Iberia opens its books

It has long been thought that Spain’s flag carrier would be the next to be gobbled up should Europe enter a new phase of airline consolidation. Following last week’s open skies agreement, the birds are circling ever closer. Now, Iberia’s board has granted permission to allow potential bidders access to its books.

Interested parties are said to include Texas Pacific, a US private equity firm, and a Spanish investment fund. British Airways, which owns a 9 per cent stake, and Germany’s Lufthansa are also likely suitors. Iberia’s shares, as a result, are flying.

As airlines go, Iberia, with a €3.7bn market capitalisation, is not a bad catch. Management has put up a good fight against low-cost carriers and its Latin American operations have benefited from the exit of several competitors. It generates reasonable cash flows and its balance sheet, by airline industry standards at least, is respectable, with estimated 2006 net debt at 55 per cent of book capital employed.

That said, Iberia still suffers from the afflictions that make investing in airlines risky. Margins are wafer thin and could be wiped out, either quickly by oil price spikes and terror alerts or slowly by economic downturns and new capacity. Spain is also one of the world’s most popular holiday destinations and attracts budget carriers like a red rag to a bull. In addition, management has struggled with Iberia’s battle-hardened unions.

But the biggest issue for those looking at Iberia should be its price. Even assuming operating profit margins double this year to 5 per cent, its estimated 2007 price/earnings ratio is now pushing 17 times – about 60-70 per cent higher than British Airways and Air France. To bring Iberia back to a sensible valuation, underlying personnel costs would have to fall by a quarter compared with last year. If potential buyers think that is a tall order, they can only be hoping that oil prices are coming down.