You don't have to go further than Iberia's Madrid headquarters to get a sense of the new direction in which chief executive Luis Gallego is seeking to take the airline.
After more than 40 years at its old Campos Velazquez base and with offices spread across four other locations around the city, the IAG-owned Spanish carrier made the decision to move to the sleek towers of Madrid's MV49 business park in 2013.
Not only do the modern facilities of MV49 provide the 88-year-old airline with something of a facelift – the building comes equipped with an onsite padel tennis court, for one thing – the move allowed Iberia to consolidate its staff at one location, making operations more efficient and cutting costs.
Such a pragmatic approach to modernisation is emblematic of what Gallego sees as his role at Iberia: to change the ethos of the Spanish flag carrier. "We are changing the way of thinking of the organisation," Gallego tells Flightglobal. "We need an organisation [that is] leaner: we are developing new processes, we are still doing the restructuring of a lot of areas."
While he says the Spanish carrier is only at the "middle of the path" of its restructuring efforts, there can be no doubt that it has come a long way since Gallego took the helm in March 2013.
Back then Iberia was haemorrhaging some €1 million a day. Efforts to restructure the company and downsize operations were stalled amid deadlocked talks with unions, and relations between the two sides were at an all-time low. A €351 million ($456 million) loss was posted for 2012.
It is difficult to understate the parlous nature of Iberia's finances during this period, which Gallego recalls frankly as a time that the airline was "in a very difficult situation: we were almost dying". He describes Iberia as having been like a "zombie" and says that fears it could disappear altogether were not unfounded.
To "stop the bleeding", as Gallego terms it, Iberia launched a transformation plan in 2012. This called for a turnaround in profitability of at least €600 million from 2012 levels, to align Iberia with IAG's target of a 12% margin by 2015. To accomplish this tough targets were set – including 4,500 redundancies, removal of 25 aircraft from the fleet and a 15% cut to the network.
Gallego acknowledges that efforts to restructure the company were in motion before he became chief executive, and says the main challenge when he arrived lay in winning the unions over to IAG's plans.
"We had a big gap in our costs with our competitors," he notes. He says his message to the unions was blunt: "We change Iberia or we kill Iberia."
After that, "it took more than one year to reach an agreement", Gallego recalls. "We had difficult moments but we were convinced that if it we wanted a future for Iberia we needed to have an agreement, so at the end it was a question of [the unions] understanding that we wanted the best for Iberia."
The breakthrough came in February 2014, when Iberia agreed new productivity pacts – including voluntary redundancy programmes up to 2017 – with cabin crew unions CCOO, CTA Vuelo, SITCPLA and UGT, and with pilot union SEPLA.
A month later, the airline closed a labour deal with ground staff unions, bringing to an end a volatile period of labour relations. The benefits of those agreements were quickly felt and the numbers began to improve dramatically.
Losses were reduced to €166 million in 2013 and transformed into a €50 million operating profit before exceptional items in 2014 – a result that helped to lift IAG's profits 80% to €1.39 billion that year.
With transformation complete, Iberia has moved to the next phase in its restructuring programme, dubbed the "plan de futuro".
The plan includes 32 initiatives broken down into five pillars, which Gallego describes thus: "First is to have a solid revenue base; second is to have simplicity and flexibility; the third one is to have a sustainable, competitive model; fourth, [for] the businesses that are not the airline – like the maintenance and [ground] handling – we need them to help the result of the company and we need them profitable… and the last pillar is the cultural change."
Gallego says that the airline now has in place "all the measures" required to reduce costs as part of the restructuring process, set to run from 2017 to 2020. He predicts it will enable Iberia to record profits "in line" with those of IAG sister carriers British Airways and Vueling in 2016.
The carrier is still hopeful that 1,427 people will leave the company. Gallego says progress has been made, with 230 pilots having agreed to voluntary redundancy out of a company target of 244. He says the carrier is now seeking 1,183 ground staff to accept redundancy "in order to have the right ratio of people to aircraft that we need for Iberia".
Iberia’s decision to now start hiring new pilots after a 11-year hiatus is "a message that things are improving, that we are moving in the right direction, and it's a message of hope to everybody", Gallego says.
While being a member of IAG has helped Iberia in its turnaround thanks to efficiencies – for example, in procurement and fleet orders – an outsider may wonder how much freedom each airline has to choose its own path, given the strategic goals handed down by chief executive Willie Walsh and his executive team.
However, Gallego denies that he feels constricted by membership of IAG. "Really we are in a group where operators have a lot of freedom, because we have a holding company but the operators are responsible," he says. "It is a group where you can do a lot of things as an operator that you cannot do in other groups in the industry, so to be honest I don't see the group as a restriction – I see the group as an opportunity."
Having sealed the productivity deal with ground staff unions, Iberia was able to enter and win a round of tenders to provide services at Spanish airports in May. Gallego sees this as the start of a new period of profitability for its ground handling division.
He also has high hopes for the airline's maintenance division, which he says has an opportunity to provide services not "only to Iberia, but to the rest of the group because with the things we are doing in Iberia [with] the four businesses that we have – line maintenance, heavy maintenance, components and engines – we can be a provider of reference to the group".
The closure of labour agreements with staff also allowed Iberia to begin growing its network again after a period of retrenchment.
Gallego describes the carrier's route development strategy as a "blank sheet of paper". He say this is not to suggest that there is no strategy, but to emphasise that Iberia is being open-minded in its approach to new opportunities.
Following a recent decision by IAG to firm up a number of Airbus A330-200 and A350-900 orders on the back of Iberia's strong financial performance, the carrier is now undertaking "profitability studies" to determine whether to start routes to cities including Tokyo, Doha, Johannesburg, Toronto, Guadalajara, Managua, San Juan in Puerto Rico, Brasilia and Asuncion.
The Latin American markets are at the core of Iberia's business and Gallego says that, even during the difficult days, the carrier remained a "market leader" in traffic between South America and Europe – a position he is determined to maintain and enhance.
From its Madrid Barajas hub, the Spanish carrier now operates to 19 destinations in Latin America, spanning most of the continent's biggest cities.
Iberia marked its return to the Cuban market in June after a two-year hiatus, with a five-times-weekly service to Havana. Other destinations that have returned to the Iberia network include Montevideo and Santo Domingo.
On 3 July, the Madrid-based carrier began serving the Colombian cities of Cali and Medellin for the first time – underscoring the point that Iberia is seeking to go where the growth is. "We have started Havana again: why? Mainly because now we have the right cost structure, because we also have an agreement with pilots," says Gallego. "If the route goes well, we will increase the capacity in the future in the same way we have done for example in Santo Domingo."
Though Iberia is now growing its Latin American network once again, Gallego believes that more is needed to cement the carrier's position in the market. Central to this is the potential for a joint venture with Oneworld partner LATAM covering routes on the South Atlantic market, on similar lines to the venture on the North Atlantic that Iberia operates with American Airlines and British Airways.
"What we are doing also is try to see if a new JV can make sense for Iberia, for example in the South Atlantic where, as we said before, we are the leaders in that market and some alliances there can help with the profitability of the routes," says Gallego.
Elsewhere, he sees opportunities to make Madrid a connecting point for traffic between South America and Europe and onwards to Asia and Africa.
Gallego says Iberia is also analysing "if Asia can make any sense for us", noting that there are traffic flows developing between Asia and South America that could be directed through Madrid.
To support its long-haul expansion, Iberia will receive the first of eight Airbus A330-200s at the end of the year. The carrier has a further five Airbus A330-200s and 16 A350-900s on order, with the first due for delivery in 2018. These aircraft will be used to replace 16 A340s in the airline's long-haul fleet.
And with IAG having signed a letter of intent for 12 Boeing 787-9s, could Iberia also be the recipient of some or all of these aircraft in the future if the orders are firmed up? Gallego stresses that "at some moment we will say what we are going to do with them", but for the time being there are no plans for additional aircraft.
The Spanish carrier is currently mulling whether to follow its IAG sister carrier British Airways in introducing a premium economy product on its long-haul fleet.
"What we are evaluating [is] whether the premium makes sense, but we are analysing in which fleet because perhaps it is not good for all of them... For example, maybe we will need more densified aircraft to compete in other destinations," says Gallego.
While Iberia has managed to restructure its businesses and return to growing its long-haul network, its short-haul operations have followed a very different path.
At the end of 2011, approximately two-thirds of the carrier's losses were related to the short and medium-haul business, with low-cost rivals such as Ryanair and EasyJet making inroads into Iberia's core markets.
This prompted Iberia to establish its own standalone carrier on the low-cost model in 2012 – Iberia Express – using a fleet of four A320s in a two-class, business/economy configuration on services to feed Iberia's Madrid hub.
Gallego knows Iberia Express inside out, having been appointed as its first chief executive. Indeed, he already had the low-cost ethos in his blood, having been chief operating officer of Barcelona-based Vueling and, prior to that, helping to found low-cost carrier Clickair in 2006.
"In 2011, Iberia took the decision to launch Iberia Express – and the idea of Iberia Express was first of all to feed Iberia in the hub, because Iberia could not have the right cost structure to do that,” Gallego says. “It was also to take [advantage of] the opportunity and experience that we have, because a big part of the thinking that developed [at] Iberia Express came from Vueling where we were developing a point-to-point operation in Barcelona.
"We considered that Iberia Express could also be an important tool to develop the point-to-point operation in Madrid, where EasyJet, Norwegian and other operators were developing their business, and we consider that Iberia had enough experience in the low-cost world to develop a company with the right cost structure, and that was Iberia Express."
What makes the carrier successful is its cost and management structures. Gallego says Iberia Express's costs are in the range of €0.04 per ASK excluding fuel: a similar level to Vueling, EasyJet and Norwegian.
He says it was also "key" to ensure that the company could develop "without influence from the parent company, because otherwise you are going to end up with the cost of the parent company, and you don't want to have that".
The extent of this separation is evident from the fact that the company has a standalone management structure and is physically separated from Iberia, being based at Madrid's Barajas airport rather than MV49.
Today, Iberia Express has a fleet of 20 A320s and is expanding its network to destinations not previously served by its parent company – but while the budget arm is doing well, Gallego rules out the idea of it taking on a similar role to IAG sister carrier Vueling. The intention is that Iberia Express will remain a feeder service for the mainline business.
Iberia may only be in the middle of its restructuring effort, but all the indications are that the carrier is on the right track.
Source: Airline Business
