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International Consolidated Airlines Group (LSE:IAG) was out of the gate at 0700 this morning with its 3rd Quarter results. One minute later the company announced that it was rushing subsidiary Iberian Airlines into the hanger for major repairs. Given that the IAG share price was up 4.30 pence to 172.30 at 45 minutes past noon, investors have apparently responded positively to both announcements. When the company is performing well overall, but one ‘engine’ is malfunctioning, the plane becomes much more difficult to fly. IAG’s plan is to get Iberian in the air again as soon as possible.
Iberia in Critical Need of Repair
There are several tell-tale words and phrases within the report that indicate the seriousness of Iberia’s condition, e.g., “record losses”, “financial decline”, “fight for survival”, “tough decisions”, “radical action”, “systemic problems”, “critical” and “time is not on our side.”
The good news is that IAG is addressing the problem in an aggressive style that UK banks might give some thought to considering. IAG CEO Willie Welsh diagnosed the root cause of Iberia’s urgent need for repair saying, “For too long the narrow self-interest of the few has damaged the long term future for the many.”
Iberia’s CEO Rafael Sánchez-Lozano stressed that “Iberia is in a fight for survival. We have to make tough decisions now. Unless we take radical action to introduce permanent structural change, the future is bleak.” In one of the most straightforward and honest statements that the market has heard from any company in a long time, Sánchez-Lozano said, “The Spanish and European economic crisis has impacted on Iberia, but its problems are systemic and pre-date the country’s current difficulties.”
**** Let’s pause for a moment and give this man a standing ovation.****
In order to stop the bleeding, which is currently €1.7 million per day, the fleet will be downsized by 25 aircraft, non-profitable third party maintenance operations will be discontinued, total network capacity will be cut by 15% to focus on the most profitable routes, 4,500 jobs will be eliminated, intense union negotiations will commence, and and the company will implement “the introduction of permanent salary adjustments to achieve a competitive and flexible cost base.”
BANKERS, ARE YOU PAYING ATTENTION?
IAG 3rd Quarter Vital Signs
3rd Quarter operating profit is nominal at €270 million.
Nine-month passenger revenue is up 12.7%. Passenger unit revenue is up by 9.1% and volume increase is up 3.3%
A healthy €286 million 9-month operating profit at British Airways has kept the company flying high against the loss of €262 million at Iberian. Or, looking at the other side of the coin, Iberia has substantially reduced the profitability of IAG.
Prognosis
Given the advanced repair techniques the company is using, the airline has a fighting chance. Repair is expected to be complete by mid-2013, following which IAG is expected to pronounce that Iberian is ready to reach cruising altitude and fly at top speed again.
