Bloomberg News

British Airways Owner IAG Plans Iberia Job Cuts After Loss

August 03, 2012

British Airways parent International Consolidated Airlines Group SA (IAG) plans to cut jobs at Spanish arm Iberia as part of a revamp to be unveiled next month after the Madrid-based unit pushed the company to a second-quarter loss.

IAG will reduce the workforce as it shrinks Iberia’s business and reshapes the network in the near term in order to boost unit revenue while seeking cost cuts in all areas, Chief Executive Officer Willie Walsh said today in a statement.

Shortfalls at Iberia mean London-based IAG will probably record a “small operating loss” for the full year, the company said, after earlier forecasting it would break even. The second- quarter operating loss was 42 million euros ($51 million), including costs from BMI, acquired in April from Deutsche Lufthansa AG (LHA), versus a year-earlier profit of 134 million euros.

“There will be a thorough review of all parts of Iberia’s business, from A to Z,” Walsh said on a conference call. “The problems are deep and structural and the economic environment reinforces the need for permanent structural change.”

IAG, founded in January last year via a merger of British Airways and Iberia, fell as much as 5.4 percent and was trading 4.8 percent lower at 151.60 pence as of 10:24 a.m. in London. The stock has advanced 2.9 percent this year, valuing the company at 2.81 billion pounds ($4.4 billion).

‘Stark Difference’

Walsh said his restructuring plan for Iberia will be ready by the end of next month and will seek to address “a stark difference in the performance” of IAG’s subsidiaries. He declined to say how many jobs might be cut, while saying that the revamp will take place over an extended period.

“The task for Willie Walsh and his team is now to undertake the sort of surgery on Iberia which has already put British Airways in good shape,” said aviation analyst John Strickland, director of JLS Consulting in London.

Walsh said that while it was evident that Iberia would require a revamp at the time IAG was formed, “Spanish macro headwinds” have made the need to address the situation more urgent, as have cost cutting programs at competitors Air France- KLM Group (AF), Europe’s biggest airline, and Lufthansa, the No. 2.

A “Eurozone crisis management group” established to evaluate the impact of the region’s sovereign debt crisis is also meeting every two weeks to review scenario planning and hedging policies, IAG said, while a “roadmap project” has begun to consider commercial and other issues that would be triggered by a Spanish exit from the common currency.

BMI Losses

The Iberia review will examine its competitiveness and profitability on routes to growth economies in Latin America, where the Spanish company is the top European carrier and Air France and Lufthansa have been adding capacity, Walsh said.

IAG’s quarterly result included 50 million euros of losses from BMI, which was bought to add scarce operating slots at British Airways’ London Heathrow hub, and the restructuring of the unit, which is being folded into BA, also accounted for the bulk of 38 million euros of one-time items, the company said.

Second-quarter revenue advanced almost 12 percent to 4.61 billion euros, IAG said today. Analysts had expected a quarterly loss of 35.6 million euros, according to a Bloomberg survey.

Air France-KLM and Lufthansa earlier this week reported earnings that beat estimates as cost-savings programs kicked in.

Air France cut its operating loss by more than half to 66 million euros, aided by the introduction of a 2 billion-euro savings plan, it said July 30. The stock jumped almost 19 percent, the most since the group’s formation via a Franco-Dutch merger in 2004, and has advanced 9.5 percent this year.

‘Sparks’

Lufthansa boosted second-quarter operating profit almost 28 percent to 361 million euros after introducing a 1.5 billion- euro efficiency program and has advanced 10 percent this year.

Still, IAG is probably the most likely of the three to make cuts stick because of Walsh’s experience in restructuring BA, where he faced down a cabin-crew strike last year, and Ireland’s Aer Lingus Group Plc (AERL), where he was also CEO, Strickland said.

“We can expect some sparks, but Walsh is best-placed to do this because he has already turned around BA and Aer Lingus and absolutely knows what’s required,” the analyst said. “Iberia has strong assets in its Madrid hub and exposure to Latin America and it will be a case of persuading the unions that there’ll be long-term growth. Otherwise it will just gradually shrink.”

Iberia Express Profit

Walsh had so far been seeking a Spanish turnaround through the transfer of domestic and short-haul flights to a new unit, Iberia Express, which aims to reduce the break-even point with less-generous contracts. The unit was profitable in June, its third full month of operations, IAG said, adding that the wider Iberia restructuring plan may lead to extra costs this year.

Walsh will draw on his previous career as a pilot to help win over Iberia flight crew as he did at BA, Strickland said.

Airline-industry net income will likely drop 62 percent to $3 billion in 2012, the International Air Transport Association reckons. While carriers will be profitable on average in most regions, they’ll post losses in Europe and Africa, IATA says.

BA’s integration of BMI is “going well,” with completion due by this year, IAG said. The purchase helped lift capacity 5.1 percent in July and for the full year will contribute a 2.3 percent increase, with the total about 3.8 percent, Walsh said.

Bankia Exit

British Airways has said it will use Heathrow slots gained from BMI to open new routes to emerging economies in Asia and Latin America, as well as to add feed from key European cities.

Walsh said that Spain’s Bankia group is likely to exit IAG as a shareholder following its state bailout.

“My personal view is that it is not a question of if they sell but when they sell,” he said. “I see no strategic value to having Bankia as an investor.”

Asked about the possibility of another airline taking a stake, Walsh said that’s nothing more than “rumour.”

The impact of the 2012 Olympics on IAG’s traffic has been generally as predicted, Walsh said, with the proportion of business bookings lower than the norm in July and August.

IAG is in talks with Airbus SAS (EAD) over A380 deliveries, with the first handover likely to be delayed until the third quarter of 2013, Walsh said. British Airways has firm orders for 12 superjumbos, of which Airbus has said it may deliver fewer examples next year as it grapples with a fix for wing cracks.

Boeing Co. (BA:US) 787s deliveries are showing “a little slippage” but remain due for handover next year, the CEO told analysts. BA has 24 Dreamliners on order.

To contact the reporter on this story: Chris Jasper in London at cjasper@bloomberg.net; Roxana Zega in London at rzega@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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