EU attacks IAG’s Air Europa acquisition

In late 2019, IAG, parent of British Airways, Iberia and Vueling, announced its intention to acquire Air Europa. Air Europa is the third-largest airline in Spain, after Iberia and Vueling, operating around 15% of all Spanish domestic flights.

The hope was that the deal would create a ‘5th European hub’ in Madrid, bulking up the existing Iberia operation, to sit alongside London, Frankfurt, Paris and Amsterdam. You can read our original article on the plans here.

At the time, the price was €1bn. Clearly a lot has changed since then, including the worst crisis aviation has ever seen. IAG has now negotiated a 50% discount on the price. Better yet, IAG doesn’t have to pay a penny until 2026.

The problem for IAG is monopoly concerns in Spain, with the additional of Air Europa giving it dominance of the domestic market with 73%. Ryanair will be the biggest competitor but only has a 15% share.

The European Union has now announced an in-depth investigation into the deal – see here.

To quote:

“The Commission is concerned that the proposed transaction could significantly reduce competition on 70 origin and destination (O&D) city pairs within and to/from Spain, on which both airlines offer direct services. On some routes, IAG and Air Europa have been the only two airlines operating.

The Commission is also concerned about the effect of the proposed transaction on routes on which other airlines rely on Air Europa’s domestic and short-haul network for their own operations at the Madrid airport and a number of other EU airports. Without Air Europa’s feeder traffic, some airlines may decide to terminate their services to international destinations also served by IAG, reducing choice for travellers.

At this stage, the Commission found that competition from other airlines, including from European low-cost carriers would likely not provide a sufficient constraint on the merged entity on the routes where it would hold high market shares. Similarly, the competitive pressure of European network airlines or Latin American airlines appears insufficient.”

The EU has until 5th November to make a decision on whether the acquisition can proceed. Interestingly, IAG has not voluntarily submitted any potential remedies for consideration.

The problem is that, as you can see from the market share figures above, there is no realistic competitor to pick up those routes.

IAG may be forced to create, and then divest, a new airline to operate these routes, or to provide substantial financial backing to a small Spanish airline to fund expansion to take on Air Europa routes. Even then, it wouldn’t help SkyTeam carriers flying to Spain who need onward connectivity within the alliance.

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