Bailout Air Europa, to Be Acquired by IAG — Owner of British Airways and Spain's Top 2 Airlines …

brown and red shed on hills

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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