International Airline Group, IAG facing four major challenges
Taking over a multinational corporation is a daunting prospect even at the best of times, but when the corporation is in a sector that is currently undergoing its worst ever crisis, the challenge takes on several extra layers of difficulty.
That’s the situation facing Luis Gallego, the 51-year-old Spaniard who today takes over the reins at British Airways owner IAG after seven years in charge of Iberia.
He replaces Willie Walsh, the outspoken chief executive who oversaw the creation of the airlines group. Walsh had been due to step down earlier this year, but when the coronavirus pandemic struck he agreed to remain aboard for an extra six months.
IAG’s cash position today is in good shape
It turned out to be quite a six months for the Irishman, with airlines around the world forced to ground planes and suspend flying for several of them as fears over the spread of the virus abounded.
Even after carriers cautiously began to take to the air again, the necessity of hefty cost cutting schemes and vast job cuts left an already battered industry reeling again.
With most airlines not expecting demand to return to pre-Covid levels until 2024, there remains a long road ahead for the industry, with IAG no exception.
For the short term, at least, cash should not be an issue, with preliminary results from today’s AGM showing that shareholders had backed plans for a €2.75bn rights issue.
IAG major shareholders raised sufficient equity for survival of the group
“Major shareholders are satisfied that IAG’s equity raise will be enough to weather the crisis, or at least that’s their hope,” one banking source told Reuters.
However, with the future shape of the industry up for grabs, there will be more than enough to keep Gallego busy as he tries to plot a steady course out of the turbulence of the previous six months.
Independent aviation consultant John Strickland told City A.M. that Gallego “with the experience of turning around Iberia into a successful profitable company”.
Here’s four more issues that he will have to contend to as he takes control today.
IAG restructuring will result in substantial job cutting
Every airline has been forced into a major restructuring programme as a result of the travel downturn, but the scale of the cuts at IAG are eye-watering.
In Spain, 14,000 Iberia employees, as well as 4,000 staff at Vueling, are being laid off, while in the UK BA is half way through a programme of redundancies that will see 12,000 people lose their jobs.
The sweeping cuts have attracted the ire of unions and lawmakers alike, with a group of MPs labelling the carrier “a national disgrace” for carrying out the cuts while the government’s job retention scheme was still in effect.
Despite the opposition, BA has pushed ahead, with 6,000 roles already having been cut. However, the revelation that Walsh was in line for a £833,000 pay-off upon leaving the firm led to furious outcry from unions.
Pilots’ association Balpa said that “it beggars belief that airline bosses can shamelessly take government aid, slash jobs and then trouser huge bonuses”.
IAG downgraded by Moody’s to Ba2 level
Last November IAG said it had agreed a €1bn deal to buy Spanish budget carrier Air Europa, but has subsequently warned that the price would have to be renegotiated due to the change in market conditions.
However, today it was reported that Air Europa had asked Spanish authorities for a €400m rescue package to cope with the consequences of the pandemic, raising questions about how appealing the deal still is.
Air Europa focuses on the long-haul sector, most of which remains at basement levels of activity due to border closures and travel bans.
Failure to renegotiate the price would be a blow to IAG’s balance sheet, said credit agency Moody’s, which yesterday downgraded IAG to Ba2.
IAG will need to re-orientate their business to leisure flight policy
Unlike many competitors, especially in the UK, BA in particular is very exposed to the business travel market, which most analysts expect to return far slower than leisure travel.
Despite the government’s shifting quarantine policy, the lucrative transatlantic market remains more or less totally shut, with bans on foreigners entering the US still in place.
Last year, the group offered nearly 7m seats on transatlantic routes, demonstrating the scale of the problem a prolonged shut down presents.
Although a possible London to New York travel corridor has been mooted, such a scheme will not be in place before Christmas, the Times reported.
According to Moody’s, BA “may potentially also need to re-orientate its business towards leisure and away from corporate travel which is typically a highly profitable segment of the airline industry and it may face challenges to return to prior levels of profitability as a result.”
Quarantine restrictions will remain to impact British Airways
Leaving business travel aside, the government’s 14-day quarantine policy has slammed the brakes on the recovery in air travel, with Easyjet today announcing it would again start cutting capacity to deal with the restrictions.
Walsh was one of the most vocal critics of the regime, and BA initially joined forces with rivals Easyjet and Ryanair to challenge the policy in the courts.
With more and more countries now being added back onto the “red list” of restricted countries, airlines are pleading with ministers to implement an airport testing regime to begin opening travel up again.
Although the government is standing firm on the line that airport testing is not an effective approach to take, it has said it is considering other ways to reduce the time people have to spend in quarantine.
However, as long as it continues with the current policy, airlines such as BA will continue to suffer.
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