International Consolidated Airlines Group (IAGA) has announced a comprehensive business plan to ‘save’ Spanish flag carrier, Iberia and return it to sustainable profitability after record financial losses. The transformation plan introduce permanent structural change across all areas of the business with the aim of stemming losses and includes a reduction of its fleet, a network cull and a significant number of job losses as the carrier reduces in scale.

The main aim is to stem Iberia’s tremendous cash losses by the middle of next year. While IAG’s other airline, British Airways, is performing well, Iberia is struggling to keep its head above the water as legacy contracts and increased competition in the short-haul market from low-cost carriers has meant it has found it difficult to compete. Through the transformation plan announced this week, IAG is looking to achieve a turnaround in profitability of at least €600 million from this year’s levels to align Iberia with IAG's target return on capital of 12 per cent by 2015.

In the short term the transformation will focus on stemming the losses and creating a profitable route network. This will include suspending loss making routes and frequencies and ensuring there is effective feed for profitable long haul flights. Iberia’s network capacity will be reduced by around 15 per cent in 2013 and this will enable it to reduce its fleet by 25 aircraft with the retirement of five long-haul and 20 short-haul aeroplanes.

“This turnaround plan is critical for Iberia and for the future of Spain. A strong and profitable Iberia can create jobs and boost tourism, a key driver in Spain's economic recovery,” said Willie Walsh, Chief Executive officer, IAG. “We want Iberia to be strong and successful. For too long the narrow self interest of the few has damaged the long term future for the many. We will not hesitate to take the necessary steps to protect the interests of our shareholders, our customers and our employees.”

According to IAG, new commercial initiatives will be introduced to boost unit revenues including increased ancillary sales and website redesign and Iberia will discontinue non-profitable third party maintenance and retain profitable ground handling services outside Madrid. As the airline is streamlined it will mean a reduction of 4,500 positions within the company, approximately a fifth of its total workforce.

As well as halting Iberia's financial decline IAG transformation’s plan should establish a viable business that can grow profitably in the long term. Iberia has many advantages, none more so than its excellent geographical position and historical ties with Latin America where IAG aims to position it as the market leader from Europe. It also has a strong brand and the ability for future growth at its Madrid Barajas Airport hub.

The new business plan will transform Iberia’s short- and medium-haul operations and will certainly better position the carrier to compete more effectively with low-cost carriers who have successfully established themselves in its home market. The plan will see comprehensive productivity improvements and the introduction of permanent salary adjustments to achieve a competitive and flexible cost base.

IAG has set a deadline of January 31, 2013 to reach agreement with the Spanish carriers unions. It has warned, however, that If agreement is not reached, deeper cuts and a more radical reduction in the size and scale of Iberia's operations will take place to secure the natural long-haul traffic flows at Madrid and safeguard the company's future.

“Iberia is in fight for survival. It is unprofitable in all its markets. We have to take tough decisions now to save the company and return it to profitability,” said Rafael Sánchez-Lozano, Chief Executive Officer, Iberia. “Unless we take radical action to introduce permanent structural change the future for the airline is bleak. However, this plan gives us a platform to turn the business around and grow.”

"The Spanish and European economic crisis has impacted on Iberia, but its problems are systemic and pre-date the country's current difficulties. The company is burning €1.7 million every day. Iberia has to modernise and adapt to the new competitive environment as its cost base is significantly higher than its main competitors in Spain and Latin America,” he added.

In a move to further strengthen its position in the Spanish market, IAG has also announced its intent to acquire full control of successful Spanish low-cost carrier Vueling. Iberia already holds a 45.85 per cent stake in the Barcelona-based business, but through its Veloz Holdco SLU subsidiary, IAG has made a €113 million offer at €7.00 per ordinary share for the remaining 54.15 per cent of the shares to gain outright control.

This deal, says IAG, will be funded using internal resources. It successfully completed, Vueling would be managed as a separate operating company with its chief executive Alex Cruz reporting directly to Willie Walsh. IAG says it would retain Vueling's Barcelona base and there are suggestions that the carrier could take on even more of Iberia’s short-haul flying.

"With its leading position in Barcelona, European growth strategy and low cost base, Vueling has much to offer IAG. It has significantly increased capacity while remaining profitable, despite the Spanish economic slowdown, and already has extensive commercial arrangements with Iberia,” explained Willie Walsh.