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Walsh may be upbeat on IAG’s prospects but is the merger with Iberia going as well as expected? Stanley Slaughter looks at the challenges for British Airways’ parent company
Willie Walsh, chief executive of IAG, seemed to be in his usual upbeat form when he spoke to city analysts last Friday.
Everything has been going well – but reading between the lines, there was reason to believe the merger between Iberia and BA is not going as smoothly as Walsh and his fellow executives had hoped. The problem is not BA and its acquisition of Bmi, but the loss-making performance of its merger partner Iberia.
As ABTN noted last month, this is not a good time for European airlines. According to figures released by the International Air Transport Association’s (IATA) Financial Monitor, European carriers lost $2.145 billion in Q1 this year whereas those in every other region made a profit, including Latin America and Asia Pacific.
Air France, already saddled with the biggest debt of any European carrier, is cutting jobs, merging units and promoting no frills flights, according to one report, to try and stop a loss for the fourth year running. The measure helped reduce its second quarter loss by more than 50 per cent but it still stood at €66 billion.
The airline’s plan, called Transform 2015, is aiming to cut 5,000 jobs by that date while at the same time lowering its indebtedness from €6.5 billion at the end of last year to €4.5 billion which is still a considerable burden. Its ceo, Jean-Cyril Spinetta has been quoted as saying this drastic measures are needed just to survive.
Lufthansa is doing better but not by much. According to its own figures released in its half year report from January to June, it has a debt of € 2.3 billion. This compares poorly with the figure of €1.4 billion for the same period last year.
It reported a loss of €168 million for the first six months of this year, compared with a €206 million loss for the same period in 2011, an 18.4 per cent improvement. However its figures for the second quarter this year showed a €229 million profit but this is 23.9 per cent down on its €301 million profit for the same months last year.
Despite Walsh’s optimism, IAG’s half year report was nothing much to crow about. The group made an operating loss of €253 million for the first six months of this year, compared with an operating profit of €88 million for the same period in 2011.
But when the figures are divided up, IAG said BA made an operating profit in the six months of €13 million while Iberia made a loss of €263 million. It all combined to make a pre-tax loss of €390 million for the group compared to a profit of €39 million last year.
In his address to the City analysts, Walsh said: “We always said there would be restructuring within Iberia but now we are committed to further restructuring. The scale and timescale of restructuring is accelerating because of the weakening financial situation and environment in Spain. Iberia’s short and medium-haul did not make money and the long-haul profits are still not sufficient to make up for this. Iberia’s cost base and conditions are out of line with the market. Both short and long-haul need fundamental structural change. We do not have that plan finalised yet – the development of the business plan will continue over the next few weeks and we hope to finish it by the end of September.”
In other words, the scale of the restructuring needed to bring Iberia into line is far greater than was at first realised or perhaps admitted. The short- haul problems could have been expected. Low-cost carriers have made a huge indent on the supremacy of legacy airlines. But Iberia has also been badly hit on its foremost domestic route between Madrid and Barcelona by the rapid success of the high-speed trains operating on this route. With Spain intent on building a nationwide network of high-speed rail links, this problem is likely to be exacerbated for Iberia.
But its long-haul performance must be far more worrying. One of the great justifications of the merger between BA and Iberia was that the latter had such profitable services to Latin America. With economies in that region growing fast, like those of Brazil and Argentina, there seemed valid grounds for assuming this would benefit Iberia as the leading European carrier to the region. This does not seem to be happening with Walsh admitting that Iberia’s long-haul profits do not cover the losses of its short-haul operation. Worst still is that IAG has not yet finalised a plan to bring about the “fundamental structural change” needed.
This is what analysts warned about when BA was still at the negotiation stage of the merger with Iberia – that Iberia’s often woeful performance made it a bad match for the slick and highly-professional BA operation. This is now what seems to be happening. It all makes the restructuring plan, due at the end of next month, more essential than ever or IAG could slide into a similar position to Air France KLM.