Happy landings for IAG, but Willie Walsh warns of fuel price threat

The good news is that the BA-Iberia tie-up looks like it's come off well. Although CEO Willie Walsh says if fuel prices don't drop soon, it might not continue.

by Emma Haslett
Last Updated: 12 May 2011
Having spent most of last year battling off the twin threats of volcanic ash and angry cabin crew, former British Airways chief exec Willie Walsh has presumably been hoping for some good news about International Airlines Group, BA's tie-up with Spanish airline Iberia. And this morning, he got it: in its first quarterly results since the deal was completed in the end of January, the group reported operating losses had more than halved, from €238m (£211m) between the two airlines before the tie-up, to €102m in the three months to the end of March. That shows the two have made significant savings - but Walsh warned that unless soaring fuel prices begin to fall, those could be at risk.

According to this morning's results, the tie-up meant a 9% growth in capacity and a 5% rise in unit revenues (ie the amount it makes per seat it sells). Combined with some pretty favourable exchange rate movements, that meant revenues rose by just over 15% to €3.64bn, while pre-tax losses fell from €273m to €47m - not too shabby. In fact, Walsh said the group is now 'on track' to meet its 'synergy targets' (which presumably means the savings both airlines can make as a result of the merger) of €400m a year by the end of its fifth year.  

But Walsh warned that the 'biggest challenge facing the industry' at the moment is high oil prices, which rose from $90 a barrel at the end of last year, to peak at $120 a barrel in the last few months. At the moment, fuel accounts for 30% of IAG's operating costs, with bills soaring by €266m - almost a third - to €1.13bn in its first quarter.

To recoup that, BA managed to raise its fuel surcharges not once, but four times over the course of three months, partially thanks to a renewed interest in business class travel from the UK's champagne-swigging classes. But Iberia wasn't so lucky - over the last quarter, a large part of its capacity has come from Latin American and domestic markets, where passengers tend to put less of an emphasis on legroom...

The good news is, of course, that this is exactly the sort of thing the tie-up is designed the combat, allowing BA and Iberia to share extra revenues from, for instance, business class travellers. But analysts have pointed out that if prices continue to stay high, the airline sector's recovery could begin to look decidedly shaky.

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