Contributor - Europe

Cathy Buyck

International Airlines Group (IAG) has agreed to buy Air Europa, a move that will further alter the alliance landscape and give the parent company of Madrid-based Iberia and Barcelona-based low-cost carrier Vueling a dominant position in the Spanish market and re-establish its leadership position in the Europe-to-Latin America market. In a regulatory statement released Monday morning, IAG announced it signed definitive transaction agreements with integrated travel company Globalia to buy its airline subsidiary Air Europa for €1 billion ($1.11 billion).
IAG will “initially” retain the Air Europa brand and the company will remain a standalone profit center within Iberia, run by Iberia chief executive Luis Gallego. “Acquiring Air Europa would add a new competitive, cost-effective airline to IAG, consolidating Madrid as a leading European hub and resulting in IAG achieving South Atlantic leadership,” said IAG CEO Willie Walsh. Gallego described the deal as “of strategic importance” for Madrid–Barajas Airport, which in recent years has lagged behind the continent’s leading four hubs at Amsterdam, Frankfurt, London Heathrow, and Paris Charles De Gaulle—in spite of the Spanish airport’s spare runway capacity. “Madrid will be able to compete with other European hubs on equal terms with a better position on Europe to Latin America routes and the possibility to become a gateway between Asia and Latin America,” he said. &nbsp;
The “bolt-on” acquisition will elevate IAG’s share in the passenger market between Europe (including Turkey and Russia) and Latin America, defined as South and Central America excluding the Caribbean, to 26 percent, up from 19 percent currently, IAG pointed out during an analysts’ presentation on November 4. &nbsp;
The deal, however, spells bad news for Air France-KLM, which had envisioned becoming the leader in the Europe-to-South/Central America market through a joint-venture with its fellow SkyTeam alliance member Air Europa. The Franco-Dutch group and Air Europa control a 19 percent and 7 percent share in that market, respectively. The SkyTeam partners announced their new metal-neutral joint venture in August 2018 and awaited the launch of the planned cooperation pending regulatory clearance of the relevant competition authorities in Europe and South America.
IAG’s announcement that it will buy Air Europa and that the Mallorca, Spain-headquartered carrier will leave SkyTeam—Air Europa became a full member of the Delta Air Lines and Air France-KLM led grouping in 2010—comes about one month after Delta shook up the alliance scene by buying 20 percent of South American airline and Oneworld member Latam. Delta will pay $1.9 billion for the stake&nbsp;and provide another $350 million to aid in Latam’s exit from Oneworld. The Delta-Latam tie-up followed an earlier setback for IAG and Oneworld’s efforts to strengthen their foothold in Latin America when Chilean courts rejected an attempt by American Airlines to acquire a stake in Latam,&nbsp;ending plans for a joint business between IAG carriers British Airways and Iberia, Latam, and American Airlines.
For Globalia, “the incorporation of Air Europa to IAG implies the strengthening of the company’s present and future that will maintain the path followed by Air Europa in the last years,” the group’s CEO, Javier Hidalgo said.&nbsp;Javier's father, Juan José Hidalgo, founded Globalia in 1971 and the company remains privately held. The acquisition of Air Europa and Air Europa Express will increase Iberia’s size by 50 percent and IAG’s by 10 percent in terms of traffic revenue. Its operations will integrate with the existing Iberia hub structure at Madrid Barajas. Air Europa operates flights to 69 destinations across a range of domestic and European short-haul routes and long-haul routes to Latin America, the U.S., the Caribbean, and North Africa. In 2018, it generated revenue of €2.1 billion and an operating profit of €100 million. It carried 11.8 million passengers aboard a fleet of 66 aircraft—12 Airbus A330-200/300s, eight Boeing 787-8s and two -9s, twenty-one 737-800s, 11 Embraer E195s, and 12 ATR 72s. Air Europa will phase out all of its A330s by the<span style="color: rgb(35, 31, 32); font-family: &quot;Arial Narrow&quot;, HelveticaNeue-Light, &quot;Helvetica Neue Light&quot;, &quot;Helvetica Neue&quot;, AvenirNextCondensed-Regular, sans-serif-condensed, Arial, &quot;Trebuchet MS&quot;, &quot;Lucida Grande&quot;, Tahoma, Verdana, sans-serif; font-size: 16px;">&nbsp;end of 2021 and increase its 787-9 fleet to 21 examples by 2025. Air Europa also has placed an order for 25 Max jets, with the first three due for delivery next year.
IAG said it expects to close the deal in the second half of 2020. The transaction does not require IAG shareholder approval, though it stands subject to regulatory approval of the relevant competition authorities. Ryanair has already vowed it will ask competition authorities to require IAG to make divestments, particularly in Air Europa’s short-haul markets, Reuters reported.&nbsp; Speaking during the LCC’s half-year results presentation on Monday, Ryanair CEO Michael O’Leary called it “a merger to monopoly in Madrid.”
“I think it is a good deal for IAG, for Willie Walsh,” said O’Leary. “I think it is a bad deal from a competition point of view.” IAG will pay Air Europa a €40 million break fee in the event the transaction fails.
The sale of Air Europa to IAG marks a new step in the consolidation of the European airline industry, through a limited number of high-profile mergers and a high number of bankruptcies that in recent months include Thomas Cook Airways in the UK, Slovenia’s Adria Airways, and France’s XL Airways and Aigle Azur. Condor in Germany is flying with the backing of a €380 million government bridging loan.

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