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.

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.

Continue reading the article on Wolf Street

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