British Airways Owner IAG Pares Loss on Spain Labor Deals

British Airways parent IAG SA slashed its first-quarter loss as demand surged on lucrative U.S. routes and Chief Executive Office Willie Walsh pushed through labor deals to cut costs at unprofitable Spanish unit Iberia.

Europe’s third-largest airline had an operating loss of 150 million euros ($208 million) before one-time items, down from 278 million euros a year earlier, according to a statement today. Iberia almost halved its loss, London-based IAG said.

Walsh has pushed through 3,000 job cuts at Iberia and scrapped the worst-performing routes while adding capacity at British Airways as he targets a 1.8 billion-euro operating profit by 2015. BA commenced flights to Austin, Texas, on March 3 and will deploy Airbus Group NV A380 superjumbos on flights to Washington from Sept. 1 as North Atlantic demand booms.

“We’re pleased with how our business is performing, particularly with the continued progress being made at Iberia,” Walsh said on a conference call. “Capacity on the North Atlantic is very much justified by the demand that we see and the growth that we expect this year.”

Earnings Target

Analysts had predicted a 168 million-euro quarterly loss, based on the average of six estimates. IAG said it expects to increase full-year operating profit by at least 500 million euros beyond the 770 million euros reported in 2013, while reiterating the target for next year.

Shares of IAG, as International Consolidated Airlines Group SA is known, rose as much as 9.8 pence, or 2.4 percent, and traded 1.5 percent higher at 410.7 pence as of 8:42 a.m.

The stock has added 2.3 percent this year after more than doubling in price in 2013, valuing the company at 8.37 billion pounds ($14 billion).

“The shares have pulled back from recent peaks and we see this as a good opportunity to top up holdings,” Mark Irvine-Fortescue, an analyst at Jefferies in London with a “buy” rating on the stock, said in a note. “There is upside potential, beyond current targets, from more structural changes at Iberia.” The 2014 outlook matches the consensus, he added.

Cost reductions should drive improved profit margins, with unit revenue staying “relatively flat,” IAG said. Walsh confirmed that the company aims to resume dividend payments and said discussions are ongoing at boardroom level.

A380 Outperforms

British Airways added the A380 and Boeing Co. 787 to its fleet last year, and nine superjumbos should be in service by the end of 2014, together with eight Dreamliners, the executive said. The airline is operating the A380 to cities including Johannesburg, Los Angeles and Singapore, with new routes to include Hong Kong, as well as Washington.

Walsh said he’s “very pleased” with the superjumbo. “Customers like the aircraft and it’s performing slightly ahead of what we expected,” he said. The CEO views the smaller 787 as best-suited to developing new routes, with the plane deployed on services to Chengdu, China, this week.

Air France-KLM Group and Deutsche Lufthansa AG, Europe’s biggest carriers by traffic, also narrowed their first-quarter shortfalls as turnaround plans took hold. Air France had a loss of 445 million euros and Lufthansa’s was 245 million euros.

British Airways pared its three-month operating loss to 5 million euros, from 72 million euros, while Iberia trimmed its deficit to 111 million euros, IAG said. Barcelona-based discount arm Vueling SA reported an operating loss of 30 million euros, having not been included in prior-year results, which preceded its full ownership by IAG.

Iberia sealed the last of three pay deals in March, locking in the support of pilots, ground-handling staff and cabin crew. Gains made in the first quarter do not yet reflect productivity agreements that took effect in April, Walsh said.