HOW’S THE MERGER OF BRITISH AIRWAYS AND IBERIA FINALLY ABLE TO CAPTURE SIGNIFICANT PROFIT IN 2013

British Airways and Spain's Iberia announced in November 2009 a preliminary agreement for a $7 billion merger to create the world's third-largest airline by revenue. The deal that was close by the end of 2010 ends the British flag carrier's long pursuit of Iberia to create an enlarged group, to able to cope with the industry's largest decline in decades. The deal will create a new holding company, which will own the two airlines. In 2011 International Airlines Group (IAG) was formed by the merger of British Airways and Iberia. The merge resulted in two airlines joining forces in all-stock transaction.

 

Since the merger Iberia kept pushing the IAG deep into the red zone. It occurred because the Spanish national carrier has battled against recession, high unemployment and competition from low-cost rivals. In May 2013 IAG unveiled a €670m pre-tax loss for the first three months of the year. Mostly it is due to €311m of exceptional charges, predominantly related to the restructuring of Iberia, which is laying off more than 3,000 staff. Iberia made operating losses of more than €200m during the period as the carrier continued to struggle against Spain’s deep recession, which has pushed unemployment to a record 27%. By contrast, BA made losses of £58m.

The huge loss margin between British Airways and Iberia showed how unbalance is the companies inside IAG. Unlike Air France and KLM which both of them are competitive in full service carriers, Iberia as a national airline is not competitive enough in the market. They are even not able to compete with Ryanair, Easyjet, and other Spanish low cost airlines. IAG have to come with bright plan to overcome this issue and some significant actions need to be done by IAG if they aim to return to the profit.

After suffering huge loss IAG executed a restructuring plan on Iberia. Iberia, whose performance has dragged on the group since the merger with BA in 2011, had made progress narrowing its loss by £153million to £137million. This has been achieved through cost-cuts, including thousands of job losses, and reducing unprofitable Latin American routes to destinations such Havana, Cuba. Iberia's restructuring saw 2,500 staff leave the airline under a voluntary redundancy program, while salaries were reduced by between 11% and 18%. As a result, Iberia's employee costs were down 14.3% for the year. The pay and productivity agreements between Iberia and its pilot and cabin crew unions that they were made are also the key to reducing the airline's costs further and providing the foundation for profitable growth. As a result Cost-cutting and productivity improvements at Iberia had contributed to a healthy share price for IAG.

IAG’s new low cost operation Vueling, which it bought last year and competes with Ryanair and EasyJet, had also performed well in Europe. Acquiring low cost Spanish carrier Vueling is a brilliant move that was done by IAG in 2013. Vueling never suffered a loss in the last 5 years and their revenue always gone up tremendously since 2008. It was brilliant acquisition since Vueling is main threat for Iberia before the company was acquired by IAG in 2013.

British Airways profit climbed up to £651million from £274million boosted by a growth in “premium” passengers as businessmen took more flights to the US and Asia as the economy recovered. In addition, more take-off and landing slots at Heathrow as a result of its BMI takeover in 2012 also helped as did more flights on bigger planes such as the A380 Superjumbo. As a result AIG turned around 2012’s €774 million (£635 million) loss to post a pre-tax profit of €227 million per 31 December 2013.

However, they will still face some issues in the future. Uncontrollable fuel costs remain a headache, whilst a reinvigorated Ryanair could eventually bring pressure to bear on the group’s new Vueling business. Moreover, uncertain economic condition is also the biggest threat for the sustainability of IAG.