Iberia Strays Off Course

In the struggle by Europe's airlines to plot a new course for deregulated skies, Spain's Iberia seemed to have a rare advantage: a coherent flight plan. Its strategy has been to fortify its "natural" market--Latin America--and funnel traffic between there and Europe through Madrid. But four years and three South American acquisitions later, Iberia is lost. Its Latin strategy has dragged it deep into the red (chart) and could ground the airline--if militant unions continue to block the wage and job cuts necessary for a planned $1 billion state bailout.

The Spanish carrier's woes are worrisome news for Europe's airlines. Many see state-owned Iberia as the archetype of Europe's protected, high-cost airlines that can no longer rely on national pride to justify their existence. Even if Iberia squirms out of its current cash crunch--as it probably will--many analysts think it's doomed to be swallowed up in a large merger or else shrink down into a small regional airline, with just a few long-haul niche routes.

BELLWETHER? A similar future may await other carriers that have lost their way, experts say, including Alitalia, Greece's Olympic, Belgium's Sabena, Portugal's TAP, and possibly Air France. Like Iberia, many suffer from small home markets and are based on Europe's fringe, where efficient hubs are difficult to build. These carriers have something else in common: All rely on state aid that never seems to solve their problems. Under European Union rules, Iberia got $930 million in "last-time" aid in 1992. Now, it wants more. Brussels indicates it may change the rules and agree. That may unleash a flood of new subsidy requests.

If Iberia gets further subsidies, its executives think they can still pull off their Latin American strategy. "Our philosophy is to be a big global company, not a regional airline," insists one official. The problem in South America, he says, was strictly one of timing: Starting in 1990, the Spanish bought stakes in carriers that were being privatized--in Argentina, Chile, and Venezuela. That cost $120 million. But partly because of management miscues, Iberia had to pump in cash to restructure and keep the carriers aloft. Total investment so far: $700 million.

Those three Latin airlines have just begun making operating profits, says Iberia. And they've enabled the Spanish carrier to boost its share of the Europe-Latin America market from 27% to 34%. Iberia thinks that slice will continue to grow.

For some experts, though, the Latin strategy was flawed from the start. "Trying to grow your way out of problems is a half-baked solution," claims Keith McMullan, managing director of London consultants Avmark International Ltd. Instead, he thinks Iberia should have put its own house in order first by slashing costs, which he says are among Europe's highest.

Iberia has tried to do so--and is trying again. After eliminating 5,000 jobs two years ago, it wants to cut an additional 2,100 from its workforce of 24,000. And it's asking employees to take 15% pay cuts. Without such moves, there's no chance Brussels will approve more subsidies. But workers called two 24-hour strikes in November to protest. The Spanish pilots' union blames management for wasting money in South America and for inefficient policies back home. The carrier flies nine types of aircraft, pilots note, boosting training and maintenance costs.

SPANISH PRIDE. On that front, too, new top brass that took over a year ago is trying to slim down. Chairman Javier Salas hopes to pare Iberia's fleet down to three plane types. He's canceling orders for new aircraft and is raising cash by selling planes and leasing them back. That's a blow: Insiders say Iberia has been "proud" to own 97% of its fleet vs. Europe's average of less than 50%. But that policy has helped swell debt to $1.6 billion, up from $139 million in 1989.

Spanish pride may be in for a still bigger fall. If losses continue, Iberia could be forced to sell assets, including Aviaco, a domestic airline, and Viva Air, a no-frills European carrier. If it can't make money in South America, it might dump its partners there--although industry sources can't see buyers lining up. Like it or not, times have changed for Iberia and Europe's other flag carriers. In the future, they may fly their proud national flags closer to home.

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