International Airlines Group, the merged British Airways and Iberian airlines, revealed it is preparing for a Spanish exit from the eurozone as it announced that huge and “unsustainable” losses from Iberia have dragged the parent company into the red.
Willlie Walsh, the chief executive of IAG, said there were “opportunities” as well as risks in a possible Spanish exit. While the broader economic downsides would be immense, he believed the airline’s preparation and “prudent management” would give it a competitive advantage.
IAG has established a eurozone crisis management group that meets every two weeks to plan for shocks to the business. That now includes a “Spain euro exit roadmap project” that is drawing up contingency plans for the group, which is highly exposed to the crisis through Iberia’s Madrid base.
While Walsh said he did not believe a euro break-up was imminent, but a new devalued Spanish currency would have some advantage for IAG. “The real risk is a global recession – it wouldn’t be confined to Spain. But the expectation would be that it would have a currency that makes our cost base in Spain much more competitive and makes Spain much more attractive for tourists.”
IAG has pulled most of its euro deposits out of Spanish banks, a precaution it had already taken in Ireland and Italy.
Restructuring and labor unrest
Walsh on Friday promised further restructuring of Iberia to cut its “unsustainable” losses, which wiped out a pre-tax profit of €13m (£10m) at BA to plunge the parent group into an overall pre-tax loss of €253m in the first six months of 2012. In the first half of 2011 the group made profits of 88m euros. The IAG boss said he was engaged in “a re-evaluation of all aspects of the business to deliver competitive costs”. He warned this would inevitably mean further job losses at Iberia.
Redundancies would probably spark more industrial action at the Spanish airline, which has cancelled hundreds of flights already this year in a dispute with the pilots’ union. But Walsh said: “Everybody in Spain and Iberia recognises the challenge – we’re being completely open. A strike is not going to do anything to improve the situation and certainly not to lower our determination. I’d like to think it will be avoided but it’s not something that will in any way reduce the scale of the change, it may perversely increase the need for it. This is work that has got to be done – we can’t sustain the losses we’re seeing at Iberia.”
However IAG said synergies from the deal will still reap rewards by 2015, citing Iberia’s move into Heathrow’s Terminal 5 this year as one way in which operating costs were being cut.
Walsh said the low-cost subsidiary he established in Spain, Iberia Express, had made a profit in June, its third full month of operation.
Overall, IAG’s revenue was up 11.5% for the first but the fuel bill rose 25.1% to €314m. For the last three months, losses narrowed to €4m, a figure that included €50m of losses from the recently acquired bmi airline that will be cut back or integrated into BA over the year.