development > listening post

36 > QATAR TODAY > JUNE 2013

CONSOLIDATION THE NAME OF THE GAME

THE GULF AIRLINES HAVE REcENTLY BEEN AccUSED OF WORKING HEAVILY OFF BALANcE SHEETS BURNING cHEAP FUEL AND BEING BANKROLLED BY THEIR RESPEcTIVE GOVERNMENTS BY SOME OF THE INDUSTRYS LEADING PLAYERS. IN AN EFFORT TO KEEP IN TOUcH, CEO OF INTERNATIONAL AIRLINES GROUP (IAG) WILLIE WALSH SAYS THAT cONSOLIDATION IS WHERE THE REAL LONG-TERM GROWTH POTENTIAL LIES.

he International Air Transport Association (IATA) raised its 2013 prot forecast for the global airline industry to QR38.6 billion ($10.6 billion) recently, due chiey to increases in passengers and cargo. Industry revenues are projected to increase by 5% to QR2.5 trillion ($671 billion) but costs are also expected to rise by 4% to QR2.4 trillion ($649 billion). The improvements in industry protability are encouraging, said Tony Tyler, Director-General and CEO of IATA, but they must be kept in perspective. We are projecting that airlines will make a net prot of QR38.6 billion on QR2.5 trillion in industry revenue. By comparison, last year, Nestle, a single company, made over QR42 billion ($11.5 billion) in prot on revenue of about QR364 billion ($100 billion). Good news for the industry, after the recent slump, but not great. IATA noted that its forecast was based on the eurozone remaining stable. Improving conditions in early 2011 and 2012 disintegrated as the eurozone crisis intensied, and it could happen again, he said. Airlines were dealing with unpleasant curve balls from governments, including European proposals for passenger rights legislation, US budget cuts to air traffic management, and anticipated

increases to air passenger duty in the UK. So how does an airline nd its way to protability and stability? IAG was formed in 2011, in the midst of the global nancial crisis, from the merger of British Airways and Iberia, the ag carriers of the UK and Spain respectively. Willie Walsh moved upstairs from CEO of BA to CEO of IAG to manage the merger from the top down. Both airlines at the time were struggling nancially, but a key benet for BA was seen as Iberias greater access to South American routes, while Iberia in return would gain from BAs more extensive North American operations. However, IAG reported a QR4.8 billion ($1.3 billion) loss for 2012 after BAs prots were wiped out by strike-hit Iberia, and the group wrote down the value of its Spanish carrier. Even so, BA managed to make an operating prot of QR1.7 billion ($454 million) in the year. Walsh had said the merger would help both airlines cope with the recession, so looking at it through these most recent gures, how has it performed? I think people tend to measure things in the short term, said Walsh. IAG are looking long-term. Our industry is one that needs to consolidate and were beginning to see the benets of consolidation globally. The airline industry has been very weak when it comes to protability, and

NET PROFIT 2012-2013

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BRITISH AIRWAYS

development > listening post

The overall financial result that we reported was clearly poor, but if you stripped out the provisions that were made for restructuring and various accounting adjustments, we still performed well.

that, but a majority of the BA prots have come from synergies that we have been able to generate by working BA and Iberia together. Scaling up Walsh explained that the combined scale of the organisation worked to get better deals, such as with insurance and aircraft purchases. Weve been able to save millions on our insurance bill by negotiating as a single company rather than two, he said. Negotiations with aircraft manufacturers are based on scale, so we can get greater discounts by ordering more. We dont have to worry about growing at the same pace, he continued, regarding the disparity in the growth of the two airlines. BA is in a better economic environment than Iberia. The UK is pretty weak, but the London market, where BA is primarily based, is actually quite strong. So although the UK has recorded successive quarters of negative growth, London hasnt seen any recession. The structure that we have allows BA to take advantage of any opportunities that exist, and we can keep it separate from any problems that Iberia faces, and vice-versa. Spain will recover in due course. This is certainly something that IAG are banking on, having recently acquired control of Spanish discount carrier Vueling Airlines for QR582 million ($160 million). Vueling and Iberia will cooperate where possible, Walsh said, though feeder ights for the larger carrier will continue to be provided by Iberia Express, set up in 2012 with non-fuel costs around 40% below its parent. We plan to retain Vuelings current business model and management structure and its strong base in Barcelona, Walsh said. It will benet from the groups nancial strength. Were always on the lookout

thats mainly because its very fragmented; there are a lot of small airlines and theyre all jockeying for market share. Very few of them have a long-term protable outlook. What were seeing now is that the industry is beginning to rationalise and were getting more and more consolidation, and structurally thats more important for the industry. So were going in the right direction and thats why Im condent about the Iberia-BA merger in the long term. I think something thats often forgotten when we look at the nancial performance of a business is that a signicant part of positive results is often created by synergies that have been created by bringing these airlines together. People often ignore
38 > QATAR TODAY > JUNE 2013

for opportunities to acquire other airlines. Weve always said if the right opportunity presented itself, we are structurally set up to allow us to bid for that. Outside of that, well be looking to develop some joint ventures, so where we cant consolidate we'll see if we can work with other carriers on a joint venture basis, and thats also a successful feature of the industry. Walsh tries to paint an optimistic picture of the long-term future of the Iberia-BA merger, but the IAG board also wants shortterm success, and the blame for the huge 2012 losses was placed rmly on his shoulders. The former BA CEO was paid a basic salary of QR4.6 million ($1.28 million) but the board decided not to pay a bonus. The irony here is that the package for the current BA chief, Keith Williams, rose 40% to QR7.9 million due to the British carriers robust performance. Is this fair? The thing about being CEO, said Walsh, is that you get all the credit when things go right, even though its everyone else who does all the work, and you get all the blame when things go wrong, Ive never had a problem with that. But I think the underlying performance of the group is satisfactory. We had a lot of restructuring last year, particularly in relation to Iberia. The overall nancial result that we reported was clearly poor, but if you stripped out the provisions that were made for restructuring and various accounting adjustments, we still performed well. The board said that the performance was good but it would be insulting to the shareholders to decline them a dividend and then award the chief executive officer a bonus. Symbiosis Qatar Airways (QA) is expected to join the Oneworld alliance, which includes such airlines as British Airways, American Airlines and Qantas, next year. Bruce Ashby, CEO of the alliance, said that QA is a king-sized feather in Oneworlds cap because its the rst of the three powerhouse Gulf carriers to sign up to an alliance. What did Ashby mean by this? I am delighted [Qatar Airways] is joining the alliance, and of the Gulf carriers, our priority was always them. They're growing so fast and its exclusively down to what Akbar Al-Baker (CEO of QA) has done in developing a truly international global airline and creating a global hub at Hamad International Airport. We recognise that he can serve areas in this part of the world that we cant. Were looking therefore to connect into the net-

work that they have developed, which has great access into Asia and India, and he can benet from being in the alliance, so we can work off each other. Youll see more of a ow of Oneworld carriers into Qatar and from Qatar into Oneworld airports in the future. Walsh forwards a very positive opinion of what Al-Baker and QA are doing for the airline industry globally, but his feelings arent shared by his peers, many of whom have complained about the steeply sloping playing eld the Gulf airlines are playing on where they are getting free or at least very cheap fuel and their governments are pushing capital their way without conditions. I think the Oneworld alliance has a more progressive attitude to developments in the Gulf than some of the other alliances, or indeed some of the other European carriers, said Walsh. A lot of the CEOs in the industry have been very critical of what is going on in the Gulf, which I dont buy into at all. What they have beneted from here is the progressive outlook in terms of the benets of aviation, good developing infrastructure and a good geographical position, so when I look at what has happened here, I admire the attitude of the governments here and the airlines here who have seen an opportunity and have seized it. A better example than Doha is Dubai, where from being ranked #99 in the world in 2001 in terms of passenger traffic, it was ranked #2 in 2012, so its inevitable it will overtake Heathrow as the busiest international airport in the world; and thats down to having vision and determination, and creating an environment where airlines can succeed. Walsh is very critical of how Londons primary airport, Heathrow, has been forgotten about by successive UK governments, which are playing politics for their own gain instead of looking at the bigger picture. They have refused to expand the airports capacity for years, and it looks like this attitude will prosper well into the near future. However, this isnt as bad for BA as it is for their local rivals. Heathrow is now full, and theres no prospect of adding any additional ights unless you add more runway capacity. It means the rest of the world will overtake it. From a selsh point of view, I guess British Airways are OK because we bought our growth and our capacity to grow by acquiring British Midland International (BMI), but for other airlines competing with us, theyre going to nd it impossible to grow because they cant get any more runway slots, said Walsh

I am delighted Qatar Airways is joining the Oneworld alliance, and of the Gulf carriers, our priority was always them. They're growing so fast, and its exclusively down to what Akbar Al-Baker has done in developing a truly international global airline and creating a global hub at Hamad International Airport.

QR38.6 QR2.5
BILLION PROFIT ON TRILLION IN INDUSTRY REVENUE IN 2013
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GLOBAL AIRLINES WILL MAKE A