Iberia Líneas A

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Iberia Líneas Aéreas de España S.A.

c/Velázquez, 130
28006 Madrid
Spain
(01) 587 8787
Fax: (01) 587 7329

State-Owned Company
Incorporated: 1927 as Iberia, Compañía Aérea de Transportes, S.A.
Employees: 30,479
Sales: Pta 382 billion (US$4.08 billion)

Iberia Líneas Aéreas de España S.A., Spain’s state-owned national airline, is the fifteenth largest in the world in number of passengers. Through subsidiaries and associated companies it handles cargo as well as passenger operations, catering services, and regional flights.

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 Lufthansa A.G. 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 in December of 1927. The three and a half hour trip was a daily service—except for Sundays—operating in both directions. In February of 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 a postal network. In July a twin-engined Dornier Wai 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 sea-planes 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.

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 its director, 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 Pts 500,000 on an income of Pts 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 Pts 1.1 million.

During the Second World War, close ties with Luft Hansa were continued, though shortages prevented them 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 Pts 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, KLM, and the British South American Corporation.

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 Pts 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.

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 10 million passengers for the first time. However, a three-month strike by Spanish air traffic controllers contributed to a loss of Pts 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 $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 the Pope of the Roman Catholic Church, both of which were expected to bring large numbers of visitors. 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 Pts 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—as 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 of 1984 a strike was called. The pilots’ work stoppage lasted one month and cost Iberia Pts 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 Supercon-stellation. Iberia’s losses for the year totaled Pts 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 $1 billion orders for Douglas MD-87, A-320, A-340 and Boeing B-757 planes. The fleet was scheduled to be completely new by 1994.

Iberia acquired a 35 percent share in LADECO, the Chilean national carrier in 1989, as part of its strategy to penetrate the South American market. 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 5 percent share. Iberia paid $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 of 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 Pts 22.5 billion in 1990. The Gulf crisis and subsequent recession also contributed to the 1991 pre-tax loss of Pts 51.3 billion.

A transaction, finalized in 1991 and worth $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 work force, and strengthened ties to the Latin American market. This Pts 760 billion strategy, with a goal of Pts 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 Pts 4.9 billion in 1992 and at Pts 55.9 billion by 1996. Of the total Pts 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 Pts 120 billion 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 was also facing 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.

Making its way into the 1990s, Iberia has opted for an ambitious and controversial expansion plan to secure its future. With its difficulty in overcoming recurring problems, the question arises as to whether the company’s large investment and acquisitions program, concentrating on the often volatile South American markets, will bring-Iberia its desired returns.

Principal Subsidiaries

AVIACO; Binter Canarias; Binter Mediterráneo; Campos Velazquez; CARGOSUR; Viva Air (99.6%); VIASA (Venezuela; 45%); LADECO (Chile; 35%); Aerolíneas Argentinas (30%); Iberswiss Catering (70%).