Iberia LíNeas AéReas De EspañA S.A. Business Information, Profile, and History

Company Perspectives:

Iberia, which was founded more than 70 years ago when it flew its first three Rohrbach-Roland aircraft on a regular service between Madrid and Barcelona, is today the head of a group that encompasses three other carriers, two of them subsidiaries (Binter Canarias and Binter Mediterráneo) and one a franchise (Iberia Regional/Air Nostrum). Iberia is a partner in the world's largest airline alliance, oneworld, and in addition to passenger and freight transportation it engages in such related activities as aircraft maintenance, airport handling services, computer systems, in-flight catering, and holiday travel packages.

History of Iberia Líneas Aéreas De España S.A.

Iberia Líneas Aéreas de España S.A. is Spain's national airline and one of the world's oldest. It carries 26 million people a year to a hundred destinations in 42 countries. Iberia also hauls 220,000 tons of freight a year. The company is also engaged in a wide array of aviation and travel support services. After receiving two substantial government bailouts in the 1990s, Iberia has become partially privatized, trimmed its payrolls, and rediscovered profitability.

Origins

The company was established in 1927 as Iberia, Compañia Aérea de Transportes, S.A. Crucial to the founding of Iberia was support from the German Deutsche Luft Hansa A.G. (Lufthansa) which, in addition to investing 24 percent of the capital, contributed materials and technical support. The majority share of the company was held by Horacio Echevarrieta, a businessman who became chairman of the board. Iberia's objective was to provide peninsular and transatlantic air services. The company immediately applied for, and obtained from the authorities, concession to establish regular flights between Madrid and Barcelona.

The fleet comprised three Rohrbach Roland monoplanes brought in by Luft Hansa. The inaugural flight, Barcelona to Madrid, was launched in December 1927. The three-and-a-half-hour trip was a daily service--except for Sundays--operating in both directions. In February 1928, the company received a permit to carry mail between these two cities and with their entry the whole of Europe was now covered by an airmail network.

In July 1928 a twin-engined Dornier Wal seaplane was chartered and took off from the southern town of Cádiz for the Canary Islands. The object of the flight was to test the viability of setting up a base for seaplanes in the Canaries for a service from Seville, with an eventual extension to the Cape Verde Islands. These would be used as a staging point for a postal route to South America.

In 1929 Iberia, along with Unión Aérea Española, was merged into Compañia de Líneas Aéreas Subvencionadas S.A. (CLASSA) and the new enterprise was granted a monopoly. CLASSA, which initially ran flights between Madrid and Seville, began regular operations in May of that year. Though Iberia as an independent entity disappeared from the air transport scene until 1937, the company's director, Daniel de Araoz, maintained its registration in the Companies Register of Madrid.

CLASSA, unlike its predecessors, indicated no intention of establishing flights across the South Atlantic. Soon after Spain was declared a republic in 1931, CLASSA was replaced by a new public entity known as Líneas Aéreas Postales Españolas (LAPE), which inherited CLASSA's fleet.

World War II Era

LAPE operated only until the outbreak of the Civil War in 1936. Iberia again came on the scene in 1937 when it began making flights in nationalist-held territory under the guidance of Araoz. The fleet consisted of seven Junkers JU-52. Support was once again provided by Luft Hansa to which all of Iberia's capital was transferred, and whose Spanish representative Araoz virtually became. The airline carried 21,000 passengers in 1938 and earned profits of Pta 500,000 on an income of Pta 5.7 million.

At the end of the Civil War, with Barajas airport in Madrid as its base, Iberia began flights between Madrid and Barcelona, Burgos, Seville, and Valencia, as well as Lisbon, in Portugal; between Seville and the Canary Islands via stopovers in Spanish Sahara; and between Palma de Mallorca and Vitoria via Barcelona and Zaragoza.

Nationalized in 1940 when outstanding debt to Luft Hansa was paid off, Iberia was granted a monopoly over regular domestic flights and in colonies and protected territories. The company's capital was sold to the state for a nominal value of Pta l.l million.

During World War II, close ties with Luft Hansa continued, though shortages prevented the Germans from supplying Iberia with materials and fuel. As fuel supplier to Spain, the United States refused to undertake deliveries until connections with Germany were severed. With this in view, in 1943 the company was integrated into Instituto Nacional de Industria (INI), the state holding conglomerate created in 1941 to promote Spanish industrial self-sufficiency. Representatives from INI, answerable to the prime minister's office, sat on the airline's board.

In 1945 Iberia received a state subsidy of Pta 10 million. By this year in addition to the Junkers, the company had also added to the fleet 17 DC-3 planes, converted from military to civilian use. In 1946 London, Rome, Montevideo, and Buenos Aires were added to Iberia's list of destinations. The service to South America was a commercial success because it met demand from those cut off from Spain since before the Civil War. However, there was soon stiff competition for this market from such rivals as Air France and the British South American Corporation.

Postwar Expansion

Though the supply of spare parts was interrupted due to the postwar diplomatic isolation imposed on Spain, Iberia continued its international expansion, becoming the flagship company for INI. On the grounds that the company was unable to meet all domestic freight and passenger demand, a second airline, Aviacion y Comercio (AVIACO), was granted authority to operate in 1948. Initially, AVIACO's destinations were to be those not served by Iberia, especially Bilbao and the northwest. In 1954 AVIACO was taken over by INI.

The signing of the Spanish-American defense treaty in 1953, elimination of visa requirements for U.S. visitors to Spain, and the introduction of tourist class on airline trips motivated Iberia to start transatlantic flights in 1954. The 1954 International Convention on Civil Aviation was applied very liberally by Spain and saw the development of mass tourism using charter flights. Over two million people now traveled to the country annually.

While Iberia was under pressure to keep up with rivals acquiring new aircraft from Boeing and Douglas, the company and its parent, INI, could not agree on the need for transatlantic jetliners. INI often imposed restrictive purchasing policies in what it saw as prudent corporate strategy. However, the purchase of three DC-8 jets was eventually approved and these were delivered in 1961. Unlike other INI enterprises, Iberia, a major contributor to the national coffers, was greatly influenced by external factors. However, INI, having control over Iberia's financial and investment decisions, did not allow the company to react to these outside forces.

By 1965 profits rose to Pta 165 million, more DC-8s had been acquired, and a joint AVIACO-Iberia board was set up to coordinate policies. A collaboration agreement with Aerolíneas Argentinas was signed in 1967; Madrid to Buenos Aires was becoming Iberia's busiest route and Aerolíneas Argentinas could now acquire aircraft with the Spaniards acting as financial intermediaries. Similar agreements were entered into with carriers in Uruguay and the Dominican Republic.

The Turbulent 1970s and 1980s

In the 1970s, Douglas DC-9 and Boeing 747 airplanes were added to Iberia's fleet; Madrid's Barajas airport had a new mechanized cargo terminal; services were started to Johannesburg, South Africa, and to cities in Mexico and Central America; and other routes were extended from Munich to Warsaw, Rome to Athens and then Istanbul. During this period a radical change in INI-Iberia relations, never very cordial, occurred when Emilio Gonzalez became head of aviation in the parent company. INI took over all major decision-making regarding Iberia and Gonzalez's power included veto rights over proposals made by the carrier. There was a fierce internal debate over the acquisition of Boeing B-727 planes versus Douglas DC-9s and the risk of duplicating maintenance costs implied by the proposed purchase of DC-9 planes. It culminated in Spanish orders that effectively revived the sagging fortunes of the B-727 production line.

In 1977, while celebrating its 50th anniversary, the airline carried ten million passengers for the first time. However, a three-month strike by Spanish air traffic controllers contributed to a loss of Pta 729 million, as did a three-day work stoppage by all ground staff. A three-year program for the development of organizational reform and a more polished image was launched. Among the issues to be addressed were improved efficiency, lowered costs, and depoliticized management and decision-making. The latter was in response to the political changes in the country leading to the separation of the Air and Defence Ministry from all matters of civil aviation. In addition Iberia entered the Atlas group--comprised of Air France, Lufthansa, Sabena, and Alitalia--for cooperation in the servicing of a number of its planes.

In 1980 a dispute arose with Boeing over commissions paid by Iberia for a B-727 aircraft order, which was ultimately canceled by INI. The matter was finally settled the following year when Boeing agreed to give Iberia a letter of credit for US$3.4 million, the amount of the commission. Also, the American company had to declare it had not paid any Spanish official in order to induce the purchase.

In 1982 Iberia entered into cooperation agreements on technology transfer, maintenance, and flight operations with Mexican and Peruvian airlines, though neither agreement involved financial participation. When electronic reservations operations were introduced into those countries' airports, Iberia had sufficient expertise in computer technology to act as adviser.

Two major events for Spain in 1982 were the World Soccer Championship and the visit of Pope John Paul II, both of which were expected to bring large numbers of tourists. The results were disappointing for Iberia, however--only 23 of the 231 charter flights were booked. For the fourth year running there were losses. In 1983 the company lost Pta 9.2 million. This was blamed on a combination of factors: an increase in fuel prices, decline in the Latin American markets, appreciation of the dollar--currency in which many payments were made&mdash well as the devaluation of the peseta and the consequent increase in costs. The airline also had a policy, from then on abandoned, of subsidizing fares of families with many children between the islands and the mainland. Furthermore, Spanish internal flights were 30 percent cheaper than those in the rest of Western Europe.

As a result of a viability plan introduced for the years 1983 and 1984, some 700 persons were laid off in an effort to reduce costs. Among those laid off were a number of pilots, and in June 1984 a strike was called. The pilots' work stoppage lasted one month and cost Iberia Pta 3 billion. Upon the company's refusal to recognize ASETMA as the maintenance personnel's union and sole representative in negotiations, maintenance technicians also went on strike. For days operations were virtually halted. Nevertheless, a total of 12.5 million passengers were carried that year and the company took delivery of its first Lockheed Superconstellation. Iberia's losses for the year totaled Pta 16 billion.

By 1987 Iberia had expanded to include flights to Tel Aviv, Khartoum, Moscow, and Tokyo, as well as to several Canadian and U.S. cities. In that year the Iberswiss Catering joint venture was established with Swissair, and a cargo subsidiary, CARGOSUR, was started for the company. In addition, Iberia, in conjunction with Air France, Lufthansa, and SAS, created a computerized communications and reservations distribution system called AMADEUS. By 1992 AMADEUS had served over 17,000 travel agencies and 16,000 ticket offices worldwide.

An internal report reviewed the issues that continued to trouble the airline during the 1980s: an unproductive network; low returns per passenger/kilometer carried; lack of motivation among employees; high financial costs; and poor public image. A new strategic plan proposed that these be handled and improved with studied solutions for each, accompanied by the creation of complementary companies that would have a different cost structure and operate specifically for regional traffic. This proposal was implemented in 1988 with the establishment of Binter Canarias, which would shuttle passengers back and forth from the Canary Islands. In the wake of improvements in the company's finances, management started a fleet modernization program in 1988, with US$l billion in orders for Douglas MD-87, A-320, and A-340 aircraft as well as Boeing B-757 planes. The fleet was scheduled to be completely new by 1994.

New World Expansion in the Early 1990s

As part of its strategy to penetrate the South American market, Iberia acquired a 35 percent share in LADECO, the Chilean national carrier, in 1989. This was followed by an agreement in 1990 to acquire a stake in Aerolíneas Argentinas, Latin America's second largest airline, which was then being privatized by the Argentine government. The agreement gave Iberia a 30 percent holding in the airline, in addition to rights of management, while Argentina retained only a five percent share. Iberia paid US$260 million in cash for its part of the contract.

Iberia was, yet again, beset by strikes in the late 1980s and early 1990s, including a stoppage in May 1991, when a 24-hour strike by both ground and air crews necessitated the cancellation of most international flights. The workers' stoppage was called in response to wage freezes imposed by management following losses of Pta 22.5 billion in 1990. The Gulf crisis and subsequent recession also contributed to the 1991 pre-tax loss of Pta 51.3 billion.

A transaction finalized in 1991 and worth US$145 million enabled Iberia to buy into Venezuela's main airline, VIASA. With this takeover Iberia acquired a 45 percent holding, while the company's partner in the agreement, the local bank Banco Popular, received a 15 percent share in the airline. Iberia thereby further raised its share in the Latin American market and came nearer its aim of being the leading carrier between Europe and that region. Iberia claimed it was defending natural markets, that these ventures had no speculative element.

In the liberalized aviation climate of the 1990s, Iberia saw its major competitive challenge from American rather than European or charter companies. The company's main priorities in meeting this challenge were set out in the strategy announced in April 1992: reorganized corporate management, trimmed company workforce, and strengthened ties to the Latin American market. This Pta 760 billion strategy, with a goal of Pta 56 billion in profits by 1996, was based on several assumptions about the future. One, in particular, was an expected 7.1 percent increase in the rate of air traffic.

Other seemingly optimistic assumptions upon which company forecasts were based included an average annual increase of 13.7 percent in revenue in the years 1992 to 1996 with a 9.5 percent average increase in costs over the same period; profits were anticipated at Pta 4.9 billion in 1992 and at Pta 55.9 billion by 1996. Of the total Pta 7.6 billion, medium-term investment, 51 percent would be from internal cash flow, 33 percent from bank debt--including loans from the European Investment Bank--and the balance from authorized company capital increase.

In an effort to help guarantee the success of Iberia's plan to become profitable again, in 1992 the European Community Commission approved the Spanish government infusion of Pta 120 billion (US$923 million) into the company. Though Iberia chairman Miguel Aguilo tried to convince the Commission's executive committee that the money should not be considered a subsidy, the panel ruled otherwise and stipulated that no further bailouts would be approved.

Another setback occurred in 1992 when it became necessary for the Argentine government to renationalize a portion of Aerolíneas Argentinas. Local minority investors could not provide funds for the loss-making enterprise, forcing the government to increase its share to 33 percent, though Iberia's stake remained at 30 percent. In spite of such problems with its Latin America investments, two major points in Iberia's favor were its 35 percent share of the market for flights between Europe and Latin America and the low break-even point on such flights--65 percent capacity, as compared to 75 percent capacity on North American trips. In addition, to further its stake in the region, Iberia was considering taking over a major Bolivian airline, Lloyd Aereo de Bolivia (LAB), which was in the process of being privatized.

To add to the list of concerns for Iberia's management, in 1992 the company also faced potential competition from such surface transportation systems as the national highway network and railways, both of which were scheduled for improvements in that year. Of particular concern was the high speed train AVE, operating between Madrid and Seville, whose inauguration was timed to coincide with the opening of Expo '92 in the latter city. This major event did, however, provide a welcome bonus for the airline--while 20 daily flights had been anticipated to serve the Andalusian capital, the Iberia Group had to supply ten percent more passenger seats in order to meet the demand. Nevertheless, Iberia lost Pta 35 billion (US$268 million) in 1992.

A new bilateral agreement allowed Iberia to become the first foreign carrier to ever establish a hub in the United States. In return, U.S. carriers were allowed to fly to Spain from several U.S. cities. The hub opened at Miami International Airport in May 1992. In spite of the strategic potential of the Spain-South America connection, cargo and passenger traffic was slow, and new chief executive Juan Saez was soon openly contemplating closing the Miami hub altogether. Iberia faced fierce competition in Miami from American Airlines, which was aggressively developing a South American network through marketing agreements with local airlines. To increase its feeder traffic from the United States, Iberia partnered with Carnival Airlines in April 1993, adding a Miami-Los Angeles code-sharing flight. All other U.S. carriers were either competitors or partners of other European airlines.

Industry observers felt that while Iberia made some reasonable yet ambitious expansion plans in South America, it did not integrate them properly with its own operations. The disastrous relationship with Aerolineas Argentinas was credited with consuming most of the cash given Iberia in the 1992 bailout. Some saw the airline's strategic focus more based on neo-imperial ambition than sound marketing logic.

Restructuring in the Mid-1990s

The airline had yet to post a profit in the 1990s, and in late 1994, with bankruptcy likely within a year, it proposed a rescue plan. Iberia suggested cutting salaries by an average of 15 percent over the next two years and dropping 3,000 of its 24,500 workers from the payroll. Iberia had already renegotiated the terms of an earlier Airbus order.

Iberia also asked the Spanish government for another capital infusion of Pta 125 billion (nearly US$1 billion). However, the European Commission had only allowed the 1992 subsidy on the grounds that no more public money be used until 1996.

Iberia's pilots perceived a failure in the company's management of its restructuring plan needed to gain the billion-dollar subsidy, and the airline suffered several strikes in November 1995. The company posted a loss of Pta 45 billion for the year. In February 1996, the pilots' union accepted the restructuring plan, which safeguarded pilot jobs in return for productivity increases and a two-year pay freeze. The airline had some of the highest paid pilots in the world.

The European Commission authorized Pta 87 billion (US$711 million) in state aid, less than requested. Iberia's domestic competitors complained about the subsidy when Iberia cut airfares at home. (Spain's domestic market had been deregulated in 1993.)

Iberia agreed to sell most of its stake in Aerolineas Argentinas for Pta 67 billion in April 1996. The buyer, Andes Holding BV, was comprised of Iberia parent company Teneo SA and units of Merrill Lynch and Bankers Trust. Xavier de Irala was appointed chairman in July 1996, replacing Javier Salas.

Iberia gave Airbus its single largest European order in February 1998, ordering 76 aircraft worth Pta 400 billion (US$2.6 billion). Iberia already operated Airbus planes, and hoped to reduce its maintenance costs by standardizing its fleet. The year's record results seemed to justify the optimistic purchase: a pre-tax group profit of Pta 65.97 billion on revenues of Pta 664 billion.

Pre-tax group profit fell to Pta 31.2 billion (EUR 187.95 billion or US$182.2 million) in 1999 on revenues of Pta 647 billion. Charter subsidiary Viva Air had ceased operations during the year. Iberia held a one-quarter share in the airline ticketing company Amadeus, whose initial public offering in October 1999 realized EUR 848 million. Iberia later reduced its interest to just over 18 percent.

In December 1999, an agreement was finally reached to sell 40 percent of Iberia to a group of shareholders. British Airways would acquire nine percent of the company for EUR 245 million (£150 million) while American Airlines took one percent. Spanish investors took the other 30 percent. Iberia had two years earlier formed code-sharing arrangements with the two airlines.

A New Outlook in 2000

Iberia foresaw continued profits in its future as it increased capacity and raised productivity. It announced a new cost-cutting plan in March 2000. An often-postponed initial public offering for the carrier was scheduled for October 2000.

An alliance with Air France surfaced in June 2000. The deal would put Iberia passengers on Air France flights to the Far East, while those of Air France would connect with Iberia's Latin American flights. Although Air France had also partnered with Delta Airlines in the United States, Iberia remained in the 'oneworld' alliance led by American Airlines and British Airways.

Principal Subsidiaries: Amadeus Global Travel Distribution SA/Amadeus Data Processing GmbH & Co (18.28%); Aviacion Y Comercio SA (AVIACO)(99.9%); Binter Canarias; Binter Mediterráneo; Campos Velazquez SA (99.99%); Compania Auxiliar al Cargo Express SA (CACESA) (74.5%); Iberswiss Catering, SA (70%); SAVIA (66%); ARSA (10%); Mundicolor (18%).

Principal Competitors: Air Europa; Alitalia-Linee Aeree Italiana, S.p.A.; Deutsche Lufthansa Aktiengesellschaft; Spanair; UAL Corporation.

Chronology

• Key Dates:

• 1927: Iberia is founded with help from Luft Hansa (later Lufthansa).
• 1929: Iberia merges with Compañia de Líneas Aéreas Subvencionadas S.A. (CLASSA).
• 1931: CLASSA is replaced by Líneas Aéreas Postales Españolas (LAPE) after Spain becomes a republic.
• 1937: Iberia displaces LAPE during the Civil War.
• 1940: Iberia nationalizes with payment of debt to Luft Hansa.
• 1943: State holding company INI takes over Iberia.
• 1967: Three Latin American airlines sign agreements with Iberia.
• 1977: Passenger count exceeds ten million in Iberia's 50th year.
• 1984: Pilots and maintenance personnel strike.
• 1987: Amadeus booking system is launched with three other airlines.
• 1991: Historic bilateral agreement clears way for a Miami hub.
• 1992: Iberia receives US$1 billion subsidy after expanding in South America.
• 1996: Restructuring plan is accepted by unions; European Community Commission allows US$711 million subsidy.
• 1999: Iberia is partially privatized.