BA Owner Still Likes Norwegian, Sees Qatar Pact Exit: IAG Update

(Bloomberg) -- IAG SA CEO Willie Walsh dropped a couple of late bombshells at the British Airways owner’s investment day on Friday, saying his company hasn’t given up on buying Norwegian Air Shuttle ASA and that Qatar Airways, the U.K. group’s biggest investor, may quit the Oneworld Alliance.

Walsh said IAG’s interest in Norwegian may start dimming over time after it had two bids rejected, but still sounded keen on a deal, adding that he’s constantly monitoring the situation. The remarks regarding Qatar Air amount to the first independent confirmation that it was serious in a recent warning that it could walk away from Oneworld amid tensions with other members.

IAG is also stepping up growth plans through 2023 in a bid to boost profit by an average of 11 percent annually from the previous five-year target. The upgraded forecast lends a voice of confidence from one of the biggest players in a European airline market shaken by rising fuel prices and overcapacity.

IAG stock advanced the most since May as investors welcomed the guidance, before trading little changed. Read more below on the biggest news to come out of the investor day, which we’ve been following since 9 a.m. London time.

Not Giving Up on Norwegian Just Yet (3:30 p.m.)

IAG is still interested in buying the Scandinavian discounter even after being twice rebuffed, Walsh tells investors. The CEO says the carrier’s European network is especially attractive, and though he cautions that his company’s interest “wanes over time,” he still appears enthusiastic.

“I’m getting updates. There’s a lot happening in that company. It’s an opportunity, especially if you look at the short-haul network. But we would only do it if we thought that would generate returns that can match.”

Expect Qatar Air to Leave Oneworld (2:50 p.m.)

It’s “highly likely” that Qatar Airways will exit the global grouping, Walsh says after being quizzed on comments from Akbar Al Baker, his counterpart at the Gulf carrier, regarding a possible exit.

“He doesn’t say these things without being genuine,” Walsh tells investors. “He is annoyed with the way some members of the Oneworld Alliance have responded to them as an alliance partner and he doesn’t think that’s appropriate.” Qatar and IAG will remain as close as ever and are looking at greater cooperation on shared aircraft, he adds.

Al Baker previously clashed with American Airlines, a Oneworld member and partner of BA on trans-Atlantic routes, over comments suggesting Gulf airlines had benefited from illegal aid, and again when Qatar sought to take a stake in the U.S. company. More recently Qatar Air has been frustrated by the long-standing joint venture between Oneworld’s Qantas Airways Ltd. and Dubai-based Emirates at a time when the U.A.E. is among nations blockading Qatar.

Planemakers Are You Listening?

IAG hasn’t yet decided on how to fill a 172-plane gap between current orders and its updated fleet plan, CFO Enrique Dupuy said. That’s split between 128 short-haul jets and 44 for long-haul routes. The additional orders would take the IAG fleet to 716 aircraft by 2023.

Cruz Wants to Fix BA’s Image Problem (12:56 p.m.)

British Airways chief Alex Cruz is aware that some of his changes to the airline haven’t been well-received -- for example, the decision to switch from free food aboard short-haul flights to paid-for M&S snacks. The airline’s now stepping up efforts keep passengers happy. Here is some of what’s coming:

• Better food, bedding and amenities in first-class (May) and premium economy (1Q)
• More lounges, even at airports where frequencies are low, including in San Francisco, Johannesburg and Geneva
• New first-class, business, premium-eco seats in a “competitive” layout
• Wi-Fi across short-haul fleet by mid-2019 and 80% of long-haul by yr end

BA will also hire 3,000 more staff next year, 2,000 of them cabin crew who will get five days more training to help address concerns about service quality. Also, a heads up from Cruz that BA plans to celebrate its centenary next year. That’s based on a rather tenuous link to a carrier called Aircraft Transport and Travel (BA itself was formed via a 1974 merger), but expect a marketing blitz.

Growth Story at Iberia (12:22 p.m.)

Spanish business Iberia is forging ahead with capacity growth after a five-year transformation program, its chairman and CEO Luis Gallego outlined. The plans still need to be approved by workers and unions, but compared with a 1 percent decline in available seat kilometers over a decade, growth will average 6 percent from now to 2023. Two-thirds of that will be in long-haul, facilitated by higher marketing spend in major Latin American markets including Argentina, Mexico, Chile and Brazil.

IAG’s Irish Answer to Norwegian Air (11:44 a.m)

Possibly even more than Level, IAG’s Aer Lingus arm positions itself against the likes of Norwegian Air in the long-haul, low-cost market. IAG’s argument for why the Irish business will succeed where Norwegian struggles: a presence at primary airports, traffic feed from partner airlines and, importantly, the financial strength of being part of a major group, something Aer Lingus CEO Stephen Kavanagh contrasted with Nordic operators Wow Air and Icelandair.

A few numbers help show what IAG is trying to achieve. Since its acquisition in 2015 Aer Lingus has boosted capacity, cut ticket prices (passenger revenue per unit is down 9 percent) and doubled its operating margin. The airline plans to increase the number of North Atlantic-destinations by two-fifths to 18 by 2023.

It Ain’t Easy Being a Short-Haul Discounter (11:06 a.m.)

From Vueling, IAG’s discount unit in Spain, came more restrained growth plans. The airline has been suffering due to an escalation in strikes by air-traffic controllers, which has shut air space in France and led to a surge in flight delays. Vueling’s current plan is to refine its bases and try to isolate the regions where ATC strikes are expected to hit hardest.

Unit CEO Javier Sánchez-Prieto is also moving to a simpler route network, smoothing out the traditional shift in capacity between the busy summer and slow winter periods, and lifting the number of hours the unit operates its aircraft each day. At the same, Vueling is limiting capacity growth by cutting its fleet plan for next year by four aircraft.

Welcome to Level, Where Your Blanket Costs less (10:43 a.m.)

Investors have heard from Vincent Hodder, CEO of Level, IAG’s newest brand and focused on producing a working model for low-cost long-haul flights. He’s outlined plans for the unit, describing how he aims to continuously remove costs. That includes reducing the expense of amenities (like earbuds, eye masks and blankets) and staff uniforms by 8 percent and 15 percent, respectively.

The airline’s looking at options for growth that include franchising the brand and sub-contracting to other operators. It’s also looking at building partnerships with short-haul airlines that can feed into its long-distance network. The airline has committed to a fleet of 14 jets in 2019, with that possibly rising to as many as 42 over five years depending on performance.

Bigger Fleet (10:25 a.m.)

IAG is planning to boost its fleet by about 130 aircraft to 716 jets by 2023, including extending the life of Boeing 747 jumbo jets at British Airways. BA will retain five more of the hump-backed planes by 2020 compared with previous plans as it widens an upgrade program.

Shares Surge (8:10 a.m.)

The stock was trading up 2.9 percent as of 8:10 a.m., giving the carrier a market value of 12.6 billion pounds, after earlier rising as much as 5.4 percent. IAG is down about 3 percent this year, compared with a 10 percent drop in the 10-member Stoxx 600 Travel & Leisure index.

Expansion Plans (7:51 a.m.)

The airline group, which owns carriers including British Airways, Spain’s Iberia and Ireland’s Aer Lingus, outlined plans for increased investment of about 500 million euros a year. The aim is to boost annual profit to 7.2 billion euros for 2019-2023, an 11 percent increase from the 2018-2022 forecast. (Profit refers to Ebitdar, or earnings before interest, taxes, depreciation, amortization, and rents or restructuring costs.)

A statement issued ahead of the presentation didn’t spell out details, but British Airways said it expects average seat kilometers, a measure of capacity, to increase by 6 percent per year, one percentage point higher than its earlier goal. The company has recently been adding transatlantic routes with its two low-cost units Aer Lingus and Level. They compete in a cutthroat market that’s been rattled by discount carrier Norwegian Air Shuttle ASA.

To contact the reporter on this story: Benjamin Katz in London at bkatz38@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Christopher Jasper

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