IAG Cuts Capacity To Deal With COVID-19 Demand Slump
International Airlines Group (IAG) became the latest airline group to suspend financial guidance for the year 2020, announcing network and cost cuts in response to the spread of COVID-19 coronavirus.
The company cut its growth target from around 3% to 2% and may end up even below 2% should the crisis worsen, according to CEO Willie Walsh. IAG has already suspended flights to China and reduced capacity to other destinations in Asia-Pacific. Now the group is following through with additional reductions in its short-haul network, particularly routes to Italy where COVID-19 is causing significant disruption.
Among the measures IAG is taking is a general freeze on hiring, while also taking a more generous approach to part-time work and unpaid leave requests than it otherwise would.
Walsh pointed out that IAG has a number of both widebody and narrowbody aircraft that are fully depreciated and can be grounded with no financial penalty incurred. Several aircraft are coming off lease and IAG has decided not to take additional aircraft on lease that were previously planned. The group “remains committed” to its current aircraft orders and to the planned acquisition of Air Europa.
“It is impossible to give accurate profit guidance,” Walsh said. IAG had prepared guidance until last week based on the observation that Asia-Pacific was beginning to stabilize and businesses in China had reopened factories. However, the outbreak in Northern Italy led to a “significant change.” News about quarantined cities south of Milan caused a “very strong fall off in demand” that also impacted other markets. IAG’s airlines have taken “a lot of capacity out of the Italian market” already, but Walsh expects that other parts of the short-haul network will also be affected.
IAG’s planning is based on the assumption that Europe’s demand contraction will follow a similar pattern to Asia-Pacific: a sharp initial decline in the affected regions followed by stabilization and recovery after several weeks.
About one-third of the planned overall capacity reduction will be made in the long-haul markets with two-thirds coming out of short-haul. Walsh warned that some of the measures IAG plans to take “may be counterintuitive,” but will put the group in a good position to respond forcefully when demand returns. The short-haul cuts have been made until the end of March while reallocation of long-haul capacity runs through June.
Walsh expects the COVID-19 crisis to become a catalyst for further consolidation of the industry in Europe and worldwide. The drop in demand will “accelerate the demise of a number of the weaker carriers this year,” he predicted. Walsh also forecast that the stronger ones will benefit in relative terms while he has “no desire” to buy failing airlines. On the other hand, IAG is open to further acquisitions beyond Air Europa when they make sense. Walsh will retire from the group at the end of March.
IAG remains committed to the Air Europa deal despite COVID-19. The takeover of the Spanish airline remains subject to regulatory approval for now. “The case for consolidation is very strong,” Walsh stressed. “We want to strengthen the Madrid hub to become a hub for the global network.”
IAG also has no plans to back out of a letter of intent for 200 Boeing 737 MAXs signed in 2019. However, the company will only seek shareholder approval for a firm order once the aircraft has returned to service. Walsh believes “Boeing will address the issues” and that the MAX will be “a great aircraft”.
IAG plans to diversify its short-haul fleet. The MAX is supposed to be operated by British Airways—from Gatwick—and Vueling first. Deliveries have been requested between 2023 and 2027, though that schedule is subject to confirmation from Boeing.
IAG’s profit after tax and exceptional items dropped by 40% to €1.7 billion ($1.86 billion) in fiscal 2019. Operating profit before exceptionals declined by 5.7% to €3.28 billion. Revenues grew by 5% to €25.5 billion. Exceptionals included the negative effects of a strike at British Airways.