IAG’s performance augurs well for industry

WHILE Ryanair paints a gloomy picture of the future of aviation out of London, warning that the market will soften resulting in dip of profits despite expected falls in fares, British Airways (BA) all but dispels that as a myth. BA chief Willie Walsh even went as far as suggesting that it was a publicity ploy adopted by Ryanair chief Michael O’Leary to shape the market to the Irish budget carrier’s advantage.

Courtesy British Airways

Courtesy British Airways

The International Airlines Group (IAG) which owns BA, Iberia and Vueling, turned in a triumphant performance, reporting pre-tax profits of 609m euros (US$680m), an increase of % year-on-year, for the quarter July to September. This was an impressive recovery from the last full year operating loss of 418m euros even though BA was profitable because of the huge loss incurred by its Spanish partner Iberia.

So if any one should doubt BA’s wisdom in merging with Iberia, it is time to realign that thinking. The honour goes to Mr Walsh for his tough hand in restructuring the Spanish carrier, introducing drastic cost-cutting measures that include reducing staff numbers. Profits at Iberia for the July-September quarter rose from 1m euros last year to 74m euros. Indications are that it will be a good turnaround full year for IAG, which reported a pre-tax profit of 103m euros for the first nine months of the current year compared with a loss of 121m euros last year.

Between Ryanair and BA, the interesting question should be what all this augurs for the future of the travel industry.

Mr Walsh said: “The mood across Europe is improving.” He attributed this in particular to the growth of traffic out of London. Indeed, that has long been coming – a prospect that is being monitored closely not only by British carriers but also long haul operators from around the world based as far away from the British hub as Cathay Pacific, Singapore Airlines (SIA) and Qantas. Delta Air Lines which acquired a 49-per-cent stake in Virgin Atlantic would have made a fortuitous investment.

Cathay reported improved performance for European routes last month, singling out London as a star performance. Overall it has been seeing revenue growth staying above the increase in capacity. Cargo is the bugbear, but there are signs that the world economies are improving. Cathay reported that exports out of Europe in particular are growing.

Yet under immediate circumstances, European carriers such as Lufthansa and Air France/KLM are still falling short of expectations and struggling with cost issues. Therein lies the reason why IAG’s performance was all the more impressive, and therein lies the challenge of competition in good and bad times. Both Walsh and O’Leary are visionaries, market movers and risk takers. In their own ways, they are preparing their airlines ahead of time.

What may have favoured BA is the return of the lucrative business class travel, especially for trans-Atlantic flights. The British flag carrier reported an increase of four per cent for premium passengers in October. “That’s all coming out of London,” said Mr Walsh. “The London economy has performed most strongly, and we’re benefiting from that.”

That spells good news for legacy airlines that made most of its money from flying premium travellers before the global economic meltdown. In good times, airlines such as SIA earned more than 40% of its profits from filling up the front end of the aircraft. However, the anticipated recovery has taken a long and painful road. In the interim, airlines such as Cathay and Qantas have introduced new or improved premium economy class products to stimulate the market. Cathay reported loads to Frankfurt, London and Paris exceeding 80%.

IAG’s performance augurs well for the industry. It remains to be seen if this holds true as more airlines post their earnings in the coming weeks.


About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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