By Sarah Young
LONDON (Reuters) – IAG’s <ICAG.L> move to axe up to 12,000 jobs at its main British Airways business reflects boss Willie Walsh’s preference to slash costs rather than seek a state bailout to survive what is expected to be the worst downturn in aviation history.
The veteran executive is betting that once the coronavirus crisis is over, IAG will be in a better position to thrive than rivals that might be beholden to politicians.
History is on his side, as IAG has reaped the rewards of past cost cutting that many competitors have struggled to match, sometimes due to government interference. However, Walsh will likely face his own challenges from politicians and labour unions, given the scale of the latest job reductions.
“The focus here is to make sure they’re as best placed (as possible) for the recovery. They were a stronger airline going in to this crisis, they want to be even stronger going out,” Davy analyst Stephen Furlong said.
IAG said late Tuesday British Airways could make up to a quarter of its 45,000 staff redundant as it forecast passenger numbers would take years to recover from the crisis sparked by the coronavirus pandemic.
Draconian restrictions on travel have brought flying to a near-halt and there is no end in sight for when it can restart, bringing airlines across the world to their knees and leaving many begging governments for rescue packages.
Thanks to its stronger finances heading into the crisis, IAG has not had to seek a government rescue so far. In any case, BA said on Tuesday there was “no government bailout standing by.”
But to cope with potentially months of disruption, Walsh believes IAG needs to cut costs as far as possible.
The former pilot has built his reputation by dragging old-fashioned airlines into the modern age of budget flying. That has usually involved cutting costs and taking on labour unions, earning him the nickname of “slasher Walsh”.
He had been due to retire in March, but decided to stay on when the crisis struck.
Competitors such as Franco-Dutch group Air France-KLM <AIRF.PA> and Germany’s Lufthansa <LHAG.DE> were already struggling to cut costs as much as IAG even before they sought bailouts from their governments.
With their rescue packages set to increase state influence, they may find it even harder to compete with a lean IAG.
On the other side of the Atlantic, U.S. airlines American Airlines Group Inc <AAL.O>, United Airlines Holdings Inc <UAL.O> and Delta Air Lines Inc <DAL.N> are all being helped by a $25 billion government rescue package.
IAG’s strong balance sheet, described by one analyst as a “fortress”, means it can afford a longer hiatus in flying than many other airlines.
The group, whose airlines also include Aer Lingus, Iberia and Vueling, said on Tuesday it had liquidity of 9.5 billion euros ($10.3 billion). That compares with Lufthansa’s 5.1 billion euros and Air France-KLM’s 6 billion, according to Bernstein analysts.
“(This) gives some reassurance to investors that IAG will be one of the survivors and possible long-term beneficiaries of this current crisis,” Goodbody analyst Mark Simpson said.
Lufthansa said on Tuesday it could seek some form of protection from creditors while talking to the German government about a 9 billion euro rescue, while Air France-KLM has been buoyed by a 7 billion euro state-backed package from France, with another 2.4 billion pledged by the Dutch.
IAG is targeting BA for cost cuts because it is the highest cost airline in the group, Davy’s Furlong said.
“If there was somewhere where there needed to be an arrest of cash outflow it would be BA,” he said.
The job cuts, which are subject to union consultation, are one of a number of steps to drive down costs. IAG has already cancelled its dividend, extended credit facilities, and used government furlough schemes to help pay staff while planes are not flying.
The group could in future also choose to access coronavirus-related government lending schemes.
BA’s 45,000 employees, according to its website, include 16,500 cabin crew and 3,900 pilots. A BA-based source said that job cuts were more likely among cabin crew, some of whom remain on historic higher cost contracts compared to newer staff.
IAG shares were down around 1.8% on Wednesday, having lost almost two-thirds of their value over the past three months.
(Reporting by Sarah Young, editing by Louise Heavens and Mark Potter)