F R 8 - 2 0 0 2
IBERIA IN GOOD SHAPE
By Andreas SpaethDeutsche Luft Hansa had already been airborne for almost two years when on 14 December 1927 two Rohrbach Rolands made their way to the runway for Iberia in Spain, one of them departing from Barcelona bound for Madrid, and the other starting from the capital city in the opposite direction. Before the end of the year, which was also the year that Lindbergh flew across the Atlantic, the young Spanish airline launched a third Rohrbach Roland bound for North Africa.
The use of the German three-engined aircraft by this airline that was founded in June 1927 was no accident, as Luft Hansa was also flying that type. Moreover, the German airline owned 24% of the 100,000 pesetas of equity capital in Iberia at the time. In 1929, Iberia merged with two other airlines, following which it flew under the shared name of Lineas Aereas Postales Españolas (LAPE). At that time there was more money to be made from transporting air mail than from carrying passengers.
The outbreak of the Spanish Civil War in 1936 forced suspension of civilian flying, and it was not until 1939 that the first Junkers Ju 52 joined the fleet and on 13 April under the name of Iberia commenced the first domestic route. Not long afterwards Lisbon became the first foreign destination in Europe. Only a year later, Iberia won the exclusive rights to transport mail, cargo and passengers in Spain and to fly from Spain to anywhere in the world. The flag carrier had been born. Since 1944 the state's shares in Iberia have been held through Holding Instituto Nacional de Industria (INI). For many years the airline's equity base was too thin for an airline that had grown to a considerable size, with INI doing little more than absorbing the continuous stream of losses.
Iberia's position as a state airline was to take it to the brink of bankruptcy several times in its history. "We were often forced to serve Spanish interests rather than the actual interests of the company,” says Guillermo Serrano, Vice President of Corporate Affairs at the airline and almost part of the company's history, having been around since 1969. Only since April 2001 has Iberia been fully privatised. 60% of its shares are now in the hands of private investors, while 5% and a golden share have been retained by the government. The rest of the shares are spread between Iberia's alliance partners British Airways (9%) and American Airlines (1%) and various Spanish banks and department stores.
Iberia's first scheduled service to South America commenced on 22 September 1946, with a DC-4 flying to Buenos Aires via Villa Cisneros in the Spanish Sahara, Natal and Rio de Janeiro This effectively laid the foundation stone for a strategy that has remained successful to this day of being the world-wide market leader in flights to South America, while at the same time opening the door to the influence of political interests on the airline's business. This was carried to the extreme at the beginning of the 1990s, when Iberia almost went bankrupt as a result of disastrous involvements with carriers like Aerolineas Argentinas and Viasa of Venezuela.
"The worst period was around 1994,” recalls Guillermo Serrano. "At that time Iberia owned 85% of Aerolineas Argentinas, and we were acting as a bank for the Argentinians, financing a never-ending series of losses.” It was the present Chairman Xabier de Irala, in office since 1996, who finally severed the fatal financial links with South America, causing a huge outcry and accusations of neo-colonialism. "If we had not been in state ownership, we would never have acquired a financial stake in Aerolineas,” says Iberia veteran Serrano, "It was a purely political decision.” With its bloated inefficiency, Iberia was one of the biggest problem children of European aviation at the beginning of the 1990s. Its losses for the year 1994 alone amounted to some Euro 225 million, and the EU Commission was several times forced to allow the Spanish government to come to the rescue with amounts in excess of one billion.
Less than a decade later, as it celebrates its 75th anniversary, Iberia's financial situation is extremely robust, and even the terrorist attacks of 11 September 2001 had little impact on the carrier compared with most airlines. Apart from Air France, Iberia is the only one of the former EU problem airlines which, following privatisation, is flying successfully into the future. By contrast, Sabena has gone bankrupt and Olympic Airways, Tap Air Portugal and Aer Lingus are still teetering on the verge of bankruptcy. Iberia on the other hand was one of the most profitable airlines in Europe in 2001, and despite a 74% fall in profits it still made an after-tax profit of Euro 53 million. And this was in an "annus horribilis” marked by recession, terrorist attacks, privatisation at a somewhat unfavourable time from the economic viewpoint and, on top of that, a pilots' strike.
Once again the first quarter of 2002 has gone much better than expected. Whereas in 2001, long before the terrorist attacks, the airline had run up a Euro 45 million loss in the first four months of the year, in the same period of 2002 it made a profit of Euro 12 million. Today a quite different wind is blowing at Iberia from that which prevailed in earlier decades: costs per available seat mile are among the lowest of the big European airlines, for example almost half as high as those of Lufthansa, and in fact they are close to those of low-cost carriers. It is this that enables Iberia to make a profit despite the fact that average yields in southern Europe are some 20% lower. Purely prestigious routes such as the Madrid-Tokyo service that was flown at a loss for 13 years have been taken out of the flight schedule. Staffing levels, which had once been somewhat excessive, have been trimmed back, with the loss of 2,500 jobs.
The fleet has been rejuvenated and simplified: it is based primarily on Airbus types and is being further homogenised, and whereas the average age of the aircraft was 13.1 years in 1997, today this has sunk to 7. Spain is the most popular destination for flights originating in Europe, ahead of France, above all thanks to charter flights which carry almost 30 million passengers a year between Spain and other European countries. As the clear market leader both in the domestic Spanish market (market share 66.4%), and also on services between Europe and South America (15.8%, ahead of Air France with 10.9%), Iberia has a solid volume of traffic. Apart from Air France, Iberia is the only European airline to have a hub at Madrid-Barajas airport, and here there is significant potential for expansion. From 2004 the number of runways that can be used simultaneously will rise from the present two to four, while in 2005 a huge new terminal complex will be opening.
This positive starting point is a great help to Iberia in getting through these difficult times, and above all the new flexibility brings considerable advantages. "It was important to be able to respond rapidly by disposing of all wet leased aircraft. Here we learned our lesson the hard way during the crisis of 1991/92,” said Iberia network planner José Bolorinos Cremades in an interview with FLUG REVUE. After 11 September, capacity was reduced immediately by 12%, and by the end of 2002 the fleet will consist of only 140 planes, compared with 173 in the business plan. Staffing levels were slimmed down by 10% and costs were trimmed back by 5%, while for 2003 further cost reductions of 10% are planned. With only three services of its own to the USA, Iberia is less exposed on North Atlantic routes, although for several months after the terrorist attacks passenger volume on these routes fell by up to 34%. Here the airline's strong orientation towards Central and South America is paying dividends, as passenger volume in this market is down by only seven to eleven percent compared with North America.
It is no coincidence that the main focus of future expansion is in Central and South America. "We are thinking about introducing new services to Boston and the west coast of the USA, but our top priority is definitely to strengthen our market leadership on connections to South America,” explains Network Manager Cremades. The services between Madrid and Buenos Aires and Mexico City are among Iberia's most profitable routes, while the present crisis in Argentina is actually working to its advantage. "The bigger the crisis, the more often our most important customers, the full fare-paying business travellers, have to fly,” says Cremades. "It is our intention to serve all the capital cities of Latin America apart from La Paz with daily flights, and to even provide a twice daily service to the most important.” The capital city of Bolivia does not feature at all in Iberia's flight schedule, while Asunción and Montevideo are operated from São Paulo as a codeshare with TAM. Otherwise, most of the central American destinations are served by a separate fleet of four Airbus A319's based in Miami.
These arrangements have in fact become a major headache for Iberia's customers in recent months, as since 11 September the USA has demanded that even transit passengers should pass through passport control and undergo up to four hours of rigorous checks, delaying onward flights. Santo Domingo or Havana would be possible alternative hubs, but, as Network Manager Cremades points out, these airports have little in the way of local traffic. "We could be forced to leave Miami, but we are hoping that the US authorities will give in,” says Cremades.
Iberia's experience of hubs outside of Spain has actually been quite negative. In 1997 the airline attempted to establish a mini-hub in Hamburg with connections from Barcelona and Madrid, continuing on to Oslo and Helsinki, but this did not work out. Once again the hoped-for local traffic from Hamburg to Scandinavia did not materialise, "And without local traffic there is no hope of success,” according to Cremades.
On the other hand, the Spanish market for connections to South America provides a steady flow of business. Some 300 flights to 21 destinations are offered each week, with 13 markets enjoying non-stop services from Madrid, including the longest route to Santiago de Chile, some 13 hours of flying time. In the last five years Iberia has increased its capacity on routes to the former colonies of Spain by 75%, and this has been matched by a rise in demand over the same period of 73.7%. Today the airline primarily employs the Airbus A340 on these routes. "Our strength in Latin America comes from the Spanish market, and our longhaul range of products is correctly dimensioned compared with, say, Swiss,” says Vice President Guillermo Serrano. "None of the oneworld partners provides much in the way of feeder services. American Airlines is the most important to us for US access,” adds Network Manager Cremades.
The Spanish airline stresses its independence and is not giving any oaths of allegiance to oneworld for the future. "We don't feel any pressure to turn our backs on something that works,” says Serrano. "We rely very heavily on ourselves and have no ambitions in the rest of the world. The Latin American market is still underdeveloped and offers a lot of potential.” Changes in its alliances should evidently not be ruled out. "Our focused strategy makes us compatible with any alliance, we bring substance and would be a useful complement to any of the alliances,” says Serrano confidently.
For some time he has felt disillusioned about the partnership with Deutsche BA, which has now been terminated. "Deutsche BA was not properly developed by BA. We were promised a second German flag carrier and we are disappointed that this failed. The collaboration soon became an irrelevance as far as we were concerned.” Iberia had better luck with its regional partner, Air Nostrum, which today operates all its flights under a franchising agreement as Iberia Regional and, with a fleet of 51 aircraft, also services international flights like the Barcelona-Hanover route, on which it employs the Canadair Regional Jet.
In Barcelona, the second biggest city of Spain, Iberia is most vulnerable to competition. "Barcelona is a dream for every network carrier, and 25% of the most well-to-do Spaniards are concentrated in the area,” explains José Bolorinos Cremades. The biggest proportion of passengers to Barcelona are creamed off by Air France, followed equally by Lufthansa and BA. On the other hand, Barcelona is at the end of the only air bridge in Europe: the 621km route to Madrid is the most heavily used in the entire continent. The "Puente Aéreo”, first established in 1974, was originally flown with the Boeing 727 but today is predominantly served by A320's and Boeing 757's in a two-class configuration. On weekdays Iberia provides 44 flights a day in both directions, with another 15 flown by competitor Spanair, soon to become a member of the Star Alliance. Iberia on its own carries an average of 22,000 passengers every day on this point-to-point route, and at peak times in the morning a jet takes off every 15 minutes. "We maintain two separate operations here,” says Cremades. "First of all we operate a genuine shuttle service on a no reservation basis which accounts for 33 flights a day in each direction. Then we also have another eleven flights that are integrated into the airline's network, on which reservations can be made.” On these latter services, all of Iberia's jets through to the Boeing 747 are used, depending on demand. The Spanish shuttle is cheap compared with Lufthansa's Hamburg-Frankfurt connection, a mere 414km long: depending on the time of day, round trips with reservations start at Euro 98, while one-way flights without advance booking are offered from Euro 101. But serious competition is expected on this route too before long: whereas the slow Talgo train currently takes 5 hours to travel between the two metropolises, the high-speed AVE will cover the distance from the end of 2004 in only two-and-a-half hours. "For the moment that is my worst nightmare,” admits José Bolorinos Cremades.
His colleague Arturo Benito, Director of Fleet Planning, is kept awake at night by other issues: he needs to finally make some important decisions about renewing the aircraft fleet. This should have been wrapped up in 1995. "We started on a fleet renewal programme in 1990, but then we had to stop due to financial problems,” says Benito. The most urgent decision is the replacement of the 747 fleet, which currently stands at eight: five 747-200's (20 to 31 years old) and a further three 747-300's leased from Air Atlanta Icelandic. Possible replacements are the Boeing 747-400XQLR, with 411 seats in three classes, the A340-600 (350 seats) and the Boeing 777-300ER, with 260-270 seats One quickly gains the impression in Madrid that a preliminary decision has already been made in favour of the long Airbus. From the end of 2003 there will already be 18 four-engined A340-300's in service with Iberia. Hence, Benito admits, "The A340-600 is the obvious choice for reasons of fleet commonality.” The 777-300, having only two engines, would be handicapped by the need to reduce capacity on flights out of high-altitude airports. "In Bogota or Mexico this would mean being forced to waste 100 passenger seats under certain conditions,” says Benito. The order has to be placed this year, as the 747 replacement is due to fly in 2004.
There are other omens that speak well for Airbus. "A brand new A320 has lower total costs than a Boeing 727.” With 55 A320's in its fleet, Iberia is one of the biggest operators of this type in Europe. And this number could rise still further. "Between 2004 and 2006 we are planning to replace the Boeing 757 with jets from the A320 family,” says Benito. "We would also like to get rid of our MD-87's and -88's as soon as possible.” At present these are flown by pilots from the former subsidiary Aviaco, which operates a different seniority list. "Here again, an Airbus replacement is the most likely option. A big regional jet is another possibility, but it has to be an aircraft family.”
Meanwhile the sale of planes taken out of service is limping along. Six DC-10's have been parked in Madrid since December 2000. The airline is hoping to realise $10-12 million from their sale, but at present no purchaser is in sight. "Most of the DC-9's and Boeing 727's were either bought to cannibalise, or else they have already been scrapped,” explains Benito. More work is in prospect for the used jet salesmen: on 1 June 2002 the A300 chapter came to an end at Iberia when the last two twin-engined jets out of what once was six are being retired after 20 years. The Canary Islands, previously the main destination served by the A300, are now to be served by the A340, which offers the same number of seats – and a new milestone in the fleet simplification process will have been achieved. Only the two leased DC-8-62F's will now be available for cargo flights. Until recently they flew in full Iberia colours, but now the largely revamped airline seems to be ashamed of its 35-year-old cargo veterans and has had them re-sprayed in the colours of their otherwise unknown owner, Cygnus Air.
From page 22 of FLUG REVUE 8/2002
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