IAG a House of Cards?

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This topic contains 218 replies, has 35 voices, and was last updated by  SimonS1 10 Nov 2013
at 10:09
.

Viewing 15 posts - 1 through 15 (of 219 total)

  • Anonymous

    HonestCrew
    Participant

    Hi all.

    I’d like to start a new thread to highlight a concern amongst BA employees.

    There is a big concern across the company right now that IAG is on the brink of becoming a ‘house of cards’ and that the slightest change in fortunes of the airline industry could bring the whole thing crashing down.

    From a struggling Spanish bank having a large stake in Iberia to the attempt to use bonds in the takeover of BMI to IAG’s recent losses.

    Naturally we are worried for the future.

    I know many of you follow BA/IAG’s business moves with interest and I’d like to know your opinions, maybe some reassurance??

    Would you be concerned if you worked for BA?

    Cheers.


    SimonS1
    Participant

    With €4 billion in the bank it doesn’t look likely to happen any time soon, and let’s face it any airline that can survive in the current economic environment is well placed.

    On the other hand it’s pretty clear that the business model needs changing, IAG’s cost base is far too high, so to an extent the employees are master of their own destiny.

    The airline business is quite a price sensitive one, so without a change in the business model there is, for example, a quite a good pincer movement building between the low cost model for short trips and the Middle East and Asian airlines for longer haul.


    VintageKrug
    Participant

    Sensible points, Simon.

    With the greatest respect HC, the perspectives of the many BA employees I have discussions with during the course of my travelling year would not be ones upon which one should make judgements about the success or otherwise of any commercial operation.

    The level of ignorance about business in some (not all!) quarters is, frankly, astonishing. One or two “get it” but the vast majority do not.

    For some reason cabin crew, and it seems particularly those at BA, are some of the most impressionable and easily lead people I’ve ever come across.

    It’s essential you take your perspectives from a wide range of sources, even from people like me who you probably believe spout a pack of lies. But I called the recent dispute just as I saw it, and the outcome I suggested did actually happen. BASSA’s preferred outcome did not.

    Many of their perspectives are informed by Galley FM, and the three specific items you mention – which are actually all quite positive in the long term – are twisted to seem negative, and straight out of the BASSA playbook.

    These perspectives are fed to you on the newly recreated, but still as leaky as ever, BASSA forum which has gone into overdrive since the alleged breaking of “agreements” last week when BA management used available cabin crew to staff a service which would otherwise have been cancelled, which helped get passengers home when otherwise they would not have, and saved BA thousands in EU compensation and disruption costs.

    Running an airline IS A VERY HIGH RISK BUSINESS. Margins are tight and negative external influences are many, varied and unpredictable. I wouldn’t work for an airline. And I certainly wouldn’t hold a material investment in one.

    BA is considerably stronger now that outdated practices have begun to be eliminated. The recent results were influenced by costs incurred by the bmi takeover and BA’s ongoing commitment to its legacy crew in paying off the Pension debt. Both are very positive from a cabin crew perspective.

    The current turnaround/consolidation strategy will take time to reach fruition, but the steps already taken at BA to get a grip on costs are already delivering savings, and the acquisition of Iberia was essential in delivering future growth, and without that acquisition BA could not have purchased bmi.

    The same turnaround is beginning to happen at Iberia. It will be painful, and the Unions will crow at every possibly opportunity. But it has to be done, uncomfortable though it will be.

    Out of this in the longer term will come a company which is larger, stronger and more cost effective. And that will be good for all employees.

    You’ll notice that unions don’t thrive at strong, profitable companies and so they will do all in their power to frustrate that objective.

    There’s no question running an airline is risky, and employees would no doubt prefer that Willie did not take any risks with IAG. Unfortunately, taking the safe uninspiring course would be a death knell to any airline and so some risk has to be factored in.

    Very few companies now have long term job security; it’s a mystery to me why cabin crew – who now work in a lower paid commoditised service industry – believe it is their birthright.

    So yes, I think you’re right to be concerned, but no more so than if you worked at any other airline. And in many respects BA as part of IAG is considerably stronger, with plenty of upside for the future precisely because of the tough decisions being taken at the top.

    And while you’re employed, your concerned status is being remunerated at a level far in excess of what should be being paid in the market, so enjoy it while it lasts.

    As legacy crew, you’re very very lucky indeed to remain employed on such a well paid contract, when many other airlines have chosen to make those on more lucrative contracts redundant (hard though that is for crew). I would suggest that such largesse cannot continue for ever and that the time for a formal renegotiation must be in the 3-8 year timeframe.

    Until then, try to rise above the fray and get on delivering excellent service to passengers.


    Hippocampus
    Participant

    HonestCrew, You genuinely have nothing to worry about.

    It is often said that the true measure of a company’s performance is not the share price or accounting profit, but cash. As SimonS1 says, IAG has cash, and lots and lots of it.

    The questions around the bond issue, the Bankia stake and Iberia’s performance are valid. The bond issue was an attempt to pursue a new and innovative form of financing for airlines in Europe that the markets were not receptive to. It is a little embarrassing for IAG that it went so far ahead with it before testing market sentiment, but nothing more than that and it is not a reflection on the financial health of IAG. The uncertainty over the Bankia stake is not helpful but it is better that it is sold to another investor rather than be held by the Spanish Government. There is a chance that Qatar Airways could acquire it which with it being rumoured to join Oneworld would be a good thing.

    As for Iberia’s performance, yes it is markedly different to that of BA. But steps are being taken to address this (Iberia Express, A330 deliveries). There is a huge amount of potential in Iberia and the logic behind the merger and the formation of the IAG structure is still sound.

    Remember three years ago BA was making very heavy losses and it was burning through cash at a worrying rate. There were many questions on this forum over its future but it restructured itself and pulled through and it’s now stronger than it has ever been.

    It would be better everyone if the airline industry had some stability and certainty but I’m afraid that this has proved elusive for over a decade and is likely to remain so.


    Bullfrog
    Participant

    IAG has spoken a lot about seeking opportunities with other European carriers. Nothing has materialised. Finnair / TAP / LOT don’t appear suitable; Malev has disappeared & I don’t think Iberia adds value.

    Perhaps the linking of BA to Iberia can be compared to that between Mercedes Benz & Chrysler. The best link that came of the latter ‘marriage’ was the divorce. The combined company was worth less than Mercedes previously.

    BA’s relationship with Qantas looks like it is nearing the end, as Emirates swoops to begin a relationship with Qantas.

    IAG has announced it may want a share in American Airlines. Chances of this happening seem remote, as both US Airways and Delta are hovering for a deal.

    Based on the above, I share the concern about the future of IAG & it’s valuable gem called British Airways. I don’t think IAG appears to have a sound business plan for the future. So whilst BA will survive, I don’t think the same for IAG.


    CallMeIshmael
    Participant

    Interesting thread honest crew which deserves a considered response once I have more time.

    Meanwhile as to the apparent cash. Page 122 of the IAG Financial Report (end 2011) indicates cash of €1.977 billion. This is included in the total of current financial assets of nearly €5.5 billion.

    However the other side, total current liabilities is over €6 billion – giving an €500 million near term negative cash gap!

    When longer term borrowings etc are included the financial liabilities increase to nearly €10.8 billion, against financial assets of a little over €6 billion.
    – a €4 billion future headache.

    Lack of cashflow is indeed a major cause of company failure. (BA used their influence in the city to help strangle Laker in this way). Though from the financial report it appears the “Cash” has actually been loaned.

    When interest rates go up, which they surely will, so will IAGs costs of borrowing.

    As LuganoPirate appears to have more experitise in this arena, his view would be interesting.

    http://www.iagshares.com/phoenix.zhtml?c=240949&p=irol-reportsannual

    The figures quoted are from IAG’s own report ending December 2011. Since then the situation has deteriorated further.


    SimonS1
    Participant

    I disagree with you in almost every area I’m afraid.

    Yes the annual report does include €1,977bn of cash, however you overlook €1.758 of ‘interest bearing deposits’ which need to be added as they are effectively cash. Total is therefore €3.735bn.

    Follow the same link and go to the IAG interim management report at 30th June 2012. It states cash and deposits at that date had further increased to €4.013m (hardly “deteriorated further”?).

    I very much doubt this is money they have loaned. Firstly there is very little short term debt in the balance sheet and secondly it would not make financial sense to borrow long term and then keep the money in the bank.

    More likely this is because the majority of air fares are paid in cash up front whereas they take credit from most of their suppliers (hence trade creditors over €5bn). So unless their suppliers withdraw credit they are unlikely to have a cashflow problem any time soon. The biggest risk here would be some form of other catastrophe – Iceland volcano, 9/11 scenario etc causing income to dry up.

    It isn’t correct to say that borrowing costs will go up when interest rates increase. Most big companies hedge all or part of their borrowing, if you check page 118 of the accounts it says 83% of their borrowing is at fixed rates. In other words an increase in interest rates would have very little impact.

    Probably fair to say at the end of the day their accounts are in pretty good shape, contract that with many US airlines who seem unable to survive without being permanently under some form of bankruptcy protection.

    The only downside is the share price, but then most people know that only fools and horses buy airline shares because of the uncertainties of the aviation industry.


    Bucksnet
    Participant

    VK, how on earth can you state that BA could not of purchased BMI without merging with Iberia first? That makes no sense at all.

    And BA shackled to Iberia is not stronger than BA alone or BA/BMI. Iberia is losing millions every week and is dragging BA down.


    Hippocampus
    Participant

    IAG (not BA) bought BMI from its own cash resources. It is unlikely that BA could have done so pre the merger. What Iberia brought to IAG was little/no debt and a very high cash balance.

    IAG management will restructure Iberia to profitability just as BA management did with BA 2-3 years ago.

    Also, now that IAG has bought bmi, it’s not surprising that its interest in other European carriers has diminished.


    Bucksnet
    Participant

    Why is it unlikely?

    BA had about £1.6 billion in cash before the IB merger if I remember correctly, and only paid £172 million for BMI.


    Bullfrog
    Participant

    Hippocampus … interest in Europe has NOT diminished because of buying BMi. Having another European airline would add both a feeder service and a third hub. I can’t think of anything that the BMi deal has done other than bring more LHR slots & extra aircraft seats.

    Europe does not have much left to offer IAG. Its KLM/Air France & Lufthansa / Swiss / Austrian / Brussels vs IAG. The remaining major European carriers are insignificant.


    CallMeIshmael
    Participant

    Recent 6 months – Jan-Jun 2012

    – Cash and other near term assets increased by €793 million

    – Borrowings, monies payable and other near term liabilities increased by over €2 billion (€2,096 million)

    I hope you can now understand why, when viewed as a whole, the situation has deteriorated.


    VintageKrug
    Participant

    Notwithstanding the fact that BA is in a relatively strong cash position, despite vested interests who continue to assert the contrary to shore-up their twisted anti-management agenda, debt isn’t a bad thing at all, especially right now as it’s historically cheap.

    In the current environment, I’d rather hold debt than assets for very many reasons.

    BASSA is busy worrying crew – who haven’t the first idea about corporate finance – about this unnecessarily.

    The very fact that IAG can take on new debt (which means investment in new aircraft, and on board products) is positive, especially at a time when many firms struggle to get access to the debt market, and particularly so as much of it is at fixed interest.

    Investing during a downturn to be ready for an upturn is exactly what IAG should be doing right now, alongside a focus on reducing costs.

    Far from a concern, it’s a very positive thing in the long term.


    Hippocampus
    Participant

    Bucksnet – £1.6bn in cash is not that much when a lot of it is from unfulfilled forward bookings.

    Bullfrog – IAG’s long term ambitions are far greater than Europe. With two hubs with potential for development and growth IAG has enough in Europe for now.

    And as for Qantas, I doubt IAG is bothered what they do. Australia doesn’t even feature in the IAG strategy.

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