British Airways-Iberia Profit Doubles Following Merger

International Consolidated Airlines Group SA said profit doubled in the first year of its formation via a merger of British Airways and Spain’s Iberia, spurred by demand for business travel on BA’s North Atlantic routes.

IAG had an operating profit of 485 million euros ($653 million) last year, compared with a pro forma 225 million euros in 2010, the London-based company said in a statement today. That surge masked losses at Iberia, which has its hub in Madrid.

Corporate traffic on money-spinning routes to the U.S. has held up even as European economies contract, while IAG also plans to add more services to emerging markets from London’s Heathrow airport after completing the $275 million takeover of Deutsche Lufthansa AG’s BMI unit to add operating slots.

“It’s strong in the right places, London and the trans-Atlantic,” said Douglas McNeill, a transport analyst at Charles Stanley in London who recommends buying IAG stock. “Iberia is clearly the less well performing part of the partnership and there is lots of work that needs to be done.”

IAG rose as much as 4 percent and was trading 2.5 percent higher at 167.30 pence as of 10:26 a.m. in London, valuing the company at 3.12 billion pounds ($5 billion).

Iberia Shortfall

The share price has slumped 41 percent since the merger amid concern about the European debt crisis and fuel expenses. It’s up 14 percent so far this year, compared with a 17 percent advance for the seven-member Bloomberg EMEA Airlines Index.

Iberia weighed on earnings, posting an operating loss of 61 million euros for 2011 versus a 592 million-euro profit at BA.

While British Airways is benefiting from a strong Atlantic market, Iberia is being hurt by the euro-crisis and competition from discount airlines and high-speed trains, Chief Executive Officer Willie Walsh said, adding that with the Spanish economy likely to remain weak for years the situation must be addressed.

“Structural costs at Iberia are too high and unacceptable, and that’s being tackled,” he said on a conference call with journalists. “The challenges are similar to the ones that we have faced in the past with BA, so there is nothing new here.”

A new unit, Iberia Express, is slated to begin operations on March 25, IAG Chairman Antonio Vazquez said last month, with the aim of lowering the cost base for short-haul flights. The plan prompted strikes by pilots opposed to revised contracts.

Cool on India

Walsh said he’s focused on completing the BMI purchase, for which IAG is “confident” of receiving regulatory approval, and is not in discussions over any other deal. The CEO said there are currently no prospects of a move in India, where IAG has been linked with a bid for a stake in Kingfisher Airlines Ltd.

“We’re not spending time looking at India because the situation doesn’t warrant any discussion by us at this stage,” he said. Overseas airlines are currently unable to invest in the country’s carriers, though a ministerial panel last month recommended allowing stakes of as much as 49 percent.

IAG is watching the situation at AMR Corp., parent of U.S. ally American Airlines, following the company’s filing for bankruptcy protection and reckons its restructuring plan to be “very credible,” Walsh said, adding that an equity tie-up is not on the agenda.

“We are not looking to invest in American and they are not looking for investment,” he said. “But we are working with them very closely. There are so many possibilities. At this stage we don’t see anything that is giving us cause for concern.”

Jumbo Rethink

Overall revenue increased 10 percent to 16.3 billion euros last year, including pro forma sales for the period prior to Jan. 24, when the merger was initiated. Fuel costs jumped 30 percent. Analysts had forecast an operating profit before one-time items of 494 million euros, based on 11 estimates.

IAG’s passenger traffic advanced 7.2 percent during the year, with North American routes logging the biggest gain at 12 percent. The increase was accentuated by disruption in 2010 caused by a cabin-crew strike and air-space closures following a volcanic eruption in Iceland.

While cost and revenue enhancements from the merger reached 74 million euros, more than the 64 million euros targeted, U.K. airport tax is weighing on margins, Walsh said, and IAG will cut the number of jobs to be created this year by about 50 percent and postpone restoring a Boeing Co. 747 jumbo jet to service.

Higher fuel costs, weaker European markets and Spanish industrial action over the new Iberia operation are likely to lead to a decline in first-half operating profit, the company said, with cost pressures easing through the second half.

    Before it's here, it's on the Bloomberg Terminal.