The Airline Business

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Institution: Buckinghamshir New University

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Word count: 1076

Introduction

International Consolidated Airlines Group S.A, commonly referred to as IAG, is a multinational airline holding organization registered in Madrid, Spain, and headquartered in London, England. The company was founded in 2011 following the merger of British Airways and Iberia. Following the merger agreement, the two flag carriers became fully owned IAG subsidiaries. IAG is also comprised of other commercial airlines such as Aer Lingus, Vueling and will soon acquire Air Europa. IAG has a unique structure that allows all its airlines to maintain their brand, operations, products, and managerial independence (IAG group, n.d.). As such, this paper provides a detailed review of the IAG organization setup and its impact on the company.

Fig 1: IAG Business model.

IAG company structure

The company has a unique group structure. The group structure is composed of cooperate parent (IAG), Airline operating companies, and the platform of common services. The multinational firm is comprised of 5 airlines and three affiliated firms. IAG group is composed of British Airways and Iberia, which are full-service flag carriers, Aer Lingus and Iberia Express, which are value carriers, and Level and Vueling, which are low-cost carriers (IAG group, n.d.). In addition, the company has a platform of common services that offer services such as financial support, procurement, and IAG Technology. The platform of common services is composed of companies such as IAG GBS, IAG Cargo, IAG Loyalty, IAG Connect.

There are significant differences between the group level and the wider company. First, at the group level, the company structure focus on the simplicity and efficiency of its portfolio. The group-level focuses on the creation of maximum value for its customers and shareholders. The group level deals with the allocation of resources to groups to ensure optimal performance of the airlines. It also focuses on coordinating the activities and operations of different groups in the holding to enhance efficiency and innovation (IAG Group, 2021). On the other hand, the wider company focuses on its operations. Each company is focused on achieving its individual performance targets. The entities are also focused on maintaining their unique identity and operations in the airline industry.

Fig. 1: AIG structure

Opportunities

Unrivaled and unique customer propositions. The structure will ensure the company creates value for its customers, ensuring group level companies collectively fulfill customers’ needs. The structure will also enable the company to differentiate the Group from rivals through consolidation, thus creating a competitive advantage. IAG structure offers an opportunity for sustainable growth through the reinforcement of existing or creating new leadership positions. The structure will also enable the company to attract, develop and retain the best talent in the industry. AIG Group structure will ensure efficiency and innovation by tapping synergy opportunities.

Challenges.

Coordinating different groups of companies with different performance targets can be an uphill task. The centralized tasks can result in bureaucratic leadership that hinders employees’ productivity in individual companies. Employees might be denied an opportunity to contribute to decision making leading to low morale and poor performance.

Advantage and disadvantages of centralizing business services at the group level

The first advantage is focused vision. Centralization of business services at the group level enables IAG to focus on the attainment of its vision. The centralization sets clear communication channels where the group’s executive can communicate the company’s vision to staff and offer guidance on achieving the vision. It eliminates inconsistencies in the provision of business services. Through the centralization of business services, IAG has continually maximized value creation for its customers, stakeholders, and shareholders (IAG Group, 2021). The second advantage is reduced costs. The top decision-making organ is housed in the company’s headquarters, thus minimizing the administrative costs. Centralization has enabled IAG to reduce costs by leveraging Group scale. Major decisions are made at the headquarters, thus eliminating costs associated with duplication of responsibilities in single airlines. The third is improved productivity and quality of services. Centralization of business services encourages group-wide innovation and mindset that enhance productivity and best services to customers.

Some of the disadvantages of centralizing business services include remote control, where executives lack control over implementing decisions inside the single airline. The executives have limited time to supervise and monitor the implementation process inside the airlines. Second is poor morale and lack of employee loyalty as they are not involved in its major decisions.

Other activities that could be centralized

Some of the activities that could be centralized include procurement of fleet and equipment, management of the airlines, customer service, and loyalty programs to enable customers to access information critical information at one source.

Types of IAG airline metrics

The group uses various financial and non-financial airline metrics to measure its performance. The financial metrics include return on invested capital (RoIC), where the Group utilizes it to assess generated returns in relation to the invested capital, ability to pay dividends, and fund growth. Second is the Gross CAPEX of the group, which includes the investment in fleet, IT, Infrastructure, and customer products before the sale of property, plant, and equipment (IAG Group, 2020). The third is the levered free cash flow which is the cash flow generated in the year prior to returns to shareholders. Forth is the adjusted earnings per share and finally, the net debt to EDITDA and profits. Non-financial metrics include net promoter score and traffic statistics. These metrics are essential to organization at group and strategic business units as they indicate the actual performance and help in the identification of areas that need improvements (Losa et al., 2020). Metrics also play an essential role in strategic planning, setting short-term and long-term goals at group and SBU levels.

Fig. 2: RoIC performance metric.

Benefits and challenges of Air Europa deal

The deal will enable Air Europa to leverage IAG Group’s vast financial resources to improve its services. The group has the financial muscle required to stream the operations of Air Europa to increase efficiency and productivity. The company will also leverage the group’s huge customer base, capital, and global operations to offer its services at a lower cost. The deal will enable the group to expand its customers base in Madrid (IAG Group, 2020). The challenges of the deal include huge debt and annual losses associated with Air Europa. The deal will impact the IAG group and its companies positively as it will widen its customer base in Europe. The deal will see the group assume the financial burdens of Air Europa, which might reduce investments in other companies.

References

IAG Group, 2020. Strategic priorities and key performance indicators. [Online] Available at: https://www.iairgroup.com/en/investors-and-shareholders/year-in-review/2020-kpis[Accessed 5 November 2021].IAG Group, 2021. Business model. [Online] Available at: https://www.iairgroup.com/en/the-group/business-model-and-strategy[Accessed 5 November 2021].IAG group, n.d. Unique group structure. [Online] Available at: https://www.iairgroup.com/en/the-group/unique-group-structure[Accessed 5 November 2021].IAG Group, 2020. Annual Report and Accounts 2020. [Online] Available at: https://www.iairgroup.com/~/media/Files/I/IAG/annual-reports/iag-annual-reports/en/iag-annual-report-and-accounts-2020.pdf[Accessed 5 November 2021].Losa, E.T., Arjomandi, A., Dakpo, K.H. and Bloomfield, J., 2020. Efficiency comparison of airline groups in Annex 1 and non-Annex 1 countries: A dynamic network DEA approach. Transport Policy, 99, pp.163-174.