Contributor - Europe

Cathy Buyck

The proposed acquisition of Air Europa by International Airlines Group (IAG) is proving to be more complex than initially anticipated by the parties, after Britain’s competition regulator decided to open its own investigation into the merger. In a statement released on Monday, the UK’s Competition and Markets Authority (CMA) confirmed it had concerns whether the combination of IAG with Air Europa “may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.” The CMA set a January 19, 2022, deadline for its initial investigation decision, at which time it can clear the buyout or open a phase 1 investigation.

 


IAG, based in Spain and the UK, is the holding company of Spanish airlines Iberia and Vueling, British Airways, and Ireland’s Aer Lingus. IAG is the largest airline group in Spain and Mallorca-based Air Europa&nbsp;ranks as the country’s third-largest airline. It served 62 destinations, primarily in Europe and South America, pre-Covid.

 


The UK probe comes amid Air Europa’s financial woes and a separate inquiry by the EU’s competition watchdog. The European Commission in June opened an in-depth investigation due to its belief that the proposed transaction could “negatively affect competition on domestic, short-haul, and long-haul routes to and from Spain.”&nbsp; The services in question include 70 origin and destination city pairs within and to/from Spain, on which both airlines offer direct services, as well as several domestic and short-haul routes feeding traffic for long-haul flights to the U.S. and Latin America via Madrid. “It is important to ensure that the [post Covid-19] recovery of the sector takes place in a competitive environment preserving sufficient choice for travelers,” said EU competition commissioner Margrethe&nbsp;Vestager.

 


Late last month, a week before the EU investigation deadline expired, Iberia—which is buying Air Europa on behalf of IAG—submitted a remedy package to alleviate the EU’s antitrust concerns, a move indicating IAG remains interested in the acquisition. Brussels is now assessing the remedies and the provisional legal deadline for that investigation is January 4.

 


During a third-quarter earnings results call on November 5, IAG CEO Luis Gallego told analysts the company is working “hard” trying to close the deal. “I think it has an important strategic value for the group, and not only for the group, for the Madrid hub,” he said. “If Spain and Madrid want to have a hub to compete with the strongest hubs in Europe, a consolidation is needed.” &nbsp;

 


Nonetheless, Gallego conceded his optimism about a positive outcome has waned. “I think we are in the middle of a conversation with three parties, the Spanish government, Globalia—the owner of Air Europa—and also the competition authorities,” he explained. “We always said that if we can find a place that is good for all of us, we will do the deal. And if not, we don't do the deal, as we have done in other occasions when we have deals that we consider didn’t make sense for us.” &nbsp;

 


IAG and Globalia announced the buyout in November 2019 and had expected the deal to close in the second half of 2020. The pandemic and a €475 million ($435 million) bailout of Air Europa by the Spanish government, however, prompted IAG in January to negotiate new conditions of the planned take-over; IAG will pay only €500 million for the Spanish airline, half of the initial takeover price, and Iberia will defer payment until the sixth anniversary of the acquisition’s completion to allow time for the Globalia airline to return the public aid.

 


Meanwhile, Air Europa’s precarious financial position will necessitate a round of state aid, El Pais reported. According to the Spanish newspaper, the airline’s auditor, KPMG, has stated “significant doubts about the company's ability to continue as a going concern.”

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