IAG CEO: Low-cost Long-haul Market 'Not Fully Exploited'

 - August 7, 2018, 11:13 AM

British Airways is increasing its capacity growth plans for the year, based largely on progress made by Rolls-Royce in addressing the durability issue affecting the intermediate pressure compressor blades in the Trent 1000 Package C and B engines that power Boeing 787-8s and -9s. BA is the only airline of International Airlines Group (IAG) to increase its 2018 capacity guidance. Aer Lingus, Iberia, and Vueling are all trimming their growth plans, said IAG CEO Willie Walsh on August 3 as the company released first-half results.

In its interim management statement, IAG also said it received “engine compensation credits from a manufacturer,” although it did not mention Rolls-Royce by name´╗┐. Walsh in the past has been explicit he wanted compensation from the British engine manufacturer for the grounding of BA’s 787s due to the Trent 1000 troubles. BA operates twenty-six 787s.

“All of the [IAG] airlines have cut down their annual growth, with exception of BA, and that is principally around the now expected utilization on the 787s, which is now better than we had originally thought given the progress that Rolls-Royce has made on the engine issue,” Walsh said during an earnings call with analysts.

Overall, IAG reduced its capacity growth plan measured in available seat kilometers (ASK) for 2018 to 6.5 percent, against 6.8 percent reported during the presentation of its first-quarter results, “as we go through the year looking for opportunities on a tactical basis to eliminate some of the growth that will help to improve the underlying financial performance,” Walsh explained. The most prominent reduction of ASK growth is at Barcelona-based LCC (low-cost carrier) Vueling, down to 9.2 percent from 13.3 percent. BA will grow capacity this year with 2.8 percent improvement, slightly above the 2.6 percent anticipated in May.

IAG’s operating profit for the six months to June 30 was €1.1 billion ($1.28 billion) before exceptional items, up 17.4 percent on the year-ago period. Operating profits and margins improved at all airlines except Vueling, which ended in the red after suffering €20 million disruption costs in the second quarter due to strikes by French ATC.

Walsh said there was nothing to say at the moment on a possible buy of Norwegian, vowing that IAG “will not be a long-term shareholder unless we acquire it.” IAG bought a 4.6 percent stake in the Oslo-based LCC earlier this year with a view to initiating a conversation on a takeover, he said, conceding that no discussions have taken place since April.

“I think, particularly in the low-cost long-haul [market], there is a profitable and not yet fully exploited segment that we intend to be a significant player in. The difference between our attitude and approach [with Norwegian] is that we believe we can do that profitably and generate the returns that we have set for all our airlines,” Walsh noted. Meanwhile, IAG continues expanding organically in the long-haul low-cost market with its LEVEL brand, which has had its own dedicated CEO since last month. LEVEL launched operations from Barcelona in June last year and started flights from Paris Orly to Montreal and Guadeloupe in July, with two new routes commencing next month to Newark and Martinique.  

He reiterated concerns over the planned £14 billion ($18.14 billion) expansion and third runway at London Heathrow. “We support the expansion, but not at any cost and without any increase of passenger charges,” he said, casting doubt on the ability of Heathrow’s current management to cut costs. “It’s not in their DNA,” he said. “If they were to buy aircraft, they would be buying them at list prices.”