BA owner catches cold from Spanish partner

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The owner of British Airways has plunged into the red due to its exposure to the troubled Spanish market.

Spain’s economic crisis plunged International Airlines Group into operating losses of £199m for the six months to June 30 following a further rise in fuel costs.

IAG, formed from the 2011 merger of BA and Iberia, reported profits of £69m a year earlier.

While steady trading conditions helped BA to make an operating profit of £10.2m, Iberia’s losses deepened to £206.9m.

IAG had been expecting to break even this year, but with the debt-laden Spanish economy expected to contract this year and next, it is now forecasting a small operating loss for 2012.

Chief executive Willie Walsh said there was a “stark difference” in the performance of the two subsidiaries.

He is working on a restructuring plan for Iberia, which is likely to include short-term downsizing and “re-evaluation of all aspects of the business”.

He warned that job cuts were inevitable.

Mr Walsh said: “Iberia’s problems are deep and structural and the economic environment reinforces the need for permanent structural change.”

Iberia generates 27 per cent of the group’s turnover, with half of this coming from Spain, while British Airways derives only around five per cent of its revenues on routes to Italy, Spain, Portugal and Greece.

The region’s difficulties have prompted IAG to establish a eurozone crisis management group, which meets every two weeks to review progress.

BA and Iberia have retained their brands in the merger, which is expected to save £314m a year by its fifth year.

It is now the third largest scheduled airline group in Europe and the sixth largest in the world, based on revenues.

The two airlines fly to more than 200 destinations on more than 400 aircraft and last year carried 55 million passengers.

IAG completed its £172m purchase of BMI from German carrier Lufthansa in April but jettisoned the regional section and low-cost operation bmibaby.

Mr Walsh said the BMI integration was going to plan but that the benefit of this and the prospect of an easing in fuel prices was more than offset by the deterioration in Spanish economic conditions.

Revenues for the second quarter were 11.5 per cent higher, helped by an improvement in North America traffic, but rising costs continued to thwart the group, with an increase in the fuel bill of £247m, or 25 per cent.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said management has much to do to turn around the business.

He added: “Entrenched employment practices in southern Europe continue to frustrate both corporations and governments alike while volatile fuel and currencies provide an ongoing headache.

“Competition from the low-cost airlines remains intense whilst a protracted economic downturn in the US would be expected to drag British Airways lower.”

Davy analyst Stephen Furlong said: “It’s been a tale of two airlines and two cities with BA and London doing well and Iberia and Madrid struggling.”

He added: “Iberia has been hit by tough economic conditions in Spain, it has a high cost base and labour costs, Spanish airport charges have risen and it is struggling to compete with low-cost airlines.”

European airlines are being hit by slower spending on air travel amid the euro zone debt crisis as well as by high fuel prices.

Many have responded by shutting down unprofitable routes and limiting their spending.

IAG’s European peers Lufthansa and Air France-KLM have embarked on cost cutting programmes, trimmed profit forecasts and slashed plans to expand capacity and fleets this year after results were battered by high fuel costs and weakening consumer demand.

In recent years – amid weak economic growth, high unemployment and an uncertain outlook – companies and consumers have changed their attitudes on how much service and comfort they are willing to pay for, with many switching to low-cost airlines such as Ryanair and easyJet.

But even budget carriers have had a tough time.

Ryanair plans to ground 80 planes in the face of weaker demand.

Earlier this year easyJet said it planned to cut flights to and from Madrid by 20 per cent after ceasing to base aircraft and employees there.

Mr Walsh said it was “a question of when, not if” troubled Spanish lender Bankia would sell its 12 per cent stake in IAG following its state bailout.

“I see no strategic value to having Bankia as an investor,” he added.