Spanish market recovery remains distant prospect

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Early signs indicate that rock bottom has already been hit in the Spanish airline market but buoyancy remains a long way off, with analysts warning that it is still too early for optimism.

Struggling Spanish flag carrier Iberia showed signs of improvement in the third quarter, posting an operating profit before exceptional items of €74 million ($100 million) compared to just over the break-even mark in the same three-month period of 2012.

However, IAG chief executive Willie Walsh said during a third-quarter earnings conference call that a significant amount of restructuring work remains to be done to get Iberia where it needs to be.

“It’s a great start, but there’s a hell of a lot of work to do,” says Walsh. “It’s good to see they have been able to deliver an operating profit in the quarter, but there is a lot of work to do there.”

Earlier this year the situation in the Spanish airline market was dire, with the country’s economy ailing and carriers slashing capacity left, right and centre. While there is “not much improvement on the demand side” today, according to Liberum Capital transport analyst Gerald Khoo, “things might have stopped getting worse”.

Spain’s economy may be showing signs of stabilising, says Khoo, “but nobody is calling it a convincing recovery as yet”. He adds: “I don’t sense that airlines see any obvious short-term opportunities for growth.”

Having said that, one Spanish carrier that has been continuing on a growth trajectory is Vueling, which was brought into the IAG fold earlier this year. However, as Khoo points out, the Barcelona-based carrier is “increasingly looking further afield for growth”, indicating that demand in its home market remains weak.

Vueling recently unveiled plans to open another foreign base in Brussels next summer and additional bases outside Spain look set to follow, with Walsh saying: “Don’t be surprised if you see further Vueling bases in the months ahead.”

While IAG focuses its efforts on restructuring Iberia and strengthening its budget arm, Iberia Express, plucky underdog Air Europa has been quietly bolstering its Spain-South America network. The SkyTeam carrier has been snapping up routes abandoned by Iberia and has recently added Montevideo, Uruguay to its network and revealed plans to serve Cordoba in Argentina.

But Walsh warns Air Europa to expect strong competition when Iberia gets back on its feet. “With the changes we are implementing and that we are negotiating, we will have a much better cost base than Air Europa, which will allow Iberia to recover lost ground,” says the IAG boss. “I wish Air Europa well, but they need to recognise Iberia is going to come back at them when we have restructured our business.”