IAG, the holding company for the merger of British Airways and Iberia, on Friday announced a “comprehensive transformation plan” that involves laying off 4,500 workers, about a quarter of its workforce, in order to reduce the Spanish carrier’s record losses and return it to profitability.
The job cuts amount to 22 percent of Iberia’s labor force, one of the largest so-called labor force adjustment plans (ERE) ever in Spain. IAG said it needed to shed workers in order to safeguard around 15,500 jobs across the airline.
The plan also calls for capacity cuts and improved productivity as part of a permanent structural change in all areas of Iberia’s business.
Labor unions feared an ERE was in the pipeline and expected layoffs of between 4,000 and 6,000. Iberia has set a deadline of January 31 next year to reach an agreement with labor representatives and threatened an ever more “radical reduction in the size and scale of Iberia’s operations” in the absence of an accord.
The scaling down of Iberia’s operations includes a cut in its network capacity of 15 percent next year to focus on profitable routes. The size of its fleet will be reduced by 25 aircraft, five long-haul and 20 short-haul planes.
The plan hopes to stem Iberia’s cash losses by the middle of next year.
Rafael Sánchez-Lozano, Iberia’s chief executive officer, said in a statement: “Iberia is in a fight for survival. It is unprofitable in all its markets. We have to take tough decisions now to save the company and return it to profitability. Unless we take radical action to introduce permanent structural change the future for the airline is bleak. However this plan gives us a platform to turn the business around and grow.”
Sánchez-Lozano said Iberia was losing 1.7 million euros a day due to the Spanish and European economic crisis and as a result of systemic problems. “Iberia has to modernize and adapt to the new competitive environment as its cost base is significantly higher than its main competitors in Spain and Latin America,” the CEO said.
The plan aims to achieve a turnaround in profitability of at least 600 million euros from 2012 levels to align Iberia with IAG’s target return on capital of 12 percent by 2015.
It includes new commercial initiatives to boost unit revenues, including increased ancillary sales and website redesign, as well as discontinuing non-profitable third-party maintenance. The airline will retain profitable ground-handling services outside Madrid.
The overhaul is to be carried out using Iberia’s internal resources. IAG on Thursday announced that Iberia would launch a public offer for the 54.15-percent stake in low-cost carrier Vueling it does not already own. The offer is at 7.00 euros per share, a 28-percent premium to Vueling’s share price prior to the announcement. The total costs of the acquisition will be 113 million euros, to be funded using internal IAG resources.
The transformation of Iberia will focus on stemming losses and creating a profitable route network. This will include suspending loss-making routes and frequencies and ensuring there is effective feed for profitable long-haul flights.
“As well as halting Iberia’s financial decline we will establish a viable business that can grow profitably in the long term. Short-and medium-haul operations will be transformed to compete effectively with low-cost carriers who have successfully established themselves in Iberia's home market,” IAG said.
“The plan will see comprehensive productivity improvements and the introduction of permanent salary adjustments to achieve a competitive and flexible cost base,” it added.
IAG insisted that an agreement on the transformation with labor unions need to be reached urgently. “Time is not on our side. We have set a deadline of January 31, 2013 to reach agreement with our trade unions. We enter those negotiations in good faith. If we do not reach consensus we will have to take more radical action which will lead to greater reductions in capacity and jobs.”
Willie Walsh, IAG's chief executive said: “We want Iberia to be strong and successful. For too long the narrow self-interest of the few has damaged the long term future for the many. We will not hesitate to take the necessary steps to protect the interests of our shareholders, our customers and our employees.”
Walsh was referring to a series of one-day stoppages by Iberia’s pilots to protest the creation of its low-cost carrier Iberia Express.
“This turnaround plan is critical for Iberia and for the future of Spain. A strong and profitable Iberia can create jobs and boost tourism, a key driver in Spain's economic recovery,” Walsh added.