Iberia buys Air Europa for 500 million euros
The operation allows the creation of an operator with a significant and more resilient size to navigate the current situation caused by COVID, as well as any other that the industry may face
Javier Sánchez-Prieto, CEO of Iberia, and Javier Hidalgo, CEO of Air Europa, have signed a new agreement for the purchase of Air Europa by Iberia.
The deal calls for a price reduction from € 1 billion to € 500 million, to be paid six years after the transaction is completed when, by all estimates, the market will have recovered.
The new agreement is good news for the two airlines, their employees, customers and shareholders, and also for the whole of Spanish society. Once the corresponding approvals are obtained, the agreement will allow both airlines to emerge faster and stronger from the current situation caused by COVID; have more capacity to face the financial commitments acquired during the pandemic, such as ICO credits and the aid granted by the State to Air Europa, and strengthen the Madrid hub so that it can expand and better compete with its European equivalents, whose airlines reference have received billion-dollar aid from their respective governments.
Luis Gallego, CEO of IAG, commented: “Both Iberia and IAG are demonstrating their resilience to face the deepest crisis in the history of aviation. Being part of a large group is the best guarantee to overcome the challenges of the current market that will also benefit Air Europa once the transaction is completed. I am pleased that we have reached an agreement with Globalia to defer payment until well into the expected recovery in air travel after the end of the pandemic and when we expect to be obtaining significant synergies as a result of the transaction ”.
Javier Hidalgo, CEO of Globalia, said: "This transaction represents a great effort from all of us and is the best way to recover tourism, transport in Spain and the Madrid hub."
Javier Sánchez-Prieto, CEO of Iberia, stated: “This operation makes all the strategic sense to reinforce the competitiveness of the Madrid hub on a global stage. It will benefit consumers and the incorporation of Air Europa into the Iberia Group will improve the viability of the company, benefiting both Iberia and Air Europa employees ”.
Despite the unprecedented impact of the Covid19 crisis on aviation, the Boards of Directors of IAG and Iberia consider that the purchase is strategic for the future of Iberia and IAG, specifically to strengthen the Madrid hub, transforming it into a true rival versus Amsterdam, Frankfurt and Paris Charles de Gaulle, develop new growth opportunities for its network and improve options for customers, including more flexible schedules and new destinations.
The purchase is expected to generate significant cost and revenue synergies, which are expected to reach full performance in 2026 and generate attractive returns on invested capital in line with those historically achieved by IAG. In turn, it is expected to contribute positively to results in the first full year after closing.
The operation could be completed in the second half of 2021, and is subject to approval by the European Commission and to reaching an agreement with SEPI in relation to certain conditions associated with the financial support provided to Air Europa during 2020. Iberia has the intention to start such conversations shortly.
Meanwhile, Iberia will continue to compete with Air Europa in all markets, as before.
A strategic operation
As indicated on the occasion of the signing of the initial agreement in November 2019, the purchase of Air Europa by the Iberia Group has a strategic sense that goes beyond the airlines themselves, and that will represent an unprecedented boost to the connectivity of our country, through the Madrid hub, with benefits in the end for customers, for tourism, commerce, employment and the economy in general, so in need of it to recover from the terrible impact of the pandemic .
According to a recent report by KMPG in 2020 on Madrid's potential as an international hub, of the six strengths that a hub requires to compete “in the Champions League”, Madrid only manages to position itself well in half of them.
In other words, it has a favorable geographical position, good infrastructure and is essential for the local economy.
However, it does not have a developed intermodality; the cargo does not reach the contribution it should, despite the fact that it has grown in recent years, and with regard to having a benchmark company, in this case Iberia, its weight is significantly less than that of its competitors in its hubs themselves, which have also received multi-million dollar direct aid from their respective governments.
All this has meant that in recent years it has been losing positions with respect to the large European hubs, both in size and in number of flights, destinations and passengers.
In aviation, hubs and large groups compete more than individual airlines. But for Madrid to be able to compete with the rest of the European hubs, and to be able to recover faster from the impact of the pandemic, it needs to be more efficient, capture more traffic that allows opening new routes focused on Asia, the Middle East and Africa, and deploy 360º.
The incorporation of Air Europa to the Iberia Group will allow it to have the critical mass necessary to attract additional connection traffic, open up to new markets, both passenger and cargo, and compete successfully with other European hubs.
This operation is also very important insofar as it is aligned with the investment of 1,571 million euros announced by the Government of Spain through AENA for the development and growth of the Adolfo Suárez Madrid-Barajas airport, which could become the gateway between Asia and Latin America and between Europe and Africa.
And also an opportunity to develop the connection of the high-speed train to T4, as it exists in the main hubs in our environment, which could choose to use European funds and favor greater efficiency and environmental sustainability of operations .
The contribution to the Spanish economy: GDP and employment
The pandemic has come to show that tourism and aviation are vital for the economy, employment and GDP.
According to an IATA report, aviation is behind 1.7 million jobs in Spain and contributes to 9.2 percent of gross domestic product (latest figures from the World Bank, 2016). In addition, for every 1,000 additional passengers obtained, about 9 jobs are created and 850,000 euros are added to the Spanish economy, so the incorporation of Air Europa to the Iberia Group is also positive for the preservation and generation of new quality jobs in the future.
Taking into account the impact of the pandemic on tourism, and therefore on the economy and employment, this operation will make Spain much more competitive to attract quality long-haul tourism thanks to the connectivity that can be developed with the Emerging countries, most of which have few connections to Madrid, also compared to other European hubs: this will favor more diversified and seasonally adjusted tourism with higher income, and thereby contribute to a better and faster recovery.
This agreement offers the possibility of opening more routes and making existing ones more sustainable. This happened with the incorporation of Vueling or Aer Lingus to the IAG group, and with the creation of Iberia Express.
On the other hand, the supply of flights between the different airlines of the group improves occupancy and therefore allows profitable routes that would not be profitable without this supply. It would be a great opportunity, for example, to grow in Asia, the Middle East, Africa and North America.
In addition, the synergies achieved by belonging to a large group allow us to compete with more competitive prices and the opportunity to continue investing in fleet and new services for customers. This has been seen in the union of Iberia and British Airways, or in the joint business agreements of the North Atlantic or Japan.
The coordination of the flight program makes it easier to improve schedules and frequencies, as has happened on the Madrid-London route between Iberia and British Airways, among others. Thus, customers will have more offer and flexibility in terms of schedules. The transaction, once closed and approved, will further increase competition between the various European hubs.
Finally, customers will also have more opportunities to earn points for their frequent flyer programs. Suma members will not lose their status by joining Avios.
Increased supply of flights improves occupancy and this translates into lower net emissions per passenger.