New European Superpower Takes to the Air

The International Airlines Group (IAG), the new holding company of British Airways (BA) and Iberia, commenced business on January 24 when its shares started trading on the London Stock Exchange and the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges. IAG’s formal launch represents the latest stage in the ongoing consolidation of the European airline market and it is currently the eighth largest air company in the world by flight capacity. But, ‘currently’ is the key word as IAG has ambitious plans to acquire control of further international operators to create a multinational multi-brand airline group. “British Airways and Iberia are the first two airlines in IAG but they won’t be the last,” said Willie Walsh, Chief Executive Officer, IAG and former boss of BA. “Our goal is for more airlines – but, importantly, the right airlines – to join the group.”

There has been much debate over the possible identity of these airlines but nothing concrete has yet been confirmed by IAG, except that it has developed a shortlist of 12 airlines that it believes are potential acquisition targets. This list is known to comprise a mix of low-cost and full-service airlines from across the world and is thought to include other partners in the oneworld alliance – perhaps Cathay Pacific Airways, Finnair, Kingfisher Airlines and Qantas – as well as the currently non-aligned AirAsia and South African Airways.

The formation of IAG has taken a long time to come to fruition due to a number of regulatory hurdles, but by maintaining the strong brands of BA and Iberia it will be able to take advantage of each company’s experience in the global market. The new airline group has a fleet of over 400 aircraft and flies to over 200 destinations with annual revenues of around €15 billion. The merger of the two European flag carriers is expected to lead to annual synergies of €400 million from 2015, with their complementary networks enabling them to fit together well.

Source: IATA BSP for year ending November 2010

As the above table clearly illustrates they both have a network reliant upon strong domestic and European traffic, although when you start to look outside of the continent the clear difference is apparent. BA’s three main intercontinental markets are North America (17.47%), Africa (5.22%) and Asia (5.22%), while Iberia’s focus is on South America (4.45%). The development of a transatlantic joint business with oneworld partner American Airlines will further strengthen the synergies. From December 20, 2010 the three airlines have added another 317 codeshare flights, adding to the 2,700 that were introduced when the arrangement was formalised in October 2010. These additions cover destinations in Canada, Mexico and cities across Europe and have enabled further network growth from all three airlines. This spring, five new routes will be introduced - New York JFK-Budapest and Chicago-Helsinki by American Airlines; London Heathrow-San Diego by BA, plus Barcelona-Miami and Madrid-Los Angeles by Iberia.

Source: Flightbase (January 14-20)

The importance of the transatlantic market to BA is evident when you look at its flights from its London Heathrow hub. New York John F Kennedy International is its number one destination with more than a third more weekly seats being offered than any other airport in its network.

Source: Flightbase (January 14-20)

Although Iberia’s base is at Madrid Barajas, Barcelona El Prat will be one of the most significant facilities in the combined IAG network with more than 47,000 seats being offered every week from its dual hubs. However, Iberia is placing less focus on the airport, allowing low-cost operators such as easyJet, Ryanair, Vueling Airlines (in which it holds a stake) fight for traffic. Paris will also be a key market with BA offering 60 weekly flights to Charles de Gaulle and Iberia providing 53 to Orly.