Chalk and Cheese High Above the Clouds
As a very frequent user of airline services, I have followed with interest the developments relating to the merger efforts of British Airways and Iberia under the umbrella of their common owner IAG (International Consolidated Airlines Group S.A.). The alliance between one airline which has dragged itself up the ladder of customer satisfaction from being a strike-riddled loss-making state-owned airline to becoming a well regarded brand, with another airline which today is plagued with the ills that affected BA two decades ago, poses a formidable management challenge.
How long will it take for the same medicine to produce a similar turn-around at Iberia? Is it indeed the same medicine that is called for in this case? What is the risk that fixing Iberia will prove a huge distraction which might dilute management focus and ultimately degrade the whole consolidated group ?
Investor’s Logic Versus Customer Benefits
A “Merger Project” document issued in 2010 by IAG describes in a fair degree of detail the legal structure, governance and ownership of the consolidated company, and indeed it seems the investment community still has faith in the substance of what IAG have set out to accomplish. So far, the realization of synergies is reported to be on track, which is probably not too surprising given some of the inefficiencies that were plaguing Iberia at the start of the deal.
In a video interview posted in 2011 on the IAG website, IAG CEO Willie Walsh talks about the rationale for the BA / Iberia merger within the general consolidation of the airline industry, and the long term perspective this will produce for IAG.
He goes on to announce with understandable pride that IAG is on course to deliver on all its promises to its customers, such as better connectivity between the flight schedules of the two companies. So on paper all looks fine, at least from the investors’ side. But is it really ?
The View from the Passenger Window
Since 1997 with the creation of Star Alliance, shortly followed by BA’s “Oneworld”, passengers have been taught to expect these alliances to offer some commonality in terms of service, comfort, product range and network coordination. This development provided real customer benefits in terms flight connectivity and broadened the range of destinations that can be accessed through code-sharing arrangements. It also allowed the airlines to share the cost of expensive infrastructure, airport lounges etc., thereby improving their cost/value proposition for the travelling consumer.
However, looking at what ultimately matters most to the air passenger, namely the flight experience itself (comfort of seat, cabin appearance and cleanliness, attentive staff, punctuality, food and beverage, entertainment, flight safety), the differences that exist between the airlines belonging to a same alliance remain significant.
Numerous passengers express surprise (and disappointment) when boarding a flight that bears a familiar number and prefix but turns out to be operated by a quite different airline. It is reasonable to assume that passengers will expect an even higher degree of alignment between airlines that are co-owned rather than merely members of one same alliance, unless one brand is clearly identified as the charter or low-cost variant of the other. Today, whilst from a business entity perspective BA and Iberia might be integrating towards being a more coherent business, one cannot overemphasize how colossal an effort remains to be made to provide the group’s passengers with a seamless experience when travelling and switching between those two airlines.
Airline Merger versus Airline Alliance
One struggles to see any end-user benefit yet arising from the BA / Iberia merger, in spite of Willie Walsh’s video statement. Let’s take the example of a journey from London to Santo Domingo in the Dominican Republic.
The fastest routes are London-Madrid-Santo Domingo, and London-Miami-Santo Domingo. The route via Madrid, using BA and Iberia, lasts a total of 15:25hrs including a stop-over in Madrid. The route via Miami involves BA and American Airlines, lasting 16:50hrs including the Miami stop-over, costs an additional £ 68 in business class compared to the Madrid route.
Willie Walsh would like the 10% time saving and £ 68 fare difference (rather negligible in regard to total cost) to be the decisive factors that will swing the customer’s choice in favour of flying with IAG-owned airlines. Any passengers on board flight IB 3486 from Santo Domingo to Madrid on 19th February, onto which they had been rescheduled from a previously cancelled Iberia flight, and which crossed the Atlantic with blocked washbasin and toilet drains and soaked carpets in some areas, will now know they made the wrong choice… And this does not even consider the risks associated with the stop-over in Madrid where luggage handling staff were partly on strike. Maybe an additional £ 68 would have been well invested for trouble-free travel on American Airlines and British Airways’ code-shared itinerary.
When Backstage Trouble Hits the Front of the Stage
In the above mentioned video interview, Mr Walsh quite remarkably states that “one of the real advantages of IAG is that we’re detached from the day-to-day operational challenges that the airlines face, which means we can spend more time focusing on the long term strategic issues“. That’s really lucky for Mr Walsh, because beyond the usual airline worries about fuel costs and security, Iberia have a mountain of other operational issues to resolve and there is a true chasm between their company’s image and what the British Airways brand now stands for.
Let’s give credit to Willie Walsh and his predecessor Colin Marshall, who sadly passed away in 2012 as Lord Marshall of Knightsbridge, for having transformed British Airways from its former status of state-owned sloppy airline to what it has become today. So although I am not an airline expert beyond the fact that I fly between 80 and 130 times a year, I am confident that Mr Walsh not only knows what is right for his investors, but also understands what his customers expect and how to run an airline effectively. Even if things have not always been easy at British Airways and industrial relations are tense at times : there is a clear sense of “The show must go on” and customer service levels are maintained as much as possible, even through difficult times.
Not so at Iberia, where the conflict has broken out into public display, prompting any reasonable air passenger to turn to other airlines to avoid the disruption, cancellations and general ill-ease of being served by such disgruntled staff. This can only compound the problems of the ailing airline into a downward spiral. The coming months will be crucial in determining IAG’s ability to manage industrial relations in a South European country where the rules of play are markedly different to those that apply in the UK.
A Sour Lesson from Past Experience
I trust Mr Walsh to be smarter than the management of Swissair who in the late 1990’s thought they could transfer the know-how, reputation and quality of what had until then been an exceptionally well regarded airline, onto a series of acquired entities to gain a pan-European or possibly global scale, resulting of the lamentable collapse of Swissair in October 2001.
Back then, based on a “hunter” strategy developed for them by McKinsey & Company to protect the airline against possible isolation resulting from Switzerland’s reluctance to engage in any form of integration with the rest of Europe, Swissair embarked (without the support of their consultants during the crucial implementation phase) on a series of investments or outright acquisitions of poor-quality often loss-making airlines, including Portuguese TAP and Belgian Sabena.
Rather than testing and learning from one acquisition before broadening the scope of this aggressive growth programme, Swissair somehow thought that process improvement and a sense of quality would automatically percolate across their rapidly expanding group, thereby ignoring some of the most basic fundamentals of Change Management.
The high levels of debt resulting from the expansion programme, coupled with the management’s inability to simultaneously address the issues they faced very rapidly brought the emerging group to its knees. The rest is history.
IAG’s ambitions are high. The group is not just about the merger of British Airways and Iberia, but aims to acquire many more. Willie Walsh said prior to IAG’s formation that he had drawn up a list of 12 possible partners from an initial pool of about 40 (source : Bloomberg). BMI was snatched up when it became available, primarily for the purpose of obtaining more slots at London’s Heathrow airport. But looking into the near future, contrary to the view he expressed in his 2011 video interview claiming he would maintain a high-level strategic view and not get sucked into operational matters, I believe that Mr Walsh and his team will now have to take account of some of the operational challenges they need to crack to “digest” the BA – Iberia merger before tackling the next big acquisition.
The dishes of a banquet cannot all be eaten together without the risk of a serious indigestion.