Iberia turns around loss but Vueling feels the pinch of costs

Iberia recorded a pre-tax profit in the quarter ending 30-Sep-2010 of EUR53 million, having lost EUR182 million in the pcp. The carrier recorded an improved load factor (85.6%) and a 4.3% growth in average earnings per RPK, again mainly as a result of the increase in the number of long-haul business-class passengers and a BA-style application of cost control measures. Air traffic in general is also on the increase again at last in Spain, with national airports operator AENA reporting 5.6% growth in passenger numbers in Sep-2010. Cargo was also a star performer for Iberia in the quarter, with an increase of 16.9% in volume.

Table 1: Iberia financial/traffic highlights, three months ended 30-Sep-2010 (all financial figures in EUR million)

Labour costs creep up

Like its oneworld alliance partner, British Airways' labour costs continued to creep up, as reflected in a small cost per ASK increase of 0.5% in the period. But in a country where four-fifths of the working population seems to have employment contracts that are set in stone - some air traffic controllers are millionaires but the 20% of the population that don't have fixed contracts can't get a job for love or money - Iberia has demonstrated in this quarter that labour costs are coming under control, as has BA.

In fact its results are as good overall as those of the British flag carrier and have been improving steadily throughout 2010. In 1H2010 (the period ending 30-Jun 2010), Iberia made an operating loss of EUR50 million, down from one of EUR274 million in the pcp, but in 2Q2010, the three month period ending on the same date, it had turned a EUR126 million operating loss in the pcp into a gain of EUR21 million.

The merger of Iberia with BA, which would create Europe's second largest airline by market value after Lufthansa, is now expected to be completed on 21-Jan-2011 subject to shareholder approval. The boards of the carriers, which have a combined market value of USD9.43 billion, have already approved the merger which would create the International Airlines Group. Shares in both airlines are expected to stop trading on 20-Jan-2011 to be replaced by IAG shares which will commence trading on 24-Jan-2011. The two carriers expect the merger to generate cost saving of EUR400 million from the sixth year of the agreement, with the new group to position itself for expected further consolidation in the global airline sector. In the interim, Iberia and BA plan to commence advanced discussions with Boeing and Airbus in early 2011 about a joint order for widebody aircraft. The carriers are reportedly considering 300 to 350-seat aircraft, such as the A350XWB, B777 or B787.

Barcelona expansion

Iberia also plans to utilise Barcelona El Prat Airport as a major hub for operations into Europe and the Americas, its rival Spanair, which is still part-owned by SAS (19.9%), having previously indicated it had its own "Hub Barcelona" policy. Iberia Regional and Vueling (which is 45% owned by Iberia) will provide feeder traffic for the carrier. Vueling is already the largest carrier at Barcelona with 25% of traffic its passengers offered more than 400 Vueling-to-Vueling connections.

Vueling's financial results for 3Q2010 were not as impressive as those of Iberia as costs increased at twice the rate of revenues. EBIT, net profit and revenue per ASK all fell but at least Vueling was able to increase its ancillary revenues. The results are also a reversal of the trend evident at Iberia, the 13% EBIT reduction going against 119% EBIT growth in 1H2010 and 59% in 2Q2010.

Table 2: Vueling financial/traffic highlights, three months ended 30-Sep-2010 (all financial figures in EUR million)

Business focused

Vueling forecasts an EBIT increase from EUR60 million to EUR70 million for the financial year 2010.

Some commentators point to the fact that Vueling is still growing - its ASKs (not in table 2) rose by 11% in the period - that it is still aggressively cutting costs and finding new ways to increase revenues by promoting ever more connections and has become a more business-focused airline. But it faces increasing competition from Spanair, Ryanair (which loves Spain, especially the Canary Islands) and others. Overall, these results will be considered acceptable but mildly disappointing.