International Airlines Group (IAG) has launched a new attempt to buy Air Europa, two years after it abandoned plans to acquire the Spanish airline. The company had previously dropped its plans amid concerns that Covid-19 travel restrictions would erode long-term demand and assertions by the European Commission that the merger would significantly reduce competition on routes within, to, and from Spain.
Under the terms of the new agreement, IAG will acquire the remaining 80 percent of Air Europa for €400 million ($423.84 million). The group, which includes flagcarrier Iberia, British Airways, Vueling, and Aer Lingus, had already paid Globalia, the Spanish travel conglomerate that owns Air Europa, €100 million in August last year for 20 percent of the airline. That implies a total value for the operation amounts to €500 million for the equity of the company. That is half of the €1 billion that was agreed upon in the original agreement announced in November 2019.
Long-awaited New Wave of Consolidation
IAG’s proposed agreement to gain full control of Air Europa marks a renewed interest by Europe’s large airline groups to buy smaller and financially weak counterparts. Lufthansa Group has submitted an offer to buy ITA Airways and Air France KLM has indicated it would be prepared to participate in the privatization of TAP Air Portugal once the process is launched. “TAP is of interest to us strategically like the base in Lisbon and we like their position in the Brazilian market,” Ben Smith, CEO of the Franco-Dutch group, told analysts during the company’s 2022 results presentation last week. “So that is of interest, but nothing to report further than that,” he said. “There are a few independent airlines in Europe that could be interested in either closer cooperation or perhaps an outright sale,” he said, pointing out that Air France KLM had made progress in repaying the government-backed Covid loans and consequently the constraints to take part in mergers and acquisitions have been removed. This allows the company to “negotiate with I'd say confidence and more legitimacy with any of the opportunities that may present themselves,” Smith remarked.
If these mergers would materialize, it would lead to a major change of the European make-up of the airline alliances. Air Europa would move from SkyTeam to OneWorld if bought by IAG, ITA would transition from SkyTeam to Star Alliance if it were to be acquired by Lufthansa and TAP would leave Star Alliance and join SkyTeam if swallowed up by Air France KLM.
Also, IAG is rumored to be interested in buying TAP after Portugal’s economy minister António Costa e Silva revealed last month that the group is being viewed in a favorable light by the country’s government. IAG CEO, Luis Gallego, on Friday remained tightlipped on a possible move. “I will not talk in particular on TAP,” he said during the company’s full-year results call. “But we explore all options that will make the group stronger.”
The proposed acquisition of Air Europa fits in that strategy, according to Gallego, as it will enable IAG’s Madrid hub to compete “on an equal footing with other European hubs and consolidate its position in the South Atlantic. Madrid is the main gateway between Latin America and Europe and there are opportunities to expand its network, providing significant benefits to our customers, employees,c and shareholders,” he noted.
More Regulatory Scrutiny
Costa e Silva acknowledged that the transaction will face regulatory scrutiny, though he insisted that the European Commission’s so-called Phase II in-depth investigation of the deal, opened in June 2021, was not the main trigger to terminate the proposed agreement with Globalia in December 2021. “We abandoned the deal [in December 2021] over the uncertainty of the market recovery and the spread of the omicron [covid] variant,” he remarked. “The context is different. We have more certainty of the future now, demand is strong and Air Europa is now more focused on leisure traffic and leisure demand is very strong.”
IAG expects securing regulatory and other approvals could take around 18 months. Among other, it will need the green light of Spanish state-owned industrial holding company Sociedad Estatal de Participaciones Industriales (SEPI) and Spanish state-owned back Instituto de Crédito Oficial (ICO), which are Air Europa’s largest creditors—they jointly granted or guaranteed more than €600 million in loans and credit facilities. Also Brussels will need to give its blessing.
In the past, the European Union has blocked the proposed merger between Ryanair and Aer Lingus, and Air Canada and Transat agreed to terminate their planned merger in 2021 following objections of the European anti-trust body. And last week, the European Commission opened an in-depth investigation to assess the proposed acquisition of Asiana by Korean Air on concerns that the transaction may reduce competition in the markets for passenger and cargo air transport services between the European Economic Area and South Korea.
Air Europa operates scheduled domestic and international flights, including European and long-haul routes to Latin America and the Caribbean. It carried 13.1 million passengers in 2019, 4.3 million in 2020, 5 million in 2021, and 10 million in 2022. Air Europa currently has an operating fleet of 50 aircraft with 15 aircraft on order via aircraft lessors. All aircraft are on operating lease, apart from one Boeing 737 finance lease.
The airline reported an operating loss of €460 million in 2020 and operating loss of €287 million in 2021. 2022 financial data is not yet available.
IAG reported an operating profit of €1.3 billion for 2022, reversing two years of losses. It restored 78 percent of 2019 group-wide capacity, measured in available seat kilometers (ASKs), in the full year and plans to operate approximately 98 percent of 2019 ASK levels this year.