Professional aviators admit they can never resist an opportunity to study another pilot’s landing. So the view from the headquarters of International Airlines Group (IAG), which overlooks the touchdown point of London Heathrow’s northern runway, could prove a distraction for the new entity’s chief executive Willie Walsh, who once flew Boeing 737s for Aer Lingus.
However, while Walsh acknowledges the pace at IAG is different to the job he held until a month ago, running subsidiary British Airways, he does not expect to have time to gaze at arriving jets as he and his management team set to work ensuring the merger with Iberia delivers on its promises.
“The way we see IAG impacting on BA and Iberia is partly about co-ordination, but also, where necessary, control,” he says. “This will ensure that what the two airlines do – and if we scale it what the other airlines do – is in the best interests of the single economic entity and the single set of shareholders.”
The aim is straightforward. To have a fully co-ordinated network that maximises passenger flow between BA and Iberia, focused on feeding Iberia’s Madrid network into Latin America and the BA routes to North America and Asia from Heathrow.
“Both the operating airlines can have plans on network development. What we will do is overlay an IAG plan – what is in the best interest for our shareholders,” says Walsh. “That way, we can get the most efficient network possible.”
IAG began trading on the London and Madrid stock exchanges on 24 January. That same day, Walsh and an initial team of 50 staff – many of whom transferred from the subsidiaries – took to new desks on a single floor at Heathrow’s World Business Centre offices.
While it was always planned that the IAG headquarters would be in London, Walsh says that early on he favoured having them within BA’s existing Waterside headquarters.
“But I quickly took the point made by [former Iberia chairman and chief executive] Fernando Conte, who was concerned that might be perceived too much as a BA takeover rather than a merger.”
The head office is in a relatively new office block nestled among the various airport hotels by Heathrow’s north-eastern perimeter road. Built on the site of the airport’s original 1940s tented terminal area, it is appropriate that the IAG team is directly overlooking the very spot from which the world’s first jet passenger service set off, operated by predecessor BOAC, in May 1952.
It was no coincidence the inaugural jet service flew from Heathrow – or London Airport as it was then – it has always been a prime point on every major airline’s network. However, during the next 60 years Heathrow has become a victim of its own success, forcing its resident airline to think tactically about how it could access growth markets as the options to expand from its home airport dried up.
“Heathrow’s full and, while we’re in a growth industry, those growth markets are not really served by BA or by connections from Heathrow,” Walsh says. “The problem we faced at BA was how to tap into key growth markets like Asia and Latin America.”
Any glimmer of hope that further significant growth could be unlocked at Heathrow via the construction of a controversial third runway diminished last year, after a change of UK government.
“Iberia’s Latin American network is second to none, so by consolidating BA and Iberia we can cover key markets and allow Iberia to strengthen Madrid Barajas as the natural hub for Europe to Latin America, while BA turns its attention more to Asia,” says Walsh.
“It fits very well. We can focus on Latin America from Madrid and on Asia from Heathrow, while maintaining the very strong network BA has into North America,” he adds.
BA and Iberia have been courting since the last century, with each holding reciprocal minority stakes for over a decade. The two airlines, partners in the oneworld alliance for a similar length of time, have operated a joint business between London and Madrid for about six years. “Iberia was, almost by default, a natural partner,” says Walsh.
The mission statement for phase one of IAG is fairly clear-cut, to achieve €400 million ($541 million) in annual synergies by year five, one-third from revenue and two-thirds from cost savings.
However, in parallel the plan is to grow the group through the addition of more “like-minded” partners, which is why “scale-able” is the buzzword chief executive Willie Walsh repeatedly uses when explaining his vision for IAG.
It was the need for this core capability that has shaped the group’s structure and led to its somewhat unimaginative name, as well as what stopped Walsh achieving his original ambition of remaining in charge at BA when he became boss of IAG.
“Right from the start of negotiations between BA and Iberia, the tie-up was seen as the starting point, rather than the end-game,” he says. “One of the challenges I set when we were discussing the structure was: ‘does it work when we scale it?’
“Early on, my view was that I would become group chief executive and continue in that role at BA, but that was quite rightly challenged because it clearly doesn’t work when we scale the business.”
This also drove the decision to adopt a neutral name for the parent company, which Walsh sees as important if more partners are to be enticed into the fold. “We’ve recognised the significant value of the brands and we want to be able to retain the brands of potential future partners without creating any conflict,” he says.
“Rather than wipe out or destroy brands, we’re looking to facilitate further investment in them. That’s very important to many people – to a lot of airlines, to a lot of countries and the people who work for those airlines.”
Walsh says that while some may view such an ambition as “crazy”, he points out that there are countless potential mergers which have not happened because of concerns about brand or nationality.
While tipping his hat to the model adopted by rival airline group Air France-KLM to deliver strong synergies from consolidation, Walsh says the one advantage of being late to the party means potential pitfalls can be avoided. “It always helps following others as you can see what they’ve done well and the potential problems that might arise,” he says.
He points out that IAG differs from Europe’s other big groups in the way the airlines sit together.
“In the case of Lufthansa, it’s very clear that it is the ‘Lufthansa group’, so everything is taken over by Lufthansa. In Air France-KLM, it’s clear that Jean-Cyril Spinetta, and now Pierre-Henri Gourgeon, head Air France and the group,” he adds.
So the two IAG airlines will continue to co-exist on an equal footing, each headed by their own chief executive – BA by Keith Williams and Iberia by Rafael Sánchez-Lozano.
“We’re not seeking to gain synergies through creating a single airline,” Walsh says. “We recognised that while on paper you might see synergies, it is incredibly difficult and the history of aviation is littered with the failures of people who tried to combine different cultures into the same airline – even markets like the USA, where they tend to speak the same language.”
As the management structures of the parent and operating airlines crystallise, Walsh is clear he is the one in charge at IAG and that he is no longer running BA. “I think it’s going to be an easy transition,” he says. “Antonio [Vazquez – former Iberia chief executive] is non-executive chairman of IAG and he has publicly said I am running the company and that his role is chairing the board. The two operating companies will have a lot of freedom and autonomy. We wanted to ensure we had a structure that allowed them to speed up rather than slow them down.”
The synergies will be delivered through “back-office activities” that in many airlines have been outsourced, says Walsh. “As a result, there are no big labour implications and most, if not all, of the unions welcomed the merger because they recognised that it created a stronger single entity.”
Willie Walsh has been open about IAG’s intention to expand through more partnerships, but emphasises this will only be possible with airlines that share his views on consolidation. For this reason, he quickly dismisses the notion that fellow oneworld airline Qantas, with which BA had previously held merger talks, is one of the names on his famous “list” of potential IAG partners.
“I don’t believe Qantas is like-minded in its view towards consolidation at the moment. They have a different strategy. They’re happy they can access the growth in Asia through their Jetstar subsidiary,” he says.
Airlines on the IAG wishlist have all the obvious qualities: strong brands, financially sound – or can be made so – and strong positions in key markets. “We aren’t ruling out a low-cost option within the group so we’re talking about ultimately creating a multinational, multibrand organisation, which could contain a low-cost brand,” Walsh says.
Investing in a start-up is also a possibility, if such a move is seen as the right way to address a particular opportunity.
Walsh believes IAG’s constituent members have a lot to offer potential partners from high-growth markets, thanks to its strong brands and “truly global” route networks. He repeats his eagerness for IAG to create an “attractive platform” through its structure. “We can do all of the work to create a platform that can unlock synergies – a key area, for example, being the creation of a simple IT platform that others can connect to – and do it in a way that others can quickly plug into and, therefore, also unlock synergies.”
Since the decision to create IAG, Walsh says other airlines have told him they now see “an opportunity” for some form of tie-up, which would not have been considered if BA or Iberia were still in isolation.
The revelation about IAG’s “list” of potential partners has also helped stir up the debate around further consolidation.
“I’ve had quite a few people ask me if they were on our list – some in a jokey way and some in a very serious way,” he says. “Some of them, I think, were asking because there had been investors or shareholders or governments asking them whether they were on the list.”
Future investment plans
IAG’s future investment plans are unlikely to extend beyond airlines and airline-related activities such as the maintenance, repair and overhaul business, says chief executive Willie Walsh.
He is determined IAG will be at the centre of the industry’s “inevitable” shift towards further consolidation and is keeping a close eye on potential acquisition opportunities, particularly BA’s Heathrow rivals bmi and Virgin Atlantic.
“It’s no secret that we’ve been interested in bmi, but largely because of its slot position at Heathrow rather than the brand,” he says. “Similarly, when I look at Virgin, what I see are slots at Heathrow and I suspect anybody looking at Virgin sees it that way, because if it is someone from within the industry, then I don’t see that they’ll want to retain the Virgin brand, particularly a brand that is intrinsically linked to a personality.”
Pointing to the recent spat between easyJet and its high-profile shareholder Stelios Haji-Ioannou, Walsh questions the benefit of acquiring a brand associated with someone who “some might describe as a ‘loose cannon’. Why would you want to acquire a business that came with some problems like that?
“Virgin hasn’t got an exciting fleet. What it has got are slots and a network at Heathrow, so if they conclude that what they’re selling is, in effect, their slots at Heathrow, then we’d be very interested,” he adds.
As things stand, Walsh rules out a move for BA’s operating partner Aer Lingus, particularly given its two high-profile shareholders – the Irish government and Ryanair boss Michael O’Leary, who hold 25% and nearly 30% stakes respectively.
“I’ve always expressed the view that Aer Lingus didn’t need the support of the Irish government. In fact the stake is a potential drag on the business,” says Walsh, who also does not believe O’Leary has shown any signs of wishing to sell his stake. “Aer Lingus is a good partner providing good Heathrow feed, but at the moment I don’t see them as a potential [acquisition] candidate, although things could change.”
Walsh believes further consolidation is the only way to ensure the long-term health and sustainability of the global airline industry, given its poor track record in recent years.
“With all of the challenges we face, everything points towards consolidation. I found the figure mentioned by [IATA director general] Giovanni Bisignani in his speech at last year’s AGM fascinating, when he said that there were 1,057 airlines in the world and over half of those had been created over the last 10 years – in an industry that lost more money during that period than ever before.
“Clearly that’s not sustainable so something has to change. My view is that in Europe you’ll have three large airline groups – IAG, Air France-KLM and Lufthansa – but you’ll also have Ryanair, easyJet and Air Berlin and they will probably continue to consolidate.
“In the USA there has been consolidation and there’s probably going to be more, so you’ll have, say, five large airlines there. The same will happen in other regions.
“Will we have 1,057 airlines in five years’ time? I think the industry would be a hell of a lot better if there was half that number.”
Walsh then points out a runway intersection that he regularly used when flying Aer Lingus 737s from Heathrow. “I’d always request an intersection take-off to jump the queue,” he says.
No doubt he sees IAG as his fast-track into the global consolidation mix.
London management team
International Airlines Group’s head office at London Heathrow is open plan, with Willie Walsh operating from a desk tucked in one corner, which reflects his no-nonsense style of management.
The group also has a small presence in Madrid, where it uses an old building within Iberia’s maintenance centre on the edge of Barajas airport. This is where IAG’s non-executive chairman and former Iberia chief executive Antonio Vazquez will have his main office. Walsh will also have a base there.
Similarly, Vazquez has space available to him in IAG’s London headquarters “but he doesn’t have an office”, quips Walsh.
Vazquez, who had been chairman and chief executive of Iberia for 18 months before switching to the role of non-executive chairman at IAG, says the merger will lead to a transformation at the Spanish airline.
“Iberia will undergo quite a significant change. It will have more routes, more frequencies and, from a management point of view, a much broader and more flexible way of operating because its commercial activities will be run jointly with British Airways,” Walsh says. “But from the aircraft operating point of view, I don’t think it will be that much different.”
Like BA, Iberia is locked in battle with part of its labour force as it looks to restructure the cost base of its short-haul feeder network.
“We have agreed to have a new model of operation with every trade union except the pilots,” says Vazquez. If agreement cannot be reached, Iberia may be forced to outsource its entire short-haul business, he warns.
IAG is the world’s sixth largest airline group by revenue (excluding FedEx Express) and traffic (Airline Business 2010 world rankings), but its management team is unlikely to number more than 100 people, says Walsh. “This will depend how much we centralise. We’re still discussing what is the most appropriate and what will maximise the synergies.”
One recent change was the decision to have more central control of the frequent-flyer programmes than previously planned.
The majority of IAG’s team has come from the subsidiaries, including Walsh’s strategy guru at BA, Robert Boyle. There have been some external appointments, such Andrew Barker who is head of investor relations and has previously worked for easyJet. “We’re also looking outside for a chief information officer,” says Walsh.
“The IAG team is a resource available to the subsidiary airlines. Similarly, should we need additional resource, then we’ll pull some out of the operating companies,” he says.