IAG To Make Drastic Cuts at Iberia

 - November 12, 2012, 12:10 PM
IAG’s plan to cull 25 airplanes from Iberia’s fleet includes the removal of 20 short-haul types. (Photo: Iberia)

A “comprehensive” plan unveiled Friday by International Airlines Group (IAG) to save its Iberia subsidiary from financial ruin calls for the company to cut 4,500 jobs, cut network capacity next year by 15 percent and eliminate 25 airplanes from the fleet.

IAG, formed last year from the merger of British Airways and Iberia, aims to stem the Spanish carrier’s cash losses by the middle of next year and effect a “turnaround” in profitability of at least €600 million ($765 million) from 2012 levels. For the first nine months of the year IAG recorded an operating loss before tax of €286 million ($365 million), compared with a €355 million ($453 million) profit during the same period last year. IAG attributes the poor financial performance primarily to Iberia.

IAG has set a deadline of January 31 to reach concessionary agreement with its unions, from which it wants permanent cuts to employee salaries “to achieve a competitive and flexible cost base.” The company has threatened deeper cuts and a more radical reduction in the size and scale of Iberia’s operations if it fails to meet the deadline.

“Iberia is in a fight for survival,” warned the Spanish airline’s CEO, Rafael Sánchez-Lozano. “It is unprofitable in all its markets. We have to take tough decisions now to save the company and return it to profitability.”

Noting that the airline hemorrhages €1.7 million ($2.2 million) every day, Lozano further stressed the urgency of acting quickly, particularly in its negotiations with its trade unions. “Time is not on our side,” he said.

Other elements of the plan include ending non-profitable third-party maintenance arrangements and retaining profitable ground handling services outside Madrid. The company also alluded to “new commercial initiatives to boost unit revenues, including increased ancillary sales and website redesign.”

Commenting on the announcement, PricewaterhouseCoopers head of airlines Roger de Peyracave suggested that IAG’s predicament reflects a common failure among unprofitable airlines. “The airline sector was showing signs of distress even at the start of the year, particularly those in the ‘squeezed middle’–those lacking clear market differentiation,” he said. “For carriers to remain successful, they will have to continue to focus on achieving significant cost reduction, harness an appropriate return on capital and see how they can achieve step changes in mature markets as well as tapping into new ones.”