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British Airways Owner IAG Cuts 4,500 Jobs at Iberia Unit

November 09, 2012

British Airways Owner IAG to Cut 4,500 Jobs at Spanish Unit

British Airways parent International Consolidated Airlines Group SA said it will eliminate 4,500 jobs at Spanish unit Iberia -- or more than one-fifth of the total -- after third-quarter profit tumbled 25 percent. Photographer: Denis Doyle/Bloomberg

British Airways (IAG) parent International Consolidated Airlines Group SA said it will eliminate 4,500 jobs at Spanish unit Iberia -- or more than one-fifth of the total -- after third-quarter profit tumbled 25 percent.

Iberia’s fleet will also be cut by 25 aircraft to reduce capacity by 15 percent next year, short-haul salaries will be reduced to levels at low-cost carriers, and unprofitable routes will be suspended, London-based IAG said in a statement.

Europe’s third-biggest airline is following Air France-KLM Group (AF) and Deutsche Lufthansa AG (LHA) in slashing jobs as European operations are hurt by an economic slump and competition from discount rivals. Chief Executive Officer Willie Walsh, who led the BA-Iberia merger in 2011, is seeking a 600 million-euro ($766 million) turnaround in earnings by 2015 at the Spanish unit, which lost 262 million euros in the first nine months.

“We want Iberia to be strong and successful,” Walsh said. “For too long the narrow self-interest of the few has damaged the long-term future for the many. We will not hesitate to take necessary steps to protect the interests of our shareholders.”

IAG stock rose 1.6 percent to 170.60 pence in London.

‘Dismantled’

Taken with a plan to buy discount carrier Vueling Airlines SA, announced yesterday, the job cuts mean that Iberia “is being dismantled,” according to Spain’s UGT general workers union.

“We totally disagree with the job cuts and restructuring plan,” Manuel Atienza, who deals with aviation issues at the union, said by telephone prior to a meeting with Iberia management. “We’ll combat that with all our weapons to negotiate a sustainable business plan that provides stability to workers.”

Pilot union Sepla said the proposals give up Iberia routes and capacity while BA continues to grow, and isn’t acceptable.

Walsh is cutting jobs at Iberia two years after riding out a strike by cabin-crew unions at British Airways to push through lower pay for new recruits. The Spanish operation is losing 1.7 million euros a day, according to IAG, which detailed its plans at an investor briefing near London’s Heathrow airport today.

“Iberia has to go through some of the medicine that BA has already been through,” said aviation analyst John Strickland at JLS Consulting in London. “BA went through this in more benign times and is looking pretty healthy. With that experience they have to clean up the other half of the business.”

Lagging Behind

Third-quarter operating profit fell to 263 million euros, including expenses from buying BMI in the U.K., from 351 million euros a year earlier. Analysts had predicted 232 million euros. IAG forecasts a full-year loss of 120 million euros, before Iberia restructuring costs, as Spanish losses wipe out earnings from BA, which had a nine-month profit of 286 million euros.

IAG stock has advanced 16 percent this year, valuing the company at 3.17 billion pounds ($5 billion). That’s less than gains of 76 percent at Paris-based Air France-KLM and 34 percent at Lufthansa, which are more advanced in cutting jobs and posted quarterly figures that beat predictions by wider margins.

Air France-KLM, Europe’s biggest airline, said on Oct. 31 it intends to scrap 1,300 positions at its Dutch unit in addition to 5,000 already being eliminated within the larger French business. Cologne-based Lufthansa is cutting 3,500 administrative posts and as many as 1,000 catering positions.

At IAG, Iberia is underperforming as Spain’s sovereign-debt crisis saps demand. Traffic at the unit dropped 3.7 percent in October from a year earlier while jumping 6.2 percent at BA.

Express Expansion

Walsh yesterday sought to bolster Spanish operations via a 113 million-euro bid for outstanding stock of Barcelona-based Vueling. IAG already owns 45.85 percent of Spain’s second-largest carrier after Iberia, and aims to complete a deal next spring establishing a low-cost platform within the group.

While the acquisition would be good for IAG, it’s negative for Vueling investors who will get 7 euros per share for a stock that might have reached 12 euros within six months, said Luis Benguerel, a trader at Interbrokers in Barcelona.

Vueling won’t be merged with Iberia Express, a short-haul unit founded to lower the break-even point by offering less-generous contracts, and its CEO, Alex Cruz, will report directly to Walsh. The Express unit will in turn take over an increasing share of Iberia’s short-haul flights, according to IAG, which said a court ruling that overturns arbitration panel findings against the transfer is a welcome development.

AMR Option

The CEO told investors he’s not considering acquisitions beyond Vueling, though investing in AMR Corp. (AAMRQ:US)’s American Airlines might be a possibility as part of the U.S. carrier’s emergence from bankruptcy if offering “additional value.”

Merging AMR with US Airways Group Inc. would also provide “an effective combination” with a positive impact for IAG, Walsh said, as would a number of other outcomes for a company with which he operates a joint business on north Atlantic routes.

AMR chief Tom Horton has told his employees a stand-alone strategy would create a stronger airline than a merger.

The acquisition of Vueling might also allow Walsh to bypass union action over the measures at Iberia, Investec analyst James Hollins said in an investor note. IAG said the job eliminations must be agreed by the end of January to avoid deeper cuts.

“Time is not on our side,” Walsh said. “If we do not reach consensus we will have to take more radical action, which will lead to greater reductions in capacity and jobs.”

Salary Cuts

Salaries will also be adjusted at Iberia’s long-haul division, and some inter-continental flights including Madrid-Johannesburg and Barcelona to Miami and Sao Paulo will be scrapped, IAG said at the investor presentation. Unprofitable maintenance services are to be terminated and ground-handling operations are likely to cease, away from Madrid, it said.

The announcement of the Vueling bid came less than seven months after IAG bolstered British Airways with the purchase of Lufthansa’s BMI unit, gaining 42 pairs of additional takeoff and landing slot pairs at crowded Heathrow, Europe’s busiest airport. BMI is now 90 percent integrated into BA, Walsh said.

U.K. politicians lack the will to tackle a capacity crunch in southeast England, and there’s little chance of a third runway ever being built at Heathrow, Europe’s busiest hub, even after the appointment of a commission to examine the matter.

The CEO said he’s also against “mixed-mode” operation at Heathrow which would allow controllers to decide whether to use runways for landings or takeoffs, suggesting it would remove the flexibility to recover from periods of disruption.

IAG will seek to develop a “more aggressive” plan for operations at Gatwick, a focus for leisure flights and point-to-point services that don’t link up with long-haul operations. The company is currently studying destinations for Airbus SAS A380 and Boeing Co. (BA:US) 787 jets that will enter the fleet next year.

To contact the reporters on this story: Kari Lundgren in London at klundgren2@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net


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