COLIN BAKER MADRID
After five years at the helm of Iberia, Xabier de Irala has privatised the airline, joined a major alliance and established a commercial ethos, and the changes are set to continue
When Iberia chairman Xabier de Irala sat down to preside over Iberia's board meeting on the 5th of April this year, it was a turning point for both the Spanish flag carrier, and for him. Following the previous day's share flotation, Irala was chairing the airline's first board meeting as a private company.
His aim when he joined Iberia in July 1996 was to take the troubled carrier into the private sector. With this goal finally met, albeit after a series of delays, Irala announced at the board meeting that Angel Mullor, general manager since 1999 was to become managing director. "Mullor will focus more on the day-to-day running of the company, while I will look at the long-term strategy," Irala explains.
Iberia has come a long way in the five years since Irala came on board. While the threat of labour unrest, which bubbled under the surface in the run up to the initial public offering (IPO), could still derail the airline's recovery, comparison with other major southern European flag carriers remains favourable. Alitalia, Olympic and TAP share Iberia's burden of having to operate with lower yields than their north European cousins. However, unlike Iberia they are all losing money and have struggled to find private investors.
This does not mean that Irala is resting on his laurels now the IPO has been completed. The burly, New-York born Basque is Iberia's first chairman from a private sector background and is keen to use his new found freedom to further increase the level of commercialism at the company.
High profile
Despite not being an airline man - the Iberia job was his first in the sector - Irala has taken a high-profile in European aviation, including a stint last year as annual chairman of the Association of European Airlines (AEA). Irala's influence with other prominent Spaniards in Brussels, including transport commissioner Loyola de Palacio, has proved useful. Indeed, a quiet word from Irala was said to have helped persuade Palacio to modify radical changes to the slot allocation system proposed by Brussels last year.
With fellow countrymen Michel Ayral, heading the EC's transport directorate and Victor Aguado taking over as director general of air traffic management body Eurocontrol, Irala's tenure at the AEA heralded a period of strong Spanish influence in European aviation policy, carried onto the world stage when he was made chairman of the International Air Transport Association (IATA) board of governors this May.
This high international profile in part reflects both Irala's skills as a communicator and his personal charm, matched by a steely determination to get things done. Sensibly perhaps, bearing in mind his status as an industry outsider, he has strived to make maximum use of his staff, of whom he speaks highly.
Irala has made his 08:00 breakfast meetings with senior management an institution at the airline. He sees advantages in the informality of the setting. "They will tell you if there's anything wrong," he says. "It gives us an opportunity to explain our strategy and get feedback." Irala brought this approach with him from General Electric, where he worked for 19 years.
His experience with GE is viewed as a valued commodity. The conglomerate and its much-vaunted head Jack Welch, are seen by many as models of private sector efficiency. Other airline chiefs too have cited GE as an influence, including peers at Air France, Delta Air Lines and Japan Airlines. Like them, Irala sees a content workforce as key to an airline's success. "If your employees are motivated, your customers are satisfied."
That said, labour remains a major concern. When he came to Iberia, Irala made getting labour costs more in line with productivity one of his first goals. "The airline was virtually bankrupt back in 1993-94," he explains. "We needed a viability plan, and that meant reducing costs, including labour costs." This has meant an average salary reduction of 8.5% in the first three year's of Irala's tenure. "This was the first step of the turnaround. Without it we wouldn't be here now."
Now that the airline is in better health, the unions are flexing their muscles and Irala makes it clear that this is a delicate area. In particular, the pilots are keen to make up what they see as lost ground and are threatening to strike over the busy summer period. Although typically diplomatic, Irala makes it clear that an agreement will have to be in the long-term interests of Iberia. "We will not agree to anything that may jeopardise the future of the company. That time is over."
Pilot negotiations
Talks with the pilots have been delayed by the IPO, and Irala seems annoyed at attempts by some pilots to link their negotiations with the flotation process, even though they were eventually persuaded to put talks on hold until the IPO was over. Irala warns that it may take some time to reach agreement. "A salary increase in line with inflation is one thing. Anything above must be matched by increased productivity," he warns. "Negotiations are not going to be easy. It always comes down to a question of money." So, while Irala has managed to keep the lid on workforce costs and unrest in recent years, labour promises to be an issue that will not go away anytime soon.
While Irala can take much of the credit for Iberia's recovery, he admits that in many ways he came in at the right time. "The economic cycle in Spain helped us," he says. He took the job just around the time that Jose Maria Aznar Lopez's centre-right Popular Party came into power, with its programme of free market reform. Irala is very much part of the market-based reform process that Spain underwent during the 1990s. The country's economy has grown considerably in the intervening period, and Irala is proud of the fact that it has now surpassed France to become the largest intra-European air transport market. Spain notched up 28 million passengers in 2000 thanks in large part to the tourist business.
Not surprisingly, Irala is not a big fan of political interference. "I made it clear when I took the job that if I got a call from the government telling me what to do, then they would need to look for another chairman," he states bluntly. "I have been able to take tough decisions which were obvious from a business point of view, but uncomfortable from a political view."
He gives as an example the decision to pull out of the Madrid-Tokyo route in 1998, which had never made a profit in its 13 years of operation. It was a decision which Irala describes as "politically difficult" and which led to irate phone calls from several politicians. Despite this, he stresses, there was no pressure from the government. "They were absolutely committed to privatisation and respected management decisions that were based on profitability."
Politically free
Of course, following the IPO, Irala has less need to worry about the political implications of any decisions and is also free from various other constraints. "We are getting rid of a lot of bureaucratic rules and procedures that you have to follow just because you are state-owned," he says. Before privatisation, every time Iberia wanted to set up a majority-owned subsidiary, it had to get approval from the government, something that Irala found irksome in today's fast-moving world of business.
He plans to use this freedom to move Iberia into a holding company structure, which is likely to include passengers, cargo, maintenance and ground handling. Irala also seeks to promote outside investment, with ground handling, seen as a particular target given its strong domestic and third party business. Irala claims that Iberia's handling interests are number three in the world in terms of value. At present, passenger traffic accounts for 80% of turnover, with handling and cargo at just over 5% each. Maintenance is 2.7%. He is keen to install the strict cost accounting that he has used from his GE and ABB days. "When all businesses are in one basket you don't know where you are making money."
On the passenger side, meanwhile, Irala emphasises Iberia's commitment to the oneworld alliance, which seems to be back on track after last year's mini-crisis prompted by the merger talks between British Airways and KLM. That had threatened to break up the partnership between core members BA and American Airlines.
Irala made it clear when he joined Iberia that it could not survive alone, given its lack of size, and eventually chose oneworld as best for Iberia's needs, which included European consolidation, a link to the Asian market, more destinations in North America and increased traffic for its Latin American routes. Equally, he points out that Iberia had much to offer, such as its 70% market share in Spain, which he is quick remind is "Europe's number one market". He also notes a strong position on intra-European routes and the airline's number one position in the Europe-Latin America market. And, he stresses, Iberia is a strong brand name.
Oneworld has not been without its tensions in recent times, and Iberia managers have expressed their annoyance at what they see as BA's heavy-handed approach to its smaller alliance partners. Industry observers point out that BA and American tend to call the shots at oneworld, where as the Star alliance is run on a more democratic basis. Relations are also strained by BA's decision to set up low-cost carrier Go, which has proved a strong competitor to Iberia on key on UK-Spain routes.
At around the time of the BA-KLM talks, Iberia agreed to a codeshare deal with Air France, European leader of the SkyTeam alliance. This covered some key Asian and Latin American destinations and was seen by some observers as a wake-up call from Iberia to BA. Irala refutes this. He points out that this happened to be the time when BA was cutting back on capacity, and Iberia was looking at alternatives for the Asian market after it dropped such routes as Madrid-Tokyo. As a result, it had to look for a viable alternative to London Heathrow. He stresses, however, that this was carried out with the full knowledge of BA and its alliance partners.
Alliance commitment
So, despite last year's rocky patch, Irala emphasises Iberia's commitment to its alliance partners. "We are in oneworld and we will do everything in our power to make oneworld work." With an eye to the inherent instability of alliances, however, he adds: "If anything happens, I think we have good options. We have invested a lot in oneworld, but as a fall-back position, we have alternatives."
Irala admits that oneworld has been hit by its failure to gain antitrust immunity from Washington and Brussels. "This has put some constraints on the possibilities for gaining synergies," he says. With a non-too-subtle reference to the other global alliances, Irala warns: "Today, some alliances have got antitrust and some have not. It is a delicate issue. We are getting into a discriminatory situation." Perhaps with an eye to the renewed attempts by BA and American to deepen their relationship, he sees the possibility of progress in this area.
BA's decision to sell low-cost subsidiary Go will no doubt help relations at oneworld. "I had very strong disagreements with BA from the beginning on this issue," Irala explains. He points to Iberia's experience with its own low-cost subsidiary Binter Canarias. "It is my firm belief that within the strategy of a network carrier such as BA, that this is bound to fail," he warns, pointing to the inherent higher structural costs. "They [low-cost carriers] must be independent."
It may seem strange then that Iberia considered bidding for Go when BA decided to sell. Irala says that they were only interested in the assets that the Go offer included (and no doubt the chance to get rid of a fierce competitor). However, in the end Iberia decided the price was too high, and it would have been difficult to fit it into Iberia's network.
Competition from low-cost carriers is certainly an issue for Iberia, given Spain's mix of tourist and business traffic. Although Madrid's Barajas airport faces capacity constraints, the planned opening of a new airport in 2004 to the south on the main Madrid-Seville high-speed train link, just 40 minutes from Madrid city centre, may offer opportunities to the likes of Go and easyJet. The latter is known to be keen on the idea of establishing a hub in Madrid.
Despite this, Irala is relatively sanguine about the low-cost threat. "Iberia has had to compete with charter airlines for the past 20 years," he says, pointing out that Iberia carries a much higher share of tourist traffic than its north European neighbours. This has already forced Iberia to lower its cost structure, he says, priming the carrier to compete against the low-cost entrants.
While congestion at Madrid may be hindering the development of the low-cost sector, it is not helping Iberia either. Only the much-troubled new hub at Milan Malpensa suffered worse delays last year in Europe. Again, Irala seems relaxed about the potential threat to Iberia's future, but it is perhaps no coincidence that he intends to make infrastructure his top priority during his tenure as annual president of IATA.
"The situation in Madrid is no different to the real challenge for the industry as a whole," Irala says. He emphasises that this challenge lies in the air as well as on the ground, referring to the air traffic management problems that plague the industry. To prove the point he notes the much higher number of aircraft movements in the USA compared with Europe, despite its similar geographical size: "This is nothing to do with room, it is about organisation and management. We still have borders in the sky."
Changes on the ground
On the ground, at least, Iberia stands to gain from two new runways at Barajas and one at Barcelona by 2004, while a new terminal at Barajas, due by 2005, may well provide Iberia with an opportunity to consolidate its operations there, which are presently spread over three terminals. Although a decision has yet to be made on this, Irala is confident that Iberia will get what it wants, but warns, "the challenge is how quickly it is ready." Madrid Barajas is no stranger to environmental protests, and again not surprisingly, one of his aims at IATA will be to promote debate on "how we match demand for capacity, quality of service and environmental concerns."
While Iberia has a lot on its plate, it can at least boast a healthy financial position. There has been speculation on what Iberia may do with its cash surplus. Irala will only say that it will be used to support its core business areas. Iberia came close to buying Air Europa last year, and Irala does not rule out looking at this again, although he emphasises there are no plans. The two still have a wet lease agreement in place.
Talks between Iberia and Air Europa broke down over several issues. Iberia's banks saw a window of opportunity for a share flotation, which was endangered by the merger talks. The owner of Air Europa, Juan Jose Hidalgo, was asking for shares and a seat on the board, claiming a cash deal would have hurt his tax position. The competition authorities would no doubt have taken a close look at the situation, and difficulties were already surfacing with the pilots.
More frequencies
In the meantime, Irala says Iberia will concentrate on increasing frequencies and the proportion of direct routes, rather than adding new destinations. More non-stop flights to Latin America are promised. Part of the long haul fleet is up for renewal by the end of the year, with seven Boeing 747-200/300s set for replacement. Iberia's options include the Boeing 777, Airbus 340 and newer 747-400.
In the meantime, Irala will be making sure that Iberia continues its development into a fully fledged commercial entity, concentrating on key strengths such as its dominance in Spain, good intra-Europe links, and its number one position between Latin America and Europe.
There will be no let up in efforts to keep unit costs down, with a target to reduce expenses per available seat kilometre (ASK) by 0.3% between 2000 and 2003 - that represents a 7.5% fall in real terms says Irala. Iberia estimates that its unit costs of around c0.07/ASK (ó10.6 per mile), on average sector lengths of 1,150km (715 miles), are already the lowest among the major European flag carriers.
Undoubtedly, Irala can look back with pride on his five-year term. He has reached his goal of taking Iberia into the private sector and installing a more commercial-orientated culture at the company. While labour problems are still on the agenda, as they are for many of Europe's reformed airlines, Iberia is certainly in better shape than when he took over.
Source: Airline Business
