The implementation of sharp reductions in capacity, cost cuts and a changed commercial focus on unit revenues are at the heart of International Airline Group's plan to revive Iberia's financial fortunes.
The Spanish carrier's troubles continued to cloud parent IAG's financial performance in the first quarter. Group operating losses widened to €278 million ($363 million), before exceptional items, compared with last year's figure of €249 million. Iberia incurred a €202 million loss for the quarter, while extra costs related to its restructuring were largely behind an additional €311 million exceptional charge it took in the quarter.
This largely stemmed from an agreement - proposed by a mediator at the end of March - which ended strike action at the carrier over proposed cuts. The deal followed two five-day stoppages.
"It has the effect of forcing us to provide an additional €265 million, and this is because of the new format of the redundancy programme which will be based much more on early retirement of the employees," explains IAG chief financial officer Enrique Dupuy. The remaining costs relate to fleet redeliveries as a result of capacity cuts.
The additional restructuring charges in this quarter come on top of a €202 million hit in the fourth quarter of last year. "We are counting on labour cost savings of somewhere in the region of €300-350 million, so it's about less than two years [for payback]," says Dupuy.
The mediator's proposals allow for up to 3,300 jobs - about 17% of the Spanish carrier's workforce - to be axed, alongside an average salary cut of 11%. It also makes provisions for a further 4% to be cut in the absence of a productivity deal. Around 1,400 staff will have left by the end of May under the scheme, with that figure rising to 80% by year-end.
"One of the very positive things the mediator did was to say that a productivity deal had to be agreed within a month, and if it wasn't, salaries could be reduced by 4%," confirms IAG chief executive Willie Walsh. As no agreement has yet been reached on productivity, Iberia has implemented this further 4% salary cut.
"Its very rare you have the situation [where] you can take the salary away while you are having the negotiations," Walsh says. "In these situations, in the past, negotiations tend to drag on for ever and with little incentive for unions to reach an agreement. But there is a big incentive for trade unions to reach agreement, because they can recover the salary we have taken away from them."
One union, pilots body SEPLA, remains to be convinced and did not sign up to the mediator's plan. Walsh though believes this will not prevent its success. "There is a difference of opinion among the lawyers in Spain. We have been advised strongly that the fact they did not sign it is not relevant and that is what the mediator said as well," he says. "We do know the pilots take the view that they are not participants, but we have reduced pilots' salaries and we are retiring pilots under the scheme, and pilots have left Iberia under the mediator's scheme."
The savings already delivered are filtering through into expectations of improving on last year's €351 million full-year operating loss. "The initial savings we are counting on are 3% unit labour cost reductions for this year for Iberia," says Dupuy, who also highlights the fuel benefits Iberia will gain from this year. "We will be seeing for 2013 a substantial material reduction in the level of Iberia losses in comparison with last year."
Capacity cuts form a big part of Iberia's restructuring plans. Last November it outlined plans to cut 25 aircraft and 15% of capacity - largely on the short and medium-haul network (see below) - as part of its restructuring. The Spanish carrier will cut its capacity 14% this year - driving an almost-2% total IAG group reduction in capacity for the year.
Iberia European cuts: June 2013 verus June 2012
Alongside the cost savings from cutting unprofitable services, Walsh sees a bigger opportunity to grow unit revenues at the carrier through this tighter capacity.
"Naturally with a reduction in capacity of 14/15%...and with discipline you are seeing in the market, you will expect to improve unit revenues. What Iberia is doing is focusing much more on unit revenue then they have done in the past."
Newly appointed Iberia chief executive Luis Gallego - whose experience at the helm of Iberia Express makes him an ideal catalyst for Iberia's restructuring, according to Dupuy - will unveil the carrier's new management team on 10 May. This will reflect the shift in commercial focus. "We've changed the commercial leadership in Iberia and they are much more focused on revenue where it is profitable rather than market share," says Walsh.
"We are very clear Iberia has a natural advantage in a number of markets and should concentrate on the markets where it is strong and has that natural advantage. But there is significant opportunity to improve its unit revenue performance by ignoring some of the very low yield traffic that it had been chasing. We are happy to take a hit on seat factor. We believe there is much better revenue through a clearer focus on revenue.
"Cost changes are a step in the right direction, but there is a gap, and a gap that can be closed by revenue improvement, particularly the focus on unit revenue improvement versus what was in our original plan - which was effectively flat unit revenue through the period."
Walsh is encouraged by the improved capacity discipline being seen in lots of markets in Europe, and sees this evident in Spain given its economic difficulties. "If you look at the Spanish market, both Ryanair and EasyJet have cut back capacity significantly and we have cut back capacity," he says. "You are not seeing anyone trying to fill the capacity reduction there. People are much more focused on unit revenue and yield - then capacity and market share - than they had been."
He points to the reductions at Madrid Barajas airport - traffic was down 9% in 2012 on an 18% cut in available seats per week. "We were only a part of that. It also reflects capacity reduction by other players in the market," says Walsh.
One airport in Spain where there has been growth is Barcelona El Prat. While traffic was only up just over 2% in 2012 on 5% less capacity, this came despite the collapse of one of the country's main carriers, Spanair. Walsh points to the role IAG's now majority-owned carrier Vueling has played in driving growth. "This reflects how efficient Vueling is," he says. "Spanair collapsed at the end of January 2012 so it shows how quickly Vueling was able to move to capture the demand, and there was real demand in Barcelona. That is one of the things about Vueling. It is fleet of foot."
Vueling will operate as a standalone company within IAG and Walsh reiterates his confidence in the carrier's strategy, which will grow its network to 100 destinations from Barcelona this summer. "Vueling has opportunities to grow the business right across Europe. The plan Vueling has, we believe, is robust and strong, and we see no reason to try to redirect their growth plans," he says.
Walsh is similarly pleased with the development of its new short-haul Spanish operation Iberia Express. The carrier, launched last March as part of its efforts to tackle Iberia's short-haul challenges out of Madrid, carried just short of 3 million passengers in its first year of operation.
"Iberia Express has been a fantastic success and demonstrates what can and should be done in the short and medium-haul market. In the absence of being able to expand Iberia Express, there will be no expansion of the Iberia short and medium-haul operation. And quite the opposite, there will be reduction in Iberia short-haul, and we have already seen that," says Walsh.
Further growth of the unit, however, is clouded over by continued uncertainty around labour arbitration that has dogged the carrier. "We will wait to see how successful we are in our appeal," he says, adding: "These restrictions end at the end of 2014, so they should be seen as a temporary restriction on what we can do with Iberia Express."