British Airways Parent Turns Profitable on Iberia Revamp

Photographer: Matthew Lloyd/Bloomberg

A British Airways aircraft, operated by International Consolidated Airlines Group SA's (IAG), stands in a service bay on the dockside at London City Airport in this aerial photograph in London. Close

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Photographer: Matthew Lloyd/Bloomberg

A British Airways aircraft, operated by International Consolidated Airlines Group SA's (IAG), stands in a service bay on the dockside at London City Airport in this aerial photograph in London.

British Airways parent IAG SA (IAG) posted a profit last year as North American routes led an earnings surge at the U.K. business and a recovery plan took hold at the group’s Spanish Iberia unit.

IAG had an operating profit before one-time items of 770 million euros ($1.1 billion) in 2013, versus a 23 million-euro year-earlier loss, the London-based company said today in a statement. Analysts had predicted earnings of 773 million euros, the average of 17 estimates in a Bloomberg survey.

Chief Executive Office Willie Walsh, already eliminating 3,000 jobs and cutting Iberia’s worst-performing routes, has advanced his turnaround strategy in recent weeks by securing productivity deals from pilots and cabin crew. IAG is making good progress toward a 1.8 billion-euro operating profit by 2015, he said today, though 2014 sales growth will be muted.

“There’s been a strong financial recovery,” Walsh said on a conference call. “Iberia has made huge progress on cost control as its restructuring takes shape.” The CEO added that the Spanish economy remains a drag on earnings, with little immediate prospect of a significant recovery in demand.

Shares of International Consolidated Airlines Group SA, as IAG is formally known, traded 10.90 pence or 2.4 percent lower at 440.90 pence as of 9:37 a.m. in London.

BA Boost

The stock has gained 9.8 percent this year, giving a market value of 8.96 billion pounds ($15 billion). That follows a jump of 120 percent in 2013 that constituted the best performance on Britain’s benchmark FTSE-100 Index.

“Some people were probably expecting more after the union agreements,” said Donal O’Neill, an analyst at Goodbody Stockbrokers in Dublin who has a “buy” recommendation on IAG shares. “There are lots of catalysts left.”

BA’s operating profit surged 73 percent to 651 million pounds last year, when it began operating the Airbus Group NV (AIR) A380 superjumbo and Boeing Co.’s all-composite 787 Dreamliner. Barcelona-based discount carrier Vueling SA, acquired in April, added 137 million euros, while Iberia trimmed its operating loss to 166 million euros from 351 million euros in 2012.

“These are solid results,” Oliver Sleath, a London-based analyst at Barclays Plc. “Hopefully we will see some growth at Iberia this summer, although IAG still needs to finalize the business plans and get the union deals ratified.”

‘Steady’

Group revenue advanced 3.1 percent to 18.7 billion euros last year, while fuel costs fell 2.5 percent. The company said it will make “steady progress” toward its 2015 earnings goal this year, with cost cuts helping to widen margins on “relatively flat” growth in unit revenue.

Iberia remains set to turn profitable in the current 12 months, while a 6 percent increase in capacity at British Airways should spur unit cost reductions there, Walsh added.

Still, with the seating boost the highest since 2008, when the financial crisis hit, the unit faces “a bumpier” summer that may “dampen profit momentum,” London-based RBC Capital Markets analyst Damian Brewer said in a note. Competition may be particulary fierce in premium markets as Air France-KLM Group (AF) and Deutsche Lufthansa AG (LHA) add new cabin products, he said.

IAG posted a fourth-quarter operating profit of 113 million euros, recovering from a 40 million-euro year-earlier loss. BA earnings doubled to 92 million pounds, Vueling had a 2 million-euro profit and Iberia cut its loss to 5 million euros.

Headcount

Iberia pared more than 2,500 jobs during the year through voluntary departures as part of its restructuring, with the final figure contingent on the pending accords with unions.

IAG has ordered A350 long-range jets for British Airways, with delivery positions also secured for Iberia, provided that the turnaround plan succeeds, Walsh has said.

Iberia cabin crew have agreed in principal to more flexible working in return for reduced pay cuts, the unit said Feb. 25, matching an accord between the carrier and its pilot union.

While progress so far has been positive, there is “still work to do,” Walsh said, with the settlements to be approved by staff and talks with ground-handling workers continuing.

Once the deals have been sealed IAG can turn to exploiting Iberia’s strength on Latin American routes that spurred the merger with BA in the first place, said John Strickland, director at JLS Consulting Ltd., an advisory firm in London.

Walsh said he has no imminent plans to resume dividend payments, though IAG’s board will examine the issue further following discussions with shareholders.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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