Bailout Air Europa, to Be Acquired by IAG — Owner of British Airways and Spain’s Top 2 Airlines — Doesn’t Pass Smell Test

IAG seeks aid from Spain to buy Spain’s #3 airline for a near-monopoly in Spain. The family that’s selling Air Europa seeks that bailout too.

By Nick Corbishley, for WOLF STREET:

Spain’s third largest airline, Air Europa, is in deep trouble, and its owners, the Hidalgo Family, are begging for a bailout. It’s also in the process of being acquired by the UK-registered International Airline Group (IAG), which already owns British Airways, Aer Lingus, and Spain’s top two carriers Iberia and Vueling. The acquisition was announced last November, months before the virus crisis began in Europe, but it hasn’t closed yet. The agreed takeover price? €1 billion. But that was before Covid upended the global aviation industry.

If the acquisition is greenlighted by European competition authorities and closes, IAG will effectively control 72% of all domestic routes in Spain, giving it a virtual monopoly. In total, 14 routes, including the all-essential Madrid-Barcelona connection, will be 100% dominated by airlines belonging to the IAG group.

Now, IAG is threatening to walk away from the deal unless Air Europa is recapitalized, its balance sheets cleaned up, and the acquisition price reduced substantially, to reflect the new grim reality facing the aviation industry.

IAG has its reasons: Like most airlines, it’s in an existential crisis. It lost €1.36 billion in Q2 and said it planned to raise €2.75 billion in new capital, backed by its biggest shareholder Qatar Airways.

If IAG walks out on the deal, it would leave the Hidalgo family significantly out of pocket, which was enough to prompt the family’s hyper-connected patriarch, Juan José Hidalgo, to leave his luxury estate on the Dominican Republic and board a plane back to Spain, where he’s trying to ensure that the family’s interests are at the forefront of ministers’ minds throughout the bailout proceedings.

Without a deal, Air Europa — and with it, its parent company, Globalia, one of Spain’s largest travel and tourism groups — may not have a future to speak of. The airline expects to rack up €380 million in losses this year. It’s unable to issue bonds on the markets and has already tapped its lenders for €140 million of government-guaranteed loans. Globalia, which also owns the travel agency Halcones Viajes and the hotel chain Be Live, both of which have been hammered by the lockdown and its aftermath, has forecast total group losses for 2020 of €600 million.

To cut costs, Air Europa has pledged to reduce the size of its fleet by around a fifth. It has resumed many of its domestic and some medium-haul flights in Europe, but many are operating below capacity. Its most important source of revenue — transatlantic flights — is at a complete standstill, and most of the planes are grounded, as Covid cases are surging across its key markets in the US, Mexico and much of South America.

But even with the planes grounded, the routes have key strategic value for Spain’s economy, says Spain’s Ministry of Transport. That, together with Air Europa’s large presence at Madrid’s Adolfo Suárez-Barajas airport, is enough to earn the airline official standing as a “company of strategic import,” which in turn opens the door to the possibility of the government dipping into its strategic bailout fund, known as SEPI, to inject fresh cash — probably somewhere in the region of half a billion euros — into the airline, in order to make sure IAG’s acquisition goes through.

The Spanish State already has skin in the game, given that it owns around 2.5% of IAG’s stock — a legacy of the BA/Iberia merger in 2010 that sparked the creation of the airline group. It has also underwritten Air Europa’s €140 million emergency loan as well as a €1 billion loan to IAG’s two Spanish subsidiaries, Iberia and Vueling. Plus, the Spanish government is considering expanding its financial support to Iberia.

This pales in comparison with the €9 billion of support Berlin gave/lent to Lufthansa, or the €10 billion the French and Dutch governments gave/lent to Air France-KLM, but the Spanish airlines are a lot smaller.

Now, it’s about to help out both IAG and Air Europa at the same time, by playing the role of matchmaker of last resort. First, the government will use the SEPI funds to recapitalize Air Europa, so that IAG will take it on in better financial condition and at a lower price that reflects the new grim reality facing the aviation industry.

That lower price will no doubt still be amenable to Air Europa’s owners, the Hidalgo family, who will get to walk away from the deal with their pockets nicely filled, albeit not quite as much as originally hoped.

It’s a win-win deal that gives a little foretaste of how government bailouts of so-called “strategic” corporations will be used not only to fill some very large pockets but also to strengthen monopoly control of industries. All paid for by the taxpayers, who are now being told the following three things:

  1. Only companies that were perfectly viable before the crisis will receive financial support from the bailout fund.
  2. The financial support will be temporary and will be reversed as soon as economic conditions return to some semblance of normality, whenever that might be.
  3. The government will recoup all of the funds it “invests” into these companies as their value recovers, just as it said it would recoup all the money it poured into the banks in the last financial crisis.

The deal and the monopolistic structure that will emerge from it has not gone down well with rival airlines.

“I think it is a good deal for IAG, for Willie Walsh. I think it is a bad deal from a competition point of view,” said Ryanair CEO Michael O’Leary in November. “It is a merger to monopoly in Madrid and I think we would certainly be looking for the competition authorities to require some competition divestments.”

And the deal doesn’t pass the smell test. As El País notes, if the government uses its strategic bailout fund to inject money into Air Europa, only for IAG to then acquire the recapitalized airline and pay the Hidalgo family the newly agreed takeover price, it raises all sorts of prickly questions about the role of the government in the operation. After all, this is a deal being brokered between two companies that are both on the receiving end of direct state aid.

Why can’t Air Europa file for bankruptcy and shed its debts under the supervision of a legal process, as has happened with airlines in Latin America, and let its shareholders hold the bag? The airline would then emerge in better shape, with new owners, and with less debts and more able to face the new environment.

But that fate — a proper restructuring — would be too harsh to bear for shareholders. As a result of the deal, the Hidalgo family will walk away from the sale of Air Europa, an airline that is effectively bankrupt, with lots of money it would never have received if it weren’t for the government’s intervention.

As for IAG, it gets a newly recapitalized company that increases its monopolistic position in Spain, and its market share in the transatlantic routes, to the detriment of the Spanish consumers that face all the problems that come with lack of competition, including higher prices, and that already, in their role as taxpayers, bailed out the airline and the shareholders that sold it. By Nick Corbishley, for WOLF STREET.

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  18 comments for “Bailout Air Europa, to Be Acquired by IAG — Owner of British Airways and Spain’s Top 2 Airlines — Doesn’t Pass Smell Test

  1. Just Some Random Guy says:

    Euro politics is dirty and corrupt? Whodathunkit?

  2. Wisoot says:

    Competition in markets – a concept of idealism in both words – was fit to follow in a strategy of globalisation – but strategy changes and contraction, localisation is ahead. Families with historical power are grasping on to their wielding sword in the vain hope that by end of 2021 their heirloom is still. Question underlying article is does the majority want to be led by a minority of old. Gen Z says no. Out of date. Their wisdom central is far from cobwebby assemblage points of old. What gen Z wants is anyones guess but it aint petrol fuelled metal boxes vulnerable to space weapons at the touch of a button. Oh sorry. My mistake. I thought your plane was a missile. Reality changed. Internet connectedness. Values developed. A higher standard is expected. Not more of the same old. Companies adapt to survive as always.

  3. Randy Oldman says:

    Verdad!

  4. nick kelly says:

    I’m just going to wonder who would buy or bailout an airline until we know if there is a going to be more than about 10- 20 % of the previous air travel.

  5. MCH says:

    Nothing to see here, move along.

    Dear Nick,

    The EU commission for Strategic Healthy Intelligent Transfer of ownership will be paying you a visit shortly to explain in personal terms why you have reached the wrong conclusion in your fanciful essay. We will explain in UNRECORDED words why this process is not a shareholder bailout and will not result in a monopoly.

    And as for the leprechaun O’Leary, we suggest that he starts finding the other end of that rainbow, opposite to where that pot of gold is. And he can eat some Lucky Charms along the way. Remember fantasy tricky wee folk Irish lore should not be taken seriously any more than the origins of said magical rainbows.

    {end sarcasm}

    Sorry, Nick, this is a well written piece about how governments are bought and paid for by the rich, but it’s so sad that it needed an injection of humor.

    • MiTurn says:

      “this is a well written piece about how governments are bought and paid for by the rich.”

      Hubris…yes indeed.

      • Paulo says:

        Excellent article and excellent comments.

        This is an unbelievable example of corruption and insider influence.

        Democracy can be as corrupt as any other form of Govt. Just think, before the internet and the ability to gather and pass information so easily this would have been exposed months after the fact and on page five. Good reporting, Nick.

        The question: What avenues of remediation are there? Obviously, there is no shame helping out the Hildagos.

        Kind of a Kodak moment with a salsa twist.

        • MCH says:

          No kidding Paulo, and for us Americans, we needn’t look overseas for such corruption, it is endemic in this country as well. Just look at the cost of concentrating power in the hands of a few.

          I’m not talking necessarily about guys like Zuck or Bezos or Musk, they have taken advantage of the system. I’m more concerned with their enablers, the jackasses and dumbos that are in charge and have happily divided the country over the last thirty years so that the new South and North are the coasts vs the middle so that each could ensure their little power base.

          That has in turn meant one party rule in many major metro, and one party rule in more than a few states. Well done, jackasses and dumbos, GW, TJ, JA, et al would be proud of how you guys managed to become as corrupt as the Monarchy they dumped.

        • Paulo says:

          For MCH,

          Canada’s Liberal Govt these days seem to forget a lot ethics as well. Lots of friends and family get contracts. This Covid chapter has a lot of cash slopping around.

          I sure as hell hope the balls stay in the air. Starting over would be the pits for our respective countries.

        • Paul Rees says:

          Democracy, the best system money can buy….

        • Mister Odwin says:

          Well, its true about the power of the internet to disseminate information widely, but who and how are the problem. Yes, we hear many things that are disturbing regarding our ‘ownership’ class. Unfortunately the consolidation/concentration of media has left us with a simulacrum of journalism. Most of us are ‘siloed’ in our areas of interest, and the only way we get outside the narrative machines that constitute what was once semi autonomous reporting is linking and sharing with each other. But woe unto he who shares the wrong thing on Twit, Face,Redd,Patr. Yes, We Are Page 5.
          It bugs the hell out of me- all the hard work of information gathering we and you do- I ask my friends when “Breaking Wind” hits the headlines, “How long ago did I warn about this?”
          Usual answer : 6 months to a year or more.
          If Brexit, Sanders, Corbyn, Trump were not warning signs that the control story was losing traction, I have no idea what Will shock the sheep enough to pay attention to the men behind the curtain.

        • c1ue says:

          @MCH
          I disagree with your analysis.
          From my view, it is precisely the media barons – of which the tech titans are now prominent – which are to blame.
          Rob Lowe talked about his break: as a 15 year old on a TV show which was the literal worst performing TV show in existence in America at that time: 64th out of 64. Yes, due to broadcast channel limits, there were literally only 64 TV shows in existence then (1979).
          But it had a 19 million audience – bigger than Game of Thrones at its peak even with a much larger population. US population in 1979 is literally 2/3rds of what it is in 2020.
          The reason for the far smaller audiences is the proliferation of channels.
          Proliferation of channels means smaller audiences are considered relatively huge – and which in turn means any given show (news is a show also) can and will specialize in order to attract and retain. Voila! CNN and Fox.
          Now add in algorithms which incite user stickiness – i.e. anger – and you have social media (and related advertising).
          The divisiveness is therefore inevitable given the fragmentation of both internet and all other media information sources.

        • MCH says:

          @c1ue

          No, I think not. The rise of tech is enabled by policies, the lack of tax on e-commerce, section 230 rule around platform responsibility. These were rules crafted by the enablers that allow the rise of these tech magnets, the only ones that might not be covered here are Microsoft and Apple.

          You remove the particular personalities, the rules would still enable a rise of similar companies and capabilities. Just different names.

        • c1ue says:

          @MCH
          I would say you are putting the cart before the horse.
          Section 230 was written in the era of BBS’s and AOL.
          Similarly, e-commerce and Amazon in particular arose due to state/federal issues regarding sales tax collection.
          None of these laws were crafted with the present tech companies in mind.
          Even Google – while there was intel agency money in its beginning – the true rise of Google was due to the advertising model which wasn’t even a gleam in Brin and Page’s mind early on.
          You also ignore that the sales tax abuse by Amazon was deliberately fought for as long as Bezos was able to. And even then, Amazon early on was not particularly profitable even with the sales tax scam. Only after building their distribution networks did the economics change.

  6. Weninger Bernhard says:

    Wolf, that is the EU for you…Spain just got massive EU Corona funds, some of it as a grant!
    Why don’t you mention in the same breath with IAG the LH Group monopoly (Swiss, Austrian Airlines, Air Dolomiti, Brussels Airlines, Eurowings, Edelweiss – all of which essentially bankrupt before the crisis). Swiss and Austrian just were 100% recapitalised by their respective governments under preassure from LH although 100% owner by LH. LH was then essentially 100% recapitalised by Merkel As it was within days of insolvency (it was essentially bankrupt before Corona if anyone can read a balance sheet) all to the tune of around €12 bn! Try and fly from Vienna or Zurich of Frankfurt to anywhere within are among those countries and you will only find one airline – LH Group and to other destinations in Europe at best a duopoly. Gets better: Austria does not allow flights between certain Eastern Europesn destinations and Austria because of Corona. LH is happy to oblige to fly you there and back via Frankfurt or Munich to get the traffic for the parent. I recently flew from to Copenhagen And my son came from London to Vienna. We both were booked on Austrian direct flights. Guess what: Flights were cancelled last minute and replaced by the parent LH with LH flights vis Frankfurt. LH took the state bailout funds from Switzerland and Austria for for Austrian and Swiss only to steal their traffic within the group now for the German parent further enabled in this with horrendous fares through an EU sanctioned monopoly.

  7. Timtim says:

    This airline deal is what is visible. More away from prying eyes, perhaps?

    Perhaps, as politicians become more scared by a changing sociopolitical climate, they will be more amenable to deals and people who protect their social and political futures.

    This may lead to a Tactical Emergency Planning Individually Determined approach with less in it for everyone else.

  8. c1ue says:

    What’s ironic is that the term hidalgo refers to a member of the Spanish nobility, albeit generally of the lower levels (of nobility).
    1%!?

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