IAG needs regulatory sign-off on its €1bn-deal for Air Europa. Ian Taylor reports

International Airlines Group’s €1-billion deal to buy Air Europa, announced on Monday, is unlikely to escape serious study by competition authorities with one leading analyst warning it threatens “market distortion”.

British Airways parent IAG said Iberia would take over Air Europa from Spanish group Globalia, retaining the carrier’s name and operating it separately, at least initially. IAG said it expects the acquisition to complete by the second half of next year.

However, EU and Spanish competition authorities are likely to take a close look as Air Europa is Spain’s third-largest carrier and IAG already owns the two biggest, Iberia and Vueling.

Ryanair chief executive Michael O’Leary wasted no time in demanding action from regulators, saying: “It’s a good deal for IAG. It’s a bad deal from a competition point of view. We’ll be looking for the competition authorities to require some divestments, particularly in Air Europa’s short-haul presence on Spanish domestic routes and European short haul.”

The acquisition will substantially increase IAG traffic at Madrid Barajas airport, especially to Latin America. IAG’s share of the Europe-Latin America market will increase from 19% to 26%.

A leading aviation analyst told Travel Weekly: “It will give IAG the two main airlines operating to Latin America out of Madrid and all the connecting traffic. It would appear to materially affect the competitive dynamics and there is the potential for market distortion.”

He said a go-ahead for the deal “will depend on the market remedies” demanded by regulators.

IAG confirmed it would pay a €40-million break fee to Globalia if the transaction does not proceed.

Air Europa is a member of the SkyTeam alliance of IAG rivals Air France-KLM and Delta. The acquisition comes after IAG’s previous attempt to expand in Latin America through a joint venture with Latam and American Airlines was vetoed by Chile’s Supreme Court in May. Delta then bought a 20% stake in Latam in September for $1.9 billion.

IAG hailed the deal as one that would “transform IAG’s Madrid hub into a true rival to Amsterdam, Frankfurt, Heathrow and Paris Charles De Gaulle” and “re-establish IAG as a leader in the Europe to Latin America and Caribbean market”.

Chief executive Willie Walsh said: “Acquiring Air Europa would result in IAG achieving South Atlantic leadership.”

He told investors the deal would offer “cost synergies [savings] across selling, general and administrative expenses, procurement, handling and distribution costs”.

One early consequence is likely to be the addition of GDS fees to Air Europa bookings. BA and Iberia imposed fees on GDS bookings two years ago and the current charge adds £18 (€22) to a return flight booking.

IAG confirmed it would be “aligning commercial policies and integrating sales forces”.

Air Europa operates 66 aircraft, including 13 Boeing 787s, and flies to 69 destinations. It carried 11.8 million passengers last year, reporting €2.1 billion in turnover and €100 million in operating profit.

IAG reported a 7% fall in operating profit for July to September last week, blaming the strike by BA pilots in September.

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