IAG/Air Europa: EU Competition Commission ignores wider airline economics
IAG's decision to pull out of its planned acquisition of Air Europa was not really a surprise after reports emerged of the EU Competition Commission's ongoing concerns, even after IAG's offer to cede 52% of Air Europa's routes.
This offer of remedies was not enough for the Commission. CAPA - Centre for Aviation analysis helps to explain why: based on the week of 29-Jul-2024, the merger would have given the enlarged IAG more than half of the seats on 49 of Air Europa's 59 routes, or 83% of the total.
IAG has come to the sensible conclusion that further remedies would make the acquisition uneconomic. Instead, it has chosen to terminate the purchase and pay a EUR50 million break fee.
The competition authority's focus on individual routes and airports was always likely to lead to concerns with this deal. However, this traditional approach ignores wider airline industry economics, the fragmented nature of European aviation and the needed role of consolidation in driving up returns.
- Iberia reportedly offered to cede 52% of Air Europa's routes to competitors, but the deal would have given IAG a majority of seats on 83% of Air Europa's routes.
- IAG would have had a majority of seats on 15 of Air Europa's 20 long haul routes, 13 of its 18 short/medium haul international routes and all 21 domestic routes.
- IAG/Air Europa faced greater regulatory scrutiny than Lufthansa/ITA and Air France-KLM/SAS.
- Regulators aim to consider consumer interests, but ignore wider airline industry economics.
Iberia reportedly offered to cede 52% of Air Europa's routes to competitors
When IAG announced in Feb-2023 that it had agreed to buy the 80% of Air Europa that it did not already own, it assumed an 18 month timeframe to completion. This was mainly to allow for regulatory approval from the European Commission's competition authority.
See related CAPA - Centre for Aviation report: IAG agrees to buy Air Europa, again - the benefits are Madrid slot share, Europe-Latin America
However, the complexity of the talks between IAG and the EU Competition Commission extended this timeframe.
A deadline of 7-Jun-2024 was extended to 20-Aug-2024. However, after reaching the point where agreement on remedies can no longer be reached, IAG has terminated the deal.
Iberia, which would have had responsibility for Air Europa within IAG, had reportedly increased the proportion of Air Europa routes it would offer to competitors from 40% to 52%.
The merger would have given IAG a majority of seats on 83% of Air Europa's routes
However, CAPA - Centre for Aviation analysis indicates that this offer was not enough, based on schedules for the week of 29-Jul-2024.
The addition of Air Europa would have given the enlarged IAG a seat share of more than 50% on 49 of its 59 routes this summer, or 83% of the total.
IAG's seat share would have been more than 70% on 32 routes, or 54% of the total.
It would have had a monopoly on 17 routes, or 29% of the total.
IAG would have had a majority of seats on 15 of Air Europa's 20 long haul routes
Air Europa operates 20 long haul routes from Madrid in the week of 29-Jul-2024.
Between them, Iberia and Air Europa have more than half of the seats on 15 of these routes (75% of them).
Air Europa is already the only airline on five of these: to Asuncion, Cordoba Pajas Blancas, Salvador Lius E Magalhaes, San Pedro (Honduras) and Santiago Cibao (Dominican Republic).
There are also three routes which are a duopoly with Iberia and where IAG would have had a 100% seat share: Panama City, Quito and Montevideo.
The combination of Air Europa and Iberia would have had more than 50% of the seats on a further seven routes: Santo Domingo Las Americas, Buenos Aires, Lima, New York JFK, Medellin, Havana and GRU Sao Paulo.
On 10 of the 12 long haul routes that would not have been IAG monopolies, there are codeshare partners of Iberia among the other operators.
Air Europa long haul routes, week of 29-Jul-2024
|
Origin |
Destination |
IB seat share |
UX seat share |
IAG share post-merger* |
Other competitors** |
|---|---|---|---|---|---|
|
Asunción |
0.0% |
100.0% |
100.0% |
||
|
Panama City |
39.3% |
60.7% |
100.0% |
||
|
76.4% |
23.6% |
100.0% |
|||
|
63.0% |
37.0% |
100.0% |
|||
|
Córdoba Pajas Blancas |
0.0% |
100.0% |
100.0% |
||
|
Salvador Luis E Magalhães |
0.0% |
100.0% |
100.0% |
||
|
San Pedro (Honduras) |
0.0% |
100.0% |
100.0% |
||
|
Santiago Cibao |
0.0% |
100.0% |
100.0% |
||
|
Santo Domingo Las Américas |
38.6% |
39.8% |
78.4% |
||
|
Buenos Aires |
50.4% |
18.6% |
69.0% |
||
|
45.6% |
21.9% |
67.5% |
|||
|
New York JFK |
48.0% |
14.4% |
62.4% |
||
|
Medellín |
0.0% |
61.7% |
61.7% |
||
|
17.1% |
39.6% |
56.7% |
|||
|
GRU São Paulo |
33.9% |
21.5% |
55.4% |
||
|
24.8% |
25.0% |
49.8% |
|||
|
0.0% |
49.0% |
49.0% |
|||
|
Bogotá |
37.8% |
10.7% |
48.5% |
||
|
0.0% |
35.6% |
35.6% |
|||
|
0.0% |
21.8% |
21.8% |
IAG would have had a majority of seats on 13 of Air Europa's 18 short/medium haul international routes
Air Europa operates 18 short/medium haul international routes in the week of 29-Jul-2024. Of these, 17 are from Madrid and one (to Paris Orly) is from Palma de Mallorca.
There is at least one competitor to Iberia/Air Europa on every one of these routes. However, the merger would have given IAG more than 50% of the seats on 13 of these routes.
On two routes, Madrid to Miami and Tel Aviv, the only other operator is a codeshare partner of Iberia.
Air Europa short and medium haul routes, week of 29-Jul-2024
|
Origin |
Destination |
IB seat share |
UX seat share |
IAG share post-merger* |
Other competitors** |
|---|---|---|---|---|---|
|
51.2% |
37.0% |
88.2% |
|||
|
54.4% |
31.9% |
86.3% |
|||
|
60.9% |
23.7% |
84.6% |
|||
|
38.8% |
39.6% |
78.4% |
|||
|
50.4% |
26.3% |
76.7% |
|||
|
27.9% |
42.3% |
70.2% |
|||
|
54.5% |
14.6% |
69.1% |
Aegean |
||
|
29.1% |
36.9% |
66.0% |
|||
|
36.1% |
24.7% |
60.8% |
|||
|
30.0% |
30.6% |
60.6% |
|||
|
46.3% |
7.7% |
54.0% |
|||
|
24.7% |
26.6% |
51.3% |
|||
|
27.4% |
23.2% |
50.6% |
|||
|
22.6% |
27.0% |
49.6% |
|||
|
0.0% |
10.9% |
49.6%*** |
|||
|
37.2% |
11.8% |
49.0% |
|||
|
23.9% |
23.0% |
46.9% |
|||
|
Tunis Carthage |
0.0% |
39.0% |
39.0% |
IAG would have had a majority of seats on all 21 of Air Europa's domestic routes
Air Europa operates 21 domestic routes in the week of 29-Jul-2024.
On ten of these, the only other operators currently are IAG's Iberia and/or Vueling and so these would have been IAG monopolies after the merger if no remedies were applied.
IAG would have had more than 50% of the seats on all 11 of the remaining domestic routes currently operated by Air Europa.
Air Europa domestic routes, week of 29-Jul-2024
|
Origin |
Destination |
IB seat share |
VY seat share |
UX seat share |
IAG share post-merger* |
Other competitors** |
|---|---|---|---|---|---|---|
|
36.7% |
0.0% |
63.3% |
100.0% |
|||
|
Málaga |
32.5% |
0.0% |
67.5% |
100.0% |
||
|
41.6% |
0.0% |
58.4% |
100.0% |
|||
|
46.9% |
0.0% |
53.1% |
100.0% |
|||
|
Barcelona-El Prat |
60.5% |
15.0% |
24.5% |
100.0% |
||
|
44.0% |
0.0% |
56.0% |
100.0% |
|||
|
44.0% |
0.0% |
56.0% |
100.0% |
|||
|
0.0% |
62.4% |
37.6% |
100.0% |
|||
|
0.0% |
65.5% |
34.5% |
100.0% |
|||
|
0.0% |
71.8% |
28.2% |
100.0% |
|||
|
0.0% |
58.0% |
30.6% |
88.6% |
|||
|
40.9% |
13.6% |
25.1% |
79.6% |
|||
|
Barcelona-El Prat |
0.0% |
53.5% |
22.1% |
75.6% |
||
|
49.2% |
0.0% |
25.9% |
75.1% |
|||
|
0.0% |
40.1% |
34.8% |
74.9% |
|||
|
54.3% |
0.0% |
20.1% |
74.4% |
|||
|
41.4% |
0.0% |
30.9% |
72.3% |
|||
|
55.9% |
0.0% |
10.4% |
66.3% |
|||
|
5.0% |
34.3% |
26.7% |
66.0% |
|||
|
Málaga |
0.0% |
41.7% |
16.9% |
58.6% |
||
|
0.0% |
49.3% |
6.1% |
55.4% |
IAG/Air Europa faced greater regulatory scrutiny than Lufthansa/ITA and Air France-KLM/SAS
Compared with Lufthansa's acquisition of 41% of ITA Airways and Air France-KLM's purchase of a 20% stake in SAS, the IAG/Air Europa deal faced greater regulatory scrutiny from Europe's competition authority.
This probably reflects the fact two issues.
First, IAG proposed to take full control of Air Europa, whereas the other two deals involve minority stakes (although the Lufthansa/ITA deal provides a mechanism for a full acquisition from 2025 subject to performance).
Second, there is a much higher degree of overlap between Air Europa and IAG (Iberia) than in the other two cases.
As the analysis above demonstrates, competition would have been reduced or eliminated on a large number of routes operated by Air Europa without remedies acceptable to the EU's Competition Commission.
Regulators aim to consider consumer interests, but ignore wider airline industry economics
The EU's regulatory motivation effort is entirely aimed at protecting the interests of consumers, maintaining choice and preventing increases in air fares on those particular routes.
By taking this narrow approach, regulators fail to take account of the wider economic realities of the airline industry.
Globally, airlines in aggregate have hardly ever generated a return on capital high enough to cover the cost of capital.
This is evidence of an industry that is too fragmented and suffers from too much competition.
Greater levels of consolidation, or market concentration, are associated with higher levels of profitability.
In Europe the airline sector is less concentrated, and less profitable (based on IATA estimates of 2024 EBIT margins), than in Latin America, Middle East and North America.
See related CAPA - Centre for Aviation report: Barriers to exit must come down to raise airline returns, attract investors
True, IAG has been one of the more profitable European airline groups. Its track record of meeting its cost of capital is better than most of its competitors'
However, IAG has not achieved this consistently through the cycle (even setting aside the period of the COVID-19 crisis).
Moreover, Air Europa has historically generated only slim margins and often grappled with high debt.
Air Europa would have taken IAG's Europe-wide seat share from 8.7% to 9.5%
On a Europe-wide scale, the acquisition of Air Europa would have taken IAG's seat share from 8.7% to just 9.5% (week of 29-Jul-2024, source: CAPA - Centre for Aviation/OAG).
This would barely change the consolidation landscape, especially after remedies that would have cut the combined capacity share.
Air Europa now faces an uncertain future
It was IAG's decision to walk away from the acquisition, but it had no choice.
The deal was wrecked on the rocks of EU Competition Commission concerns that would either have banned the deal or required remedies that rendered it uneconomic.
This could now lead to unintended consequences.
One possible consequence is that Air Europa's parent company Globalia no longer considers it viable. Any resultant failure of Air Europa would do little to preserve consumer choice.
In this event, the competition regulator would not be able to prevent IAG from ending up with a much stronger market share on Air Europa's routes anyway.
In any event, Air Europa now faces an uncertain future.
More consolidation is needed in order to raise returns
As CAPA - Centre for Aviation has argued previously, consolidation of the airline industry in Europe - and globally - is a necessary step to raising returns at a time when significant investment is needed to fund the transition to a sustainable future.
In May-2024, SAS CEO Anko Van der Werff noted that the European Commission was happy for regulation to increase fares as a consequence of rules such as EU261 (consumer protection) and emissions trading.
However, he continued, "Then, you talk about consolidation... And then it's like 'hold on, you can't do that, because then flying will be too expensive'".
The time has come for regulators in Europe and elsewhere to think beyond consumer prices when considering airline mergers.