It’s no secret that Iberia - which merged with BA last year to form the aforementioned IAG - has been in a bit of a pickle for some time. It’s hardly the only airline thus afflicted either, what with rising fuel costs and competition from the likes of EasyjJet and Ryanair. But this morning’s announcement reveals exactly how much tough love is going to be required to get the Spanish flag carrier back on the straight and level.
The depth of Iberia’s woes seem to have taken even IAG’s bosses by surprise. It is apparently burning up 1.7m Euros a day and is being blamed for the 30% drop in IAG’s Q3 group profits reported today, and for what is shaping up to be a full-year loss in the order of 120m Euros for the group. In the nine months to September 30, IAG has lost 169m Euros compared to a profit for the same period last year of 355m Euros. Hence Walsh’s dramatic ‘fight for survival’ rhetoric this morning.
So what’s the big plan? Cutting those 4,500 jobs for a start - that’s a whopping 20% of the workforce and is unlikely to go down well in Madrid, where Iberia pilots have already been protesting about lower salaries paid by budget arm Iberia Express. Walsh - who is well known as a hard-nosed turnaround specialist - has already hinted that a failure to agree terms by January could lead to more job losses. But the need to cut labour costs by an estimated 300m Euros means that something’s gotta give.
Iberia’s 156-strong fleet is also being cut by 25 aircraft, and less-profitable routes are being pared too. But many analysts reckon that the airline, which has been losing money for three years on the trot, could struggle to show an operating profit before 2015.
Those familiar with the IAG CEO’s modus operandi will recognise this approach. Walsh is certainly not one to let a good crisis go to waste and there is an element here of creating the ‘burning platform’ of turnaround textbook fame. Reform and cost-cutting at Iberia were always going to be part of the agenda - indeed such synergies are the driving force behind the creation of IAG in the first place, and its subsequent acquisition and consolidation strategy.
As boss of BA from 2005 - 2011, Walsh built up a war chest of cash to spend buying up ‘distressed airlines’ in need of restructuring, and purchases to date include not only Iberia but also BMI and a 55% stake in rival Spanish low cost carrier Vueling (which as of today it is turning into a 100% stake). Even if things aren’t going entirely according to plan A, you certainly cannot accuse him of a lack of energy or persistence in pursuing this strategy.
The markets welcomed news of the cost-cutting plan - share rose 1.2% making IAG the third largest firm in the FTSE100. Chocks away!