On our best behavior: Willie Walsh, IAG

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Willie Walsh, CEO of International Airlines Group, tells Graham Newton that airlines are finally beginning to behave like normal businesses

Are you happy with IAG’s performance so far?

I’m delighted. The group has certainly achieved its key goals. The two founding airlines—British Airways and Iberia—are in good health and the transformation of Iberia in particular under the leadership of Luis Gallego has been astounding. But all partners, including Aer Lingus and Vueling, have made significant contributions to the bottom line. We had record financial results in 2015. Revenue was up 13.3% and operating profit was up 65%. The indications are that we will exceed those levels in 2016.

Will the reshuffle of top management affect IAG’s strategy?

IAG’s strength is in the structure we have put in place. It gives our people the opportunity to move to bigger and more challenging roles. Alex Cruz, former CEO at Vueling, is now in charge of BA following Keith Williams’ retirement and Steve Gunning, former CEO at IAG Cargo, has moved to become BA’s Chief Financial Officer. Javier Sánchez-Prieto, former Iberia CFO, is the new Vueling boss and Andrew Crawley, who was BA’s chief commercial officer, has taken the helm at IAG Cargo.

We want to see these types of move continue. I joke that the team at Iberia Express is like our Under-21s, and they will make the first team when they are ready.

Why did the idea of IAG—an airline group—appeal to you?

Consolidation is not the answer to aviation’s challenges but it is certainly part of the answer. The US industry provides the evidence for that. Consolidation has clearly improved profitability there, and that has triggered massive investment in aircraft and in the product. That has benefited the carriers and the customer.

We wanted a similar platform for success, and the tie-up between BA and Iberia gave us that platform. A key question for us right from the start of the relationship was whether the partnership would be scalable and could we expand the group. So we made sure we had a framework that would allow us to grow and be profitable, no matter the economic environment or whether fuel prices were high or low. But the fuel price was never the major issue anyway; it was ill discipline in capacity. Consolidation goes some way to solving that problem.

IAG is involved in various relationships. What is working well, and is a move toward full-blown mergers and acquisition an obvious end game in these arrangements?

There are two basic areas of interest for airlines looking to work together. Those are revenue synergies and cost synergies.

A full merger would give an airline both, but ownership and control rules throughout the world mean full mergers are unlikely. We work closely with American Airlines, for example, but I don’t think I will ever see the day when we can properly merge, should we ever decide that’s the best way forward.

So there are different levels of integration across IAG’s partnerships. All of them make significant contributions, though, and many can be seen as a precursor to deeper involvement and consolidation. We knew Aer Lingus well before the acquisition, for example.

And IAG has signed a joint business agreement with the LATAM Airlines Group on air travel across the South Atlantic, for which we are seeking the appropriate competition approval from the relevant authorities in South America. That is obviously on a smaller scale than our North Atlantic business, but is nevertheless very interesting.

The debate about a third runway at London Heathrow rumbles on. What is your view?

One of the points that gets lost in the Heathrow debate is the ridiculous cost of putting the airport’s infrastructure scheme in place. It is estimated at £23 billion, including surface access projects. Of that total, £180 million is set aside for the actual runway construction. That’s less than 1% of the total cost. We must challenge that, because ultimately it is the airlines that end up paying the bill.

And airport charges at Heathrow are still going up. The annual price increase is less than the rise in inflation at the moment, but that follows years of costs going up far in excess of inflation. We had some huge hikes before, and Heathrow remains the most expensive major hub in the world. Any further increases resulting from building a third runway would be excessive.

And it would be hard for an airline to explain. Customers don’t understand why airport charges are going up when ticket prices are coming down.

How much damage has the UK’s air passenger duty done to the country’s economy?

APD is a ridiculous tax. It is a tax on business, a tax on leisure, a tax on everything that the UK is trying to do.

The government spends hundreds of millions of pounds sterling to attract visitors and businesses to the UK, and then taxes them if they do decide to come. It doesn’t make any sense. If the tax is properly reviewed, then it would be clear that its removal would boost GDP and boost employment. Look what happened in Ireland when it scrapped its tax. The economy undoubtedly benefited. The UK should follow Ireland’s example.

That doesn’t mean reducing APD; that means scrapping it entirely.

What European issues stand out for you, and what do you think of the proposed Aviation Package?

The Aviation Package is a step forward in that it recognizes the importance of aviation to the European economy.

But for me, the issue that must be tackled immediately is the continual strikes by air traffic controllers in France. The disruption this causes throughout Europe is simply unacceptable, and we need to find a solution fast. It not only damages the economy but also restricts the freedom of movement. The technology is there to provide safe overflight capacity from neighboring countries, and that is something that should be explored. More than that, though, we need an end to these unwarranted and unjustified strikes.

Is industry profitability here to stay, or is it just enjoying a few good years before another inevitable dip?

I have no doubt that this is a different industry now. Airlines can finally begin to behave like normal businesses. For the first time, they are able to focus on generating proper returns and working for their shareholders. It also gives them the ability to make the necessary investments for a sustainable future. I’ve been involved in the airline business for 38 years, and the leaders are definitely talking a different language now.

Sustainable growth also means environmental responsibility. So how important is the next ICAO Assembly?

Financial sustainability is possible only if we continue to address environmental issues. The industry’s work on the environment is unique. It has achieved so much, and we must continue the good work.

We simply must take the opportunity to introduce a global carbon offsetting scheme at the forthcoming ICAO Assembly. We cannot afford to go back to a patchwork quilt of measures.

What do you want to achieve in your time as IATA Chairman?

I see the role of Chairman as providing support to the Director General. So I will be concentrating on helping Alexandre de Juniac to succeed Tony Tyler. IATA has been fortunate to have benefited from the leadership of Tony, and I am sure it is also fortunate to have Alexandre replace him.

Alexandre understands the industry completely despite working in it for a relatively short time, and he is a great diplomat. I look forward to supporting him and what will undoubtedly be strong, purposeful leadership.

Willie Walsh

2011 Appointed Chief Executive Officer of International Airlines Group.

2005–2011 CEO of British Airways.

2001–2005 CEO of Aer Lingus.

2000–2001 Chief Operating Officer of Aer Lingus.

1998–2000 CEO of Futura (Aer Lingus’ Spanish Charter airline).

1979 Joined Aer Lingus as a cadet pilot.