IAG set to acquire Air Europa for $1.1 billion
International Airlines Group (IAG) (IAG), the parent company of Aer Lingus, British Airways, Iberia and low-cost carriers like LEVEL and Vueling, has announced that the group is set to acquire Air Europa, a Madrid-Barajas International Airport (MAD) based airline, for $1.1 billion (€1 billion). The move, pending approval by regulatory authorities, would help IAG to create a mega-hub in Madrid to compete with other major hubs in Europe.
The acquisition of Air Europa “would add a new competitive, cost effective airline to IAG, consolidating Madrid as a leading European hub”, as the addition of Air Europa to the group’s roster would result in “IAG achieving South Atlantic leadership”, according to IAG Chief Executive Officer Willie Walsh as cited in a press release.
If approved, the deal is expected to be finalized in the second half of 2020.
Air Europa’s American connections
According to the statement, under the Strategic rationale heading, the airline group believes that adding Air Europa would allow IAG to once again dominate the South Atlantic market, which connects Europe with South America and the Caribbean.
As of December 31, 2018, Air Europa generated $2.3 billion (€2.1 billion) of revenue, resulting in an operating profit of $111 million (€100 million). The airline has 68 aircraft to its name and is in the process of renewing its fleet – the Spanish carrier is slowly phasing out the Airbus A330 from its long-haul fleet, replacing the A330s with the 787 Dreamliners. The order for 14 Boeing 787-9 aircraft was announced on January 15, 2015, adding on to the previous order of eight Dreamliners dating 2007, with the first new wide-body arriving on March 15, 2016. As of October 30, 2019, the carrier has 14 787s in its fleet.
Air Europa mostly operates from its hub in Madrid-Barajas (MAD), with 69 destinations connecting Spain and the Americas, including flights to North and South America.
IAG’s preliminary plan indicates that the group is set to integrate Air Europe into Iberia’s operations at MAD and into IAG’s whole network, including sales, loyalty programs and schedules. Initially, the Air Europe brand would be retained and only the management side of operations would be taken over by Iberia’s executives. If the deal to acquire Air Europe is not approved by regulators, the group is committed to pay a $44 million (€40 million) fee to the Spanish airline.
Looking at the situation in air traffic in Spain, low-cost carriers dominate the market. AENA, the company which overlooks airports in the country, noted that “low-cost carriers are continuing to increase their share” in Spain, as they accounted for 55.4% of total passenger traffic in 2018, an increase of 1.1% compared to 2017. Meanwhile, IAG’s airlines alone accounted for 27.8% of the traffic, while Air Europa transferred 17.3 million passengers in 2018 – a market share of 6.6%, according to data presented by AENA.
Nevertheless, IAG acquiring Air Europe is not aimed at combating low-cost carriers on intra-European routes – from the group’s perspective, that job goes to Vueling and the recently established LCC, LEVEL.
If the deal goes through, IAG with Air Europa is looking at over 30% of the total passenger market in Spain, potentially even reaching 35% of the market share.
On July 23, 2019, Air Europa announced its H1 2019 traffic results and the airline’s passenger numbers grew by 14%. In addition, the airline announced several new routes in H2 2019 – flights to Fortaleza, Brazil and Iguazu, Argentina are some of them, as Air Europa further expands capacity from Spain to the South Atlantic market. Meanwhile, Iberia’s results as of September 30, 2019, indicate that the Spanish carrier has increased its passenger numbers by 7.3% year-to-date (YTD).
The aforementioned South Atlantic market would become heavily consolidated, with some routes becoming monopolized under the IAG banner. For example, flights from Madrid-Barajas (MAD) to Montevideo, Uruguay (MVD), Panama City (PTY), Santo Domingo, Dominican Republic (SDQ) would become some of the monopolized routes, while flights to other destinations in the Americas would offer little-to-none competition due to IAG’s commercial capabilities.
Fairness of Competition
IAG’s purchase of Air Europe’s 100% shares will only go through if European Commission (EC) gives the green light for the latter to merge into one of the biggest airline groups in the world.
According to European law, the two involved parties would have to provide ways, or remedies, as the EC calls them, to ensure fair competition within the market if the European Commission approves the merger “subject to remedies”.
If the deal goes through, Air Europe would likely leave SkyTeam, as every IAG airline is in the oneworld alliance and the latter has already noted that Air Europa would be integrated into existing IAG joint businesses.
One recent and very comparable example is Lufthansa’s (LHAB) (LHA) acquisition of Air Berlin (AB1) assets, including the subsidiaries NIKI, LGW and a number of aircraft, crew and slots from Air Berlin (AB1) . Lufthansa’s (LHAB) (LHA) buyout came after the latter has announced its insolvency on August 15 and ceased operations a few months afterwards, on October 28, 2017.
However, due to the two parties operating from one market in Germany, Lufthansa (LHAB) (LHA) ‘s portfolio of aircraft and slots in certain airports would have been unfair, ruled the European governing body.
“The activities of Lufthansa (LHAB) (LHA) and NIKI overlapped on around 130 routes. As a result of the takeover, competition would have been very limited on around 70 of these 130 routes, and around 50 of those routes Lufthansa (LHAB) (LHA) would have had a quasi-monopoly for the supply of seats to tour operators and passengers,” stated the European Commission’s press release from December 21, 2017.
IAG’s interest in Air Europa has already attracted attention by competitors. Ryanair’s Chief Executive Officer, Michael O’Leary has revealed the intention to ask competition authorities to require some divestments, especially regarding Air Europa’s intra-European network, which directly correlates with Ryanair’s interests.
Nevertheless, O’Leary has also expressed his compliments to IAG’s CEO, as “it is a good deal for IAG” and Walsh personally, before reiterating that the acquisition is “a bad deal from a competition point of view”.
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