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Luis Gallego will today, Wednesday 9 September, start his first full day as Chief Executive of IAG.
When Luis, perhaps metaphorically speaking, takes his seat at IAG’s offices near Heathrow he will have a full in-tray.
It’s no exaggeration to say that the decisions made over the coming months and years will set the course for the group for the rest of the decade.
Whilst Luis Gallego is relatively unknown in the UK and is likely to have a very different management style to Willie Walsh, he has been a close protégé.
Luis has led Iberia since 2013. During that time Luis completely overhauled its management and relaunched its brand image. Prior to that, Luis led Iberia Express, frequently hailed by Willie Walsh as a model of operational excellence.
Here’s a glimpse of what is sitting in Luis’s in-tray:
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COVID-19
The most immediate issue is of course COVID-19.
Yesterday, IAG successfully completed a rights issue to raise €2.7 billion from shareholders. This is dwarfed by €11 billion and €9 billion in state support for Air France-KLM and Lufthansa.
Whilst IAG has completed other fund raising measures such as pre-selling Avios to American Express, and British Airways mortgaging aircraft, this latter debt has to be repaid in early 2021.
There is no sign of anything close to a coherent reciprocal approach between national governments on reopening borders to air travellers with consistent prerequisites and no need for quarantine restrictions. IAG’s largest long-haul markets in the Americas, and other key BA markets in India and South Africa are likely to be closed for some time.
IAG’s business model has always been to have full ownership of its airlines and make financial decisions based on “rational” investment criteria.
Willie Walsh appeared to leave the door open to IAG seeking state support in an interview with CNN last week. Should national governments provide financial support to individual IAG airlines in exchange for equity stakes, this will become problematic. Tensions between individual IAG airlines have arisen in the past and these could be exacerbated by national governments seeking to interfere in fleet and route planning decisions.
IAG will also have to expect greater influence from Qatar Airways, whose support was critical to the rights issue and has resulted in it placing two non-Executive Directors on IAG’s board.
Air Europa
IAG confirmed yesterday that it is still intent on acquiring Air Europa in 2021, subject to a renegotiation of the original purchase price.
According to a report in El Pais, Air Europa is seeking state support of €400 million. Whilst it may be easier to secure regulatory approval for the purchase of Air Europa when the airline industry is on its knees, regulators may still demand significant concessions on overlapping routes.
IAG must be relieved that its planned purchase of Norwegian did not go through, and with Delta having to write down its stakes in AeroMexico and LATAM to zero, that it eschewed taking minority stakes in airlines. With rising debt levels IAG is unlikely to have the means to make further acquisitions in the coming years, but it will have to look for more non-equity partnerships to drive traffic in to its networks.
LEVEL
IAG had big ambitions for LEVEL as a pan-European low cost brand.
At its Capital Markets Day in 2018, IAG set out plans to grow its fleet from 14 aircraft in 2019 to 42 aircraft in 2023.
LEVEL has since closed bases in Amsterdam, Paris Orly and Vienna. It is left with two aircraft at Barcelona, operated through Iberia’s Air Operator Certificate.
When IAG launched LEVEL it made much of the speed of the launch and the use of other IAG assets. It later admitted that the use of Iberia’s aircraft and AOC was in fact because it had to pre-empt a planned launch of long-haul routes at Barcelona by Norwegian.
If the acquisition of Air Europa goes ahead IAG will have five brands in Spain (Air Europa, Iberia, Iberia Express, LEVEL and Vueling). These will inevitably have to be rationalised.
London Gatwick
BA is currently operating a limited long-haul schedule at Gatwick.
It is likely that the transfer of short-haul flights to Heathrow will become permanent to protect BA’s Heathrow slots.
Should BA substantially downsize at Gatwick, the question is what should replace it. IAG’s other brands do not have anywhere near the brand recognition of BA in the South East. None have gained any significant traction in the UK market.
IAG effectively leaving Gatwick would leave the market wide open for easyJet and Wizz Air to expand. This would, in turn, affect BA at Heathrow in the medium term.
Fleet Planning
Before COVID-19, IAG had largely decided on its fleet strategy for the medium term.
BA had, rightly in turns out, decided not to buy more new Airbus A380s. It had settled on the Boeing 777-9 to replace many Boeing 747 aircraft. This is on top of existing orders for Airbus A350 and Boeing 787-10 aircraft. Aer Lingus and Iberia have Airbus A321 LR and XLR aircraft on order.
IAG will have to decide what to do with the Letter Of Intent to order the Boeing 737 MAX.
It will also have to decide what, if anything, will replace older Boeing 777-200 aircraft at BA. It’s noteworthy that BA has not yet ordered Airbus A321 LR and XLR aircraft which it might do if it wants to rebalance its long-haul route network away from North America.
IAG Synergies
IAG has, to use management consultant speak, picked the low hanging fruit as far as synergies between airlines are concerned.
There is certainly scope for more such as a single online booking engine or a single frequent flyer programme across IAG airlines. These do require significant investment in IT and come with implementation risk.
Staff Engagement
Willie Walsh, as he would say himself, was never recruited to win popularity contests amongst staff.
Few dispassionate observers and many BA staff themselves, would disagree that many working practices were in need of reform. Many would say, particularly for a service orientated industry, the pendulum has swung too far.
Those who have followed BA’s history will know the airline has been in a permanent state of restructuring for most of its existence. It won’t be known whether the latest round of reform is the last of any significant changes, or merely another chapter.
Compared to many of IAG’s peers, measures of staff engagement are noticeably absent from formal presentations. Even Qantas CEO Alan Joyce, who has had his own run-ins with Qantas staff, managed to offer some warm words and talk up departing employees to prospective employers at its annual results presentation.
For a group that actually has a lot of offer in terms of career opportunities around the world, when the time comes to rebuild, there is a lot it could do to re-engage staff.
On top of all that…
It’s worth remembering that COVID-19 may hopefully be soon over, or at least more manageable, and other issues will return to the fore.
IAG will face renewed scrutiny on its commitment to achieve net zero carbon emissions by 2050. Oh, and there is Brexit..