Business Comment: Iberia should be forced to feel the pain

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The Independent Online
British Airways has opened a second front in the battle to stop European competitors being propped up with state subsidies. As its legal action against aid to Air France grinds through the European Court, a whole new set of objections have been lodged with Brussels, this time to planned subsidies to Iberia, the ailing Spanish airline.

There are very good reasons Iberia's request for 130bn pesetas (pounds 620m) should be blocked. Only four years ago Brussels allowed Iberia a pounds 600m subsidy under its "one time, last time" rule. To grant further cash would be to ride roughshod over the European Commission's own rulebook. Iberia argues that this "one time" rule did not preclude additional cash should the airline run into further trouble due to "exceptional circumstances". It is still unclear exactly what exceptional reasons Iberia has given to Brussels, though the fall in the value of the peseta is thought to be one of them.

Even if this argument is accepted, Brussels' approval of the aid would go against its own clear and explicit regulations, which set out the timetables under which new requests can be made. A condition of the previous grant was that Iberia should not be considered for further subsidies until the end of next year. Brussels' own credibility is at stake as it contemplates the pressure from Madrid to drop the condition.

Iberia is offering to cut 3,500 jobs from its 24,000 workforce and introduce pay cuts in order to improve efficiency. Something more radical is clearly necessary. For a start, it should sell its investments in South American airlines, close unprofitable routes, and put some of its property holdings on the market. If necessary, it should slim down to the size of a regional airline. It would be painful, of course. But if BA, Lufthansa and Scandinavian airlines can restructure without recourse to the taxpayer, then Iberia should also be forced to do so.

No matter how hard BA might protest, it could never muster the lobbying power of the Madrid government. That is why Brussels officials, including Neil Kinnock, the recently-appointed Transport Commissioner, should not buckle under the political pressure. A decision is expected before the Commission's summer holiday.