By Mark Pilling in Madrid

As he approaches two years at the head of Iberia, Fernando Conte wants to take the Spanish carrier to the next level with plans to acquire in Latin America and to see new members join oneworld

When it comes to publicity, Fernando Conte is a shy man. Whereas his predecessor, the ebullient Xabier de Irala, took a deliberately high profile both at home and abroad, Conte is content to stay in the background – at least for now. But his stated aim to buy into a Latin American carrier, his strong backing for airline consolidation and his prediction that the oneworld alliance, of which Iberia is a member, could add new members in Asia, Latin America and eastern Europe this year, show he shares the same global aspirations as de Irala.

The fact that Conte shuns the limelight that a high-profile airline chairman inevitably attracts is nothing to do with a lack of confidence: the articulate Spaniard is simply happier letting the performance of his airline do the talking. And his steady stewardship of Iberia since he took over in June 2003 is evidence enough that the carrier is on course to see through a transformation in fortunes that de Irala started almost a decade ago.

That transformation has seen Iberia go from loss-making, state-owned basket case in the mid-1990s to a successful privatisation in April 2001. With eight straight years of profit behind it and relative financial stability secured, Conte describes his job as "continuous improvement" with the aim of achieving "profitable growth". Such outwardly benign statements belie the tough task ahead. The main financial restructuring may be mostly in place, but now comes the equally tough task of altering the company's corporate culture for ever. Along the way, that means creating a business with a cost base for its short- and medium-haul operations that can virtually match its European low-cost competition. By the end of its current three-year Director's plan, which runs until the end of 2005, Conte believes it will not be far off.

"The challenge towards the future is to include in the culture of the company the concern about the customer experience," he says. "During the first six years since the decision about privatisation was taken, this company focused a lot on financial performance, which is crucial. This need to be financially sound is now embedded in Iberia's culture.

"The second phase is that we are not in a monopoly situation, so customers will not come to us if we don't offer the right product and service at the right price. That's the area we are focusing on at this point – beyond the pure strategic decisions of how to grow, where to grow, and so on."

Changing the mindset of Iberia's employees, a high percentage of whom have substantial seniority, is not easy, but has to happen, says Conte. "The employees need to know that the environment we have today is not the one that we had 20 years ago. People are uncomfortable realising that things have changed dramatically within our sector."

Getting the message across is made harder because Iberia has made steady, if unspectacular, profits throughout the industry crisis, he adds. "That creates some sort of a gap where people believe you are in a secure position, but that's not true at all."

Pilot negotiations
To take the next step, Iberia needs to further improve employee flexibility and productivity, says Conte. These needs are top of the list in talks with the airline's main pilots' union, SEPLA, on a new contract to replace one that expired in December. While Conte appreciates the pilots' "sensible" desire for Iberia to grow, it must be linked with profitability.

"If we have the terms and conditions that allow us to grow in a profitable way, then we will do it, because we have the position to do it, the markets to do it and the financial strength to do it. But we will not do it if it is against profitability. What we have clearly demanded is more productivity," says Conte, pointing out management's aim to achieve high single-digit gains. "We want more flexibility in working conditions, giving the company the capability to change things and adapt in a fast way to the market requirements. Secondly, we want pilots to work more."

Both in the air and on the ground, Iberia has already made significant productivity improvements in the past 18 months. Its objective is to become competitive with low-cost carriers such as easyJet. Over three years, Iberia will have narrowed the cost gap from 25-30% to 10-15%, says Enrique Dupuy, chief financial officer. The main differences were a 32% gap in aircraft and crew productivity, 27% in commercial and distribution and 24% for in-flight service. The first area is being addressed by adding 4-5% more seats to its fleet, reducing the number of flight attendants for shorter flights, improving aircraft utilisation and accelerating the phase-out of its remaining four Boeing 747-200s. Elsewhere, commercial costs are falling dramatically as Iberia follows the trend of slashing travel agency commissions, while the airline is saving money by having moved, from March 2004, to a pay-on-board model for in-flight service.

These measures mean Iberia is on target to achieve a 10-12% reduction in unit costs by the end of 2005. The cost gap that remains is "one we can live with", says Dupuy. It can justify the price premium it charges by virtue of its network product, frequent-flyer programme, membership of oneworld, business travel product and brand name, he says. But Iberia is thinking of going even further. One element being considered as the carrier prepares its new three-year business plan is whether to eliminate business class on some routes and match the seating configurations of low-cost carriers.

"Today we voluntarily maintain a configuration with an 18-20% difference," says Dupuy. Eliminating business class on its Airbus A319s would enable Iberia to match the 156 seats offered by the likes of easyJet. Iberia's aircraft "densification" exercise has already increased A319 seat numbers from 122 to 132. Going to a one-class product would bring it within touching distance of low-cost carriers, he says. "This would collapse the industry myth that legacy carriers can never lower their costs to the level of low-cost carriers."

Iberia is in a position to take such strides because it started from a lower cost base than others. When benchmarked against European majors, it maintained a significant gap in unit cost terms during the 1990s, and in a like-for-like comparison still has a 10-20% advantage, says Dupuy. "Basically, we have been forced in the past to perform," he says. That was in the face of a huge charter carrier influx into Spain. Holiday flights once represented 70% of the country's incoming traffic, and it is this traffic that has been picked off by low-cost players rather than eating into Iberia's business. "This explains why we haven't been hurt so dramatically by low-cost carriers or even domestic competitors like Air Europa or Spanair," says Dupuy. Iberia has looked into setting up its own low-cost subsidiary, but has ruled out such a move, says Conte.

For the past two years, Iberia's three main markets – domestic, European and intercontinental – have all been profitable and have seen market share grow, says Conte. Short-haul markets have seen steeply declining yields, but the downward spiral is beginning to slow. In some markets, especially where there is free competition, such as that between Spain and the UK, yields are even recovering slightly. Business on UK routes should be aided by Iberia's joint venture with minority shareholder British Airways.

The two carriers became firm partners in late 1999 when BA took a 9% stake in Iberia soon after the Spanish carrier announced it was joining oneworld. At the same time, oneworld's US branch and BA's transatlantic partner, American Airlines, strengthened the alliance by buying a 1% holding in Iberia. BA and Iberia forged tight codeshare links and later applied for – and won – anti-trust immunity from Brussels for a commercial tie-up on routes between the two countries.

British Airways venture
From January, the carriers began a merged operation on London Heathrow to Barcelona and Madrid as part of a wide-ranging "balanced" profit-sharing collaboration. Conte is confident the joint venture will increase revenue for both parties, but will not give figures. From the summer, the carriers will optimise their schedules to create a more even spread of flights throughout the day between London and Spain.

BA and Iberia complement each other well, with Iberia able to tap into the UK carrier's strong Asian network, and BA exploiting Iberia's extensive Latin links. "We are basing our European strategy not only on connecting European cities with Spain, which is important, but even more important is to connect European passengers to Latin American, and that is a unique strength that we have," says Conte.

About 30% of Iberia's traffic connects to its extensive Latin network. Although the carrier is gaining market share in the Europe-Latin American market, it has temporarily lost its market leadership to the merged Air France/KLM. Their combined 20% share has overtaken Iberia's 17%, but not for long. "We will recover that pretty soon, I can assure you," says Conte, because of the carrier's many direct flights, Spain's cultural and ethic connections with the region, and the country's huge investment in the continent which matches that of the USA.

Looking beyond the organic growth Iberia expects from its European and Latin markets, Conte is reviving the carrier's strategy of buying into airlines, and studies are progressing in both continents. "Airlines are continuously discussing this issue," he says. "The only barrier that is still extending is the ownership issue and the political factors linked to that. But things are changing, and there will be changes in the next two to three years. I have a priority which starts in Latin America, but the second one is Europe."

Conte will not be specific about acquisition targets in Latin America, saying only: "We have an opportunity that we are pursuing to invest in Latin American airlines." A natural target would be Mexico, which is proving to be one of Iberia's strongest Latin markets, where the government is preparing to privatise the country's main carriers, Aeromexico and Mexicana. Another prospect is El Salvador's TACA. Iberia has just started a codeshare on TACA flights connecting Miami with Central America, replacing former Iberia services from Florida's largest airport. "TACA is an opportunity certainly, but you have a number of them," says Conte.

He will be determined to improve on Iberia's chequered history of buying into Latin airlines. During the 1990s it made disastrous investments in Aerolineas Argentinas, Chile's Ladeco and Venezuela's Viasa. It was de Irala who was instrumental in extricating the airline from mistakes that cost it over $1 billion. But Iberia's motivations were very different in those days. "You have to consider the following," says Conte. "First, the investments were done when the reasons were political and not financial or operational. Second, the investments were done in companies where the financial structure was substantially destroyed."

Acquisition strategy
Conte describes Iberia's investigations into airline acquisitions as a "systematic exercise", adding: "One of my clear views is that the airline sector is, overall, extremely fragmented to start with, especially in Europe. We have tried to solve that through things like alliances." That doesn't mean a BA/Iberia merger is a certainty, but all the right moves are being made. "We will continue this path, and unless something very special happens with either BA or Iberia, the normal thing to see is a closer relationship. Overall in Europe, things should be clarified in the three-year term," says Conte, and that includes the BA/Iberia situation.

As oneworld's BA and Iberia forge ever closer links, other carriers are being wooed to join the fold. This will be a major shift for an alliance that has had the same line-up of members for nine years. "We forecast that we will end this year with more airlines in our alliance, but we don't have the same type of goals as other alliances," says Conte, who is chairman of the alliance's governing board until June. "Oneworld is a very special alliance. We are very proud of having, in general, good companies, well-run companies and healthy companies. We have a [recruitment] process that is fairly selective. We don't open the door to every airline that is knocking. In connection with this, the oneworld spirit is to be a little bit less dependent between each other than other alliances."

In order of priority, Conte lists Asia, including either China or Japan; Latin America; and eastern Europe, including Russia, as the regions where new members will be recruited in 2005. With China Southern lining up with SkyTeam, the strongest candidates in China are Air China and China Eastern. Oneworld carriers have tended to be closer to the latter in the past, but with Cathay Pacific taking a 9.9% stake in Air China last year, that may signal a move towards oneworld. In Japan, oneworld has been courting Japan Airlines for several years. The Latin options for oneworld, in a continent where LAN is the alliance's key player, include Mexicana and TACA. The candidates in eastern Europe are fewer, with Aeroflot and CSA Czech Airlines already aligned with SkyTeam and Poland's LOT a member of Star.

As Conte plays his part in taking oneworld to the next stage, he wants Iberia to move to the next level in terms of profitability. The carrier expects a net return of over €200 million ($260 million) for 2004, but its performance needs to be improved. "Our profitability is not good enough – that's clear," he says. "We have a margin of 3-4%; it should be at least five points more." Achieving such an improvement is not an overnight task for Conte's team. However, with the right cost base, partners and service culture falling into place, Conte believes Iberia is on track to meet its target.

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Source: Airline Business