IAG profits rise strongly…in contrast to Air France/KLM and Lufthansa Group

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In stark contrast to financial results for Air France/KLM and Lufthansa Group, IAG (British Airways, BMI, Iberia and Vueling) posted strong financials at the end of Q3 2014. The table below shows a comparative between the three European legacy groups

 

IAG pic

(source: CAPA and company reports)

 

So how has IAG managed to improve its performance relative to AF/KLM and LH Group?

The broad strategic emphasis of all three companies has been largely the same – namely a focus on restructuring their network through introducing or extending point-to-point operations (IAG – Vueling, AF/KLM – Transavia and LH – Germanwings), while also undertaking capacity reduction or stabilisation in their hub business and seeking to reduce the impact of legacy costs among staff.

Arguably, IAG’s profit performance reflects three key differences.

  • It is further in the process of developing point-to-point with the development of Vueling. The LCC carrier ASK growth in 3Q2014 accelerated to 28.1 percent.  In terms of 3Q2014 margin, Vueling remains the most profitable airline in IAG. Nevertheless, its profit grew by less than 1 percent despite sharp growth in revenues (21 percent).
  • The weakest player of its portfolio, Iberia has been able to sustain impressive restructuring in 2013-14 which has reduced its drag on group performance. Iberia grew its revenues by 3.4 percent and increased its operating margin by 6.9 percentage points to 13.1 percent for the year to September 2014. If adjustment is made for operating leases since Iberia makes much greater use of these, Iberia’s margin was up 7.0 percentage points to 15.2 percent, the same level as British Airways.
  • The group did not have to contend with industrial action by staff whereas both AF/KLM and LH Group experienced severe cancellations as a consequence of the pilots actions at both carriers who are resisting the re-structuring plans of senior management at these airline groups. IAG’s third quarter 2014 operating costs  grew by 5.3 percent y-on-y, less than the growth in both RASK and ASK. Importantly, BA and Iberia enjoyed a year on year reduction in employee costs per ASK.

Taking Lufthansa group by comparison – we have reported in previous posts the difficulties facing Austrian Airlines in its attempts to restructure. In turn, AF/KLM senior management caved in to pilots’ demands to not create Transavia Europe which was going to be the point-to-point future for the group. There do not appear to be equivalent problems for IAG in terms either of restructuring a poorly performing subsidiary nor direct resistance to the growth of Vueling.

One final strength for IAG is the strength at London Heathrow which has been able to weather the storm of competition from the 3+1 Middle Eastern Carriers (Emirates, Etihad, Qatar Airways and Turkish Airlines).

The implications for AF/KLM and LH Group are reasonably clear:

  • An inability of senior management to extract concessions from pilots and other staff on pay and conditions will mean that cost containment efforts will be limited hence dampening profitability.
  • While IAG can keep its distance from the Middle Eastern Carriers because of London Heathrow and Madrid’s strength to Latin America, LH Group and AF/KLM will have to find a way to deal with them that may involve cooperation. Despite the current breakdown in relations between LH and Turkish Airlines, Qatar Airways has joined OneWorld and Etihad’s alliance with Alitalia (a member of Skyteam) will imply a rapprochement of sorts.
  • Successful deployment and growth of the point-to-point business (LH’s “wings” concept and Transavia Europe) appear to be crucial in confronting the threat from the LCCs and ULCCs.

 

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