IAG – The ego needs grounding

International Airlines Group, through British Airways, has a pivotal position at Heathrow so its statements on the vexed issue of a third runway need to be taken seriously.

It certainly does not help if, in the space of just a few weeks, the CEO threatens to leave Heathrow if landing charges are increased heavily to pay for a new runway and then threatens to leave if a decision on building the runway is delayed. However, the most worrying thing about Willie Walsh’s recent outburst is not what he said, but how he said it.

“If the government continues to dither over a new runway, then I’ll move my business elsewhere.”

The “I” in IAG stands for “International” not “Willie”. IAG belongs to its shareholders, not Mr Walsh.

Like a politician, a successful CEO has a limited lifespan. Too long in the job and they begin to think they are indestructible and somehow above the company they lead. The very best CEO’s know when to call time. If he were to leave, or depart upstairs, now he would be going on a high.

If IAG has any strong non-Executive directors, they should talk to Mr Walsh now and remind him firmly that he speaks on behalf of the company, not himself, and his public statements must reflect that. A gentle hint that he has been in the job for rather a long time might also be appropriate.

 

An Irish happy ending

When IAG first announced their interest in buying Aer Lingus we said this was a marriage made in heaven.

Aer Lingus had done well to put itself on a sounder base and was able to ride through the Irish economic troubles relatively unscathed. However, going forward, the airline was just too small to survive on its own. Furthermore, there were not many possible saviours around.

For IAG, Aer Lingus was attractive because of its base in Dublin and established routes to the US which will allow it to funnel traffic from Europe through Dublin, as well as take Irish passengers overseas via Madrid and Heathrow.

The Irish government could rid itself of a potential liability – and get some cash as well. And the staff of the airline would have a much more secure future in an airline group that is growing.

As we said at the time, it was just too good to happen. Something was bound to get in the way. Yet, one by one, the obstacles were overcome.

The unions might not have been hugely supportive (it is, after all, their job to look for any negatives) but they did not attempt to wreck the deal.

Irish politicians who could have been difficult about surrendering the Irish flag-carrier to foreigners (and partly British foreigners at that) were won over by the logic of the deal combined with the fear of what they would do with the airline if IAG walked away.

Finally, Ryanair, who had a large minority stake in the airline and could have proved very obstructive, gave in and agreed to sell their shares. They were even quite nice about it and wished Aer Lingus all the best in the future. Being Ryanair they could not resist a dig and commented that their original plan to buy Aer Lingus had been to give them a stake in the middle-market but since their “being nice” campaign had been so successful, they no longer felt they needed a more up-market brand. Of course, they have been able to cash in a holding for a good price and avoid the huge expense of further litigation. Even Ryanair can, on occasions, see when a fight is no longer worth the effort.

Business does not normally do happy endings but this genuinely seems like one where all parties win.

The Sage of Necker Island nails it

We have said several times that the proposal by IAG to buy Aer Lingus makes perfect sense for all parties. It is certainly the best available option for the Irish government to ensure the stability and growth of Aer Lingus and its employees. The idea that IAG just wanted Aer Lingus for its Heathrow slots was silly because part of the appeal for the company was the opportunity to carry large numbers of passengers to and from Ireland via its hubs – and they could not do that if that stopped flying to Ireland. Anyway, the Irish government has now agreed to sell its shares so that leaves IAG the job of doing a deal with the two minority shareholders, Ryanair and Etihad, who will have to decide whether they want cash or would prefer to remain passive investors.

Whilst logic pointed to the deal being good for all parties, anyone unconvinced only had to read a letter Richard Branson wrote to the Irish government asking them not to sell because, according to him, such a sale “would not be in the public interest”.

You can guarantee that whenever old Beardie uses that phrase, he means “not in the interest of Virgin”. He trots out the same old phrase every time he thinks the Virgin group’s franchise fees might be hit. In fact, on this occasion, it is quite hard to see Virgin Atlantic losing much, if anything from the deal – though that, of course is beside the point because in the Branson universe, any move by British Airways or its parent, is bound to be “against the public interest”.

Anyone who still had not made up their mind by this stage would surely have been swayed by another letter from that well known philanthropist, Donald Trump. Even he joined in the bandwagon by saying a sale would “not be in the public interest” because he was worried about the provision of air services for golfers at a new course he was developing. No doubt if golfers come to play in sufficient numbers at the new course, IAG will be only too delighted to fly them in.

With both Branson and Trump against the deal, IAG must have known the sale was as good as done.

Are IAG losing the plot with Iberia?

Iberia’s problems are well known. It has too many expensive staff and strong unions which resist any form of change. For the last eighteen months, the airline has been battling the unions to put the airline on a better footing but the unions have resisted. Now, IAG are getting tough and threatening up to 4,500 job losses, salary cuts and a reduction in the planned fleet and, if agreement cannot be made, it is clear that part of the airline will simply be hived off.

So far, all that sounds fairly normal. This is the standard medicine for a badly-performing company that is used to state ownership and a quasi-monopoly. 

Except something is missing.

Iberia is in terrible shape not just because of having too many overpaid staff but because it is generally regarded as a bad airline. Many Spaniards have avoided the airline because of its poor service whilst foreigners rarely fly with them out of choice. Even without the constant threat of strikes, the airline offers a service that is barely up to the standards of its European competitors and many of its ground staff and cabin crew are indifferent, if not downright hostile, to passengers.

IAG are tackling the first part of the problem. Costs need to be cut and – somehow – IAG will succeed but they appear not to be doing anything at all to make the airline more attractive to passengers. Of course, it is difficult to spend money on service improvements and staff motivation whilst slashing jobs and salaries but it is not impossible. Staff who remain with the airline need to feel that they will be working harder and getting paid less but that they will be part of a world class airline again. So far, the lack of communication on future plans to either staff or customers has been shocking.

This is a potentially fatal flaw because, even if the airline can be made to operate efficiently, without passengers, they will fail.

IAG approved to purchase British Midland

So, finally, the EU authorities have today agreed to IAG buying British Midland and saving the airline from the scrapheap. This is good news for the airline’s pilots and cabin crew, most of whom should transfer to BA without problems. Redundancies amongst office staff are likely but these would have happened with or without the involvement of BA or another airline.

To get the agreement, IAG had to offer to give back fourteen slots at Heathrow as opposed to the original ten that they said they would give up initially. Twelve of these are earmarked for domestic and European routes where BA would have a monopoly.

Since BA has also had to agree to specific terms to facilitate interlining of passengers from competing airlines to its domestic services, which was a major concern for Virgin, I wonder which airline is going to come forward and offer to start flying from Heathrow to Edinburgh or Glasgow.

BMI could not make a profit on those routes – even with the clout of Lufthansa and the Star Alliance behind them. I doubt that any airline would see much potential in such routes.

What about Virgin who claimed to be so concerned about the loss of the Scottish routes? Surely now is the time for Richard Branson to put his money where his mouth was…