DEAL DEAD: IAG scraps its plan to buy Air Europa

The parent company of British Airways, International Airlines Group, has scrapped its plan to buy Spanish airline Air Europa for €400 million.

The deal had received sustained criticism from the European Commission, since it would have given IAG a virtual monopoly on domestic flights in Spain.

Even a last minute offer to divest 52% of Air Europa’s routes was not enough, since there was no single competitor big enough to take them on and provide an effective challenge.

Other areas of concern were:

• reduced competition on short haul flights on some routes to Europe and the Middle East

• concern that, when Ryanair was nominally a competitor, it often operated from secondary airports and did not compete directly

• reduced competition on some long haul routes, primarily to North and South America

The UK competition authorities had previously come out against the deal, since Air Europa competes with IAG carriers on various long haul routes via an aircraft change in Madrid.

IAG had been told that the final decision from the European Commission, which would have come during August, was not going to be positive and decided to draw a line now.

IAG will pay a break fee of €50m to Globalia, the parent of Air Europa. IAG will keep its existing 20% shareholding in the company.

In a short statement in its second quarter financial results, IAG said it had:

concluded that in the current regulatory environment it would not be in the best interests of shareholders to continue with the transaction.

Was the deal doomed to fail?

Once acquired, IAG would have become the largest airline group flying between Europe and the Caribbean and Europe and Latin America.

Even more importantly, if you live in Spain, was the fact that IAG would have operated 73% of all domestic flights. The next biggest airline would have been Ryanair with 15%. Behind this was BinterCanarias with 9%, but this is focused on the Canary Islands.

IAG’s view had been that, by adding Air Europa to Iberia, it could create a hub in Madrid that could compete with Heathrow, Amsterdam and Frankfurt. Air Europa had been struggling financially and IAG believed that this would ensure a deal got done. The European Commission had other ideas.

There are more fish in the sea, of course. The obvious target is TAP Air Portugal which is being prepared for sale. Whether the European Commission would prefer Lufthansa Group or Air France KLM to purchase TAP to increase regional competition remains to be seen.