Spain fights for approval of Iberia aid

Date: 11/02/1999

By Chris Johnstone

THE Spanish government is set to reignite controversy over aid to airlines by calling on the European Commission to honour its promise to consider approving a fresh cash injection for flag-carrier Iberia.

Although the firm which owns Iberia, state holding company SEPI, regards clearance of the €120-million package of aid by the Commission as a mere formality, officials working for Transport Commissioner Neil Kinnock are adamant that the demand must be notified and vetted for evidence that the airline is financially sound.

The Commission implicitly recognised Iberia's right to request a fresh cash injection in its January 1996 decision to allow SEPI's predecessor, Teneo, to pump around €500 million into the airline as the action of a normal investor. It also stated then that Madrid could come back in 1997 with a fresh request based on the airline's financial performance over the previous two years.

The Spanish government considers that the decision not to take up this offer for a further two years has bolstered its claim for the cash to be cleared. SEPI says it needs the fresh cash injection to wipe out some of the airline's past debts.

The move is part of a three-stage process aimed at privatising Iberia completely by the end of the year.

Under the first phase, British Airways (BA) and American Airlines will jointly take a stake of 10&percent; in the airline (9&percent; for BA and 1&percent; for American). This will be followed by moves to make up to 30&percent; of the airline's capital available to institutional investors, with large banks such as Banco Bilbao Vizcaya and Argentaria already expressing an interest in becoming core shareholders.

Around 55&percent; of the airline will then be floated on the stock exchange, with a small stake of between 6&percent; and 7&percent; of the airline reserved for employees.

Madrid believes that the arrival of fresh shareholders and the stock flotation will help persuade the Commission to clear the cash injection as the action of an ordinary investor.

Commission officials say that the share stakes held by British Airways and American, while relatively small, are powerful arguments for clearance. “It will certainly help their case,” said one official. Investment by private companies is a clear signal to the Commission that SEPI's actions are in line with the market.

Rival airlines have given a muted response to the Spanish government's plans.

Spanair, a private airline which is seeking a stock flotation at the end of this year or in early 2000 to raise fresh cash, said it would not object to the aid package if Iberia could show that it had improved its financial performance as demanded by the Commission.

BA, one of the severest critics in the past of state hand-outs to airlines, can be expected to keep quiet this time round as it has something at stake. It went to the trouble of producing a study in 1995 which helped dash Iberia's hopes of winning a second round of state aid despite the airline's claims that its problems were caused by “external circumstances”.

Now the prospect of partnership with Iberia provides BA with a powerful ally on routes between Europe and Latin America - a missing link in its attempts to piece together a world-wide airline alliance.

Iberia expects to post a full year pre-tax profit of €265 million for 1998, up from €86.7 million in 1997.

The airline returned to profitability in 1996, turning the corner after a recent troubled period which had raised questions over whether Iberia would even survive.

In 1994, the carrier was so short of cash that it was technically bankrupt, forcing the government to seek permission from the Commission for a new capital injection lifeline.

Iberia was cleared in 1992 by the then Transport Commissioner Karel van Miert to receive €722 million in state aid to settle significant debts, buy new aircraft, and embark on an ambitious strategy of boosting services to South America by more than 13&percent; a year. That headlong expansion in the Americas was one of the main factors which later almost proved the airline's undoing.