Transport Airlines

IAG’s Aggressive Tactics With Iberia Are Paying Off

May 04, 2014 10:30 am

Skift Take

Walsh’s work in Spain for clues on how whoever saves Alitalia can untangle the carrier’ snug messes.

— Jason Clampet

Free Report: The Changing Business of Extended-Stay Hotels

Juan Medina  / Reuters

Iberia employees rally against IAG boss Willie Walsh last August. Juan Medina / Reuters


Barely a word could be heard over the din of whistles and wooden spoons banging against metal saucepan lids.

Madrid’s streets and the Spanish capital’s airport, Barajas, were jam-packed with thousands of Iberia workers, angry at what they saw was a British company coming in and wrecking their jobs.

For one employee, Maria Francisca Sanchez, who had worked at Spain’s national airline for 27 years, it was all too much. She wept as inside the airport protesters clashed with police. “British go home,” the strikers screamed as they furiously waved Union flags defaced with skulls and cross-bones. For the more than 3,000 Iberia staff, who had been told their jobs were on the line, the attacks were personal.

They knew exactly who was to blame. On one banner, an image of Willie Walsh, the head of Iberia’s parent company, International Airlines Group, had been spray-painted next to a Jolly Roger. Political analysts took to the airwaves to decry the merger, two years earlier, of British Airways and Iberia, which they claimed “favoured massively” BA. The date was Feb 18, 2013 and Iberia’s workforce was out in force for the first day of a five-day strike against the restructuring of the Spanish flag carrier, announced three months earlier.

IAG, which was born out of the 2011 merger, had warned that Iberia was leaking cash at a rate of €1.7m (£1.4m) a day and was facing a “fight for survival”. But the workers were unconvinced. Spain’s pilots’ union, Sepla, was calling for the merger to be dismantled, accusing IAG of using Iberia to plug a hole in BA’s pension scheme.

Walsh was also fending off the attack dogs in the UK, who were questioning the structure of the 2011 £5.3bn all-share deal, which handed shareholders in Iberia what some thought was an over-generous 44pc share of the combined group. But the hard-headed airline chief, who had just about managed to shake off the nickname “slasher Walsh”, gained during his time as chief executive of Aer Lingus, was having none of it.

Walsh had been here before. He fought the unions at the Irish airline, where he pushed through thousands of job cuts before taking a similar axe to costs at his next employer, BA. He was on familiar ground and he was not backing down. “The turnaround at Iberia will be successful,” he declared on a call in February 2013 to discuss IAG’s 2012 results, which saw the airlines group crash almost €1bn into the red.

Fast-forward 15 months, and IAG’s first-quarter results on Friday, which will cover the three months to March 31 when airlines traditionally make a loss before generating the bulk of their sales over the summer, will be a much more civilised affair.

IAG will be able to point to considerable progress at Iberia, whose future this time last year was still hanging in the balance. Is Walsh about to pull off a great restructuring trick for a third time?

Following its heavy losses in 2012, IAG announced in February that it flew back into the black in 2013, posting a pre-tax profit after exceptional items of €227m. Iberia reduced its losses to €166m, and analysts believe the airline is well on track to return to profitability this year. IAG has a targeted group operating profit of €1.8bn by the end of 2015, but Stephen Furlong, aviation analyst at Davy, believes the group could achieve closer to €2bn following several key developments.

“They had a capital markets day from a stock market perspective last November and gave guidance their medium-term target is €1.8bn operating profit for 2014. At that time it was certainly believed they would get the cabin crew and the ground staff of various unions in Iberia [to agree to a deal] but since then they have got Sepla, the pilots’ union, to agree to a deal as well.”

While the initial restructuring – or “mediation” – agreement with unions helped to tow Iberia out of the intensive care unit, the airline’s management, led since March 2013 by the well-respected Luis Gallego, needed to secure a productivity agreement to save the carrier from “slow decline”.

On Feb 13, the airline announced a deal with Sepla to improve productivity and freeze pilots’ salaries until 2015. Any pay increases after that date will be linked to the airline’s productivity. It was the first time since 2009 that Iberia’s management had succeeded in securing a labour agreement with pilots, allowing the airline to increase flying hours and reduce salaries to legal and industry-wide standards.


Some long-haul routes that were flown by crews of three pilots will now be served by two. Flying hours for pilots on short-haul routes will be raised to the legal limit of up to 100 hours in 28 days and up to 900 hours a year.

Entry level salaries for pilots will come down to about €35,500 a year, which Iberia describes as “market rates”. First officers at Iberia who agreed to transfer to Iberia Express, the airline’s lower cost subsidiary set up in 2012 to reduce costs on short-haul feeder routes, would be promoted to captain to make up for the less favourable terms and conditions.

The creation of Iberia Express had long been a bone of contention between the airline and Sepla, which branded the subsidiary “illegal”. An arbitrator was appointed to resolve the dispute and, to IAG’s frustration, a cap was placed on Iberia Express’s growth. Some analysts believed the cap was behind IAG’s decision, in November 2012, to mount a full takeover of the low cost airline Vueling.

With a limit on Iberia Express’s growth, it was believed IAG would use Vueling to fly short-haul routes previously served by Iberia – a theory the group consistently denied. Instead, Vueling, under chief executive Alex Cruz, has been expanding elsewhere in Europe, taking on Ryanair and easyJet in markets such as Belgium and Italy where other struggling national flag carriers are having to retreat.

Last month, Spain’s supreme court voided the cap on Iberia Express, allowing IAG to forge ahead with its ambitions for the subsidiary. This summer, Iberia, which suffered a capacity cut of 14pc in 2013, will open routes once again in pursuit of profitable growth. New long-haul routes include to Santo Domingo in the Dominican Republic and Montevideo in Uruguay.

Just over a year since the furious scenes in Madrid, things are once again looking up. “I really believe Iberia could in the coming years turn out to be one of the most successful of the turnaround legacy carriers in Europe, more successful than the efforts of Air France-KLM to address issues and more than we are seeing at Lufthansa,” said John Strickland, an aviation industry analyst at JLS Consulting. “It comes back to management culture. The structure and approach of IAG is different [from other carriers].”

For Gerald Khoo, analyst at Liberum Capital, one of the key turning points was the appointment of Gallego as chief executive in March last year. The modest Gallego, who was previously head of Iberia Express, has impressed with his tough negotiating skills but for also winning the respect of unions.

Khoo said: “IAG should be viewed as a sort of activist shareholder of Iberia; obviously it owns 100pc but the point is management is delegated to the Iberia management. The key change was the new CEO. You could argue that he [Gallego] has done what Willie Walsh might have done, which is effectively clear out a lot of senior management and get the business pointing in the right direction. He did so pretty quickly and with a speed that certainly caught me by surprise.”

Iberia is not out of the woods. Until the flag carrier is back in the black, the cava won’t flow in Madrid. There will also probably always be questions over whether the merger of BA and Iberia was structured correctly or whether the timing was right.

But analysts are increasingly positive about IAG’s prospects; it was the biggest riser on the FTSE 100 in 2013. When it comes to turning around troubled airlines, it appears Walsh is still on form.

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