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

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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.”

Air Europa acquisition by IAG is cancelled

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.

IAG pulls out of Air Europa acquisition

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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Comments (22)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • d3vski says:

    To a certain extent, I understand the competition issues but considering the very generous terms offered to IAG to buy Air Europa, is there not a risk that the authorities could be pushing Air Europa to bankruptcy by putting impediments in the way of a merger … with the end result that IAG still dominate Spanish market?

    What are the chances of an independent 3rd party coming in and ploughing money into Air Europa whilst the Pandemic still rages on?

    Maybe I have simplified this too much and got the wrong end of the stick… happy to be directed by those who know better?

    • marcw says:

      The issue is, we don’t know really much. You are right that between IAG owning Air Europa or Air Europa going down, in both cases IAG will have a monopoly. What’s different is between IAG owning Air Europa and a third party owning Air Europa. We do know that the CE asked other parties whether they would be interested in stepping in assisting Air Europa. Sadly, we will never know what the report said, as IB and UX have pulled the transaction, so CE won’t publish the final report (hence why IB is paying 75M and not 40M – the 40M was agreed to be payed only, and only, CE blocked the transaction – everything hinted towards that, but we never got a public report).

      The plan now is that IB seems to only acquire 49% of UX shares, while Globalia and the Spanish State will own the remaining bits of the airline. Today it’s confirmed that Globalia has agreed to pump some cash in the airline.

  • BuildBackBetter says:

    Good news for travellers.

    • JDB says:

      Unfortunately, I’m not sure it does much for travellers as UX will struggle to survive in its current form, so some sort of corporate action/major change will happen anyway. The Spanish government (via SEPI) is providing some temporary assistance, but it isn’t clear how far they are willing to or want to go.

  • John says:

    Some industry observers suggest acquisitions among European airlines will pick up steam soon.

    So IAG can’t acquire Air Europa. Along similar line, I would think LH Group cannot acquire ITA. (Its position in Italy would be so strong such that the Commission wouldn’t allow it without terms so restrictive to effectively kill the appeal for LH.)

    So who can acquire whom? I guess AFKL would have an easier time with either UX or ITA.

    But what about AY and FI? Those are also hurting disproportionally much under the pandemic and are seem as takeover candidates.

    And what about TP? Despite having some routes that held up relatively well during the pandemic (South America, Africa, Portugal), they are in terrible financial shape…

    • JDB says:

      Most of the airlines that have taken government cash are not permitted to make acquisitions under the terms of the bailout.

      • John says:

        True, but some groups have already fully repaid their bail-outs. E.g., LH group. I’m sure AFKL must be at least fairly close to repaying their debts.

    • Max says:

      ITA is different from Alitalia. They are much smaller and the company has already been shaped according to Lufthansa’s wish list. Otherwise LH’s lobbyists would have told the German government to step in and intervene on EU level. Likewise France intervened to make sure that ITA will exclusively buy Airbus planes.

      It’s very likely that ITA will be taken over by Lufthansa soon.
      Next on their list would be TAP. After that SAS and probably UX, although these two have a lower priority.

      • Rob says:

        Even more reason to do the BA to ITA status match if there is a chance Lufty buys it!

  • marcw says:

    IB & Air Europa plan to submit a new agreement within 2 months.
    In the meantime IB is paying 75M to Globalia, guaranteeing UX does not engage with other competitors. This sum will be substracted from the final price read more in CincoDias.

  • marcw says:

    The new agreement suggests IB will only acquire 49% of UX

  • Lee says:

    Always a nonsense for IAG to be buying anyone. They cry wolf that the UK governement has to do more to help air travel for BA and that BA will have to make some tough decision and has had over 10,000 people pretty much forced to take redunancy or face being sacked yet they have money to buy another airline which no other airline is doing…..IAG are been such a hand brake on BA and runied the airline. BA would flourish outside IAG again and IAG would be nothing as without BA….no disrespect to the other carriers….and why is Aer Linggus operating flights to the US out of the Uk when BA should be operating them…… Cruz, a disasterous time at BA on took on something far bigger than he is capable of and going nowhere now…..Willie Walsh, just wanted to sack BA staff no matter what and Luis Gallego, who is he? and what has he really ever achieved…..very little! What happen to real leaders in airlines….IAG have a huge ego and their only non-innovation is cost cutting….they offer nothing new to the industry….

    • marcw says:

      How has IAG ruined BA?
      Why should BA start operating from MAN when BA clearly abandoned non-London airports?
      BA wrote its biggest profits, flew to more destinations than ever before under Cruz. Not bad, huh?
      Luis Gallego launched Clickair (later merged with Vueling), Iberia Express and turned around IB. He’s a guy that knows the industry inside-out. And he’s a listener. He might not be famous, but do you need famous people to run airlines? Now you have an accountant running BA, who never really left BA. That’s an issue for BA for the long-term.

      At the end of the day, cost cutting is in the DNA of all airlines. If you want to succeed in the current market, you are either fund by your respective sates or your revenue must cover your expenses. Customers want cheap tickets (remember this).

  • Nick says:

    UX would be a perfect acquisition target for DL if ownership rules weren’t quite so strict. In non-covid times I expect they might have teamed up with AFKL to do it together. Which to be honest would probably have given the best outcome as well, so it’s a shame it won’t happen.

    • marcw says:

      Agree. A DL + AFKLM + Globalia combo would be fantastic. The fact that AFKLM was interested in acquiring UX precipitated the deal between IB+UX. AFKLM was genuinely interested (perhaps together with DL, we don’t know that).

    • John says:

      Is DL willing to do it? They just had to pour more cash into Aeromexico, LATAM, and Virgin Atlantic.

      Those investments might need more cash. Also, Delta is not having a majority stake in any of these airlines (it’s just a minority shareholder of AFKL as well).

  • Jonathan says:

    Another problem that may have been part of this decision is Royal Air Maroc based in neighbouring Morocco are now also the most recent joining member of the OneWorld alliance

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