Five years ago Willie Walsh set out on a mission to reinvent the airline merger as he brought two fiercely independent international flag carriers – British Airways and Iberia – into single ownership under the International Airlines Group umbrella.
Since setting up shop in offices on London Heathrow’s northside in January 2011, Walsh and his team have already achieved much of what they set out to do. The group has expanded its portfolio through tactical take-overs and acquisitions of “like-minded” players as the IAG chief executive worked through his objectives to create one of the world’s leading airline clusters.
“We’ve demonstrated that a proper structure is the foundation to success. And that may sound very simple but I think a lot of people have got that bit wrong,” Walsh says.
The group didn’t have to wait long to start its expansion, as BMI came up for grabs in 2012 and was absorbed into BA to bolster its position at Heathrow. In 2013, IAG converted Iberia’s minority shareholding in Vueling to full ownership, adding a low-cost airline to the group’s armoury. And last year Aer Lingus joined in a strategic move that brings a strong transatlantic presence, a good position at Heathrow and high growth potential.
Walsh declares himself satisfied with IAG’s progress so far and sees more potential opportunities for the group as industry consolidation plays out. He points to the decisions taken during its conception about how the business would be set up as being key to its success.
“This was something we debated a lot while we were negotiating BA and Iberia,” he says.
And the fact IAG came late to the European airline merger party was turned to its advantage: “It helped us that we followed on from others in terms of consolidation, so we were able to look at some of the positives and some of the negatives.
“The structure means we’ve been able to bring Vueling into the group and it is sat side-by-side with BA and Iberia and has been able to continue to develop as a low-cost carrier. We’ve always challenged this view that it is very difficult to see how a low-cost carrier that is a subsidiary of a full-service or traditional airline can operate successfully.”
Walsh also says the way IAG is wired enables businesses to function independently and avoid being disrupted by another’s local issues.
“While Iberia was going through the depths of a crisis, the other parts of the group were able to focus on their opportunities,” he says. “We’ve been able to keep them all focused in their own areas and that is unique in terms of the consolidation around Europe.”
Given Walsh’s intentions for the group, it was no surprise that when Flightglobal sat down with him five years ago, “scale-able” was his buzzword when explaining his vision. That ideal was adhered to last year when IAG was successful in its bid for Aer Lingus.
Walsh knew the Irish carrier well, having headed the airline from 2001 to 2005. He hinted to Airline Business in 2011 that it was on the IAG radar saying, while he didn’t see Aer Lingus as a potential acquisition candidate, “things could change”. And they did.
“It was always on ‘the list’ for obvious reasons – it was an airline we knew well and worked with, it was a strong brand, it had a good position on the transatlantic, it had key slot positions at Heathrow, it was profitable and we thought there was great potential to expand – particularly on the transatlantic,” says Walsh.
But the timing of IAG’s move was driven by two factors – one of which was the need to resolve a key issue around Aer Lingus’s responsibility for its pensions deficit.
“I’d always been clear from my history in the airline that this was not an issue... but I was always reluctant to look at Aer Lingus because of the questions surrounding it. Given the scale of the pensions deficit in BA, I didn’t want to take on another one.”
As IAG prepared to bid in 2014, it decided to wait for Aer Lingus to complete the process of securing shareholder approval for the resolution of its pension deficit. But the timing of the bid was ultimately driven by news that Aer Lingus’s long-standing chief executive, Christoph Mueller, was to depart.
That offered a bidding window in mid-December 2014 when Walsh approached the Aer Lingus chairman and the rest is history.
AER LINGUS SUCCESSION
Aer Lingus finance chief Stephen Kavanagh succeeded Mueller as chief executive in March last year, an appointment Walsh says he is extremely pleased with but claims no influence on. Walsh, who has taken on the interim role of Aer Lingus chairman to support the new CEO during his initial time at the helm, rates Kavanagh highly from his time at the airline when he was a rising star in network planning.
“It was absolutely clear to me that he was the right choice to be CEO, and while it was not my decision, I did make my views known to the Aer Lingus board that if it wasn’t going to be Stephen then I would be giving him a job at IAG, because I didn’t think he’d stay if he didn’t get the CEO’s role.”
IAG refers to its new Irish gateway as “the accidental hub”, explains Walsh: “Dublin was never set out or designed to be a hub, it just so happened that people recognised there’s a real advantage in ‘hubbing’ over Dublin and that’s given us the confidence to expand the transatlantic network.”
He highlights recent figures from Dublin airport that show a rapid rise in transatlantic transfer traffic in the first quarter. The number of passengers transferring from the UK and mainland Europe to the USA increased by 68%, and by 72% in the other direction.
Aer Lingus announced three new US destinations last year – Hartford, Newark and Los Angeles – and Walsh expects there will be more transatlantic expansion from Dublin to come. “We’ll probably add more capacity on some of the existing services and potentially another destination in 2017, and I think we’ll do the same again in 2018.”
Walsh says while this strategy was already in play, the IAG connection brings Aer Lingus into IAG’s joint business with American Airlines on the Atlantic, giving it the point-of-sale presence at the European end and on the US side. “We saw that as adding more feed into the Dublin operation of Aer Lingus.”
He adds that IAG is not looking to divert traffic from Heathrow over Dublin, but points out that the Irish capital offers far more connections to the UK than BA’s Heathrow hub, serving 21 points. “That’s clearly an opportunity for us to serve the UK market [from the transatlantic] in areas that BA can’t because of slots at Heathrow.”
Aer Lingus holds orders for 11 Airbus widebodies – two A330-300s and nine A350-900s – and Walsh says that IAG does not plan to redeploy any of that capacity elsewhere within the group. But Aer Lingus had to switch its A350 order to the -900 when Airbus suspended development of the -800 variant and Walsh questions whether the larger model could be a step too far for the airline.
“We felt that the -900 was maybe too big an aircraft for Aer Lingus, and that the A330 is a better aircraft [for it]. We’ve looked at [the A330neo], but given that Aer Lingus doesn’t really have what I’d call a long-haul network, the fuel advantage is marginal compared with the A330ceo.”
Aer Lingus’s nine A350s, due from 2018, add to an existing order the group holds for 16 A350-900s for Iberia and 18 -1000s for BA, and Walsh says the plan for the Aer Lingus order is “something we’re discussing at the moment”.
“We have flexibility within the fleet plans. What we have done is accelerated Aer Lingus’s transatlantic expansion and we’re using A330s for that,” he says.
While IAG has been on the acquisition path since its inception, it has found itself the target of a similar move from the Middle East. Qatar Airways’ acquisition of a 10% stake in 2014 was no surprise: Walsh and Qatar’s group CEO Akbar Al Baker have long been mutual admirers and there are close ties between BA and the Doha-based flag carrier, both of whom are members of the Oneworld alliance.
But while negotiations continue about a wider joint venture, Walsh plays down the significance of Qatar’s stake in relation to a commercial relationship with IAG.
“The shareholding is separate from our willingness to work with them. Their decision to invest in IAG was a financial decision on their part. They liked what we are doing and it’s proven to be a good investment – I got a nice note from my good friend Akbar to thank me for the dividend.”
IAG and Qatar Airways already have a tie-up in the cargo business which Walsh says is working well and discussions continue about extending this to the passenger side. As well as codeshares, potential areas of co-operation that have been discussed include joint procurement of aircraft and the leasing of aircraft, as well as working together on engine maintenance.
“I’m optimistic that we’ll be able to conclude a deal, which will then be subject to approval from competition regulators,” he says.
In October, BA is switching its “tag” service from Heathrow to Doha, which operates via Bahrain, to a direct flight. Walsh says some “air-service issues” need to be resolved to allow the two partners to fully implement their JV plans.
Walsh says that there is already “a very liberal bilateral” in place between the UK and Qatar, but “to do some of the things we want to do we have to ensure we both have all of the required air service agreements, because you can’t codeshare to countries where you don’t have a bilateral”.
Al Baker’s delight at the dividend payment is understandable. In its last financial year, IAG’s operating profit increased 65% to €2.3 billion ($2.64 billion), while profit after tax rose by more than 50% to €1.5 billion. This came shortly after Walsh announced IAG increased its financial objectives for the next five years including a return on invested capital of 15% and operating profit margin of 12-15%. The previous targets had been 12% plus and between 10-14%, respectively.
Walsh is confident that this range is achievable despite the unpredictable influence of variables such as oil price, competitive moves, trading conditions and labour issues.
“There’s no reason why this industry can’t generate reasonable levels of profitability through the cycle and it is now much more mature and realistic than it used to be,” he says, pointing out that the industry’s traditional “cyclical strategic thinking” is now a thing of the past.
“We’ve demonstrated we can make money in a high-oil-price environment and that we can respond quicker and better to external shocks. It is recognised now that this is an industry funded by shareholders and those shareholders expect a return.”
Walsh also believes that today’s airline workforces are “rational people” and it’s only when employees don’t believe their business faces a genuine threat that they behave irrationally. He singles out Air France as an example of this.
“I think there’s a strong belief in Air France that the French government will always step in, it doesn’t matter what happens, and therefore they don’t need to change,” he says. “I think that’s madness, because Air France is getting smaller and smaller and less and less relevant in an industry where size does have significance.”
SIZING THE OPPORTUNITY
Size matters in aircraft too, and Walsh says another advantage of the IAG structure is that it could enable small fleets of Airbus A380s to be allocated within the group’s airlines outside BA. The UK carrier was due to receive the 12th and final A380 from its current order during May and Walsh “can make a case for a few more”.
He adds: “One of the issues we’re always conscious of is flexibility in the event of an economic downturn. The A380 wouldn’t work on every part of our network, so from that point of view we’d be less ambitious [in fleet size] than Emirates would be.”
As well as possibly expanding BA’s London Heathrow-based A380 fleet, according to Walsh, “where it can work for us, because of the group structure we have, we could see a case for a couple of A380s in Iberia. You might even make a case for an A380 in Aer Lingus.”
He adds that the Iberia and Aer Lingus idea is a “what if” scenario and is a feasible option as the group “is putting into place a common specification before we then do the common procurement so that you don’t have to keep changing the configuration of the aircraft”.
The Vueling acquisition delivered IAG a stronger presence in the European low-cost market, but Walsh says it is the group’s structure that enables the Spanish airline to flourish on its own terms among legacy peers, without the risk of “contaminating” its cost base and business approach.
“They have to have flexibility and low cost and we’ve ensured that the other airlines only interact with them where there’s clear value and they can benefit from lower cost through access to our scale or to additional revenues by feeding traffic. And it’s managed through IAG.”
Vueling’s entry into the group also provided Walsh with a simple solution to the BA leadership succession, with chief executive Alex Cruz taking over from Keith Williams during April.
The IAG leadership programme begins at the smaller divisions like Iberia Express, which has provided the training ground for the CEOs of Iberia and Vueling – Luis Gallego and Javier Sanchez-Prieto.
“Iberia Express is like the Under-21 team. We put them in there, we give them a challenging job and if they succeed we bring them into the first team and stick them on the bench,” says Walsh.
“I appointed Alex because of his leadership qualities – it’s not all about his experience at Vueling. He’s a data-driven person and that’s something BA will benefit from,” says Walsh, who emphasises that Cruz is “not going to turn BA into a low-cost carrier”.
Walsh says that the appointment of Cruz, along with former IAG cargo chief Steve Gunning as finance chief, “will be very important to BA delivering on the next stage of plans and targets that we have for it”.
This is a record fourth appearance on the cover of Airline Business for Walsh, having first been interviewed over a decade ago when at the helm of Aer Lingus and later when leading BA. He then spoke to us as he set off on the IAG adventure in 2011.
“I’ll be honest with you, when I took on the BA job in 2005 I didn’t expect to be in BA/IAG 11 years later. I did 25 years in Aer Lingus. I’m not going to do 25 years at BA/IAG,” he says.
“I’ve a 12-month rolling contract. I’m happy to stay as long as the board are happy. I’ve always made clear that if I woke up one morning and didn’t enjoy coming in to work, then I’d know it was time to finish. But I do enjoy it and I’ve no plan to retire.”
One of those former youth team players, Gallego, is someone Walsh considers as his potential successor. “Why couldn’t he be the CEO at IAG? Alex I’m sure would want the same.”
So with BA’s management succession in play, Iberia stabilised on the right path, and the Aer Lingus incorporation into its stride, where does Walsh see IAG’s next strategic move?
“There are lots of airlines that look interesting at the moment,” he says.
“There’s nothing we’re actively pursuing but we definitely believe there will be future opportunities for further consolidation in Europe. How we participate in that, and whether we participate in that, is the only question to be answered at this stage.”
One European airline that could come into play is low-cost carrier Norwegian – a business that Walsh openly admires. He is friends with chief executive Bjorn Kjos and has been supportive of the carrier’s efforts to secure a US foreign air carrier permit.
“I think Bjorn’s a very smart guy, the company is ambitious and growing fast. But I’m unclear in my own mind as to where it’s going. It could well be that they are trying to make themselves attractive for an acquisition but Bjorn shows no evidence of slowing down or wanting to move out.”
One market in which IAG is looking to expand its presence is China. But this will be “all about organic growth. We’re not looking to invest in a Chinese carrier,” says Walsh.
Codeshares are planned with China Eastern and China Southern. Meanwhile Iberia has accelerated the launch of its Madrid-Shanghai service from October to the end of June.
BA’s China network currently includes Beijing, Shanghai, Chengdu and Hong Kong and Walsh says IAG is “actively looking at a number of other cities in China”. These include Shenzhen, Guangzhou, Chongqing, Wuhan and Xian.
So five years into the IAG project, Walsh clearly remains as ambitious as ever as he evaluates his next moves. But every deal is purely about good business rationale – even the swoop for his former airline Aer Lingus: “Some people have said it must be a great personal satisfaction. It wasn’t, it was business satisfaction for me. You know me: no emotion.”
Source: Airline Business