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 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.
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.
- A Coruña
- 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.