IAG sees recovery signs at Spanish carrier

International Airlines Group said the revamp of its Spanish carrier Iberia was starting to bear fruit as the group swung to a quarterly profit, sending its shares to an all-time high.

IAG, Europe’s third-biggest airline by market value, has spent around €700 million on restructuring Iberia, which reduced losses for the first time in almost three years in the second quarter.

The Spanish airline became unprofitable in all markets, including long-haul, following its merger with British Airways (BA) in 2011.

Iberia has been hit by competition from low-cost rivals and high-speed trains, labour disputes and a recession that has left a quarter of Spaniards out of work.

"Iberia has started to turn the corner," IAG chief executive Willie Walsh told reporters. "It is starting to see the benefits of cuts to costs and capacity but there's still a long way to go."

Full-service carriers such as BA and Germany's Lufthansa have slashed jobs and shelved growth plans as they grapple with high fuel prices, a weak economy and fight to defend market share against nimbler low-cost rivals such as Ryanair.

Lufthansa, itself in the middle of a deep revamp, today reported a 27 per cent fall in second-quarter profit after staff costs grew and demand remained weak.

IAG has cut 1,700 jobs at the Madrid-based carrier and plans to take that figure to more than 3,000 by 2014 as part of plans to focus long-haul routes which it believes can become profitable. Budget carrier Vueling, which IAG acquired earlier this year, and its Iberia Express unit, will concentrate on shorter services.

Losses at Iberia, Europe’s biggest carrier to Latin America, fell to €35 million in the three months to June 30th from 93 million in the same quarter last year.

Prior to its merger with Iberia, BA faced similar problems to the Spanish carrier and responded by cutting staff, lowering salaries and offering more competitive ticket prices. BA is now performing consistently well and second-quarter profit almost trebled to €247 million, boosted by strong transatlantic traffic out of its London Heathrow base.

Shares in IAG, which have risen 57 per cent so far this year, hit 312.30 pence in early trade, their highest level since the merged BA-Iberia listed on the stock market in January 2011. The stock was 3.9 per cent higher by 0905 GMT, valuing the group around £5.6 billion.

“We’re seeing the combined effect of a strong performance from BA and the early impact of the radical restructuring at Iberia,” said Davy analyst Stephen Furlong. “This will focus investors’ minds on IAG’s profit targets, which, judging by the progress being made at Iberia, look doable.”

Mr Walsh reiterated his view that IAG would deliver an operating profit of €1.6 billion by 2015.

IAG reported a second-quarter operating profit of €245 million, compared with a 4 million loss a year ago, and ahead of an average forecast from analysts of €163 million.

IAG said it could not provide guidance for 2013 operating profit because it was waiting for shareholder approval for its fleet replacement orders, which could have an impact on future profits.

Earlier this year Mr Walsh said IAG would report an operating result close to the €485 million profit it delivered in 2011, subject to the success of its Iberia restructuring plan.

The group plans to increase capacity by 5.2 per cent this year, helped by Vueling, which delivered a €27 million profit in the quarter.

(Reuters)