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April 23, 2024
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It will take at least another six months to be completed, but the acquisition of independent Spanish airline Air Europa by International Airlines Group’s subsidiary Iberia has taken another hurdle. In an amended agreement announced on January 19, Iberia said it will acquire Air Europa’s entire share capital from Globalia for EUR 500 million. That’s half the price of the original agreement announced on November 4, 2019, which was expected to be completed in the second half-year of 2020.

Back then, the timing of the acquisition couldn’t have been much worse as the air travel industry was about to enter its worst-ever crisis caused by the Covid-pandemic. While reports about doubts about the deal surfaced in the media now and then, IAG said it remained committed to the deal.

At its HY1-results presentation on July 31, CEO Willie Walsh and CFO Steve Gunning said: “Notwithstanding the unprecedented impact that the Covid-19 pandemic has had on the airline industry, the IAG Board continues to believe that the acquisition of Air Europa has considerable strategic and financial benefits for IAG and its shareholders. The transaction demonstrates the Group’s ability to continue, despite the challenging operating environment, to execute on its strategic priorities and take advantage of consolidation opportunities IAG and Globalia remain in active discussions regarding a potential restructuring of the Air Europa acquisition taking into account the impact of the Covid-19 pandemic.”

Original offer too high

The main issue has been the acquisition price. Short of cash itself and with airline shares significantly down, there was no way that Iberia subsidiary IP OPCO Holding was to pay the full EUR 1.0 billion as agreed in 2019. Hence the revised figure of EUR 500 million. And even this has been stretched to the full, as Iberia will only pay for the acquisition on the sixth anniversary of the completion of the agreement. So if the deal is really done by let’s say July, Globalia will only be paid July 2027. If IAG still plans to raise the funding through external debt financing as planned back in 2019 is not clear.

The six-year delay doesn’t seem to be coincidental. Last November, Globalia and the Spanish government through the Sociedad Estatal de Participaciones Industriales (SEPI) agreed on a EUR 475 million loan that spans exactly this period. Of this, EUR 240 million is a participating loan, and the remainder a regular loan with a maturity of six years. This followed on the EUR 141 million five-year term loan provided by the Instituto de Credito Oficial during the first Covid-crisis last May.
“The revised terms in the Amendment Agreement are conditional on the satisfactory negotiation between Iberia and SEPI regarding the non-financial terms associated with the financial support provided by SEPI to Air Europa during 2020. Iberia intends to begin discussions with SEPI shortly concerning these conditions”, an IAG statement says. Even with SEPI approval, the amended agreement also needs the go-ahead from the European Commission.

IAG/Iberia has high expectations of the integration of Air Europa at its Madrid hub,
it said in this slide from the November 2019 presentation.  

That Air Europa remains a strong asset to IAG has everything to do with the strategic importance and synergies it expects from a tie-up between Iberia and Air Europa. In this week’s media statement, it repeated its ambition to develop Madrid Barajas airport into a ‘true rival’ to Amsterdam Schiphol, Frankfurt, and Paris Charles de Gaulle. The combined network of both airlines not only span Europe but especially to South and Latin America with its Spanish population. More choice and flexibility for customers should make Iberia/Air Europa the preferred airlines for travelers.
In November 2019, IAG said the acquisition of Air Europe will increase Iberia’s size by fifty percent. Globalia acquired a majority share in Air Europa in 1991.

The benefits of these cost and revenue synergies are now to become fully visible by 2026, again a year later than foreseen in 2019. But already in 2022, its first full year, the acquisition should be earnings accretive and deliver “considerable value to the Group (…) prior to payment of the consideration of the sixth anniversary of the completion and generate returns on invested capital in line with those historically achieved by IAG by then.” IAG expects the acquisition to have a marginal effect on net cash flow in 2021, with cash flow becoming positive in 2026 once the loans to SEPI have been repaid.

Air Europa booked a pre-tax profit of 42 million in 2019

According to the most recent figures available of 2019, Air Europa’s gross assets were valued at EUR 967 million. It earned EUR 21 billion in revenues carrying 13.1 million passengers, earned an operating profit of EUR 71 million, and a pre-tax profit of EUR 42 million. As a result of the government-backed loans, Air Europa’s net debt has soared to EUR 500 million.
The airline currently has 52 aircraft in its fleet down from 66 last year and all leased except one. All six ATR42/72s are in service, as are seventeen Boeing 737-800s, five 787-8s and eight -9s, and seven Embraer E195-LRs. It had planned for replacing the Embraer’s with the MAX 8 from 2020, with its fleet plan showing 94 MAX 8s joining the airline between 2020 and 2025. We have no information on how this schedule has changed.

author avatar
Richard Schuurman
Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016. Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.

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