Case Analysis Of British Airways

Firstly, at least the shareholders seem satisfied with the merger in the beginning. IAG was valued at 5.3 billion pounds (8.5 billion US dollars) on its trading debut, giving it a bigger market capitalization than Air France-KLM group .

Joining with Iberia allowed British Airways to overtake Air France-KLM’s market value of $5.4 billion and narrow the gap to Germany’s Deutsche Lufthansa AG, which is worth $9.7 billion. The enlarged business will also act as a platform for further deals, said Willie Walsh. The new company will have annual revenue of $18.5 billion, placing it third in Europe, and it has the same ranking by traffic, or passengers carried multiplied by the distance flown, the measure most widely used in evaluating airline standings.

The improved results were driven mainly by unit cost reduction and by a first contribution from LCC Vueling after its acquisition on 26-Apr-2013. British Airways more than doubled its operating profit to reach EUR762 million, contributing EUR415 million out of the total EUR793 million improvement in the group’s operating result. Iberia also reduced its pre-exceptional operating loss from EUR351 million to EUR166 million. IAG acquired Vueling on 26 Apr-2013, from which date it contributed EUR168 million to the group operating result .

Now let’s see whether IAG brought about real cost reduction. BA’s unit revenues (revenue per available seat kilometre, RASK) has been increasing but with a slowing speed partly due to the also increasing unit costs (cost per available seat kilometre, CASK).

Although there are fluctuations in ex-fuel cost per available seat kilometer (CASK) due to currency movements, the overall unit cost has been low and stable compared to other legacy carriers. The group’s unit revenues (total revenue per ASK) fell by 2.0% but unit cost reduced significantly (CASK), thus we could deduce that the improvement in operating profit in 2013 was driven more by unit cost reduction than by unit revenue

Now, Iberia has reached important productivity agreements with both pilot and cabin crew unions and negotiations are ongoing with ground staff. IAG CEO Willie Walsh expects Iberia to return to profit in 2014. While admitting that its profit would “not be at a level that is acceptable”, he said it was “going in the right direction”.

IAG also engaged in further deals to enlarge the corporation. In the beginning of August 2008, American Airlines announced an alliance with BA and Iberia, allowing the two carriers to fix fares, routes, and schedules together. In 2010, apart from confirming the merger between themselves, British Airways and Iberia also began to coordinate the transatlantic routes with American Airlines. The alliance of the three generates an estimated 230 million pounds for BA, in addition to the 330 million pounds cost saving stemmed from the merge with Iberia.

In 2012, IAG bought British Midland Airways Limited, the second-largest holder of Heathrow airport from Lufthansa for £172.5m .This act exacerbated the losses at IAG that year.

In 2013, IAG acquired the Spanish low-cost carrier Vueling. Its operating profit in the first year of joining IAG was four times its 2012 profit, which its CEO mainly credited to the cost