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IAG to buy Air Europa in a €1bn deal – Air Europa to leave SkyTeam and adopt Avios

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IAG, the parent company of British Airways, has announced the acquisition of Air Europa for €1bn.

Air Europa is the 3rd biggest airline in Spain.  The acquisition, according to IAG, will turn Madrid into a genuine ‘5th European hub’ city alongside London, Frankfurt, Paris and Amsterdam.

Importantly, IAG will become the largest airline group flying between Europe and the Caribbean and Europe and Latin America.  Even more importantly, if you live in Spain, is the fact that IAG will operate 73% of all domestic flights in Spain.

I met the Air Europa CEO last Autumn at an event he sponsored in Mallorca, and later got a tour of their facilities at Palma (see below).  I must admit that I was surprised by the size of the airline, especially the long-haul network, which had gone under my radar.

Note that the acquisition does NOT include the travel agent, ground handling and hotel businesses owned by the parent company, Globalia.

IAG to buy Air Europa

To quote IAG:

“Air Europa is one of the leading private airlines in Spain, operating scheduled domestic and international flights to 69 destinations, including European and long-haul routes to Latin America, the United States of America, the Caribbean and North Africa.

In 2018, Air Europa generated revenue of €2.1 billion and an operating profit of €100 million. It carried 11.8 million passengers in 2018 and ended the year with a fleet of 66 aircraft.

The Board of IAG believes that the transaction would:

• Increase the importance of IAG’s Madrid hub, transforming it into a true rival to Europe’s big four hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles De Gaulle;

• Unlock further network growth opportunities and re-establish IAG’s South Atlantic leadership; and

• Result in significant customer benefits through providing increased choice and schedule flexibility and greater opportunities to earn and redeem miles”

The Air Europa brand is to be retained, at least for the medium term, and the airline will be a stand-alone profit centre inside IAG.  Despite this, there will clearly be very close co-operation with Iberia covering everything from flight scheduling to codesharing.  It is worth noting that Air Europa is NOT a full service airline in the mould of BA or Iberia (it is nearer to Aer Lingus) and would need substantial changes to its operating model if it was to rebrand as Iberia.

Air Europa will also, subject to approvals, be joining the existing revenue-sharing joint venture agreements, such as the one between BA, American, Iberia and Finnair between Europe and North America.

IAG has confirmed that Air Europa will be adopting Avios.

Are there competition concerns?

Oh yes.

This deal increases the size of Iberia by 50%, assuming you treat them as one airline.

There is no mention of ‘regulatory concerns’ in the IAG press release, but the competition regulators will clearly be taking a close look at this, especially in terms of the Spanish domestic market.

You can tell from the tone of the announcement that IAG will be pushing this as ‘enhancing Madrid’s position in European aviation’ and if there is a price to pay in terms of IAG running the majority of domestic flights in Spain, then so be it …..

Eight airlines control 99.6% of Spanish domestic flights, according to CAPA.  Unfortunately for regulators, IAG will now own the three biggest, running a total of 73% of all domestic flights:

  • Vueling – 32%
  • Iberia – 26%
  • Air Europa – 15%

Ryanair comes joint third, also with 15%.  You then drop to BinterCanarias with 9%, which mainly operates in and to the Canary Islands.

HFP readers in the City will note that the ‘break fee’ on the deal is only €40m.  This is peanuts compared to the size of the transaction and implies to me that IAG expects to have ‘issues’.

IAG to buy Air Europa

And what about Air Europa and SkyTeam?

Intriguingly, the press release (PDF) issued by IAG seems to have forgotten to make any mention of SkyTeam.  However, the full presentation made available to analysts confirms that it will leave in a one-line statement – no further information is given.

With LATAM recently quitting oneworld and presumably switching to SkyTeam following its partnership with Delta, there will be a wry smile on a few faces this morning.

However, there is also no guarantee that Air Europa joins oneworld.  Aer Lingus is not a oneworld member, for example, and the relationship between Air Europa and Iberia will be similar to the one that BA has with Aer Lingus.  If the plan is to fully integrate Air Europa with Iberia within five years or so, there is no point having it join oneworld for a short interim period.

There will be a notice period to serve out with SkyTeam which is probably longer than the time it will take to complete the Air Europa deal (H2 2020).  IAG will probably find itself with a SkyTeam partner for six months or so!

From the point of the view of the average HFP reader, the key benefit here will be an increased number of places to redeem Avios – although this won’t be happening for at least 18 months I imagine.

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Comments

  1. iazzaman says:

    Antitrust ok with it? Don’t think so.

    • 73% domestic market share? What could possibly go wrong ….

      • Mainland Spain is almost fine, the high-speed trains have a big share. Now, the mainland Spain – Canary Islands, that’s another issue. iAG+Air Europa will have 97% share, even more now that Norwegian and Ryanair are cutting routes and frequencies.

      • But as a proportion of the Single Market…

  2. Good news. Wide bodies on some short haul routes.. Presume Suma points will be turned into Avios at some point.

  3. Catalan says:

    I’m sure IAG will argue that a similar percentage of market share at Frankfurt, Munich and Zurich are with the Lufthansa Group, if the ruling goes against them.

    • Mr(s) Entitled says:

      What is the current market share of the UK domestic market? I’ve had a look but cant find it broken down by carrier.

      • Doubt IAG is more than 20%. Does it have more than 50 flights per day?

        • BA will be _much_ less than 50% of UK domestic market. They are near-dominant on LHR and LCY routes but you look at London airports as a whole, they are probably a little more than 50%. BA don’t run any non-London domestic services so Easyjet and Flybe will be second and third with Aer Lingus (Belfast services), Loganair etc also having a small but decent slice of the pie.

          • Mr(s) Entitled says:

            I think BA will be high due to the services from the regions to London. Flybe, inter regions, might be higher (is market share passengers or flights?) but can’t imagine any LCC carrier will feature prominently.

            My point, to the extent I had one, is to question if ~75% of domestic flights is really any different to what we, and potentially, others have? I suspect the market for domestic flights isn’t deep enough to support many players.

          • BA’s domestic flights to London from the English airports, (Manchester, Leeds Bradford, Newcastle) are more in competition with the trains for point to point travel and people connecting on are in competition with KLM, Air France, etc.

            There’s plenty competition on London to Scotland when you include all 6 airports

  4. With regard to oneworld integration, is there a possibility that they might join as an affiliate of IB before the two operations are merged?

    Maybe this is wishful thinking on my part, but a key difference with EI is that EI wasn’t a member of an alliance before, whereas Air Europa’s frequent flyers are used to taking advantage of alliance partners?

  5. Out of interest, why isn’t Aer Lingus part of Oneworld? What’s the benefit of not being part of this grouping? Thanks

    • Aer Lingus was part of OneWorld many years ago, before they adopted a less full-service model and culled routes which caused them to leave I think?

      • Lady London says:

        When you say EI is operating a ‘less full service’ model, what exactly is missing in comparaison to BA & IB?

        • Jonathan says:

          I Think the main reason is down to the reasons that Virgin Atlantic isn’t jumping into any airline alliances, being part of these groups gives them less power and control over their operations and running of the company, and they’re forced to let some of that power go to the top people who run the alliances

        • Look at the slides – IAG is putting it in the ‘value’ category.

        • Not much difference between offerings now. They are rolling out AerSpace at the moment (broadly similar idea to Club Europe) and have done a lot with their long haul product recently as well.

          I’d like to see them join for selfish reasons, as I use them occasionally for work and leisure and access to decent Avios earning rates, tier points and BAEC status benefits would be nice.

          In reality there’s a lot of behind-the-scenes integration to make things work and EI have agreements with non-OW partners (Ethiad and United) that are presumably difficult to exit.

  6. Excellent news!

  7. Hi All,
    OT – is anyone getting an email for redeeming AMEX offers recently? the credit comes through in the end but I never get an email anymore….

    • I get them all the time now, it’s verging on spam!

      • Although I receive emails reminding me to use the offers, I never receive emails confirming that I have used an offer. So I think that something isn’t working within the Amex IT platforms.

        • Same here, I’ve used quite a few offers recently but I’ve not had “you’ve used your offer” emails for any of them. Statement credit or points have consistently posted in 3-4 days.

          I do seem to get plenty of the “you have offers from” or “saved offer about to expire” emails though.

    • I used the Post Office offers morning and received an immediate email.

  8. One for Rob and hopefully not something I’ve missed posted already but seems like TCB have their 25% bonus conversion to Avios at the moment

  9. No sure I’d agree with you the Break Fee is particularly small. It would typically be higher for a listed target.

    A couple of recent brand-name example:
    Drax buying Scottish Power’s power generation assets for £702m: break fee £14m
    Restaurant Group buying Wagamama for £357m (EV £559): break fee £6m.

    … and then you get the opposite conclusion about completion risk. Or you could say the vendors have gone into this aware there will be compeition issues and don’t therefore want to look silly if/when IAG walk away: this way IAG are more liklely to accept the concessions required of them.

  10. Patrick says:

    4% break fee is not low. It is quite standard these days…

    • This is a small deal though. 40m won’t even cover their advisors.

      • Shoestring says:

        I can’t see that is likely – why would *Air Europa* be paying more than EUR40m to their advisors? They don’t have to due due diligence or anything, just decide if they are happy with the offer price and ensure that from an owner’s POV (ie Globalia), they as seller have not done anything that might come back to bite them if IAG find anything dodgy later.

        Think about selling a house – the acquiring party’s legal advisors have to do all the work whereas the seller’s lawyers basically just have to check the contract is watertight and that the seller will get their money.

        If it fails as a deal, I see Globalia banking a large proportion of the EUR40m as profit.

        • You’re out of touch. You pay over £1m to your PR agency these days during an M&A process, before you start on the bankers and lawyers.

  11. One sentence in the final slide caught my attention; “Transaction does not require IAG shareholder approval” – I wonder why…

    • Shoestring says:

      Raffles can probs give a banking view but normally because it’s not an acquisition amount relative to the enterprise value of IAG (£15b)/ or market cap (£11b) where shareholder consent is required

      • Basically you need a vote if the target is sized at more than 25% of your gross asset, profits, capital or equity value.

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