The success of International Airlines Group (IAG) in the last two to three years is proof that its strategic partnership works. The group, made up originally of British Airways (BA) and Spanish carrier Iberia and subsequently Vueling which is a budget operator, was joined by Aer Lingus in August this year.
Excluding Aer Lingus, IAG posted a pre-tax profit for 2015 third-quarter of €1.1 billion (US$1.2 billion), an increase of 48% from last year. Chief executive Willie Walsh said: “We’re reporting strong quarter results with a positive contribution from all of our airlines.” Encouraged by a better third quarter than the second, the group is confident that its operating profits for the full year could be as high as €2.3 billion, reaffirming its previous forecast of over €2.2 billion but looking more optimistically at a higher number. Operating profits for the first nine months were €1.8 billion.
Compared to Europe’s largest partnership airline Air France-KLM which continued to report deepening losses, its second-quarter loss of €79 million was larger than that of €11 million a year ago, even as fuel costs held steady in the lower range, IAG on the other hand is gaining new strengths. If the weakening euro has affected Air France-KLM adversely, so has it affected IAG, particularly for BA as the major partner of IAG. But the state of the currency can work both ways, whether positively or negatively, depending on the specific market. In fact Air France-KLM, as does IAG, stands to gain from operations outside continental EU, particularly the United States.
It would be pretentious to suggest that there is a formulaic – even more pretentious of an inherent – magic in the IAG partnership that contributes to its success. Partnerships are forged for several reasons, and not few of them were motivated by political, even personal, reasons. Invariably the investment is almost always about synergy, or premised upon the potential for synergy. The IAG proposal was not without reservations and scepticism among analysts. The merger was completed in January 2011. In its second year, IAG plunged from a profit of €527 million to a loss of €997 million, prompting chief executive Willie Walsh to admit that it might have been better to delay but not scuttle the marriage as he remained convinced of its benefits.
Walsh said: “This is an important step in the process towards creating one of the world’s global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation.”
Give credit to Walsh for his vision and leadership. As the industry moved into mega alliances, BA too needed to expand and extend beyond its traditional borders, and when the industry not long after was dragged down by a global economic meltdown, the increased pressure of competition in a reduced market demanded an urgent shift to focus on cost efficiency to try and retain market share. Anti-merger Iberia supporters expressed concern that the Spanish carrier would be swallowed up by the larger British carrier. While Walsh reiterated that Iberia would retain its identity, he did not mince his words when he mentioned how Iberia was lagging behind BA and was in a “fight for survival”.
In fact, the circumstances turned out to be a blessing in disguise for Iberia, which was buffered by BA for the stringent cost-cutting measures that followed and whose action was legitimised by the dire straits it found itself rather than risk going bust altogether. It was a good match, both airlines operating few overlapping routes. And as Walsh noted, “It combines BA’s strength position on the mature North Atlantic market with Iberia’s strong position in the fast growing South Atlantic market.” It was a Walsh tour de force, the kind of business intrepidity that Air France-KLM was not prepared to flaunt, perhaps wisely, when faced with the prospect of increasing its stake in the beleaguered Italian carrier Alitalia. The mega frenzy can lead to costly makeovers and adjustments, draining resources of the parent. Clearly IAG was not a passive investment for BA, unlike the lacklustre partnership between Singapore Airlines (SIA) and Virgin Atlantic while it lasted before SIA sold it to Delta Air Lines at a loss.
IAG bounced back into profitability in 2013, posting a profit of €227 million, which more than tripled a year later to €828 million. The question now is how much stronger can IAG get with Aer Lingus coming on board. The Irish flag carrier made an operating profit of €45 million from the day it joined IAG.
It was not surprising that Aer Lingus felt the same initial reservation as Iberia when approached by IAG, but the successful integration of the Spanish carrier did much to allay the concern. Aer Lingus would too retain its independent identity. The good news for IAG was that Aer Lingus was joining as a profitable partner with expanded operations across the Atlantic. Wrenching the Irish carrier from Ryanair in a possible takeover by the budget carrier was a feat for BA through IAG, literally putting a lid on the competition as low-cost carriers across Europe continue to challenge the legacy market. Air France-KLM for one is feeling the pinch.
Adding Aer Lingus to IAG provides numerous opportunities for synergy and extensive connectivity to Ireland, as far as BA is concerned, particularly as landing slots for expansion at London Heathrow become a scarcity. Walsh, a former chief of Aer Lingus, said connecting Heathrow and Dublin would be a priority and assured the continuation of Aer Lingus’s profitable regional routes. The Irish government is cherishing the hope that Dublin would assume new importance as a hub for transatlantic operations.
For Aer Lingus, tapping into the bigger IAG network would help fuel its growth. Internationally, IAG partners would be better positioned to meet the competition from other airlines, particularly Middle East carriers such as Emirates and Etihad Airways. European carriers such as Air France-KLM and Lufthansa are struggling to stave off competition by Gulf carriers, which recently were also criticised by US carriers United, American and Delta of unfair competition supported by state subsidies valued at US$42 billion.
Interestingly, Qatar Airways already has a 10% stake in IAG. Qatar chief executive Akbar Al Baker saw it as “an excellent opportunity to further develop our westwards strategy,” linking the airline with two major European hubs and strong transatlantic networks. Qatar has a strong network eastwards, from the Middle East across India to Asia and Australia, and this largely complements the IAG network. The question now is how much more of IAG will Qatar eventually own as the group, additionally with a strong American Airlines alliance, looks poised to grow stronger.
Categories: Aer Lingus, British Airways, Iberia, International Airlines Group (IAG), Qatar Airways Tags: Aer Lingus, Air Frnace-KLM, American Airlines, British Airways, Delta Air Lines, Etihad Airways, Iberia, International Airlines Group, Lufthansa, Qatar Airways, Ryanair, Singapore Airlines, United Airlines, Virgin Atlantic, Vueling
Trackbacks and pingbacks
» Daily Aviation Brief – 01/12/2015
[…] Read more: http://www.aspireaviation.com/2015/12/01/international-airlines-group-partnership/ […]
737 MAX 737 NG 747-8 747-8F 777-300ER 777X 787 787-9 787-10 A320 A320neo A330-200 A330-300 A350 XWB A350-900 A350-1000 A380 AirAsia Airbus Alan Joyce All Nippon Airways American Airlines Boeing British Airways Cathay Pacific Delta Air Lines Dreamliner Emirates Airline Etihad Airways General Electric GEnx Japan Airlines Jetstar Jetstar Asia Jetstar Hong Kong Pratt & Whitney Qantas Qatar Airways Rolls-Royce Scoot Airlines SilkAir Singapore Airlines Tigerair United Airlines Virgin Australia