A version of this article appears in the August 25 issue of Aviation Week & Space Technology.
Iberia’s prospects did not look promising a couple of years ago and its parent, International Airlines Group (IAG), sent a message to the Spanish airline and its employees that was crystal clear: Shape up or scale down. Growth is not yet in the cards, but IAG CEO Willie Walsh is sufficiently happy with Iberia’s ongoing restructuring to order 16 new widebody aircraft worth $4 billion at list prices.
IAG is acquiring eight Airbus A350-900s and eight A330-200s to gradually replace 16 A340-family aircraft in Iberia’s long-haul fleet between 2015 and 2020. Iberia still has 25 four-engine A340s, comprising 17 -600 series variants and eight older -300s, according to Aviation Week Intelligence Network’s commercial fleets database. The carrier has started retrofitting its A340-600s with new interiors, and by the end of 2015 all of them should feature the new cabins and inflight entertainment.
Iberia also has 33 widebody aircraft, including eight new A330-300s that joined the fleet between February 2013 and April 2014.
Walsh says IAG decided not to order A330neos because “we wanted to get our hands on new fuel-efficient aircraft as soon as possible. The A330s will be available to us by the end of 2015. If we were to wait for the neo, we probably would be looking at 2019-20, and that is too late. We can start taking delivery of the A350s during 2018.”
The A350s will be equipped with Rolls-Royce Trent XWB engines.
The new fuel-efficient widebodies are part of IAG’s drive to realize more cost improvements. Retaining an all-Airbus long-haul fleet at Iberia, instead of a mixed fleet of Airbus models and Boeing 787s, will also generate cost savings in maintenance and crewing, notes Walsh.
IAG secured commercial terms for the A350s as part of the group’s order for the type in April 2013, which also included 18 firm A350-1000 orders and 18 options for the model for British Airways. The A330 aircraft will be obtained either by converting existing options from the 2011 Airbus order or from the operating lease market, depending on financial and delivery terms.
Iberia is now determining the configuration of the new aircraft. British Airways’ long-haul aircraft typically feature first class and premium economy sections, whereas Iberia in its latest product upgrade opted to stick to a two-class configuration. The A330-200s and A350-900s are replacement aircraft and will operate on Iberia’s current long-haul network spanning 16 destinations in Latin America, five in the U.S., and Luanda in Angola.
The order coincides with a return to profit at Iberia, and the recent agreement with unions on the voluntary departure of about 1,400 employees.
The carrier reported an operating profit of €16 million ($21 million) for the three months ending June 30, compared with a €35 million loss in the same period last year. Operating margin was 1.5%, which is still markedly below British Airways’ 9.1% but a strong improvement on Iberia’s past performance, marked by five successive years of losses and burning operating cash. IAG’s problem child ended last year with an operating loss of €166 million, down from the €351 million operating loss posted in 2012.
IAG believes Iberia is now on the right track and, says Walsh, “we’re confident that it will deliver an appropiate level of profitability. These orders demonstrate our commitment to make Iberia competitive.”
The airline went “through a fantastic journey” to reduce costs in the past 12-18 months and progress has been “incredible,” he says.
Iberia’s employee cost per available kilometer (CASK) declined by 10.5% in the second quarter versus the year-ago period. And IAG CFO Enrique Dupuy asserts further improvements will be realized throughout the year. For this year, he expects full-year employee CASK at Iberia to be 14% lower than in 2012. In 2015, employee CASK is forecast to be 20% below the 2012 level.
The Spanish airline’s operational transformation has drastically improved service reliability, Walsh emphasizes, and “Iberia now has a world-leading punctuality.” On-time departures (the percentage within 15 min. of schedule) averaged 91% in the first six months of 2014, compared to a poor 63% in 2011, 74% in 2012 and 87% in 2013.
Iberia achieved another goal in its comprehensive restructuring in July, after concluding an agreement with representatives of ground staff and pilots to trim up to up to 1,427 positions by the end of 2017. All departures will be on a voluntary basis and the exact number of job reductions will depend on how many employees accept the offer.
The new wave of voluntary departures is on top of an earlier deal, to cut 3,141 positions across the company, increase productivity and reduce salaries.
Iberia launched a drastic overhaul plan in November 2012 under pressure from IAG. This plan foresaw the launch of a low-cost short- and medium-haul airline, Iberia Express, and up to 4,500 job cuts, which led to strong opposition and several weeks of damaging strikes. Following mediation supported by the government, this target was lowered to 3,141 workers.
With this new agreement with pilots and ground staff in place, IAG is achieving its initial goal of slimming down Iberia’s workforce by 4,500 positions from 2012 levels. The Madrid-based carrier had some 20,600 employees in 2012.