Iberia

Iberia: a new hammer can crack an old nut, but sometimes the new ones taste better

Following Luis Gallego’s promotion in Mar-2013 from CEO of Iberia Express to be CEO of Iberia, changes to Iberia’s management structure had been anticipated. On 10-May-2012, Iberia announced changes aimed at better implementing its Transformation Plan and restoring competitiveness and profitability to the carrier. While it is often worth taking a new hammer to crack an old nut, IAG has simultaneously been squirreling away some tastier new ones.

Based on comments at CAPA’s Airlines in Transition conference by Willie Walsh, CEO of Iberia’s parent IAG, that Iberia Express has ex fuel unit costs 40% lower than Iberia’s, we estimate that its CASK is similar to those of easyJet and Vueling. Mr Walsh also said that it is better to restructure what you have than to start something new. However, given fierce resistance to change at Iberia, he has given himself a good deal more leverage by establishing Iberia Express and also by taking over Vueling. Iberia Express has even helped the group to grow its passenger share in Madrid this year.

IAG profit guidance is dropped after first quarter loss, but can it still reach its previous target?

These are challenging times for IAG. The only one of the European Big Three to report a wider operating loss for 1Q2013 and to see net debt increase year-on-year, it also took significant new labour restructuring provisions in connection with Iberia. It has also dropped its previous ambitious target of exceeding 2011’s EUR485 million operating profit in 2013 for the time being.

The first quarter operating loss was affected by two factors whose negative impact should fall away over the rest of the year: first, the lag between Iberia’s capacity cuts and headcount cuts and, second, by a mirror image factor at British Airways, namely headcount increases ahead of the introduction of the A380 and 787 later this year.

Nevertheless, five years after the global financial crisis and more than two years into the British Airways/Iberia merger, IAG will need to show it can still match its previous 2013 profit target if it is to allay growing doubts over its ability to reach its 2015 goal of EUR1.6 billion in operating profit.

Airlines in Transition: Willie Walsh's view of the world of global airline alliances

Few have single-handedly changed the landscape of global airline alliances the way Willie Walsh has. As the CEO of International Airlines Group, the owner of British Airways and Iberia (and soon Vueling), Mr Walsh had an instrumental role in bringing Qatar Airways into the oneworld alliance.

The ascension of Qatar occurs at a time alliances are undergoing significant change: Qantas in Mar-2013 launched a partnership with Emirates; oneworld's airberlin may partner with Air France-KLM; and Etihad has a staggering number of partners. Mr Walsh is respected amongst fellow executives for his candid and direct views – which peers perhaps wish they felt at the same liberty to say.

During CAPA's recent Airlines in Transition conference in Dublin, Mr Walsh gave a number of his thoughts on global alliances. He supports bilateral relationships and thinks the Qantas-Emirates alliance will be good for both partners. Mr Walsh also noted the limits of alliances: they are mainly to deliver additional revenue, not cost savings, and perhaps exist only because global mergers are not permitted by regulators.

Airlines in Transition part 3: How full service airlines are reshaping models to be more competitive

Over the past three decades, airline industry profits followed a fairly consistent cyclical pattern until the turn of the twenty-first century, which has so far seen seven loss-making years. If 2013 reports a profit, as forecast by IATA, the industry will have had four years of positive results (2010 to 2013). Nevertheless, profits are insufficient to cover the cost of capital and full service carriers still face critical challenges.

The global economy is still weak, fuel prices remain high, LCCs are undermining the legacy carriers’ short-haul markets and the rapid expansion of Gulf carriers is having an impact on their long-haul markets. In our third report on CAPA’s Airlines in Transition conference, we look at how FSCs are responding to these challenges.

Does British Airways’ 787 option conversion signal a return to a more expansionist capex policy?

IAG recently announced the conversion of 18 options to buy Boeing 787 aircraft for delivery to its UK subsidiary British Airways between 2017 and 2021. These new orders, which need confirmation by IAG shareholders, are in addition to 24 firm orders already in the pipeline and leave BA with a further 10 options. IAG also secured an undisclosed number of 787 delivery positions for Iberia, demonstrating the improved purchasing power of the merged entity.

The conversion of the 18 options will mean BA has a total of 60 firm aircraft orders in place with Boeing and Airbus, more than at any time since the 1990s. In the early 2000s, the global economic downturn, Iraq War and SARS all led to a seemingly permanent cut in BA’s level of capital expenditure. BA’s average fleet age has crept above the world airline average as it has focused smaller capital sums on product improvements, rather than new aircraft, but demand does not seem to have suffered. Will the fuel savings offered by new generation aircraft force it to change direction once again?

European airline labour productivity: CAPA rankings

This analysis updates CAPA's previous study of European airlines’ labour productivity ("European airlines’ labour productivity. Oxymoron for some, Vueling and Ryanair excel on costs") to reflect the most recent financial results and adds four carriers not included in the original article (Wizz Air, Aegean Airlines and the two IAG subsidiaries British Airways and Iberia).

The contrasting performance of LCCs and legacy carriers is clear, although there are some notable exceptions to the pattern. BA and Iberia’s different labour cost productivity is significant, while Air France-KLM and SAS are weak performers.

We introduce an overall CAPA European airline labour productivity ranking, revealing the carrier with Europe’s most productive workforce, based on six measures.