Turbulent times ahead for Iberia under the IAG banner

In February 2013, thousands of workers of the Spanish airline Iberia gathered outside its headquarters in Madrid to protest against plans to cut company personnel by a quarter.

The streamlining proposal followed Iberia’s merger with British Airways in 2011 under the IAG banner and for many of the Spanish company’s workers, the other parties in the deal were the villains. Some demonstrators held up pictures of IAG chief executive Willie Walsh above the words: “Wanted, dead or alive.”

Iberia, which had been one of modern Spain’s flagship companies, is losing about €1 million a day. Overstretched by its routes, overspending on staff, squeezed by the competition and badly affected by the euro zone economic crisis, the future looked bleak. It was also having to wage a campaign to convince Spaniards – particularly its own employees – that the merger was in its best interests.

Justo Peral, of the SEPLA pilots’ union, accused British Airways of treating Iberia in an “abusive” way and claimed the former was funnelling funds away from the Spanish firm – a charge Walsh denied.

“Two years ago, Iberia was on the verge of collapse,” says Xabier Fageda, a professor of economy at the University of Barcelona and aviation expert. “It was the weak partner. When the merger happened, it may have looked as if [British Airways and Iberia] were on an even footing, but they weren’t.”

Yet two years on, things are looking very different. Iberia reported an operating profit of €162 million in the third quarter of 2014, compared with €74 million in the same period a year earlier, and it is expected to post its first net annual profit in six years when it publishes its full 2014 results.

In part, this reflects the overall recovery of the Spanish economy from a deep half-decade slump, with the IMF expecting growth of 2 per cent this year. But analysts say it is largely a result of the company’s radical post-merger overhaul.

That includes cutting nearly 5,500 jobs between 2013 and 2017, with 3,800 already eliminated, in addition to substantial salary cuts. These measures have affected cabin crew and ground staff and while SEPLA remains critical of IAG’s handling of Iberia, in-house unrest has been relatively muted in recent months.

“This will create new opportunities for Iberia to enhance its profitability further in the next two or three years,” Walsh said last summer, after a new round of job cuts had been successfully negotiated and company results showed that a turnaround was under way.

Cuts to routes as well as the wage bill have also been key to the restructuring and in 2013, Iberia stopped flying to Athens, Amsterdam, Cairo, Santo Domingo, Montevideo, Havana and Johannesburg.

The improvement in Iberia’s fortunes has been most apparent in the performance of Iberia Express, its short- and medium-haul carrier, created in 2011. In 2013, it carried 3.2 million passengers, 47 per cent up on the previous year (which had, admittedly, been blighted by industrial action).

“Iberia Express has been crucial to Iberia’s recovery,” says Rosario Silva, an aviation expert at the IE business school. “It has allowed Iberia to make ground on its competitors when it comes to cutting costs in the short- and medium-haul network.” That network, she says, feeds the airline’s traditional, long-haul routes.

The brightening mood at Iberia was particularly apparent last autumn, when the company resumed flights to Santo Domingo and Montevideo.

“What has changed in the last year-and-a-half for us to return to Montevideo?” asked company chairman Luis Gallego, who was present. “The answer is: now we’re competitive.” This month, Iberia announced it is reopening its Havana connection. Latin America is seen as crucial for the airline as it seeks to consolidate the upswing in its fortunes.

But challenges remain even in Iberia’s traditional stronghold across the Atlantic. Air France and Air Europa have gained ground there and Spain’s many Latin America immigrants are travelling to and from their native countries with less frequency than they were just a few years ago, due to the economic climate.

In Spain, Iberia is facing a less familiar rival in the form of the AVE high-speed rail network.

Turbulent times could, therefore, lie ahead for Iberia. But the company which was once described by El País newspaper as "IAG's sick little sister" is looking healthier than many had dared believe was possible a couple of years ago.