UPDATE 2-IAG agrees to link Spanish pilot wages with profits

Thu Feb 13, 2014 12:55pm EST

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By Robert Hetz and Elisabeth O'Leary

MADRID Feb 13 (Reuters) - International Airlines Group has reached a deal with Spanish pilots to link salary rises to group profitability from 2015, helping to ensure the viability of local carrier Iberia.

IAG, which groups British Airways and Spanish carriers Iberia and Vueling, said in a statement on Thursday that Spanish pilots union SEPLA had agreed that wages would be frozen until 2015, and also agreed to productivity improvements.

Luis Gallego, Iberia's executive chairman, called the deal "groundbreaking".

"A strong and profitable Iberia can protect jobs in the long term and boost tourism, which is a key driver in (Madrid airport) Barajas and Spain's economic recovery," he said in a statement.

Iberia has been a drag on earnings at IAG, Europe's No. 3 airline by market value, since its merger with BA in 2011. It was hit by competition from low-cost carriers and high-speed trains during a prolonged economic downturn in Spain and became unprofitable in all markets, including long haul.

It embarked on a cost-cutting drive last year, reducing the number of routes it offers by 14 percent. It aims to slash 3,800 of its 15,000-strong staff in a redundancy round that sparked strikes in 2013.

Iberia's passenger traffic fell 16.5 percent last year as a result of its cutbacks, though the carrier, which is also negotiating new agreements with flight crew, is due to post its first annual profit since 2010.

Gallego told a news conference that the preliminary deal with pilots would help Iberia's competitiveness on its Latin American routes and would also help it fend off competition from low cost carriers in Spain.

Justo Peral, head of Iberia's pilots union, said Iberia's pilot labour costs would drop over 60 percent after the changes, which include more flexible hours.

IAG said the agreement put Iberia on track for the more positive of two scenarios outlined at IAG's Capital Markets Day in November 2013.

In November IAG raised its 2015 operating profit goal to 1.8 billion euros ($2.5 billion) from 1.6 billion, citing savings from integrating budget carrier Vueling, improved margins at BA and a recovery at Iberia.

IAG shares closed up 2.8 percent on Thursday at 442 pence per share.

Gallego said on Thursday that savings from the deal with pilots would also help it grow Iberia Express, its low cost brand, which could end up flying 15 percent of Iberia's capacity - which would allow it to increase its fleet to 25 airplanes from 15 now.