IAG Plans For Possible Spanish Euro Exit
08/03/2012| 05:16am US/Eastern
LONDON--International Consolidated Airlines Group SA (ICAGY, IAG.LN, IAG.MC) said Friday it has made contingency plans for Spain's possible exit from the single European currency, the most public acknowledgment yet by a European blue-chip company of the dangers of a euro-zone collapse.
IAG, the parent company of British Airways and Spanish carrier Iberia, said it has created a euro-zone crisis management group that has started a "Spain euro exit road map project" to consider how the country's departure from the single currency would affect all areas of its business. The crisis group is meeting every two weeks.
Willie Walsh, IAG's chief executive, said that despite the planning, he thinks the euro will survive its current crisis and Spain will remain in the euro zone. "We plan for lots of different eventualities," Mr. Walsh said, citing volcanic ash as another issue. Airlines face a wide variety of business risks, also including bad weather, terrorism and strikes, and so generally plan extensively for problems.
IAG said that Iberia provides 27% of the group's revenue, of which about half comes from Spain. A small amount of additional revenue comes from routes to and from Spain and other troubled southern European countries Italy, Greece and Portugal. IAG's performance in Spain has declined sharply over the past year due to the country's recession and pushed Iberia into a loss for the first half of the year, the company said.
Mr. Walsh said that IAG's euro analysis initially looked at risk's of Greece's possible exit from the common currency. No direct impact was seen from that but a secondary effect was perceived to be increased pressure on Spain, he said.
IAG has also slashed its exposure to Spanish banks, which represented just 3% of IAG counterparties as of June 30 compared with 27% six months earlier. IAG has similarly reduced its exposure to banks in bailed-out nations Greece, Ireland and Portugal, as well as in Italy, to less than 1 million euros ($1.23 million).
The possibility of Spain using a currency other than the euro in itself is not a problem for IAG, Mr. Walsh said. "We deal with a lot of different currencies, and we're well used to dealing with a lot of currencies," he said. IAG currently operates in two currencies, the euro and the British pound.
Other big European airlines are far less exposed to Spain than IAG. Germany's Deutsche Lufthansa AG (DLAKY, LHA.XE) gets more than 40% of its revenue in currencies other than the euro, according to a person familiar with its business, and Spain only accounts for a small part of its euro revenue.
Spain is British tour operator TUI Travel PLC's "most popular destination," said a spokeswoman, "and we believe it will remain so." She said that to be "responsible," the company has "contingency plans in place to cover any number of scenarios." TUI Travel is part of German travel group TUI AG (>> TUI AG), which declined to comment on any contingency planning for Spain's possible exit from the euro.
Other multinationals are being similarly circumspect. A spokesman for Volkswagen AG (VLKAY, VOW.XE), Europe's largest auto maker by sales, which owns two of Spain's 13 automotive factories, declined to comment but referred to remarks last month by the auto maker's sales and marketing chief Christian Klingler, who said the company is monitoring events in southern Europe very closely.
For IAG, the impact of Spain's potential euro exit would be hard to judge. If Spain returned to the peseta and faced a major devaluation, Spaniards would find it more expensive to travel. But Spain would become much less expensive for outsiders, potentially prompting a big inflow of tourists.
For now, Spain is the weakest part of IAG's business and it is considering for Iberia "a re-evaluation of all aspects of the business" only six months after it relaunched the carrier's domestic business with Iberia Express. IAG's new discount airline aims to claw back business from rival lower-cost carriers like Ryanair Holdings PLC (RYAAY, RYA.DB) and easyJet PLC (ESYJY, EZJ.LN), which have taken the lion's share of Spain's domestic traffic.
Iberia's lackluster performance, as Spain has grappled this year with a major banking crisis, is weighing heavily on its parent.
IAG warned it now expects to make a small loss in 2012 as the Spanish economy worsens even as trading conditions at British Airways are strong and the integration of recently-acquired U.K. regional carrier BMI remains on track.
Iberia's problems were "deep and structural," Mr. Walsh said.
"All parts of the Iberian network are unprofitable-the nature of business from the South Atlantic to Latin America is changing and we need to restructure to take account of this as our competitors are," he said.
IAG said it will have a plan for Iberia by the end of September, with the extent of the transformation of the unit likely to depend on how badly economic conditions in Spain worsen.
"Iberia has everything loaded against it at the moment with economic headwinds due to the euro-zone debt crisis and looming hikes to airport charges in Spain by the state-owned airport operator," said John Strickland from aviation consultants JLS Consulting.
"I think [Mr. Walsh] will be very determined to turn around Iberia, although it could be a long and painful walk as these things don't happen overnight," Mr. Strickland said. "There's a possibility that we will see a shrinking Iberia over coming years as the airline focuses on profitable routes."
IAG swung to an after-tax loss in the three months to June 30 of EUR95 million after exceptional items from a profit of EUR38 million a year earlier as higher fuel costs and losses at Iberia offset buoyant North Atlantic traffic.
IAG didn't break out an attributable net profit figure for the quarter.
Revenue rose 14% to EUR4.61 billion, but employee costs rose 9.2% to EUR1.11 billion while fuel costs and charges for the airlines' carbon-dioxide emissions rose 25% to EUR1.56 billion. IAG turned in a second-quarter operating loss before exceptional items of EUR4 million compared with operating profit of EUR190 million the same period the previous year.
Net loss attributable to shareholders for the half year was EUR251 million, a large swing from a profit of EUR88 million at the interim stage last year.
"There remains a stark difference in the performance of our subsidiaries," Mr. Walsh said. "British Airways made an operating profit despite rising fuel prices while Iberia's losses deepened."
Iberia's operating loss was EUR263 million for the half-year period.
The gloomy outlook from IAG, Europe's third largest airline operator by number of passengers carried after Lufthansa and Air France-KLM (AFLYY, AF.FR) comes as higher jet fuel prices, up 12% in the past month alone, and slowing growth in traffic continue to strain the airline industry worldwide, particularly in Europe where the euro-zone sovereign debt crisis is constricting growth.
Airlines world-wide are under pressure to cut costs; earlier this week, Air France-KLM and Lufthansa said that despite the success of existing cost-cutting programs they would need to take further steps to shore up their finances.
IAG was the biggest loser in the FTSE100 blue-chip index in morning trading Friday, down around 5.2% at 151 pence.
Write to Marietta Cauchi at firstname.lastname@example.org
-Jan Hromadko and Christoph Rauwald in Frankfurt contributed to this article.
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