IAG makes contingency plans for Spanish Eurozone exit

IAG, the airline formed by the merger of British Airways and Iberia, is beginning to look more seriously at the implications of a possible exit from the Eurozone by Spain.

You say pesetaInternational Consolidated Airline Group (to give it its full name) has a high exposure to the Eurozone periphery through Iberia's Spanish base and, to a lesser extent, the British Airways route network. Iberia provides 27% of the group's external turnover, with around half of this coming from Spain, so the return of the peseta could have a dramatic effect on the company's operations.

The group has people working on a Spain Euro exit road-map project which considers the commercial, administrative, systems and people issues that would need to be addressed were the Iberian country to bid adis to the single currency.

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The airline's Eurozone crisis management group meets every two weeks, though its remit extends far beyond preparing for a possible return of the peseta. The group reviews progress on projects, does scenario planning based on previous shocks to the business and has a responsibility to ensure financial counter-party risk and hedging policies continue to be fit for purpose.

Blowing in the windThe group's cash reserves and hedging operations lead to substantial counter-party exposure with banks around the world, including those in the Eurozone. Airlines know a lot about which way the wind is blowing, and so the group has been steadily reducing its counter-party exposure with Spanish banks this year, reducing it to 3% of total exposure from 27% at the end of 2011. The group's exposure to Italian, Irish, Portuguese and Greek banks was less than €1m, consisting of cash to meet day to day operating needs, IAG said in a statement.

Shares in the airline fell in both London and Madrid on Friday morning after the group issued a profit warning, with blame laid firmly at the door of its struggling Iberia business.

Chief Executive Willie Walsh revealed that IAG is now implementing a restructuring of its struggling Spanish airline, Iberia: "Iberia's problems are deep and structural and the economic environment reinforces the need for permanent structural change."

it makes you wonder why British Airways was so keen to merge with it, but the extra airport "slots" will doubtless come in handy.

The restructuring will likely include short-term downsizing and network reshaping which will probably lead to some redundancies: "Inevitably, we will not be able to avoid job losses as part of this process," said Walsh, who is no stranger to confrontation with IAG's heavily unionised work-force.