International Airlines Group (IAG), the FTSE travel giant formed nine years ago from the merger between British Airways (BA) and Spanish airline Iberia, is set to acquire Air Europe – currently Spain’s third largest airline. The deal, which will be worth a reported €1 billion, is expected to close at some point during the second half of next year, if it gains regulatory approval.
IAG, which also owns Aer Lingus and Vueling, the latter also a Spanish airline, sees the acquisition of Air Europe as both offering increased market share across Latin America and the Caribbean and further strengthening its hand in its attempt to turn Madrid’s Barajas airport in a genuine rival to Europe’s biggest aviation ‘hubs’, such as London’s Heathrow, Paris’s Charles De Gaul, Amsterdam and Frankfurt.
The IAG share price is marginally up today, 0.44% at the time of writing, with investors not yet showing an either particularly positive or negative reaction to the news, which broke yesterday. The company’s share price edged up 1.2% yesterday, taking total gains to less than 2%. IAG’s competitor airlines have, however, shown stronger opinions. Ryanair’s colourful chief executive Michael O’Leary has already reacted by calling the proposed acquisition “a bad deal from a competition point of view”, leading the early calls for competition regulators to block it.
IAG is Europe’s third largest airline group after Lufthansa and budget carrier Ryanair and last year its fleet of 573 aircraft carried almost 113 million passengers. Air Europa’s 66 aircraft carried just short of 12 million passengers to 69 destinations serviced by 66 aircraft over 2018. The company runs routes to destinations across Europe, Latin America, the USA, Caribbean and North Africa.
IAG’s lack of current reach in Latin America and the Caribbean is believed to be of particular interest to IAG, whose chief executive, 58-year-old Willie Walsh, remarked on the “strong strategic fit” seen to exist between the two companies. He further stated IAG’s board saw the acquisition as leading to the addition of:
“a new competitive, cost-effective airline to IAG, consolidating Madrid as a leading European hub and resulting in IAG achieving South Atlantic leadership, therefore generating additional financial value for our shareholders.”
Ryanair’s O’Leary agreed with the logic of IAG’s bid from its own point of view, while expressing the view that he doesn’t believe the combined company would be good for the airline industry or passengers as a whole, commenting:
“I think it is a good deal for IAG, for Willie Walsh; I think it is a bad deal from a competition point of view. It is a merger to monopoly in Madrid and I think we would certainly be looking for the competition authorities to require some competition divestments, particularly in the Air Europa short haul.”
The lack of strong investor enthusiasm for the acquisition is largely being put down to a lack of detail in IAG’s statement yesterday. Analysts agreed there was good strategic logic behind the deal but are holding off for further details before assessing its likely value to IAG as a group. City brokers Liberum explained that caution, and the relative degree of uncertainty that still exists around whether the proposed acquisition, with a note that read:
“While we do not anticipate a bidding war for Air Europa, given the attractiveness of its Latin American network, it is possible that regulatory obstacles do not merely result in a return to the status quo ante.Instead, other potential partners could move to acquire the business if IAG cannot do so.”
The broker particularly pointed towards Air France-KLM, which has attempted to put together a South Atlantic joint venture with Air Europa in the past as one that, “could be such an interested party”.Risk Warning:
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