Buenos Aires into Barcelona.
Mutzabaugh: Avios are a big selling point. For U.S. customers, British Airways and Iberia are partners with American. But, with Level, American Airlines frequent fliers are not able to earn AAdvantage miles. Is that correct?
Walsh: That is correct. That may change in due course, but that is correct at this stage.
Mutzabaugh: You say ‘may change’ … Is that something folks should keep an eye out for? Or will the status quo hold for the foreseeable future?
Walsh: I think status quo, for the time being. We’re not going to restrict our approach to this. We’ll do what makes sense. When we see consumer demand, we’ll see if we can respond to what it is consumers are looking for. (At the beginning), we felt what the opportunity for us was to make Avios available.
Mutzabaugh: Level plans to expand its footprint in North America. But what about some of the leisure-oriented routes that British Airways is currently flying with its “high-density” Boeing 777s? Routes like London Gatwick-Oakland and London Gatwick-Fort Lauderdale? You’ve said Level will be an all-A330 fleet, but could some of those leisure British Airways routes switch over to Level?
Walsh: We intend to leave British Airways operating from Gatwick. That’s basically an aircraft configuration issue. As you’ve seen with (Level), it’s just a two-class configuration with a premium economy, 37” seat pitch, and an economy cabin. BA seating is 10-abreast in the economy cabin, but we still have a business-class cabin with a flatbed and the (international style) Premium Economy. We don’t see a flatbed product being introduced into Level.
I think the business-class product on British Airways continues to be in strong demand. People are still looking for that flatbed, but we don’t see the demand for that being uniform across Europe. Therefore it is right for us to continue with the British Airways brand and the 777 out of Gatwick but use Level in other European cities.
IN PICTURES: 30 (more) cool aviation photos (Q&A continues below)
Mutzabaugh: Comparing the Level product to Norwegian, your competitor’s “Premium” seats on long-haul flights have a 46” inch pitch. Your Premium Economy seats on Level will have 37” of room. Norwegian will have some advantage there. What’s your thinking about going with a tighter product there in the front of the plane? And are you concerned that could be a selling point for Norwegian?
Walsh: Not really. We did quite a bit of research with our existing brands when we looked at this. We think that this is a configuration that will be pretty attractive. It clearly enables us to price at a point where we don’t think Norwegian can compete with us.
We think that we’ve got a cost advantage over Norwegian. And this is important: We’re in this business to make money, as I’m sure Norwegian are as well.
We were driven very much by, “What pricing will stimulate the demand? What is it that people are looking for when they want to travel in a premium cabin? Is it a bed? Is just that little bit more comfort?” All of this pointed us toward something that is differentiated from the economy cabin at a pricing point that’s probably what most people (would expect for) economy pricing. A 37” seat pitch and much-more attractive in-flight customer proposition (food, bags and other amenities included) than you would have had with a traditional carrier.
We’re not focused solely on Norwegian. We admire what they’ve done. But we don’t think the 787 is the right aircraft in this segment. The 787 is a great aircraft, but it’s expensive in this (long-haul, low-cost) segment of the market.
Mutzabaugh: And, just to reiterate: Even with the price points Level is selling at, IAG expects this to be a moneymaker...
Walsh: Yes, or we wouldn’t do it. We’re very much focused on return on invested capital. We’re very clear that all parts of our group have to meet the financial targets. We wouldn’t do this if we didn’t believe that the business is capable of generating the returns that we’ve targeted.
We believe this is a segment that can be competed profitably by IAG. And uniquely, I think, we’re positioned to be able to do that achieve the financial targets that we’ve set. If we didn’t believe that, I guarantee you we wouldn’t be doing this.
TWITTER: You can follow Today in the Sky editor Ben Mutzabaugh at twitter.com/TodayInTheSky
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