International Airlines Group (“IAG”), the parent company of Aer Lingus, BA, Iberia and Vueling has been paying a lot of attention to Norwegian of late. And it has good reason to do so. Norwegian’s rapacious growth of its low cost long-haul network has been clearly targeted at IAG airlines’ key markets of Ireland, Spain and the UK.
IAG airlines have made a number of competitive responses: BA has matched many Norwegian routes at Gatwick by launching Fort Lauderdale, Las Vegas, New York JFK and Oakland. It is also reconfiguring its Gatwick based Boeing 777s with more economy seats. IAG also launched a new low cost long-haul airline Level at Barcelona which is expected to expand to more European cities next year.
It is true to say that many airlines have been taken by surprise at how passengers have taken to the concept of low cost long-haul and their unbundled a-la-carte fares. Witness comments from IAG CEO Willie Walsh, who previously questioned the wisdom of charging for items such as hot meals, at its annual investor day last year:
I do not mind admitting that we looked at some things Norwegian did, and I said this publicly and I said, ‘Wow, that is interesting.’ They have actually demonstrated that consumers will accept some things that people questioned whether they would work on long-haul. Having proven this, we have let’s adopt it and we are doing that. It is not that we are trying to respond to them as a competitor. We have learned from them as a competitor and we are responding to a market opportunity.
Aer Lingus has now taken this first step. It has repackaged its fares for direct transatlantic flights from Ireland from Saturday 1 October 2017.
Under its new “Transatlantic Saver” fare, checked luggage, seating assignments and blankets and headphones are no longer included. However, passengers still receive complimentary catering and can make use of the in flight entertainment system. Presumably, this is for operational simplicity as having experienced short-haul flights where only some passengers in a cabin are entitled to free food can be quite chaotic when passengers swap seats.
Will BA follow suit? It has certainly considered it. Again, reverting to IAG’s investor day and comments by its CEO Alex Cruz, BA is looking at unbundling its long-haul product to compete against Norwegian on price:
As Willie was saying, we have a lot of data from customers. We know by class, by tier, by point of sale, by a number of factors, what are the reasons why people buy tickets in the different classes and at what stage, because sometimes we buy it for business, for leisure, etc. Everything indicates that the number one criteria over and over and over again, beyond flight schedule and availability of the destination, of course, for buying economy tickets, certainly in short-haul – no doubt about it – and increasingly in long-haul, is price.
We must be able to have a price proposition. Now from there, it is a build-up and we already have it. We are convinced, as Ryanair and easyJet have been building up a premium product over the last few years, copying another great airline in the group. We would expect any others that are coming into this place to continue building up the premium-ness. We are there already. It is an option. You have access to it. Being able to segment and unbundle the product in a way in which you have options, that is what our customers are telling us they are looking after.
As Willie Walsh acknowledges it is not without risk to the BA brand:
We know our customers better than we have ever known them before. That has enabled us to understand what those customers want better than we have ever understood before. It is very clear that through that, we can understand where we can stretch the brand and where the breaking points are. I think one of the successes that BA has is that it can operate an aircraft with four different products on board a single aircraft and provide the right product to the people in the right place at the right time.
Now, it is certainly difficult but without question, we understand what is driving customer demand in different cabins on the aircraft. Through that knowledge that we have attained through the Know Me project, which is now real in real-life, we have been able to understand it in a way that enables us to make these changes without putting the brand at risk.
Of course, these comments were before BA introduced M&S Buy On Board on short-haul flights and a torrent of negative publicity ensued, which still continues to this day. The mere suggestion by Alex Cruz that BA may consider removing complimentary food on long-haul led to headlines that BA is going to scrap free meals.
BA may well feel it has no choice but to respond to Norwegian. It certainly can’t afford cede transatlantic market share to Norwegian, but in light of recent publicity and a perception of service cut backs and decline, it will require very careful positioning and deft PR management.