IAG: How Iberia Became the Group’s Best Airline

The most significant fact in IAG’s 2025 results is that Iberia is now the group’s best performing airline. For most of the group’s history, British Airways was the profit engine and Iberia the restructuring problem. That reversal reflects a decade of cost reduction, a rebuilt Latin American network and the strength of the Spanish market. This case study explains how it happened. It is part of the Spain Company Stories hub.

How did Iberia become the group’s strongest airline?

Through restructuring first and network strategy second. Iberia went through severe cost reduction after the group’s formation, including difficult labour negotiations and the restructuring of its ground-handling business, which produced a cost base that supports its current margins.

The network is the growth engine. Iberia is the leading European carrier for connections to South America, and it increased frequencies to its principal South American destinations by around 4.4% during 2025, including through new Airbus A321XLR aircraft that make secondary routes viable.

Madrid is the structural asset. A hub with strong Latin American traffic rights, a large domestic feeder network and airport capacity that most European hubs lack gives Iberia room to grow that Heathrow-constrained British Airways does not have.

Why is the A321XLR significant?

Because it changes which routes are economically viable. A narrowbody aircraft with transatlantic range allows an airline to serve secondary long-haul destinations with frequencies that a widebody could not fill profitably, opening city pairs that previously required connecting traffic.

For Iberia this is particularly valuable in Latin America, where a large number of medium-sized cities generate real demand from Madrid but not enough to justify a daily widebody. Aer Lingus is using the same aircraft for the North Atlantic on the same logic.

The strategic consequence is a fragmentation of long-haul networks. Fewer passengers connecting through mega-hubs, more direct services between secondary cities, and a competitive dynamic that favours airlines willing to operate smaller aircraft over long distances.

What happened in the North Atlantic?

It softened, which is notable given how much of European airline profitability depends on it. IAG holds a very large combined share across the North Atlantic, and 2025 demand there was affected by stricter United States migration policies and geopolitical tension, with those destinations expected to grow only in single digits.

British Airways offset this by rebuilding premium capacity toward pre-pandemic levels, which is the more profitable segment of transatlantic flying and where the group’s brand and Heathrow slots retain genuine advantage.

The diversification argument works here. Latin America and Spanish domestic performed strongly while the North Atlantic was weak, and a group with both did considerably better than one dependent on either alone.

What is the transformation programme doing?

Efficiency and customer experience simultaneously, which airlines usually treat as a trade-off. The group has targeted operational reliability, on-time performance and customer satisfaction alongside cost reduction, on the argument that punctuality is both a cost saving and a product improvement.

Investment is substantial and visible: Starlink satellite connectivity across the fleet, Iberia refitting all its A330 long-haul cabins including a new business suite product, lounge upgrades at Madrid, and a new premium lounge in Terminal 4 developed with the airport operator.

The financial ambition attached to the Spanish platform is explicit: a medium-term target for Iberia of €1.4bn of operating profit, against €1,027m in 2024. That is a demanding objective and it indicates where the group expects its growth to come from.

How does IAG compare with its European rivals?

Favourably, and it says so. Group margins of 15.1% were described as significantly better than global competitors, and IAG reported the highest nine-month net income among the large European airline groups including Air France-KLM and Lufthansa.

The structural reasons are the North Atlantic and Latin American networks, both of which are higher-yield than intra-European flying, combined with a low-cost short-haul carrier in Vueling that competes in the Spanish domestic and European leisure markets.

The comparison also explains why both of IAG’s principal rivals bid for TAP Air Portugal. Neither has a Southern European hub with Iberia’s Latin American position, and acquiring one is the fastest available route to matching that part of IAG’s network.

What is IAG Loyalty worth?

More than most observers assume. Loyalty programmes generate revenue by selling miles or points to banks issuing co-branded credit cards, retailers and partners, and that revenue arrives in cash upfront with the redemption liability recognised later.

It is a genuinely different business from flying: high margin, capital-light, recurring and considerably less cyclical than passenger revenue. Several analyses of North American airlines have concluded that the loyalty programme is worth more than the airline attached to it.

IAG has been developing this deliberately, launching restructured club propositions at both British Airways and Iberia and adding partners to the Avios currency. The strategic logic is to build an asset whose value does not depend on load factors.

Why does Madrid work as a hub?

Capacity, geography and traffic rights. Madrid-Barajas has runway and terminal capacity that Heathrow, Frankfurt, Amsterdam and Paris either lack or must ration, which means Iberia can add frequencies without buying slots at prohibitive prices.

Geographically it is well positioned for Latin America, with flight times from Madrid to South American cities shorter than from northern European hubs, and the historical and linguistic connections generate genuine origin-and-destination demand rather than only connecting traffic.

The domestic and short-haul feeder network completes it. Iberia and Vueling together provide the Spanish and European connections that fill long-haul aircraft, and Spanish domestic aviation is unusually strong because the country’s geography and rail network leave many city pairs where flying remains competitive.

What is the outlook for 2026?

Continued strength with normalising growth. IAG has pointed to compelling market dynamics and long-term secular growth in travel demand, with North Atlantic destinations expected to grow in single digits after a softer 2025 and Latin America continuing to perform.

The capacity picture is disciplined. Group capacity grew 2.4% in 2025 while passenger numbers fell slightly, which indicates deliberate management of supply to protect yields rather than pursuit of volume.

The financial priority is clearly capital return. A €1.5bn excess cash plan beginning with a €500m buyback, on top of existing distributions, signals a group generating more cash than its investment programme requires — which is an unusual and enviable position for an airline.

How does Vueling fit the group?

As the short-haul low-cost operation that competes for Spanish domestic and European leisure traffic against Ryanair and easyJet, and as the feeder for Barcelona in particular.

Its results are more seasonal and more marginal than the group’s long-haul carriers, and quarterly performance swings substantially with the timing of Easter and the summer peak. It absorbed the largest relative impact from calendar effects in the first quarter of 2025.

Strategically it does something the group could not otherwise do: hold position in a segment where low-cost carriers would otherwise take the traffic entirely, at a cost base that a full-service airline cannot match. Every European legacy group has attempted this and few have made it work as consistently.

Frequently Asked Questions