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CEO Interview - An Exciting Business

Antonio Vazquez, Executive Chairman and CEO of IberiaIberia Executive Chairman and CEO Antonio Vázquez details his hopes for the BA merger and how he sees the aviation sector after his experience in other industries.

What is your evaluation of Iberia’s performance in the present climate?

Iberia’s performance has been in line with all the other major network carriers in Europe. The home market is difficult but improving. The  good news is that our long-haul routes have been recovering well and are profitable. This is boosting the company’s figures.

To take advantage of this, we have re-allocated resources to Latin America and trimmed capacity on short-haul operations. Overall load factors are up, as are revenues and yields.

I am cautiously optimistic for 2011. Cargo revenue is up and passenger numbers are increasing. However next year will be more difficult in that the fuel price—which makes up about a quarter of our costs—will doubtless rise.

What impact will the merger with BA have?

The merger means significant benefits for our customers—they will have more travel options, among other things—for our shareholders and for our employees. It gives us critical mass to work more efficiently in a very competitive environment. We  also expect to be able to realize benefits in the short term. By year five we expect $548 million (EUR400 million) in synergies: 40% from increased revenue and 60% from cost savings. The merger will also allow us to be active in the consolidation market in the future.

Can you successfully integrate the different cultures?

I have done many mergers in my life. It is important to have common behavior. The cultures in British Airways and Iberia are not that different; after all, we have faced the same challenges with very similar business models. Both companies are customer and profit oriented. I do not expect combining the cultures to be a significant task.

We should also keep in mind that, operationally, we will remain as different companies. We are working under the International Airline Group (IAG) banner but we will keep the two brands separate. IMG just gives us the flexibility to consolidate further. 

 How will you manage the hubs? Madrid has space, while London Heathrow is constrained.

True—this is not only a combination of airlines, it is also a merging of hubs. Heathrow is saturated—this is the reality and we will have to live with it at two runways.

Fortunately, Madrid has capacity, which is very positive for the merger. We might be able to relieve some of the pressure on BA at Heathrow by better using Madrid and its possibilities to accommodate our growth. That’s good news for both airlines and for the alliance with American Airlines.

Speaking of American, what are the hopes for Trans-Atlantic consolidation? Is your alliance a step on the way to a merger?

Put simply, we don’t have the legal foundation to merge. That  might change, in which case we will consider the topic then.

Consolidation is a practical solution to the industry’s profitability problem. Airlines are the most fragmented part of the aviation value chain. The margins we operate on are far too low and consolidation makes perfect sense.

We are seeing mergers all over the world—LAN-TAM, Continental-United. The world is moving on, and there is momentum towards consolidation. Of course, it all depends on the regulators but it would be healthy for the industry to be able to merge across borders.

Your background is in the tobacco industry. Has anything surprised you about aviation?

Tobacco is more predictable and has superior margins, but I  have been involved in aviation before thanks to my previous three years as a board member of Iberia, so there have been no surprises. In  any case, aviation is an exciting business and I’m happy to have made the change. What I find most appealing is the timing of the industry restructuring. There is a clear need for a different business model.

 The latest security event is a case in point. How should governments react?

There is a threat and that is a genuine concern, but it should not lead the authorities to overreact. They must keep the balance between the possible risks and the burden that is imposed by trying to avoid them. This is the way that has been followed by other transportation sectors, such as train and subway networks, which are also subject to these threats. It is important that governments take into account the international dimension of air transportation and not impose unilateral measures. 

The industry is an easy target for government taxes, especially in Europe. Is this a trend that will continue to hurt airlines?

Governments should cease to consider air transport a luxury business and must realize the role it plays as a motor of the economy and international relations.

Some countries understand the economic benefits of air transport. And they are mindful that anything that hinders aviation—including fees or taxes—is detrimental to the benefits that we bring.

Why don’t passengers complain about taxes? Have they become distanced from the airlines?

This is an important debate. On one hand, this industry has traditionally passed all its cost savings on to the consumer. On  the other hand, we need to consider that the most important complaint is not about the final price being too high. In the end, this is all about demand elasticity due to changes in price.

When dealing with governments, you have to understand that it is difficult for politicians because they have to reconcile long‑term benefits with a decision that may lose them the election tomorrow.

All we can do is keep our door open for consultation. Governments already know the arguments; we can only hope they make the right decision. It is worrying when they don’t come up with the obvious answer, but all we can do is keep supplying information and support.

Do we treat passengers well enough? Or do we need to completely rethink the processes involved in air transport?

We need to distinguish between different types of carrier. From  a network carrier perspective, we have a strong interest in service. If you sacrifice quality for short-term profit you will not have a  sustainable business model.

We do our best to treat our customers well. Perhaps we even do more than we should. Look at the volcanic disruption in Europe in 2010. Airlines were compensating passengers and taking care of them beyond the specified requirements. No other industry would do that. Airlines are very close to their customers.

Most complaints are about issues beyond airline control. But  we are the face of the whole value chain and we become the victims of long immigration queues or weather delays. We must cooperate with all stakeholders, such as airports and customs, to make processes as easy and as transparent for passengers as possible.

Is the environmental resolution at the International Civil Aviation Organization (ICAO) assembly enough to stop the European Union’s Emissions Trading Scheme (EU ETS)?

The ICAO Resolution—which includes an initiative to explore the feasibility of global, market-based measures for aviation—is certainly an important step in the right direction to fulfil the industry’s objective: a global sectoral approach to reducing aviation emissions. A global solution will avoid creating a patchwork of conflicting and potentially overlapping regional schemes.

But many steps are still needed to reach an agreement on such a global solution, including the next United Nations Framework Convention on Climate Change negotiations in Cancún.

What is important from our point of view is not to be affected by isolated schemes but rather to be counted as a global industry that should be subject to a global scheme. Certainly, the fight against climate change needs to tackle all aviation emissions to be efficient. An isolated scheme will not solve the problem of aviation’s carbon footprint and will distort competition between airlines. We need to find a compromise solution to include all aviation emissions, but that hasn’t been done yet.

IATA has set some ambitious environmental targets. How will we get there?

The entire value chain has a strong level of commitment to achieving those targets. They are ambitious but it is right to have them. No other industry has set itself such targets.

The key factor will be advances in air traffic management such as SES or NextGen in the United States. These must happen quickly. Without SES, carriers in Europe won’t be able to make big CO2 savings. It makes no sense to be inefficient in the sky, which simply forces airlines to buy more fuel and carbon rights. We are paying for the inefficiency of governments.

If you could make three changes to the industry tomorrow, what would they be?

First I would like to see global regulations that take into account the fact that air transport is a key contributor to global economic prosperity. We need to avoid burdensome and potentially contradictory regulations around the world. Aviation is a global industry and airlines compete on that basis. For these reasons, we need worldwide harmonized rules to set a level playing field on a global basis. If there was a choice between global regulation and perfect local regulation, I would say go global.

Second, we need more efficient air traffic management. In  Europe we need the implementation of SES and in the US, the implementation of NextGen.

Finally I would like to see more consolidation within the industry to give airlines the dimensions that would make this a  rational business. Market forces should create opportunities, not restrict them.

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