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IBERIACASE

STUDY

IberiawasfoundedonJune28,1927byHoracioEcheberrieta. ItwasnotonlySpainsfirstairline,

butalsothefirsttoflybetweenEuropeandSouthAmerica(asof1946),thefirsttoestablishawalk

on air shuttle service (between Madrid and Barcelona), and the first in Europe to offer an

internationalfrequentflyerscustomerloyaltyprogramme(IberiaPlus).

In2001,onApril3,Iberiasprivatizationprocesswascompleted,whenitsshareswerelistedforthe

first timeon the stockexchange. The followingyear Iberiawas included in the selective Ibex35

stockmarket

index.

Today

Iberia

is

an

international

transport

group

operating

in

around

100

airports.

IBERIASPOSITIONSHORTLYAFTERPRIVATISATION(2002)

AlthoughSpainisnotamajorairlinehub,itisarapidlygrowingmarket:

FASTGROWINGSPANISHMARKET

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Iberia revenuesaresplit roughly1/3,1/3,1/3across threemarketsegments:Domestic,European

andLonghaul/Intercontinental:

SpainhasmoredomesticpassengersthananyotherEuropeancountry.Itslargesizeandrelativelyundevelopedroadandrailinfrastructureoutweightheimpactofbeingsmallerin

populationthan

some

other

countries.

The

case

majority

of

customers

fly

point

to

point

(i.e.,

notthroughahubsuchasMadrid).Thedomesticmarkethasrelativelyfewcompetitorson

mostroutes,butisforecasttodeclineduetoimprovementsinmotorwayandraillinks.Iberia

enjoysmarketsharesof5060%,and85%inthepremiumsegment.Ithasgoodrelationships

withthelocalairportsandrelatedlocalgovernmentandthisallowsitsignificantinfluenceover

departuretimes,gatesandplansforairportexpansionandmodification.

TheEuropeanmarketisalsolargeinSpain.GermanySpainhasthelargestnumberofflightsofanytwoEuropeancountrieswithUKSpainsecond.Themajorityofpassengersflyonpointto

pointroutes,

although

slightly

less

so

than

for

the

domestic

market.

European

flights

face

increasingcompetitionfromLCCs(lowcastcarriers)suchasRyanair,particularlytoandfrom

touristdestinations.SpainistiedwithItalyasthesecondmostpenetratedLCCmarketafterthe

UK.However,todatetheLCCshavetakenshareprimarilyfromCharterairlines.

Competitivenessvariesalotbyroutebutingeneral,hightrafficroutesattractnew

competitorsovertime.Therearenomajorregulatorybarriersstoppinganewairlinestartingup

althoughtheycanfinditdifficulttofindslotsatverybusyairportssuchasHeathrowor

Madrid.

LonghaulmarketshavebeenhitbytherecenttwintowersbombinginNewYork,butareexpected

to

recover.

Iberia

serves

the

needs

of

domestic

travelers

and

has

the

highest

market

share(forEuropeanairlines)inroutestoLatinAmerica.Itsshareoftouristandbusiness

customersareaboutequal(thelatterhavinggrownsignificantlyinrecentyears).Someairlines

arecontracting,suchasBA.SeveraloftheLatinAmericanairlineshaveexperiencedsevere

problemsrelatedtothemeltdownofsomeLatinAmericaneconomiesinrecentyears.

ThemajorityofpassengersflyonconnectingflightstoMadridorBarcelonabeforeflyingto

theirfinaldestinationalthoughasignificantnumberflypointtopoint(i.e.,directfromMadrid

andBarcelona).OnroutesfromSpaintoLatinAmerican,asonroutestomanyotherinter

continentalmarketssuchastheUS,governmentregulationmeansthatIberiaistheonly

Europeanairlineallowedtofly.

Examplesofpricesfordifferentroutesinthesethreedifferentmarketsareattachedasanappendix.

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MARKETSHAREEVOLUTIONEUROPELATINAMERICA

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%1998 1999 2000 2001 2002

Iberia More destinations Higher numbers of non-stop flights

Higher daily frequency

Air France

KLM

British Airways Retrenching to business and point to

point customers only

Lufthansa

Source: Iberia.com

Iberiasoperationalperformanceismixed.Costsarehighrelativetothelowcostcarriers.However,

unitcostsarelowrelativetoothernationalcarriers.

IBERIAUNITCOSTSBELOWTRADITIONALAIRLINES

600 800 1.000 1.200 1.400

14

13

12

11

10

9

8

7

6

51.600 1.800 2.000

SASLufthansa

Austrian Airlines

British Airways

KLM

Air France

IberiaEasyJet

Ryan Air

Low Cost Carriers

Costs

(Euro

Cents/

ASK**)

Average Stage Length (Kms)

Date for period January December 2002, except Ryanair and Easyjet fiscal year 2002.** Costs are Operating costs less 33% of Operating Leases. ASK is the number of seats

times distance flown (a unit of capacity) Source: AEA, Iberia.com

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Morespecifically(ontheparametersidentifiedinthenoteontheairlinebusiness):

NETWORK.IberiahastwomajorhubsMadrid(whichisthebiggestforintercontinentalflights)andBarcelona.ItisparticularlystronginMadrid(inexcessof50%marketshare),whichisrelativelybusinessorientatedandtheprimehubforinter

continentalflights.Bothhubshaveexperiencedhighgrowthandareexpectedto

continuetoshowthis.However,LCCsarebuildingshareatBarcelonainparticular,and

otherSpanishairportssuchasMalagaandAlicante.

IberiaoperatesmanyflightsfromSpaintoEuropeanlocationsandtomajorinter

continentalhubsparticularlyLatinAmericawhereithasahighshareoftotalflights.It

hasalsobeenincreasingtheproportionofbusinesscustomersontheseroutes.

POSITIONING/BRANDING.IberiaisthepremiumairlineinSpain.RecentinitiativesincludestronggrowthofitsEuropeannetwork,launchingIberia.comandelectronic

ticketing,eprocurementandinitialreductioninstaffcosts.Ithasatraditionalmodel,

includingbranding,frequentflyerprograms(aspartoftheOneWorldalliance),business

lounges,onboardcatering,traditionalseating(spacedout,limitedreclineinbusiness),a

relativelyundifferentiatedservicebetweenbusinessandtouristclasscustomers,heavy

useoftravelagentsandrelativelyhighcommissions(10%)

Aircraftutilisationisparticularlypoorprimarilyduetonetworkplanningandslow

turnarounds.

ALLLIANCES.IberiaisamemberoftheOneWorldairlinealliancealongwithAmericanAirlines,BritishAirways,AerLingus,LANChile,CathayPacific,FinnairandQantas.

Togethertheyflytoalmost600destinationsin135countries.Onaverage,everyfive

secondsthereisatakeofforlandingbyanaircraftofanairlineinthealliance.

AIRCRAFTMIX.ThefleetisamixofBoeingandAirbusaircraft.

OUTSOURCING.Iberiahasnotoutsourcedmanyofitsactivities

SYSTEMDEVELOPMENT.Iberiadoesnothaveanyothermajorbusinesses

Iberiaisarelativelyprofitableairlineandhasbeenforthepastfewyears.

Sources:IberiaWebsite,Press.

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Iberiacasestudy 5

LOWESTPRICESOFIBERIAFLIGHTSFROMMADRID

OutboundflightsMonday19June,2006bookedonemonthinadvance

Destination Distance(Km) Overnightstay(Euros) 4daystay(Euros) NotesGranada(Spain) 310 262 104

Murcia(Spain) 300 452 104

Geneva 1200 55 70 350Euroforadayreturn

London 1650 66 168

NewYork 5800 1820 1121 506EuroforFridayor

Saturdaydeparture

RiodeJaniero 7000 3753 1149

Guatemala 7500 3048 4258

LOWESTPRICESOFIBERIAFLIGHTSFROMBARCELONA

OutboundflightsMonday19June,2006bookedonemonthinadvance

Destination Distance(Km) Overnightstay(Euros) 4daystay(Euros) NotesGranada(Spain) 620 298 150

Murcia(Spain) 420 388 104 ViaMadrid

Geneva 750 339 179

London 1600 171 235

NewYork 5800+ 1820 1200 ViaMadrid

RiodeJaniero 7000+ 3753 1228 ViaMadrid

Guatemala 7500+ 3048 4253 ViaMadrid