Securing approval for a takeover of Air Europa by British Airways and Iberia parent IAG was always a long shot, says Ian Taylor
The on-off-on-off acquisition of Air Europa by British Airways parent International Airlines Group (IAG) was finally confirmed to be off on August 1, when IAG announced it had terminated the purchase agreement owing to “the current regulatory environment”.
It is tempting to wonder what kind of regulatory environment IAG expected when it first announced the acquisition in 2019 and how this differed from the current situation.
The takeover was always going to be a challenge for competition authorities to sign off as IAG already owns Spanish flag-carrier Iberia and Spain’s second-largest airline Vueling, based in Barcelona. Air Europa is the country’s third-largest carrier.
IAG initially agreed a €1-billion deal for an Iberia takeover of Air Europa from parent Globalia – Spain’s largest tourism group – in November 2019.
It hailed the deal as a means to develop Madrid as a transatlantic hub to rival Amsterdam, Frankfurt, Heathrow and Paris Charles De Gaulle.
But obtaining regulatory sign-off was always going to be difficult.
Travel Weekly warned at the time that the deal was “unlikely to escape serious study by competition authorities” despite IAG’s initial optimism that it would be completed by the second half of 2020.
It pointed out 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”, noting the acquisition would substantially increase IAG traffic at Madrid Barajas where its share of the Europe-Latin America market would rise from 19% to 26%.
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.”
O’Leary warned: “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.”
A leading aviation analyst told Travel Weekly the deal “would appear to materially affect the competitive dynamics and there is the potential for market distortion.
“It will give IAG the two main airlines operating to Latin America out of Madrid and all the connecting traffic.”
The analyst warned any go-ahead would “depend on the market remedies” demanded by regulators.
‘South Atlantic leadership’
The 2019 takeover agreement came after IAG’s previous attempt to expand in Latin America through a joint venture with Latin American carrier Latam and American Airlines was vetoed by Chile’s Supreme Court in May 2019.
American Airlines’ rival Delta Air Lines, joint owner of Virgin Atlantic, then bought a 20% stake in Latam in September 2019, paying $1.9 billion.
IAG turned instead to Air Europa, hailing the agreement in November as one that would “re-establish IAG as a leader in the Europe-to-Latin-America-and-Caribbean market”.
Willie Walsh, now director general of Iata but IAG chief executive at the time, suggested: “Acquiring Air Europa would result in IAG achieving South Atlantic leadership.”
He assured investors the deal would also offer “cost synergies across selling, general and administrative expenses, procurement, handling and distribution costs”.
Then Covid-19 hit, and airlines were all-but grounded from late March 2020.
IAG renegotiated the deal for Air Europa, announcing an amended agreement with Globalia in January 2021 which halved the price to €500 million and deferred payment until six years after the acquisition was completed.
By this time, IAG expected the deal to complete in the second half of 2021 – subject to EC approval.
“Assuming completion in the second half of 2021,” the group noted, “IAG will be taking on Air Europa at a time when air travel recovery could be meaningful as the rollout of Covid-19 vaccines proceeds worldwide.”
In the event, a meaningful recovery in air travel only came in the second half of 2022.
The European Commission opened an investigation into the likely impacts of the takeover in June 2021, noting concerns that it would reduce competition on domestic routes in Spain and on international routes to and from Madrid.
In November 2021, the UK Competition and Markets Authority (CMA) followed suit, launching an investigation into whether the deal would harm competition in the UK.
IAG terminated the bid soon after, in December 2021, after EU regulators indicated the ‘remedies’ the group was proposing – the surrender of some airport slots and routes – were insufficient to address the competition concerns.
Chief executive Luis Gallego, who by then had succeeded Walsh, noted: “It is very disappointing, but the decision [to terminate] makes sense due to the market conditions, the deep crisis resulting from Covid-19 and taking into account our desire to maintain a disciplined approach to capital allocation.”
However, he added: “We have committed to analyse alternative arrangements with Globalia.”
‘It doesn’t look good’
In March 2022, IAG agreed to make a loan of €100 million to Air Europa repayable in seven years, with an option to convert the loan into a 20% equity stake.
IAG subsequently did exactly that, converting the loan into a 20% shareholding in Air Europa in August 2022.
Then it launched a second attempt to buy Air Europa in February 2023, agreeing to pay the €400 million balance for the 80% of the carrier still owned by Globalia. Presumably, Gallego and IAG assumed the regulatory landscape had been changed by the pandemic and its impact on aviation.
The group again stressed the deal’s “strategic importance”. Noting it would strengthen IAG’s position in Latin America and the Caribbean.
But the business newspaper the Financial Times quoted an EU competition source as saying: “This is the second time this merger has been attempted, and it doesn’t look good. We didn’t like the first one. It’s going to be worse this time around.”
The European Commission noted “preliminary concerns” that the transaction could reduce competition on domestic, short-haul and long-haul routes in and out of Spain and opened an ‘in-depth’ investigation.
Presumably, the information IAG received from the competition commissioner on the ‘remedies’ in prospect did not look good.
Hey presto, alongside a quarterly results announcement on August 1, IAG noted the takeover was “no longer probable” and it would pay Globalia a break fee of €50 million.
It reported: “The Board of Directors has concluded that in the current regulatory environment it would not be in the best interests of shareholders to continue with the transaction.”
We will see if that is the final word on the projected takeover. No doubt, Globalia will be considering alternative options for Air Europa and Luis Gallego will be looking at other ways to bolster IAG’s Latin American and Caribbean market shares.