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IAG may be struggling to lift Iberia out of the doldrums, but its consideration of Vueling is so mired in its recent failures that it is hard to see how IAG will make a success out of any purchase.

Updated: IAG has indeed decided to go ahead with an offer to buy 54.15 percent of Spanish low-cost carrier Vueling it does not own: The offer will be €7.00 ($9) per ordinary share of Vueling with the total cost of acquiring 54.15 per cent anticipated to be €113 million ($144 million). It will be funded using internal IAG resources.

Original story: British Airways parent IAG SA will consider making an offer for shares of Barcelona-based Vueling Airlines SA that it doesn’t already own as Europe’s third- biggest carrier seeks to stem losses in its Spanish business.

The board of IAG, as International Consolidated Airlines Group SA is known, will discuss an approach for the discount operator — which has a market value of 164 million euros ($209 million) — at a meeting today, it said in a statement.

“No decision to make an offer has yet been reached nor, accordingly, on any of its potential terms, including in particular the price,” London-based IAG said yesterday, adding that further announcements will be made in due course.

IAG, which owns 45.85 percent of Vueling, may detail plans for Spain at an investor day tomorrow coinciding with an earnings release. Chief Executive Officer Willie Walsh has moved some short-haul flights to a new unit, Iberia Express, to bring down the break-even point with less-generous contracts and said in August that operations were under further review.

Vueling, Spain’s No. 2 carrier behind Iberia, could be combined with the Express business, though that would risk inflating costs at a company that has thrived under CEO Alex Cruz, said analyst John Strickland at JLS Consulting in London.

‘Slippery slope’

“Their independence has been the reason for their success,” he said. “I can see the logic for IAG, but if Vueling is going to retain its strengths they have to avoid the slippery slope of gravitating upwards in cost and losing their fleet-of-foot.”

Vueling stock fell 4.4 percent to 5.47 euros yesterday, paring gains this year to 41 percent. Shares of the carrier, where traffic has surged following the collapse of Barcelona- based rival Spanair SA, were suspended following the close.

IAG fell 3.1 percent to 169.50 pence and is up 15 percent this year for a value of 3.14 billion pounds ($5 billion).

Spanish unions are braced for “widespread job losses” at Iberia, an official at the Sepla pilots union said yesterday by telephone before the IAG statement. Three main labor groups have signed an agreement to resist cuts to the payroll unless linked to a plan to restore traffic lost to Iberia Express, Vueling and Iberia affiliate Air Nostrum, the official said.

Traffic dropped 3.7 percent at Iberia last month versus a year earlier as Spain’s sovereign-debt crisis continued to sap demand for travel. The figure at British Airways, with which the Spanish arm merged in 2011, jumped 6.2 percent, IAG said Nov. 6.

Tough target

IAG may struggle to achieve a target of ending losses at Iberia by the end of 2013 or early 2014, Oddo & Cie analyst Yan Derocles said. Shortfalls at the Spanish unit mean the group may record a “small operating loss” for the full year, IAG said in August after earlier forecasting that it would break even.

“It’s a transition between the new and old Iberia,” Derocles said before the Vueling announcement. “They need a combination of job cuts and productivity gains. The track record of BA and IAG management is quite good in terms of cost-cuts.”

Air France-KLM Group and Deutsche Lufthansa AG, Europe’s two biggest carriers, last week posted earnings that beat estimates after reaping the benefits of moves to eliminate thousands of jobs. Air France said Oct. 31 it plans to cut 1,300 posts at its Dutch unit in addition to 5,000 already going from the payroll at the larger French business. Lufthansa is scraping 3,500 administrative positions and as many as 1,000 in catering.

With assistance from Kari Lundgren in London. Editors: Chad Thomas, Heather Harris. To contact the reporters on this story: Chris Jasper in London at [email protected]; Manuel Baigorri in Madrid at [email protected]. To contact the editors responsible for this story: Chad Thomas at [email protected]; Kenneth Wong at [email protected]

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Tags: british airways, space, vueling

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