Willie Walsh
As he prepares to parachute into retirement, IAG boss Willie Walsh is slashing cabin crew overheads at British Airways a decade after unions forced him to back off, writes John Kinsella
The IAG boss is preparing to retire but not before cutting crew salaries and perks at British Airways a decade after unions thwarted a similar move
Willie Walsh is finally leaving Aer Lingus owner International Airlines Group (IAG) in September, a few weeks short of his 59th birthday. Last January, the company announced that Walsh would step down from the board in March and leave the company at the end of June. Then Covid-19 happened and Walsh stayed on for another three months to cope with the worst crisis in the group’s history. The Irishman’s parting gesture has been to restructure overheads ahead of his successor Luis Gallego taking over.
Walsh has unfinished business with British Airways cabin crew going back to 2010. The unionised workforce at the airline, which was in state ownership until 1987, is among the best paid in the industry. Ten years ago, on the back of another recession, Walsh attempted to overhaul various perks and allowances. Industrial action that included 22 days of strikes forced the CEO to back down, though the GMB and Unite unions conceded that new hires would have inferior contracts to existing staff.
As a response to the Covid-19 crisis, BA is now seeking 12,000 redundancies from the 45,000 workforce. The airline says that c.6,000 staff have applied for a severance package. Cabin crew and ground crew who don’t depart voluntarily have to reapply for their job, and if they don’t accept revised employment terms, they will only receive statutory redundancy.
The new contracts cut salaries by c.20% and allowances have been reduced too. When the lower allowances are factored in, veteran cabin crew claim they could see their take-home pay reduced by 30% to 50%. Lower-paid staff – the ones who joined since 2010 – will see their pay increase.
Naturally enough, the cost-cutting plan has infuriated affected employees. Unfortunately for them, their bargaining power is at a very low ebb, given that at the moment it makes more financial sense for BA to ground aircraft than to fly them.
Unite general secretary Len McCluskey has described the company’s strategy as despicable. The House of Commons Transport Committee said it is unacceptable that a company would seek to drive this level of change under the cover of a pandemic. “We view it as a national disgrace,” the politicians thundered. That’s water off a duck’s back for Walsh, who will shortly be out of the firing line. His successor can also shrug off the opprobrium on the basis that the restructuring was initiated on Walsh’s watch.
In the good times, Walsh delivered huge value for IAG shareholders and he was well rewarded for his efforts. The CEO’s salary and pension package is c.€1.2m a year, with a c.€500,000 annual cash bonus. There is also sizeable remuneration in the form of IAG shares, and Walsh’s total compensation for 2019 was c.€3.6m. That was based on IAG shares priced by the market at £5.40, though recently the share has been trading at the £2 level.
Between shares and salary, pension and bonus, IAG’s annual report discloses that the former Aer Lingus pilot earned €37m in the CEO role at IAG from 2011 to 2019. That’s a lot, but so too have been shareholder returns. In the 2015 to 2018 period, IAG paid shareholders €3,770m in dividends and share buybacks. That was supposed to be topped up with €625m for 2019 but the payout for last year was limited to €290m after the final dividend was scrapped.
IAG’s generosity has left the balance sheet in rag order, though the board is
to blame for that, not Walsh. The group’s total liabilities in June 2020 amounted to €31.3bn, €10bn higher than just 18 months earlier. Now shareholders are being asked to hand back €2.75bn in a rights issue to steady the ship.
While the coronavirus has tainted Walsh’s legacy, he’s had a fantastic career. In October 2005 he left Aer Lingus to join British Airways as CEO, and in January 2011 he became chief executive of International Airlines Group, formed through the merger of BA and Spanish airline Iberia. Vueling and Aer Lingus were subsequently added to the group, we well as British Midland, though a title at Norwegian was unsuccessful. In the works is IAG’s €1bn takeover of Air Europa, another Spanish airline.
For 2011, Wash’s first year in charge of the IAG combine, the group’s turnover was €16.3bn, net profit was €555m and earnings per share was 32c. The 2019 outcome was €25.5bn turnover, €2.4bn net profit and 120c in EPS.
The early years of IAG were shaky. The company booked a loss of €885m in 2012, due mainly to restructuring costs, principally at Iberia. IAG was back in profit by 2013, with a pre-tax surplus of €150m. In 2014, Walsh delivered €1bn net profit, and doubled that figure to just on €2bn in 2016. Growth stalled in 2017 before a 50% spurt in earnings through 2018, while last year there was no growth.
And what about the share price? The British Airways share was 570p in February 2007, crashed to a low of 120p in mid-2009, remained below 200p through the early years of the 2010s and only gained altitude from 2013. In July 2018, IAG shares fetched 726p, the highest ever, though the stock was sold down to 410p during 2019 before another strong rebound to 636p at the start of 2020. Then Covid19 struck and the share was sold down to a low of 164p before regaining some altitude recently and returning to the 200p level.
Due to the Covid-19 impact, the first half of 2020 was a horror show for IAG. The Q2 March to June period produced a record operating loss of €1,365m compared with an operating
profit of €960m last year. Q2 passenger traffic fell by 98% year-onyear and capacity was slashed by 95%.
In the same quarter, revenue declined by €6bn year-on-year. There was a corresponding decline in some costs, such as fuel, handling and catering, landing fees and engineering costs. These fell by €2.8bn year-onyear, and Walsh also lopped €600m off the payroll overhead with statefunded furloughs and salary reduction measures. A sting in the tail was an exceptional charge of €1,270m relating to jet fuel. This reflected the losses on fuel hedging derivatives maturing in 2020 for which there will be no fuel purchased. Another exceptional H1 charge was €730m impairment on aircraft being permanently retired from the IAG fleet. Headed for the boneyard in the desert are 32 Boeing 747 jumbo jets along with 29 other aircraft.
IAG expects that it will take until at least 2023 for passenger demand to recover to pre-Covid levels. The company has modelled a Base Case scenario that envisages capacity gradually increasing to 46% for Q4 this year, and down 24% on average for 2021 compared with 2019.
IAG’s Downside Case models the domestic and European short-haul sector recovering faster than longhaul. In this scenario, capacity is twothirds lower in Q4 than a year earlier, and down by a third through 2021. “The directors consider the Downside Case to be a severe but plausible scenario,” the company stated. “The group is not able to provide certainty that there could not be more severe downside scenarios than those it has considered.”
Immediate financial stresses are illustrated by British Airways drawing down €330m in debt from a UK government bailout facility; Iberia and Vueling arranging new debt facilities of up to €1bn; BA mortgaging specific aircraft for a €670m loan; and Iberia effecting a similar arrangement to raise €200m.
For the moment, IAG hasn’t detailed any specific funding initiatives in relation to Aer Lingus. The airline is IAG’s problem for the moment, though that could change if Luis Gallego decides that IAG is better off solely as a UK/Spain combine. However, the Irish airline is far more efficient than the two Spanish airlines in the IAG group.
Certainly the Irish government has done Aer Lingus no favours with its clampdown on overseas travel. After ministers ignored recommendations from the Aviation Recovery Taskforce and the Tourism Recovery Taskforce, Aer Lingus commented that government policy was shifting towards a Covid-19 elimination strategy rather than one of containment and economic coexistence with the virus. “The full economic consequences of such a shift in policy and of Ireland being ‘Closed for Business’ would be profound,” the company declared.