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CAPA conference: Airline execs warn against low-cost subsidiaries

Analysis: The hidden cost of flying

Legacy and mid-sized airlines should avoid creating low-cost carriers as they will "ultimately fail", top airline executives have said.

Speaking at the CAPA conference in Dublin,  a panel of chief executives from Flybe, Air Baltic, Lot Polish Airlines and the chairman from City Jet all agreed that there are few examples of successful budget subsidiaries and too many factors go against it such as unions, costs and culture.

The members of the panel were discussing survival strategies for mid and small airlines and whether pursuing a low-cost model was viable.

Flybe CEO Saad Hammad said: Ultimately [creating a low-cost subsidiary] is the road to perdition. I think you've got to adjust your stage length and be true to it in terms of your cost performance."

He said Flybe had gone through a major restructuring in 2013, which included cutting a third of its workforce but now is able to compete better on cost while "staying true to its business purpose".

"You don’t always have to play head on at the low cost elephant charging down the runway," he added.

City Jet chairman Pat Byrne said an airline thinking of creating a budget carrier should look at why their main carrier is not as profitable as it should be before starting something new.

"Any airline that wants to emulate the low cost carrier but feels they can't do it themselves so therefore creates a subsidiary will ultimately fail the subsidiary for the exact same reasons.

"Painting a new colour on the plane and designing new uniforms is not going to bring low cost, it's a mentality, an ethos, a cultural issue and it cannot work."

LOT Polish Airlines CEO Sebastian Mikosz said: "There are only two cases of successful low-cost creation by a legacy carrier, which is Vueling and Jet Star. All the others are just a spin-off with the same mentality, same culture and same path of functioning."

Mikosz said LOT became a victim of trying to create a subsidiary, and in 2009 had to close Central Wings. "The unions of LOT didn't understand that there can be a completely different payment scheme. The whole company was trying to prove the other concept is not viable so it's not a way we will go in the future."

Air Baltic CEO Martin Gauss said his airline is unique as it operates using "low-cost principles" without positioning itself as a low-cost carrier.

"The way the airline is run is helping us compete against the likes of Ryanair," he said.

"I think there is a transition happening where low-cost carriers are moving up a bit and the mid-size carriers are moving down," Gauss added.

Lufthansa and Air France have both experienced long-running disputes with unions over plans to expand their low cost carriers.

Last month, Lufthansa said it lost €232 million in 2014 due to 10 such strikes. And in September, Air France said the four-day strike over its Transavia expansion plans cost the airline around €10 - €15million a day.

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