Xabier de Irala Estevez is a not only a newcomer to the airline business, but he is also Iberia's first president from the private sector. He has already created a stir among Iberia's Spanish competitors.
After only two full months in the job, he implemented an aggressive domestic pricing strategy, which has led to a complaint to the European Commission by the Asociacion Español de Companias Areas (Aeca), representing Spain's private operators. Aeca claims Iberia is using part of the government's Pta87 billion (US$685 million) capital injection to fund the domestic price cutting. Brussels cleared the injection last January to pay down debt and cover the social costs of 3,500 redundancies.
Irala strongly refutes any suggestion that the money was used for anything other than the purposes laid down by the Commission and insists that Iberia has proved that much to Brussels. The carrier says Pta50 billion was used to pay down some of its longterm debt, which fell from Pta221 billion at the end of 1995 to Pta126 billion at the end of last year. The remaining Pta37 billion covered redundancy payments for the 3,500 employees laid off during 1996.
Yet Aeca is going further and demanding that the Commission block the extra Pta20 billion Iberia is expecting from the government this year. Indeed, a senior Commission official says he would rather not have to face a further application from the Spanish government, with all the accompanying political baggage that comes with it: 'The less we hear about it the better,' says the source. But if Irala is right and the carrier proves to Brussels that it has met all the targets then the Commission will be hard pushed to refuse to clear the additional funds. As Irala says: 'I don't see how or why anybody could pull back from a commitment that was acquired.'
Fending off Aeca's complaints and keeping Brussels happy only represents the tip of the iceberg for Irala, however. Right at the start of this exclusive interview with Airline Business he makes quite clear that the ultimate reason for his appointment is to oversee the privatisation of the carrier by 2000. Along the way he needs to persuade the unions to back the three year strategic plan, which he promises to unveil early in 1997, as well as concluding the search for a major alliance partner or partners - a crucial part of his plan. 'I don't think Iberia has either the critical mass or a niche of excellence that can allow this company to survive on its own,' admits Irala.
He refuses to dwell on the short tenure of his private sector counterparts at Alitalia, and the manner in which he discusses the union and employee issue goes to show how fine a line he has to tread. He is more candid about continuing political interference. Indeed, he has already been forced to compromise on one decision, which would have re-routed all European services from Palma over Barcelona. A source Iberia indicates that the Spanish tourism minister, who hails from the Balearic Islands, took particular exception to the loss of non-stop services. The compromise will see the services to London, Frankfurt and Paris continue until March, while management attempts to make them profitable.
US-born Irala makes some interesting observations about the nature of alliance building in this sector - without giving much away about Iberia's ultimate choice of partner. One hint can perhaps be found in his observation that the carrier's strategy for Latin American does not bring it into conflict with American Airlines' plans for the region.
The chances of a link-up between the two (with British Airways coming into the equation if the UK carrier's linkup with American gets approval) would be strengthened if the wide-reaching alliance between the Dallas-based carrier and Aerolineas Argentinas goes ahead - at presstime, an announcement was expected by the end of November.
Iberia still retains management control of the South American carrier despite having to 'sell' most of its 83 per cent holding to a consortium majority controlled by the Spanish carrier's holding company Sepi (formerly called Teneo).
More trouble could be brewing for Irala if LanChile goes ahead with its threat to complain about Iberia's actions during Ladeco's recent dip into bankruptcy.
Irala's previous experience as vice president finance of General Electric CGR in France, and his last appointment as executive vice president and managing director of Asea Brown Boveri España, to name but two former positions, will undoubtedly stand him in good stead as he attempts to reinvigorate one of the larger dinosaurs of European aviation. And the biggest part of that challenge will come when he has to make unions and politicians alike face some particularly unpalatable home truths.
Airline Business: You are the first president of Iberia to come from the private sector. How different is the company culture?
Xabier de Irala Estevez: There is sometimes a tendency to think that when you come to a public company the level of competence is very different, and this is the first thing that I must make very clear. I have found that there is a very high level of technical competence in most of the areas that comprise the business.
It is more, as you said, a matter of culture. We come first from an environment where there was no competition and therefore the business was not P&L driven. We used to fly planes. Now we like to say that we fly passengers, so now we have to come out and sell. And that is a whole different culture.
The basic difference that I find is that the competitive culture is something that is still relatively new. And so you have different cultures and different groups depending on whether you are a pilot or an engineer, and sometimes these groups are motivated not by P&Lbut by other issues that in tomorrow's environment become more or less irrelevant.
Also being a public company it is very difficult, no matter how professional a manager you are, to abstract yourself from political decisions. The government has made it very clear that this company will be privatised. That is the main reason why I am here; that is the end objective. And of course there is no privatisation process if you don't make money.
This year Iberia will make money for the first time in many years, basically because of the restructuring plan, which is producing results. Some very difficult decisions have been taken in the past - it is the only company in Spain that I know of that after several salary freezes has reduced salaries.
This is very important, because you wouldn't be able to get that in a company that does not believe in its future. It was a tough decision and was very difficult to negotiate but it was achieved. Obviously we have taken other measures, including boosting productivity.
To answer your question, the biggest challenge for this company is to get some 20,000 employees motivated and working together in the same direction. Implementation is the biggest challenge and what we need to do is to set up an internal communications process that allows a debate where people can give their opinion without being shot. And I am not naive enough to believe that that is going to happen overnight.
The second thing that I have told my people is that I refuse to accept that in this company there are no competent people. The group responds to the Gauss curve - a bunch of people here are very good, a bunch of people here are very poor, and then most of the people are average. They need to be led and understand where we want to go. It is a matter of identifying who the leaders are in this company because we need to work together.
And this was my third message. We, the employees of this company, are going to make this company competitive. If we are not successful it's going to be our fault and nobody else's. If you start asking questions about what the problems are at Iberia, you get different answers depending on which group you ask. It's always the problem of the government, or the previous president, but never of the 20,000 employees.
Technical issues are relatively easy to settle if you have competent people, who do the right analysis, given the proper information. But to get 20,000 people to understand what you want from them, to get them motivated and to get Iberia out of the monopolistic attitude and culture into a competitive situation where the P&L is the most important thing - that is the number one challenge. And of course, as long as the company is still public it is not that easy.
We must not forget that the reason why we started to restructure Iberia [this time around] and the employees made sacrifices on salaries was to become competitive. And this is exactly what we have done beginning 1 October. I have made it very clear that not only do we accept competition, we believe it is absolutely necessary. We think there is room for several operators, we don't want anybody to go bankrupt, the name of the game is to make money and this I'm sure is one objective that we all have in common. We realise that for Iberia this means a lower market share, but having said that the competition must also accept that we have been leaders in the past, we are leaders today in the national market, and we will defend that leadership position.
The plan called for approximately US$15 million profit [for 1996]and we might even reach US$30 million income if everything goes fine. I think the conditions will be met and therefore I am not even thinking that [we will not get the money]. If we have met our part of the commitment, I am sure all the other parties will meet their commitment.
So the question is how are we going to grow, what kind of alliances? Because this the second priority. I don't think Iberia has either the critical mass or a niche of excellence that can allow this company to survive on its own. So now it will be a matter of deciding who is going to be our best partner to consolidate our position in Europe.
I have the feeling that probably by January we should be able to clarify some of these strategic options. But alliances in this industry are still very light. When you talk about an alliance in another industry you are usually immediately talking about joint ventures, mergers or acquisitions. In this industry an alliance basically means a commercial agreement. You can go deeper with codesharing and antitrust immunity and so forth. But usually the next step, which would be a further integration aimed at finding cost synergies - which is really where the money is - would require mergers that right now are very difficult because of government intervention, either direct or indirect. In our case it's direct, but even in the US - where as you know the market is pretty liberalised - today a foreign company cannot buy more than 25 per cent of the stock. That makes it almost impossible to contemplate a merger in the short term.
It is certainly one of the alternatives but there are others. Right now all the options are open. And what is important to understand is that we might have different partners for our European and US strategy.
Aviaco is a different situation. It has a brand name locally and is efficient in many of the aspects of the operation. But it has a cost problem when we look into the future. Right now we are looking at the 1997 programme by putting Iberia and Aviaco resources together. We are going through the theoretical exercise of looking at what the synergies are. This is something that has never been done seriously in the past.
Whether we retain a different brand or not in the end we have the same owner, and what we have to do is work together to maximise the benefit for the shareholders.
Binter Mediterraneo is another story. It is losing money and we are looking for a quick strategic decision. Divestment, if possible, might be an alternative because strategically it doesn't really bring us much.
We might be able to use the same methods and this is where some of our affiliates may play a role if we are able to give them a competitive cost structure.
In the end globalisation will happen very quickly, with a significant concentration process. But I also think that there will be room for some niche players. We are going to have to be very, very efficient - there will be no room for losers. So we'd better be prepared for it. If not, we are just going to be wiped out.
Source: Airline Business
