Spain Considers Equity Stake in Air Europa
Spain considers an equity stake in Air Europa as part of a revised partnership with IAG and Iberia after the initial merger falls through.
Before the COVID pandemic hit, Iberia (Madrid) and their parent company IAG had agreed to buy Air Europa (Madrid) for $1 billion. After the onslaught of the pandemic against airline finances, the Spanish government provided a bailout to Air Europa, which reduced the acquisition cost of the airline to $500 million. The deal eventually fell through due to onerous concessions required by the European Commission to protect local interests and competition.
Why Purchase Air Europa?
IAG had argued that by acquiring Air Europa, the group would be better equipped to turn Madrid into a major European hub similar to Amsterdam or Frankfurt. The two largest players at the airport, Air Europa and Iberia, would be able to cooperate better and synergize their operations. IAG was also looking into more access to Latin America after Delta’s partial acquisition of LATAM. With Air Europa in the IAG family, Iberia, Vueling, and Level would be able to provide better connections from Spain.
Bumps in the Road
The transaction hit early bumps after the first government bailout of Air Europa. Since the loans included an equity conversion, IAG negotiated a price reduction. The revised valuation was half of the price initially negotiated, and IAG would return the government’s loans starting five years after closing (initially projected to start repayment in 2026).
The European Commission initially gave the merger a green light, but later began a more extensive review after the petitions of other major legacy airlines. IAG and Air Europa had agreed to divest some short-haul route slots and open up international slots to avoid competition issues. The European Commission hinted that the proposed concessions would be insufficient. With the prospect of onerous concessions, IAG abandoned the deal last year.
Since then, IAG paid $75 million to Air Europa for terminating the agreement, but the amount would serve to offset any possible future transaction. The Spanish government has been under fire for questionable loans to certain airlines, which have made authorities keen on recouping their investment. After the initial deal was abandoned, IAG and Air Europa agreed to seek out a different way to cooperate that would survive European Commission scrutiny. The Spanish government seems to have found a middle ground, where it will exercise part of its convertible loans into a 40% equity investment in Air Europa, with IAG acquiring an undisclosed percentage. Air Europa’s current owners, the Globalia Group, would retain a minority stake.
Will This Fly?
A joint ownership agreement with the Spanish government and Globalia has better chances of surviving the European Commission evaluation. The government can better leverage the argument that the partnership is in the best interest of Spanish competition: the government can guarantee some degree of corporate independence. With a joint ownership agreement, Air Europa and IAG can better coordinate codeshares and frequent flyer programs. Whether this leads to a joint venture agreement is currently unpredictable. That being said, a successful agreement would likely push Air Europa to join OneWorld and cooperate more closely with other OW carriers, such as American and Qatar. With a more cooperative environment with the other IAG member airlines, Air Europa would likely have operational agreements with low-cost carriers Vueling and Level.
Although government and IAG officials have yet to publicly comment on the potential agreement, the transaction seems to have the best chance at pleasing all parties involved. The deal’s structure would preserve Air Europa’s independence while giving the Spanish government more security of a return of their loans. The Globalia Group would not be totally removed from Air Europa and IAG would move closer to making Madrid a better European gateway.