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International Airlines Group, parent of British Airways, plunged into an annual net loss of 943 million euros ($1.2 billion) in 2012 on severe financial strains at its Spanish arm Iberia and owing to a soaring fuel bill.
But IAG's share price soared more than 8.0 percent, easily topping London's benchmark FTSE 100 index in the process, as the market cheered the group's pledge to turn around ailing Iberia.
The loss after tax, equivalent to $1.24 billion, compared with a net profit of 562 million euros in 2011, IAG said in a results statement, adding that it had been hit hard by impairment and restructuring charges at Iberia.
Revenues grew 10.9 percent to 18.12 billion euros but the fuel bill rocketed by a fifth to 6.10 billion euros.
Before exceptional items, British Airways made an annual operating profit of 347 million euros -- but Iberia suffered an operating loss of 351 million euros.
"2012 has been a year of transformation for IAG -- we bought (no-frills carrier) bmi and integrated it into British Airways and initiated our restructuring of Iberia," said IAG chief executive Willie Walsh.
"However there was a significant impact on the results from exceptional and non-operating items... These items include provision for restructuring and impairment costs in Iberia."
IAG had earlier this month revealed that it would axe more than 3,800 jobs at Iberia -- about 700 fewer than planned. The division has struggled as a result of Spain's weak economic backdrop.
"We have embarked on a significant transformation programme in Iberia -- and these results emphasise further that the airline must adapt to survive," Walsh said on Thursday.
"It must stem its cash losses and adjust its cost base permanently if it is to compete with other airlines in all its strategic markets and lay the foundations for profitable growth in the future.
"Despite three months of negotiations between Iberia and its trade unions, no agreement was reached on an initial restructuring plan. Therefore, we have announced that Iberia will proceed with a 15-percent cut in capacity and has started the formal collective redundancy process which will affect 3,807 jobs."
IAG shares rocketed 8.18 percent to stand at 239.82 pence in mid-afternoon trading on the FTSE 100, which was up 0.47 percent to 6,352.70 points.
2013 "is all about the Iberia turnaround with a final agreement between management and Iberia's unions expected shortly," Dolmen Stockbrokers said in a client note.
IAG had already warned last last year that more cuts could follow at Spain's Iberia given the severe economic crisis in the eurozone country.
Spain's economy is in deep recession as an austerity programme chokes consumer spending amid unemployment that surged to more than 26 percent of the workforce in the fourth quarter of 2012.
The eurozone's fourth-largest economy has been hovering on the edge of a sovereign bailout, after already securing a eurozone rescue loan of up to 100 billion euros for its banks.
"IAG's performance for 2012 was set against a sharp year-over-year rise in the effective price of fuel ... and the deteriorating economic environment in the eurozone and particularly Spain," the airlines group added on Thursday.
It last year completed a takeover of Lufthansa's loss-making unit bmi in a deal worth £172.5 million.
In addition, IAG in 2012 launched an offer for full control of Vueling Airlines -- which is already almost half owned by Iberia -- for 113 million euros.
BA and Iberia merged in January 2011 in a tie-up aimed at slashing one another's costs, as a sharp economic downturn and rise of low-cost competitors sparked steep losses for traditional carriers.