British Airways’ Walsh ups profit forecasts as UK ticket sales surge

 

Willie Walsh got a new job this month: the Irish government hired the British Airways supremo as chairman of advisers to its state debt agency. And the latest evidence of the impact of Mr Walsh’s drastic cost-cutting at International Airlines Group (IAG) suggests the Irish couldn’t have found a better person for the job.

For IAG – parent company of BA and Spain’s Iberia, where Mr Walsh remains chief executive on top of his part-time Irish job – raised its annual profit forecast yesterday, after benefiting from an impressive and speedy turnaround at Iberia. Buoyant demand for BA’s services out of London has piloted the company higher too – but clearly Mr Walsh’s drastic cost-cutting had a major role to play.

Only eight months ago, as IAG crashed to a €1bn (£834m) pre-tax annual loss, Mr Walsh was admitting that the Spanish economy had deteriorated faster and deeper than BA had expected when it merged with Iberia. While the British flag bearer made an operating profit of €347m in 2012, Iberia wiped that out, slumping to an operating loss of €351m. And City analysts were questioning whether the merger had been a disaster.

But Mr Walsh went to war with Spanish unions, and sacked more than 3,000 staff; yesterday came the first signs of the results of that action: IAG shares flew up 8 per cent to 376.9p after third-quarter profits more than doubled to €690m. That beat City expectations, as did IAG’s forecast for an annual operating profit of €740m. BA’s operating profit was €477m, up from €268m a year earlier, while Iberia turned last year’s tiny €1m profit into a €74m profit this time around.

All the figures are travelling in the right direction: revenues across the airlines group – IAG now also owns Spanish budget carrier Vuelling – flew up by 6.9 per cent and costs were down 1.5 per cent.

What makes it all the more impressive is that the turnaround has come while other airlines flew into turbulence. Lufthansa’s results earlier this month fell well short of expectations, and Ryanair sharecrashed 11 per cent  this week after the budget airline struck its second profits warning in two months.

Yet BA has enjoyed steady growth – particularly in lucrative business-class cabins. In October, premium passengers were up by 4 per cent.

“That’s all coming out of London,” Mr Walsh said. “The London economy has performed most strongly, and we’re benefiting from that.”

So why is BA flying high when Ryanair boss Michael O’Leary complained that UK passengers stayed put over the sunny summer and winter fares are falling? Mr Walsh reckons that claim had more to do with his fellow Irish boss than the British market.

“I don’t believe everything O’Leary says,” the IAG chief executive said.

Mr Walsh believes Ryanair’s profit warnings over impending “soft prices” are a way to cut its own fares and may be a route to forcing other, weaker European airlines out of business.

“He’s the price leader, he makes the prices – so when he talks about the market and prices being soft, it’s because he’s sensing weakness in other airlines. One of his best strengths is to get so much free advertising. But [Ryanair’s] problem is unique to Ryanair’s performance,” Mr Walsh said.

In fact, the IAG boss’s  view of the European aviation market has perked up over the past few months.

“The mood across Europe is improving,” he said. “People are feeling more confident and I think next year more businesses will be inclined to spend money, investing and maybe creating new jobs. I’m cautiously optimistic about 2014. You can’t relax in this industry – but we’re heading in the right direction.”

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