IAG’s plan to buy Air Europa is dead – for now

IAG, the parent company of British Airways, slipped out a one-line statement to the Stock Exchange yesterday to say that the acquisition of Spain’s Air Europa is dead, at least for now.

The full announcement reads:

“International Airlines Group (“IAG”) and Globalia today confirm that discussions are at an advanced stage to terminate the agreement signed on 4 November 2019 and amended on 20 January 2021, under which IAG’s subsidiary, Iberia, had agreed to acquire the entire issued share capital of Air Europa (the “Acquisition”). A further update will be made in the future, as appropriate.”

The original deal committed IAG to paying a €40 million break fee to Globalia if it backed out of the deal. The announcement implies that IAG is trying to reduce this sum.

This was not a huge surprise.

The European Union came out against the acquisition of Air Europa in July.

“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.“

Whilst probably not the killer blow, the UK Competition & Markets Authority also decided to flex its muscles, announcing an investigation last month.

This was due to the potential for:

• reduced competition, either now or in the future, between the UK and Madrid
• reduced competition for British Airways on long-haul routes where Air Europa offers low fares for UK customers willing to change aircraft in Madrid

The price had already been halved – with no payment until 2026

In a sign of how desperate Globalia had become to get rid of Air Europa, it had already agreed to give IAG a 50% discount on the previously agreed €1 billion purchase price.

It even agreed to astonishing payment terms – it wouldn’t ask IAG for a penny (well, Eurocent) until 2026.

It had also, it seems, come to an agreement with the Spanish Government that a soft loan of €475 million made to Air Europa could transfer to IAG.

Why did IAG’s Air Europa acquisition hit the buffers?

It’s easy to blame Covid for the failure of the acquisition. In reality, IAG appeared to believe that rules over monopoly power would somehow not apply to them.

Air Europa is the 3rd biggest airline in Spain.

Once acquired, IAG would 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 would have operated 73% of all domestic flights in Spain.

There was no easy way around this 73% number. The next biggest airline was Ryanair with 15%.

You then drop to BinterCanarias with 9%. It mainly operates in and to the Canary Islands and was unlikely to want to pick up random Spanish domestic routes. It would have needed to double in size to take on enough IAG routes to ease competition concerns, and without the benefit of feed from other IAG airlines it would have struggled regardless.

There was talk of IAG setting up ‘an airline within an airline’ which could be floated on the Stock Market but once Covid hit this was never going to be realistic.

IAG also intended that Air Europa would join the existing revenue-sharing joint venture with BA, American, Iberia and Finnair between Europe and North America. This would have reduced competition on long haul routes.

The fact that Air Europa was a member of the SkyTeam alliance was also a problem. Once bought by IAG, other SkyTeam airlines such as Delta would have lost transfer passengers to/from their flights to Spain. This could have threatened the viability of these flights and further entrenched IAG’s market position.

Despite all this, IAG is not giving up

IAG CEO Luis Gallego was quoted during a conference yesterday as saying:

“We are assessing other possibilities to continue” with the purchase and “We are trying to have a new structure that allows the deal to happen”.

What this new structure would be – given that paying a cut-price €500 million in five years time clearly wasn’t attractive enough – is an interesting question.

For now, IAG’s attempt to gain a virtual monopoly on Spanish domestic flights, under the cover of “enhancing Madrid’s position in European aviation“, is dead.

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