BA Parent’s $20 Billion Airbus Deal Backs Spanish Turnaround

British Airways parent IAG SA’s plan to purchase $20 billion worth of Airbus SAS short-haul planes underscores Chief Executive Officer’s Willie Walsh’s drive to end losses in Spain and back discount unit Vueling SA.

The accord for as many as 220 A320s, including the Neo version with new engines due from 2015, includes 62 firm orders for Vueling, London-based IAG said in a statement late yesterday. The firm orders are valued at $5.4 billion at list price, although airlines typically get steep discounts.

IAG, as International Consolidated Airlines Group SA is known, is exiting unviable short-haul routes and cutting more than 3,100 jobs at unprofitable Spanish arm Iberia in a bid to achieve 1.6 billion euros ($2 billion) in operating profit in 2015. The company acquired full control of Vueling in April for 123.5 million euros, extending its efforts to secure a Spanish turnaround by expanding the Barcelona-based no-frills unit.

“This order is the first indication of IAG’s intentions to use Vueling as a direct lower-cost replacement for short haul services currently provided by Iberia,” Donal O’Neill, a Dublin-based analyst at Goodbody Stockbrokers who rates IAG “buy,” said in a note. Vueling could even be used to replace some of BA’s less-profitable short-haul routes at London Gatwick airport, a secondary base to its Heathrow hub, he said.

IAG shares traded little changed at 314.10 pence as of 8:49 a.m. in London, valuing the airline at 5.82 billion pounds ($9 billion) following a 70 percent gain this year.

Merger Benefits

“Vueling has managed to successfully expand its business profitably by targeting both growth markets and those areas where weak competitors are reducing capacity,” IAG Chief Executive Officer Willie Walsh said in the statement. The order also highlights the benefits of consolidation, said Walsh, who formed IAG from a merger of BA and Iberia in January, 2011.

Vueling, which had been looking at placing a single-aisle order before its takeover, will get its planes between 2015 and 2020, replacing some of its 70 existing A320s while expanding the overall fleet. The firm order is split between 30 classic A320s and 32 Neos, with no engines selected so far.

The discount unit contributed 27 million euros to IAG’s operating profit in the second quarter, a period when BA made 247 million euros and Madrid-based Iberia lost 35 million euros.

IAG’s decision in favor of Airbus, the incumbent short-haul plane provider for Vueling and IAG, is a setback for Bombardier Inc., which was looking to sell its CSeries narrow-body to the discount carrier. The Canadian manufacturer has struggled to win orders against competition from Airbus and Boeing Co., whose 737 also failed to fin favor with IAG.

Fleet Plans

Europe’s third-largest airline group is already adding new long-haul planes such as the Boeing 787 and Airbus A350, as well as the A380 superjumbo at British Airways, to cut costs by replacing less fuel efficient jets.

Yesterday’s commitment includes options for 58 more Airbus narrow-bodies for Vueling, with the additional 100 neo options for possible use at British Airways, Iberia or Vueling.

IAG said the firm order for Vueling needs shareholder approval later this year, when investors will also be asked to back a previous deal to acquire additional 787s and A350s.

The airline, the first in the world to operate both the 787 and A380, will take a total of 12 superjumbos by 2016, plus 42 Dreamliners by 2021. The carrier will also take 18 Airbus A350-1000 wide-bodies between 2017 and 2023, and is examining Boeing’s re-engined 777X.

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