IAG Bids for Discount Carrier Vueling to End Spain Losses

British Airways parent IAG SA (IAG) offered to buy outstanding shares of Spanish discount carrier Vueling Airlines SA (VLG) for 113 million euros ($144 million) as Europe’s third-biggest carrier seeks to bolster its ailing Iberia unit.

The approach values Barcelona-based Vueling at 7 euros a share, according to a statement from IAG, which already owns 45.85 percent of the smaller carrier’s stock. That’s 1.53 euros or 28 percent above the closing price yesterday.

IAG Chief Executive Officer Willie Walsh has already moved some Spanish flights to a new unit, Iberia Express, in an effort to bring down the break-even point with less-generous contracts. Unions said today that a takeover of Vueling could be linked to a plan to cut 6,000 Spanish jobs that may be announced tomorrow.

“With its leading position in Barcelona, European growth strategy and low cost base, Vueling has much to offer,” Walsh said today. “It has significantly increased capacity while remaining profitable, despite the Spanish economic slowdown.”

Integrating Vueling will give IAG a low-cost platform and should boost earnings from year one, according to the statement. The offer should be completed next spring, and Walsh said the unit would be run as a separate operating company, retaining the current management team led by CEO Alex Cruz.

‘Unattractive’

Shares of Vueling rose 1.38 euros, or 25 percent, to 6.85 euros at the close of trading in Madrid. IAG, as International Consolidated Airlines Group SA is known, dropped 0.9 percent to 168 pence in London, where the company is based.

The bid will probably be sufficient to persuade Vueling investors to sell, according to Francisco Salvador, a Madrid- based strategist at FGA/MG Valores.

“There may be people who are disappointed with the price,” he said. “It’s reasonable if you take into account current conditions and that IAG already owns more than 45 percent of the stock. However, if you look at Vueling’s potential and expect the market to recover, then it’s relatively unattractive.”

Combining Vueling -- Spain’s second-biggest carrier after Iberia -- with the Express business would risk inflating costs at a company that has thrived under Cruz, said analyst John Strickland at JLS Consulting in London.

‘Slippery Slope’

“Their independence has been the reason for their success,” he said. “I can see the logic for IAG, but if Vueling is going to retain its strengths they have to avoid the slippery slope of gravitating upwards in cost and losing their fleet-of-foot.”

Vueling had gained 41 percent this year even before the IAG offer, with the shares surging following a jump in traffic after the collapse of Barcelona-based rival Spanair SA.

IAG, which has advanced 15 percent this year, valuing the company at 3.13 billion pounds ($5 billion), will hold an investor briefing on its strategy at London’s Heathrow airport tomorrow, spokeswoman Lorena Monsalves said today.

Spanish unions are anticipating “widespread job losses” at Iberia, an official at the Sepla pilots union said yesterday by telephone before the IAG statement. Three main labor groups have signed an agreement to resist cuts to the payroll unless linked to a plan to restore traffic lost to Iberia Express, Vueling and Iberia affiliate Air Nostrum, the official said.

Pay, Disposals

As many as 5,200 ground workers, 850 cabin crew and 350 pilots may be fired, the UGT general workers union estimates. The labor group is also bracing for a 5 percent pay cut and the sale of engineering, ground-handling and maintenance activities.

An Iberia official declined to comment on job cuts today, adding that the situation should become clear tomorrow.

Traffic dropped 3.7 percent at Iberia last month versus a year earlier as Spain’s sovereign-debt crisis continued to sap demand for travel. The figure at British Airways, with which the Spanish arm merged in 2011, jumped 6.2 percent, IAG said Nov. 6.

“The BA side of the equation is working very well, but Iberia has problems, not only macro-economic, but the perennial problem at legacy carriers of short-haul losses and low-cost competition,” Strickland said. Walsh could announce route cuts, as well as “significant” job losses, he added.

Vueling posted a nine-month pretax profit of 59 million euros and has assets of 805 million euros. IAG reports earnings for the period tomorrow after slumping to a 253 million-euro operating loss in the first half, with a 13 million-euro profit at BA and a 263 million-euros loss at Iberia, including items.

Tough Task

IAG may struggle to achieve a target of ending losses at Iberia by the end of 2013 or early 2014, Oddo & Cie analyst Yan Derocles said. Shortfalls at the Spanish unit mean the group may record a “small operating loss” for the full year, IAG said in August after earlier forecasting that it would break even.

“It’s a transition between the new and old Iberia,” Derocles said before the Vueling announcement. “They need a combination of job cuts and productivity gains. The track record of BA and IAG management is quite good in terms of cost-cuts.”

Air France-KLM Group (AF) and Deutsche Lufthansa AG (LHA), Europe’s two biggest carriers, last week posted earnings that beat estimates after reaping the benefits of moves to eliminate thousands of jobs. Air France said Oct. 31 it plans to cut 1,300 posts at its Dutch unit in addition to 5,000 already going from the payroll at the larger French business. Lufthansa is scraping 3,500 administrative positions and as many as 1,000 in catering.

SAS Group, the parent of Scandinavia Airlines, said today it will delay a third-quarter earnings report until Nov. 12 as it seeks to complete the renegotiation of credit facilities. Shares of the carrier, which said cost cuts and asset disposals are part of those talks, fell as much as 2.4 percent.

To contact the reporters on this story: Chris Jasper in London at cjasper@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net

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