Iberia ‘must adapt’ after IAG pushed into red

British Airways’ parent company has slumped to a loss of almost €1 billion (£865 million) as it battles to turn around troubled Spanish carrier Iberia.

International Airlines Group (IAG) said it has racked up €202m in restructuring costs at Iberia, which “must adapt to survive” in the face of competition from low-cost rivals and the problems caused by Spain’s economic crisis.

Combined with a €343m write-down in the value of the airline’s assets, the cost of the shake-up pushed IAG to a pre-tax loss of €997m for the year to December, which contrasts sharply with the €503m profit it recorded for 2011.

At an underlying level, the group posted a loss of €23m for the year, well below the €59m deficit forecast by analysts.

IAG expanded its UK operations last year with the £172m acquisition of Bmi from German carrier Lufthansa, and it said the integration of the business had been completed more smoothly than it had expected, with operating losses of €98m well below its original forecast of €150m.

Espirito Santo analyst Gerald Khoo said: “Compared with our forecasts, the outperformance at the underlying level was driven by better revenue, and this in turn appears to have been driven by BA and the earlier-than-expected completion of the integration of Bmi, against a weaker performance at Iberia.”

Revenues grew 10.9 per cent to €18.1bn, but IAG’s fuel bill soared 20.4 per cent to €6.1bn.

The group – formed by the merger of BA and Iberia in 2011 – is pressing ahead with plans to axe 3,800 jobs and slash capacity by 15 per cent this year in a bid to stem losses at the Spanish airline, where workers staged a five-day strike last month over the planned job cuts and salary reductions.

Chief executive Willie Walsh said: “We have embarked on a significant transformation programme in Iberia – and these results emphasise further that the airline must adapt to survive.

“It must stem its cash losses and adjust its cost base permanently if it is to compete with other airlines in all its strategic markets and lay the foundations for profitable growth in the

future.”

Investec analyst James Hollins said the broker was “encouraged” by the strength of trading at BA, which delivered an operating profit of €347m as passenger revenues grew almost 9 per cent.

But those profits were wiped out by the losses at Iberia, which widened from €98m in 2011 to €351m as economic conditions worsened in Spain, driving traffic down 3.1 per cent.

Hollins, who rates IAG’s shares as a “buy”, added: “We welcome the aggressive tone being taken by the management on Iberia.”

Walsh said the group’s

performance this year hinged on the outcome of the restructuring of its troubled Spanish arm, but he expects to report a better operating result than the €485m profit it delivered in 2011.

Espirito Santo’s Khoo said: “We believe this would be towards the upper end of the current consensus range and is higher than our current €389m forecast, suggesting upside risks to estimates.”