IAG’s Walsh Pledges Iberia Overhaul Following 2012 Loss

British Airways parent International Consolidated Airlines Group SA pledged to push through a plan to shrink Spanish division Iberia by 15 percent and deliver a profit rebound this year following a group-wide loss in 2012.

Iberia, where workers are staging strikes over as many as 3,807 job cuts, “must adapt to survive,” IAG Chief Executive Officer Willie Walsh said today. Unions engaged in non-binding mediation talks have until March 12 to reach a deal, he said.

Europe’s third-largest carrier had an operating loss of 23 million euros ($30 million) in 2012, excluding one-time items, versus earnings of 485 million euros a year earlier. While that beat estimates thanks to a 347 million-euro profit at British Airways, spurring the stock to its biggest gain since July 30, the result was undermined by Iberia’s 351 million-euro loss.

“This is all about the core unacceptable performance of Iberia which must be tackled in a permanent and structural way,” Walsh said on a conference call. Losses at the unit, where the Irishman is seeking a 600 million-euro earnings turnaround by 2015, go “well beyond” Spain’s economic woes, he said.

Profit Target

Shares of London-based IAG rose as much as 6.8 percent to

236.70 pence and were trading at 233.20 pence as of 10:12 a.m. in the U.K. capital. The stock has added 26 percent this year, valuing the group at 4.33 billion pounds ($6.6 billion).

That compares with a 15 percent gain at Air France-KLM Group, Europe’s biggest airline, which last week posted a 300 million-euro full-year operating loss.

“We see Willie Walsh winning the battle on driving the required turnaround,” James Hollins, an analyst at Investec in London with a “buy” recommendation on the stock, said in a note to investors. IAG had been expected to post an 88 million-euro loss, based on seven estimates in a Bloomberg News survey.

IAG said today it’s expecting an operating result this year that will beat 2011’s 485 million-euro profit, excluding any further Iberia-related hits from additional restructuring that Walsh said is under consideration. The company booked a 202 million-euro restructuring cost against the Madrid-based unit in 2012, plus a 343 million-euro impairment charge.

Express Gains

Walsh said that a lower figure of 3,147 given for firings is the total that might be viable if linked to productivity gains and other measures, and he declined to say if the figure represents a minimum acceptable level of cuts. Strikes at Iberia, which commenced last week and continue next month, are meanwhile costing the airline about 3 million euros a day.

The Spanish overhaul includes the transfer of some domestic and short-haul flights to Iberia Express, which was established last year with less-generous employee contracts and posted a profit for 2012. That “stunning” performance “shows what can be done with the right focus,” according to the CEO.

IAG has also made a bid for the 54 percent of Barcelona-based Vueling Airlines SA it doesn’t already own in a further move to lower costs in the country. Vueling almost tripled its net income to 28.3 million euros in 2012 as the passenger total climbed 20 percent to 14.8 million, it said yesterday.

IAG’s revenue rose 11 percent to 18.1 billion euros in 2012 after passenger traffic, or the number of customers times the distance flown, gained 4.4 percent, with a jump of 7.7 percent at British Airways versus a 3.1 percent contraction at Iberia.

BMI Boost

Excluding the purchase of BMI from Germany’s Deutsche Lufthansa AG on April 20, which added money-spinning flights at BA’s London Heathrow hub, company-wide traffic rose 2.6 percent. The passenger total increased 5.6 percent to 54.6 million.

Savings from the 2011 merger of British Airways and Iberia which formed IAG reached 313 million euros last year, beating a target of 225 million euros. Still, revenue and cost synergies alone are not enough, Walsh said, and must “go hand in hand with permanent structural change.”

British Airways will seek to boost margins on key routes this year as it adds the Boeing Co. 787 Dreamliner and the Airbus SAS A380 superjumbo, phasing out less efficient planes.

Dreamliner deliveries, due from May, will likely be delayed as the manufacturer tries to fix a battery fault that grounded the fleet on Jan. 16, Walsh said, adding that Boeing 767s will remain in service if necessary, with no network impact. “I believe Boeing will resolve the technical issues,” he said.

Plans for the A380 remain on track, with an announcement imminent on destinations to be served by the new flagship.

BA also began offering hand-luggage only tickets last week with a fare discount of 9 pounds to 15 pounds, available to five destinations from London’s Gatwick airport. The step, which consumer groups said amounts to charging for checked bags, will help IAG compete with discount airlines such as EasyJet Plc.

Sustained budget uncertainty in the U.S. is a concern, the CEO said, and while the planned merger of IAG’s partner American Airlines with US Airways Group Inc. is a positive, benefits will not accrue this year.