IAG’s Air Europa Purchase Is Still In Progress

Willie Walsh, IAG chief executive, confirmed that the purchase of Spanish airline Air Europa would go ahead despite the current situation. At the company’s Q1 results today, he said that the process was ongoing, but there was now a price adjustment mechanism. The company announced last November that it planned to acquire the airline for around €1 billion ($1.1 billion).

Air Europa
IAG is still planning to acquire Air Europa, but due to the current outbreak, the deal has been delayed, and a new price needs to be negotiated. Photo: Jbarcena via Flickr

Despite struggling to survive the impact of the virus outbreak, IAG has no plans to halt its acquisition of Spanish carrier Air Europa. Initially, the purchase was due to complete in the first half of this year. But as priorities have shifted, the timeline has slipped. No new date has been given for the completion of the deal, but Mr Walsh told reporters that,

We still have to go through the full competition regulatory approval process. And that is ongoing. So at this point, the process continues”.

Financial difficulties

Mr Walsh confirmed the ongoing status of the deal at IAG’s Q1 results last Thursday. IAG suffered a devastating loss of €1.8bn (£1.5bn) for the first part of the year. Worryingly, it said it expects the second quarter to be as bad, if not worse.

However, IAG is insisting that, despite financial difficulties, the move still makes strategic sense. The purchase is designed to strengthen Iberia’s presence in Madrid and establish a real IAG hub in Spain. It would also help to develop IAG’s position in the Europe-to-Latin-America and Europe-to-Caribbean markets. Perhaps the reason IAG is so keen to keep trying for a deal because IAG has agreed to a €40 million break fee should the transaction be terminated or fail to achieve regulatory approval.

vueling to receive state-guaranteed funding
IAG will have a firm hold in Spain as it already owns Vueling and Iberia. There are some doubts about the purchase due to strict competition rules. The European Commission has not yet approved the deal. Photo: Getty Images

There is still work to do on the deal, as Walsh noted that there is still the rather important issue of pricing to finalize. Walsh acknowledged that Air Europa was also having a difficult time. He said that,

I am not sure they are taking in any revenues, and I don’t have visibility on the actions they have taken to reduce their cash outflow.”

Air Europa

Air Europa is one of Spain’s leading private airlines. It has a strong focus on domestic routes as well as the long-haul routes to Latin America and the Caribbean, which made it so attractive to IAG. Once assimilated into IAG, Aer Europa would be a stand-alone operation within Iberia, run by Iberia’s CEO, Luis Gallego. However, Gallego is due to take over Walsh’s role when Walsh retires in September.

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Air Europa is the third largest airline in Spain behind Iberia and Vueling. Both of which are already owned by IAG. Photo: Iberia

The carrier is the third-largest in Spain. IAG-owned Iberia and Vueling are the largest. The acquisition of Air Europa gives IAG a firm hold in the country a decent stance going forward to create a Spanish hub. In an attempt to ease fears of a monopoly, IAG made a deal with another Spanish carrier, Volotea, will open up to four bases in Spain to operate routes through slots from Iberia and Air Europa. The agreement has yet to be approved by the European Commission.

Conclusion

Overall, it’s not a surprise that IAG is looking at negotiating the price; The aviation industry is very volatile at the moment. Additionally, Walsh’s comment about Air Europa not taking steps to reduce cash flow is a hint that the airline is not worth as much as before. But Walsh should be worrying about whether or not he’ll get approval for the deal at all. After all, it would give IAG a substantial presence in Spain.

Additionally, Walsh is due to step down in September. It wouldn’t be a surprise if they are still negotiating after Walsh has gone. What do you think of the deal? Is it wise for IAG to think about spending money right now? Do you think concerns about the agreement are justified? Let us know your thoughts in the comments.

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