BA owner IAG makes £199m loss

Spain's economic crisis and the "deep and structural" problems of its main airline plunged the owner of British Airways into the red today.

A further rise in fuel costs added to the pain as International Airlines Group (IAG) - formed from the 2011 merger of BA and Iberia - posted operating losses of 253 million euros (£199 million) for the six months to June 30, compared with profits of 88 million euros (£69 million) a year earlier.

While steady trading conditions helped BA make an operating profit of 13 million euros (£10.2 million), Iberia's losses deepened to 263 million euros (£206.9 million).

IAG had been expecting to break even this year but with the debt-laden Spanish economy expected to contract this year and next, it is now forecasting a small operating loss for 2012.

Chief executive Willie Walsh said there was a "stark difference" in the performance of the two subsidiaries.

He is working on a restructuring plan for Iberia, which is likely to include short-term downsizing, network reshaping and "re-evaluation of all aspects of the business". He warned that job cuts were inevitable.

Mr Walsh said: "Iberia's problems are deep and structural and the economic environment reinforces the need for permanent structural change."

Iberia generates 27% of the group's turnover, with half of this coming from Spain, while British Airways derives only around 5% of its revenues on routes to Italy, Spain, Portugal and Greece.

The region's difficulties have prompted IAG to establish a eurozone crisis management group, which meets every two weeks to review progress.

IAG shares opened 5% lower today.

BA and Iberia have retained their brands in the merger, which is expected to save 400 million euro (£314 million) a year by its fifth year.

It is now the third largest scheduled airline group in Europe and the sixth largest in the world, based on revenues.

The pair fly to more than 200 destinations on more than 400 aircraft and last year carried 55 million passengers.

IAG completed its £172 million purchase of bmi from German carrier Lufthansa in April but jettisoned the regional section and low-cost operation bmibaby.

Mr Walsh said the BMI integration was going to plan but that the benefit of this and the prospect of an easing in fuel prices was more than offset by the deterioration in Spanish economic conditions.

Revenues for the second quarter were 11.5% higher, helped by an improvement in North America traffic, but rising costs continued to thwart the group, with an increase in the fuel bill of 314 million euro (£247 million), or 25%.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said management has much to do to turn around the business.

He added: "Entrenched employment practices in southern Europe continue to frustrate both corporations and governments alike while volatile fuel and currencies provide an ongoing headache.

"Competition from the low-cost airlines remains intense whilst a protracted economic downturn in the US would be expected to drag British Airways lower."

PA