IAG Makes a Play For Madrid and Latin America With Air Europa Acquisition

Air Europa, IAG, Iberia

When Delta snatched LATAM from American’s arms, I said this:

Delta has fundamentally re-drawn the map around the globe. If long-entrenched partners who were about to implement a joint venture can be broken up, then anything can be up for grabs.

The second act of this story is now being written. IAG, parent of Iberia, British Airways, and others, has agreed to buy Skyteam-member Air Europa for EUR 1 billion cash. Air Europa, you may recall, applied for a joint venture with long-time partner Air France/KLM last year, so this is a major shift. Competition concerns may sink this deal, but it once again shows why IAG is the best-run airline group in Europe.

The idea is for IAG to keep Air Europa a separate brand in the beginning, but it will be a division of Iberia. It will be a part of the joint ventures with other IAG airlines, and it will codeshare with IAG partners. Air Europa will also adopt Avios as its loyalty currency. Eventually, I assume it’ll merge into Iberia if the cost equation looks right for that to happen.

Let’s dive into this deal, starting with a look at why IAG would want to buy Air Europa in the first place. And for that, a simple map will help.

Air Europa route map via Diio by Cirium

Air Europa is a profitable Spanish airline with a huge bias toward Latin America. IAG can kill two birds with one stone here. It can massively strengthen itself in Latin America, and it can consolidate Madrid into a near-fortress hub.

How much of a fortress will it be? I turned to Diio by Cirium to look at seat share by hub, and well, this shows why IAG is salivating right now.

Data via Diio by Cirium – Seat share includes all seats marketed by airlines owned by the company that owns the primary hub carrier

If you include British Airways and other IAG carriers with Iberia, you’ll see that the company would vault from a middling 45.4 percent seat share up to 61.9 percent. That is at the upper end of the range of European hubs. and it would make IAG a real powerhouse there.

Interestingly, the addition of Air Europa only adds four new routes to IAG’s portfolio in Madrid: Recife and Salvador in Brazil along with Asunción in Paraguay and San Pedro Sula in Honduras (based on the July schedule).

Most worrying to competition authorities, however, is that there are 15 markets that have service from IAG and Air Europa today… and nobody else. These will lose competition (at least in the air) entirely.

  • Europe
    • A Coruña
    • Alicante
    • Asturias
    • Barcelona
    • Bilbao
    • Dusseldorf
    • Málaga
    • Sevilla
    • Valencia
    • Venice
    • Vigo
  • Americas
    • Miami*
    • Montevideo
    • Panama City
    • Santo Domingo (DR)

*Miami counts only if you include joint venture partner American’s service

That may not seem like an enormous amount of overlap, but nine of those routes are domestic Spanish routes. You know that there will be public pressure to stop the loss of competition in those markets, and the government is going to be listening.

With all that, is it really going to be possible to push this through? Considering this merger takes the top two carriers in the market and brings them together, you might be surprised that IAG would even take a swing at it. But IAG has its spin machine turned on full blast and is ready for a fight. The first bullet point in the press release says this merger will:

Increase the importance of IAG’s Madrid hub, transforming it into a true rival to Europe’s big four hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles De Gaulle

Ah yes, so this isn’t about competition in Madrid; it’s about competition across Europe. If you think about the other hubs in Europe, then this combination will allow IAG to become more of a player. That’s good for Madrid because it will mean growth, or so the rationale would suggest.

Presumably Air Europa thinks this rationale will work, or it wouldn’t have taken the risk. After all, if this fails, it’s going to be pretty awkward going back to Air France/KLM again. I’ll admit, I kind of want to see that.

I imagine what’ll happen in the end is that the authorities will demand concessions for this to gain approval, but I don’t know what those concessions might be and whether they’ll be acceptable to both parties. Ryanair CEO Michael O’Leary is already crowing about wanting assets to be shed for this to go through. That stands to reason since O’Leary’s airline would likely be the beneficiary of such a divestment.

For IAG, this is a great deal. Nobody denies that. It’s creative, and it helps the airline to solve a problem in a region where it may end up losing LATAM as a partner in the future. So, good on IAG for making the move. Now, we just have to see how much the competition authorities want to be given up before it gives its blessings to the union.

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19 comments on “IAG Makes a Play For Madrid and Latin America With Air Europa Acquisition

  1. Dear Cranky

    All the Airline Leaders such as Delta & IAG is starting to see the real value in the Latam. That’s why Viva Air as an ULCC has been here for 7 years.


  2. I don’t quite understand what Globalia, Air Europa’s parent company, gains in the long term from losing what is arguably the cornerstone of their business model. For those who don’t know, they’re a vertically-integrated travel group: You can buy a holiday package in one of their agencies to one of their resorts, that you’ll get to on an Air Europa plane. So I don’t see the benefit of losing control of such a key step in the process. Plus, at least in their last annual financial statement it was by far the unit that generated the largest amount of revenue, while on the other hand some of their routes especially to Latin America are viable in large part to the resorts they serve.

    1. Wasn’t that Thomas Cook’s model?

      If so perhaps that is why they don’t seem to value it so much.

      1. With the difference that Globalia makes a profit, at least in theory. The only explanation that I can think of is that there must be something really wrong with the rest of the group for the Hidalgos to sell the crown jewels like that at this time. Maybe they’re in way too much debt and they know that the whole group will come crashing down with the next recession, so they’re trying to get as much value as possible while they can. That would also explain why they’re trying to merge their travel agencies with those of Barceló, their main competitor. However, they’re also trying to enter the high-speed rail business, so they’ve got plans for the future? I don’t know, here’s a good analysis of the situation for those who can read Spanish:



        The sale of Air Europa forces Globalia to redefine its future

        The acquisition of Air Europa by IAG, if approved by the competition authorities, leaves Globalia without its main source of revenue and with its future up in the air. In 2018, the airline division accounted for more than 50% of the group’s turnover, i.e. 2.114 billion of the 3.850 billion euros generated by the entire company.

        What is undoubtedly the crown jewel of Globalia, is not only what generates the most revenue but also the one that grew the most last year, 9.3%, double the growth of the group as a whole, which was of 4.3%.

        On the other hand, the group’s other main lines of business experienced a drop in sales. The retail division, with Halcón Viajes, Viajes Ecuador, Globalia Corporate Travel’s Business agencies and Tubillete online, had a total turnover of 1.094 billion euros in 2018, a decrease of almost 60 million (-5.1%) compared to the 1.153 billion in turnover in 2017. However, for the year 2019, a 2% growth is expected.

        The wholesale division, headed by the tour operator Travelplan, is also not in a booming situation after they reduced their revenues by 4.8% in 2018, falling from 624 million euros in 2017 to 594 million euros.

        The hotel division represented by Be Live Hotels has had a better performance. In 2018 the turnover exceeded 132 million euros with an average occupancy of more than 78%, contributing an EBITDA to the group of 13.3 million euros.

        This operation takes place one month after the conversations between Globalia and Barceló for the merger of their retail divisions, negotiations that will now have a different look given the announcement of the sale of Air Europa.

        Globalia did not want to add anything new to what was explained in IAG’s communication and they are only waiting for the operation to be completed in the second half of 2020 when the Spanish and European competition authorities are expected to approve the transaction or not.

        In IAG’s statement, Globalia’s CEO, Javier Hidalgo, limited himself to stating that “for Globalia, the incorporation of Air Europa into the IAG group means a strengthening of the company’s present and future, which will maintain the path followed by Air Europa in recent years. We are convinced that it will be a success for Air Europa to join a group such as IAG, which has demonstrated over the years its commitment to the development of the airlines that make up the group and to the Madrid hub”. But it does not allude to what the plans will be for the rest of the group.

        Shortly after the announcement, Globalia yesterday sent a letter to workers to inform them that the decision to sell Air Europa, Aeronova and Air Europa Suma Miles will not affect the operation and that “they will continue to compete as before” with the rest of the airlines. The employees in charge of maintenance and handling operations of the airline, which are not included in the operation with IAG, will be guaranteed all long-term contracts.

        The Hidalgo family company also reminds HOSTELTUR that in recent months strategic decisions have been taken for the company, such as the plans to compete with Renfe in the high-speed rail network, hand in hand with the French company SNCF.

        The truth is that Globalia without Air Europa would fall from the podium of the large Spanish tourist groups, where for now is second only behind the Barceló group, going to a turnover of about 1.700 billion euros without its air division.

        ‘It has surprised us’.

        From Fetave, a business association in which Globalia’s retail and wholesale divisions are represented, Chairman César Gutiérrez admits that the operation ‘has surprised us’, but makes a first ‘positive’ assessment for what it will represent as a boost for Madrid-Barajas airport, which will become the main hub between Europe and Latin America.

        “It is not a far-fetched operation because it is what happens in other European airports such as Heathrow (London) or Charles de Gaulle (Paris) where there is an airline that carries a greater weight in the hub,” he says.

        On the impact it will have on competition in the domestic market, when IAG concentrates 72% of domestic air connections, Gutiérrez prefers to wait for the National Commission of Markets and Competition to assess ‘the suitability or not’ of the operation. ‘We trust CNMC to do its job and be the one to say if the merger can go forward,’ he says.

        César Gutiérrez acknowledges that ‘IAG has bought the crown jewel’ of the group but is convinced that Globalia’s management will have ‘a strategic plan’ for the rest of the divisions, which are growing with new acquisitions such as the wholesaler Marsol. ‘Although there is still a long way to go until the competition authorities make their pronouncements,’ he concludes.

        1. Air Europa is a subscale carrier in an industry which is consolidating into a few large players. Subscale European flag carriers have an increasingly tough time, and several have already dropped by the wayside – Alitalia only survives because the Italian govt is utterly shameless about propping it up.

          Air Berlin was a sick man to start with, but being caught in between the Euro ULCCs like Ryanair and WizzAir on the one hand, and IAG, AF/KL and LH on the other, is, in the long-run, not a comfortable place to be. It’s not crazy to think that, in the long-run, Air Europa would face similar issues.

          If IAG is willing to pay a pretty penny, it’s hard to criticize Globalia from getting out while the getting is good.

  3. If the EU is at all awake, this should face major antitrust concerns in Europe. We’ll see if it does. It is noteworthy that LH group hubs are the only ones that would be more concentrated in the hands of the hub carrier.

    As for the previously pending JV between Air Europa and AF/KL, AF/KL is continuing with their partnership with Gol which says that Delta’s statements about the Skyteam alliance very much impact its own partners. DL had no interest in Air Europa and likely won’t miss it but AF/KL clearly desired to deepen ties with Skyteam’s Spanish partner. I am sure it will increasingly become apparent to DL’s partners that DL will pursue its goals from a US market perspective and if DL’s partners want to do deals they have to come up with the cash. DL/Latam is about a much larger presence in Latin America than Gol could offer even though AF/KL have benefitted from using G3 to connect passengers to/from their Brazil gateways.

    Given that it is certain that antitrust authorities in Europe are likely to require divestitures of this deal, this might not turn out to be as big of a deal as it looks on paper. Given that Latam will maintain its relationships in Europe, this might just mean that airline relationships in Latin America to/from Europe and the US will look very different. It also doesn’t change that a big driver of the DL-Latam deal is giving DL a presence in S. Florida to Latin America and adds competition, something that already exists from Spain to Latin America. This deal would seek to undo that competition which is why it likely will be questioned.

    The long term question is what other global markets are next on DL’s list to disrupt current alliance arrangements.

  4. Is Madrid slot-controlled? If not, then the anti-competitive argument doesn’t really hold as any airline can just go start a bunch of these flights themselves (then again, Iberia/IAG could too).

    If MAD does have capacity limitations or other controls, then any sort of anti-competition divestiture would almost certainly mean losing a bunch of slots, as they are perhaps the easiest thing to transfer. That’s of course assuming that it goes through and IAG is still interested even losing slots and maybe other things too.

    1. Jason
      Far more airlines are failing in Europe than are being started to keep a lid on more concentrated competition. Given that a significant part of the deal involves transatlantic flights, the hurdle for new competitors is even stronger.
      Right now there are at least 3 reasonably strong players in the Spain to S. America market – Iberia, Air Europa and Latam. Any concentration of the market to less than the current number of players and share is going to be harmful to consumers.
      The same is true within Spain or within Europe – perhaps with lower barriers to entry.

      There is a reason why Germany and the UK have much higher air fares than other countries including France and CF’s graph above. In order to have viable competition, there needs to be a reasonable ability for low cost carriers to expand and that includes airport infrastructure but also a market share by the dominant carrier that doesn’t suffocate the competition. With the exception of LHR, most of the airports to the right of MAD in CF’s graph have reasonable LCC share or LCC expansion potential. You can’t just turn on double digit amounts of LCC competition in markets as big as MAD or create additional longhaul competitors. Once you let the competition consolidate, consumers will pay.

  5. Hi Cranky,

    I really like the use of customized charts/visualizations in your posts.

    Do you think you can come up with an analysis of the top N hubs around the globe (ex. DL-ATL, TK-IST, EK-DXB, etc.) showing relative strengths and weaknesses?
    Here is an old article that made a quick benchmark in terms of #destinations:

    Thanks your great posts! And thanks to all knowledgeable commentators for your insights!

  6. I am curious how or if the Flight Shaming Movement that started in Sweden has or will affect European airlines. Are the airlines ignoring it or are there strategic moves to counteract it? Is this proposed acquisition meant to counter the Flight Shaming Movement or ignore it?

  7. The following was posted on Airliners. net 6 days ago:

    Airline Weekly had interesting insight from an interview with outgoing LATAM CEO Ignaco Cueto. Give more details how the deal came together.

    When Chile’s supreme court unanimously blocked Latam’s planned joint venture with American in May, “we set off the alarms” and immediately began looking at other options, Cueto said. Three months ago, at a meeting with Delta executives facilitated by bankers, he raised the idea of cooperation. And thus the discussions began. Cueto estimates the new alliance with Delta could add some $250m a year to Latam’s financial result. Cueto expressed confidence Latam this time wins approval for its joint venture.
    As for Latam’s proposed joint venture with Europe’s IAG, which the Chilean supreme court also rejected, it remains unaffected by the Delta partnership. And implementing the IAG joint venture with carveouts for itineraries involving Chile remains a possibility.

    Apparently (and if I’m not misreading the comments) it was LATAM that sought out a new partner. According to this interview, Delta didn’t “snatch LATAM from American’s arms.”

    At this point, how the deal came together is far less important than where we go from here. To that point, and having written the above, I must point out that your conclusion that the Delta/American/LATAM situation “has fundamentally re-drawn the map around the globe” is obviously spot on. Your other point is also apparently true. “If long-entrenched partners who were about to implement a joint venture can be broken up, then anything can be up for grabs.” Maybe Copa’s next? Who knows?

    My reactions: Why not? … and the other obvious takeaway is that the transactions of the past few years are spelling the beginning of the end of airline alliances as we’ve known them. It’s quite telling that this current breakup is only between LATAM and American. Apart from Gol, an obvious potential new partner for American between North and South America, the partnerships between South America and Europe appear to be holding – for now.

    Again, why not? A contract has virtually no limitations except legality. Parties to a contract can agree to anything, as long as it’s legal. Why can’t two, three or even more airlines work with other airlines’ partners if all sides agree, and they get the necessary regulatory approvals?

    I was in real estate for a number of years. The real estate business model is predicated on both competition and cooperation. There’s no reason that can’t also be the case in the transportation industry. The U.S. freight railroads do it all the time. The efficient interchange of traffic is the lifeblood of that industry. Shipments tend to be routed along the most efficient path instead of being confined to a particular carrier’s network. I understand that’s part of why the railroad industry in the U.S. hasn’t consolidated into two large nationwide carriers (there are four now, two in the east, and two in the west, plus Kansas City Southern, but I digress…). There’s no reason why airlines can’t work across traditional alliances when it’s in everyone’s best interests.

    1. Ghost,
      you are absolutely right except the only difference that you leave out is that Delta has the financial strength to build the airline world it wants, something very few other airlines can do.

      Yes, airlines can work outside of alliance partnerships and Delta has recently trashed the Skyteam alliance probably because it contains airlines like Aerolineas Argentinas and Air Europe which have very low strategic value to Delta. But Delta has the strength to build the world it wants and that makes other medium and small airlines up for grabs if they are willing to yield a certain amount of control to Delta in return for becoming a stronger airline in the process. Gol and Virgin Atlantic are stronger airlines than when Delta invested in them.

      The Middle East airlines have invested in global airlines but have seen far less in part because their model is far more focused on dominating global aviation, not just a region, and their partners have had to fit into the ME3’s model.

      Delta’s partnerships are clearly focused on the US but that doesn’t stop airlines from developing partnerships within their own region or that do not conflict with Delta.

      Also, railroads are based on fixed infrastructure while airlines are not which makes the airline industry far more volatile – and interesting.

      1. Tim,

        Just because Delta wants to buy a stake in its partners doesn’t make it a requirement that other carriers follow suit. It’s quite possible that some carriers would like to steer clear of outside ownership. Each deal can stand on its own.

        I have to quibble a bit with your statement that railroads are based on fixed infrastructure while airlines aren’t. All transportation modes rely on some kind of fixed infrastructure. I can’t see Delta landing an Embraer 175 on a wheat field in the middle of North Dakota. Airlines usually need airports. Airports are fixed infrastructure. Development in the U.S. largely followed rivers or was otherwise close to water. Rivers and other waterways are fixed infrastructure and sometimes require work to keep them navigable. There’s also the need for harbors or other infrastructure to connect the water with the land. The railroads could transcend river routes by building overland. Historically, development followed the railroads, not the other way around. Once places were established, roads usually followed, although the railroads often followed established wagon, stagecoach, foot or horse trails. The land the U.S. government gave to the Union Pacific was virtually worthless until the Union Pacific provided an easy way to get people and raw materials to it and take people and products from it. Barges and ships need navigable waterways and harbors. Railroads need tracks and offloading facilities. Cars and trucks need roads. Airlines need airports. All of those are fixed infrastructure.

        1. Ghost,
          airlines can move their planes easily to any airport which can accommodate the aircraft they intend to operate. Railroads have to operate on the lines EACH RAILROAD has built, acquired, or on which they have negotiated usage rights. Airports in the US are generally publicly owned at some level while railroads are private companies. it is not worth arguing the point because it isn’t central to this discussion but airlines and railroads operate on different usage models. Alliances are far more than just interchange of equipment. Airlines did that decades ago.

          As for Delta, the point which CF recognized and which is central to this partner swapping exercise is that Delta has very publicly stated that it doesn’t have a need for a dozen extra airlines in Skyteam while there are a half dozen that do the lifting. Beyond Skyteam, Delta has built its own network of airlines that expand beyond Delta’s network and beyond the Skyteam alliance and Delta has done it with equity, something no other airline has done to anywhere near the same degree or success.

          And, specific to Latin America/Iberia/Air Europa, Delta has invested in airlines where another carrier could boost Delta’s strategic position in the market – but without dominating the market to the exclusion of competition. Perhaps you can find disagreement on this point – and I welcome it – but I don’t see any DL partnerships that have pushed them to the #1 position to the exclusion of other airlines. Many of the airlines in CF’s chart above have much higher levels of concentration and much less ability for competitors to enter the market than DL’s partnerships. That is fundamentally different than what some other airlines have done, including the IB/UX acquisition.

          1. Tim,

            Delta’s business model is Delta’s business model. That doesn’t mean every other airline has an obligation to copy it. Southwest has a very different business model than Delta. It’s also been consistently profitable over more years than Delta. So why would Southwest want to copy everything Delta does? How many times has Southwest filed for Chapter 11 in the last twenty years? How many times has Delta?

            Every transportation mode needs some form of infrastructure to support its operations. It’s no more complex than that. Obviously railroads aren’t airlines. They aren’t real estate brokers either. My point was about the ability of businesses to both compete and cooperate. There’s no reason that airlines can’t have multiple joint ventures and codeshare arrangements with multiple carriers. It’s not new. It’s done quite a bit.

            1. Ghost,
              the only part relevant to this discussion is my statement that Delta is the only airline that either can or has invested more than $1 billion of equity in more than a half dozen airlines around the world. No other airline anywhere in the world has successfully invested as much money in as many airlines – and success is defined by the fact that those partner airlines continue to exist. A few airlines such as EY have invested in other airlines in order to rescue and control them – but most of those investee airlines failed and there was a lot less benefit to the investor airline.

              As for the argument that WN must be successful because it has never filed for bankruptcy, you do realize that WN did not exist as an interstate carrier in the regulated era of the US airline industry, don’t you? And as a regulated business, all of the 3 remaining global formerly regulated airlines offered defined benefit pension plans, just as the automakers and steel companies and a number of other industries that have also filed for bankruptcy.

              It should dawn on you that the biggest reason every major formerly regulated US airline except for AS has filed for bankruptcy is because of the pension plans that the formerly regulated airlines offered but post-deregulation interstate airlines did not and never have offered.

              And then of course is the reality that WN doesn’t offer global service and hasn’t even been able to sustain service to the largest non-US global city in Mexico City, the country adjacent to the US.

              And that WN dominates its hubs/focus cities and goes to endless legal efforts to keep competitors out of those efforts. WN’s dominance of DAL, MDW and HOU makes discussion of the dominance of IB/UX at MAD look patently ridiculous.

              So, yes, WN is an incredibly well run company but let’s not sugarcoat what they have accomplished or why they have achieved what they have – and that their failures have simply been on an a different scale and for different reasons.

              and they still don’t compete in the same global markets that are the discussion regarding the alliance switching that started w/ DL-Latam.

  8. I don’t think there will be an issue around removing competition on the European routes you list. Aside from the ability of Ryanair (or easyJet) to add capacity if prices rise, most of the domestic destinations have High Speed Rail service as the main competition.

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