IAG snaps up Air Europa to boost Latin American operations

Consolidation continues in the global aviation market, this time delivering a shift in transatlantic services. International Airline Group announced this morning its intentions to buy Air Europa. The Spanish carrier will become part of the Iberia operation within IAG though remain an independent brand, at least to start. The deal is valued at 1 billion euro and full integration is expected by 2025.

Acquiring Air Europa would add 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.

IAG has a strong track record of successful acquisitions, most recently with the acquisition of Aer Lingus in 2015 and we are convinced Air Europa presents a strong strategic fit for the group.

– Willie Walsh, Chief Executive of IAG

The move helps IAG to bolster its operations between Europe and Latin America/Caribbean markets just weeks after its oneworld partner LATAM announced it will leave the alliance as Delta Air Lines invested in the company.

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Multiplying Madrid’s Meaning

The deal focuses squarely on the value of Madrid as a hub for the IAG operations. Air Europa joins Vueling and Level as Spanish airlines within the IAG operation. further increasing the group’s position in that market. As Iberia CEO Luis Gallego notes, “This is of strategic importance for the Madrid hub, which in recent years has lagged behind other European hubs. Following this agreement, Madrid will be able to compete with other European hubs on equal terms with a better position on Europe to Latin America routes and the possibility to become a gateway between Asia and Latin America.”

While other major hubs in Europe pushing their operational limits due to capacity, Madrid’s Barajas International Airport still has room to grow. The Air Europa operation will be integrated into the hub structure at Madrid, even while running as a separate brand. IAG also anticipates integrating Air Europa into its intra-group codeshares across all gateways and, eventually, its joint venture businesses in the Transatlantic markets.

The decision to keep the brand separate for now makes a tiny bit of sense, though longer term the value is unclear. With three other Spain-based brands covering the range of product offerings – full service, as well as short-haul and long-haul LCC operations – it is unclear how Air Europa as a standalone operation makes much sense for IAG. As the operation transitions on to the IAG platform of common services it will become easier to fold it into the existing brands, chipping away at the Air Europa parent in favor of boosting the other brands with the crew and fleet as appropriate.

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Competition concerns

The improved hub operations at Madrid come with a cost for consumers. Assuming the deal goes through without any regulatory limitations the combined carriers would displace Ryanair from the top position in Spain measured by passengers carried. Not surprisingly, that shift concerns Michael O’Leary, who has suggested regulatory relief in the form of slot divestments or behavioral limitations might be called for as a result.

While such divestments would obviously be good for Ryanair, determining exactly where the cuts are needed is more challenging. The combined operation would serve only 26% of the Europe-South America traffic, for example, hardly a monopoly position. Better access to slots at Madrid and Barcelona are likely targets. Both airports are slot coordinated, limiting the total operations. But the current operational targets, especially at Madrid, are below the theoretical maximum flights the airports could handle given their runway configuration.

Questions also arise over the competitive landscape for domestic flights in Brazil as a result of this deal. Air Europa’s parent company Globalia recently received approval from the Brazilian government to launch a domestic airline in that country. The future of that deal, including IAG’s desire to pursue such should the authority be transferred, remains unclear. Brazil’s domestic market shows softness on the economic side but also potential for growth as Avianca Brasil’s recent demise reduced competition overall.

Shifting Alliances

As part of the deal Air Europa will transition away from FlyingBlue as its loyalty scheme to the Avios program used by the other IAG companies. Moreover, the deal would mark the end of Air Europa’s participation in SkyTeam, though whether it joins oneworld remains to be seen. The Delta/LATAM deal sees the alliances losing a significant partner airline, as that operation signaled hesitance in joining SkyTeam. The same could happen with Air Europa, though on a smaller scale given the size of the operation. IAG has previously shown a willingness to do similar with Aer Lingus, rolling it into the joint ventures and Avios program but not into oneworld.

While the benefits to the airlines from such consolidation are clear the value to passengers remains far more murky. Especially as barriers to entry – namely around market share and route authorities – increase.