News Column

IAG Continues To Reap Benefits Of Iberia Restructuring

July 31, 2014

Steve McGrath

LONDON (Alliance News) - International Consolidated Airlines Group PLC's efforts to slash costs at Spanish airline Iberia continued to pay off, as it reported a big rise in operating profit in the second quarter Thursday and said it expects a big jump in profit for the full year.

The parent of British Airways, Iberia and Spain's Vueling also moved to take capacity out of the market, after several European airlines in recent weeks warned that overcapacity was weighing on fares and hitting profits. IAG Chief Executive Willie Walsh said the airline group would reduce its planned 2014 winter season capacity by three percentage points.

IAG said all three of its airlines posted their best second quarter operating results since the financial crisis began in 2007.

The group posted an operating profit, excluding exceptional items, of EUR380 million in the three months to June 30, up from EUR245 million a year earlier, as revenue rose 6.7% to EUR5.09 billion. Its passenger unit revenue for the quarter actually fell 0.4%, but non-fuel unit costs were down 4.4%.

Its fuel unit costs for the quarter were down 9.3%, and it benefited from the dollar's weakness in this sense. At constant currencies, fuel unit costs were down 5.4%.

British Airways' operating profit was EUR332 million in the quarter, up from EUR247 million last year, while Iberia made an operating profit of EUR16 million, compared with an operating loss of EUR35 million last year. Vueling's operating profit was EUR30 million, up from EUR27 million last year.

"Iberia's restructuring continues to have a positive impact and last week Iberia signed an agreement that could lead to an additional reduction of up to 1,427 jobs. This will create new opportunities for Iberia to enhance its profitability further in the next two or three years," Walsh said in the statement.

Overall, IAG cut employee unit costs by 8.9%, or 9.5% at constant currencies, as the average number of employees was reduced by 2.4% while productivity improved by 14.0%. The improvements were driven by the addition of Vueling, the Iberia restructuring, and "efficient capacity growth" at British Airways.

Willie Walsh had dramatically cut costs at British Airways when he was boss only of that airline. When it merged with Iberia, creating IAG, he then started the same process at Iberia. He has met with stiff resistance from staff both times, but eventually prevailed. Both legacy carriers had very high costs, particularly compared with the low-cost airlines that have emerged in recent decades, and needed to bring them down to ensure survival. Vueling had a lower cost base when it was bought, and has helped the group's overall cost average.

For the first half of the year, IAG posted an operating profit before exceptional items of EUR230 million, compared with a loss of EUR33 million last year. Revenue rose to EUR9.29 billion, from EUR8.71 billion.

The company said that at current fuel prices and foreign exchange rates, it expects to improve operating profit for the whole of 2014 by at least EUR500 million from the 2013 figure of EUR770 million.

"Passenger unit revenues should remain relatively flat, with margin expansion driven by a reduction in unit costs," it said.

IAG's pretax profit for the first half was EUR155 million, compared with last year's EUR506 million loss, while it swung to a net profit of EUR96 million, compared with a EUR503 million loss. The quarterly pretax profit was EUR358 million, up from EUR164 million a year earlier, while net profit more than doubled to EUR280 million, from EUR127 million.

IAG also said Friday that it would buy new long-haul aircraft for Iberia, replacing ageing aircraft and therefore improving fuel efficiency while reducing maintenance and crew costs.

Its aid it would convert options it had for eight Airbus A350-900 aircraft into firm orders, and will also secure eight A330-200 aircraft by either converting existing options or by leasing them, depending on financial and delivery terms.

The aircraft will replace 16 A340 family aircraft in Iberia's longhaul fleet and will be delivered between 2015 and 2020.

"Iberia has taken significant steps to restructure its business and the progress made so far means that we can bring new longhaul aircraft into the airline's fleet. These orders demonstrate our commitment to make Iberia competitive," Walsh said.

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Source: Alliance News

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