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When International Airlines Group announced its third quarter results last Friday, 1 November 2019, Willie Walsh offered some warm words to one of its rival airlines Delta.
Willie praised Delta for its strategic move in acquiring 20% of LATAM airlines, thereby snatching it out of the Oneworld alliance. It also all but ended the prospect of further co-operation between LATAM and IAG airlines, which had been faltering due to regulators in Chile denying approval for a revenue-sharing joint-venture.
There was a hint that more details of IAG’s plans for Latin America were to come at its Capital Markets Day this Friday 8 November 2019, but no-one could have guessed that IAG had a plan up its sleeve.
Today, Monday 4 November 2019, IAG has announced it has reached an agreement to acquire Air Europa for €1 billion in cash.
This is what IAG would term a “transformational deal”. It significantly increases its presence at Madrid, by some 50%.
Whilst IAG making this move as revenge on Delta makes for a good story, this deal is likely to having been brewing for some time as it is highly unlikely that due diligence could be completed and terms agreed within a little over a month.
There are competition concerns. It is inevitable that remedies will be demanded by regulators and there can be no certainty that these will be palatable to IAG.
About Air Europa
Readers in the UK will be forgiven for not knowing much about Air Europa.
It is the third largest airline in Spain after Iberia and Vueling, operating a fleet of 66 aircraft, principally to destinations in mainland Europe and Latin America. It has a relatively limited presence in the UK, flying from London Gatwick to Madrid.
Air Europa serves a number of destinations in Latin America not already served by IAG airlines such as Cordoba in Argentina and Recife in Brazil.
Air Europa is currently a member of the SkyTeam and will leave the alliance after its acquisition by IAG.
IAG’s Acquisition Of Air Europa
IAG has confirmed the following details this morning:
IAG will initially retain the Air Europa brand and it will operate as subsidiary of Iberia. IAG views the airline as operating as a “value carrier” in the mould of Aer Lingus. This suggests that it won’t be fully integrated into Iberia. However, as Iberia has a stronger brand presence in Latin American markets, it is likely it will adopt a brand name closely associated with Iberia.
Like Aer Lingus, Air Europa is unlikely to join the Oneworld alliance as a full member but may join as a “Oneworld Connect” partner.
IAG is keeping its cards close to its chest as to how its operations will be ultimately integrated into the group. When IAG acquired bmi in 2012 some in IAG pressed for the airline to be kept separate from BA and IAG secured productivity improvements from BA pilots as condition of its integration into BA. IAG may do the same here.
There’s also little fleet commonality with Iberia as Air Europa operates the Boeing 737 and Boeing 787, neither of which are used by Iberia.
Competition Concerns
The transaction is expected to complete in the second half of 2020. There can be no certainty this will ultimately go ahead.
The most significant impediment will be competition concerns and the approach adopted by regulators. Whilst IAG has sought to frame this deal as increasing the scale and competitiveness of Madrid against other hubs in Europe, that is not how regulators will review the transaction. They will look at individual city pairs and there are very substantial number – both short and long-haul – where competition will be reduced by this transaction.
It is implausible that regulators won’t demand that IAG offers slots to entrants on overlapping city pairs. If the number demand is too great, then IAG may choose to walk away.
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