Iberia’s purchase of Air Europa and the impact on the ‘Madrid hub’

Summary

• Iberia to complete the purchase of Air Europa in 2H2020.
• Air Europa will join Spanish airlines that are already a significant chunk of International Airlines Group (IAG).
• The deal has raised competitive concerns from airlines, including Ryanair, but that carrier might even benefit as much as lose out.
• Madrid is not a genuine 360° hub yet.
• Regions to the east demand more coverage.
• But that risks cannibalising the routes of Iberia's IAG fellow member British Airways.

Iberia will have as many long haul aircraft as Air France

Iberia's CEO Luis Gallego, commenting on the purchase agreement for around EUR1 billion with Air Europa Lineas Aereas, said the acquisition will allow the Madrid hub to compete with other European hubs. He added: "The Madrid hub has lost its position with other European hubs", and explained that with Air Europa's long haul fleet Iberia will be able "for instance, to have 63 long haul aircraft, similar to the 65 aircraft that Air France-KLM has". At Madrid Barajas Airport Iberia will have a "360° hub".

Mr Gallego is confident that while the purchase process could take 18 to 24 months, it will be done in 2H2020. He insists that Iberia has carried out a route by route analysis and is convinced that the acquisition will be beneficial to the users.

Iberia is part of IAG, along with Iberia Express and the majority-owned Vueling, both of which have a presence at Madrid Barajas Airport, though not so much Vueling, whose emphasis remains on Barcelona where it is by far the largest airline by seat capacity. IAG's low cost short and long haul brand LEVEL also has a base at Barcelona (its first), but it is a minor player.

Air Europa, the third largest airline in Spain and owned by Globalia, is based in Mallorca and operates scheduled and charter services from its bases in Madrid, Barcelona and Tenerife South to destinations in Europe, North America and South America.

Madrid far more important to IAG than Barcelona

IAG believes consolidation is needed so that Madrid Barajas can be a genuine rival to Europe's big four hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles De Gaulle - the 'FLAP' airports, as they are known. Interestingly, little mention is made of Barcelona or anywhere else.

Ryanair raises anti-competitive concerns, but could benefit from the deal

But the deal has raised anti-competitive concerns. Not least, nor surprisingly, from the largest carrier in Spain: Ryanair.

The IAG/Air Europa combination would dominate Spain-Latin America services, which are routes that Ryanair doesn't fly but where it benefits from self-connection by both outgoing and incoming passengers. The link-up would thus have a considerable impact on wider Europe-Latin America services.

The way IAG played it was to posit consolidation between the two airlines as a side issue to its desire to boost the Madrid hub, and that is something that will always play well with governments.

But Ryanair might conversely also benefit from the establishment of Madrid as the premier European gateway to and from Latin America.

It already has 10.4% of seat capacity at Barajas. By comparison, it has (taking the FLAPs in initial order) 2% at Frankfurt International; 0% at London Heathrow; less than 1% at Amsterdam Schiphol; and 0% at Paris CDG. It is likely that slot divestments will be made to carriers like Ryanair, which could be perceived as "losing out" under this deal.

So how does all this play out with reference to Madrid's comparative hub power after the conclusion of the deal? Mr Gallego claims it will be a "360°" hub.

Madrid's long haul route network is firmly oriented westwards

That claim is true today, but only up to a point, as the route map for Barajas Airport demonstrates.

Madrid Barajas route map

Source: CAPA/OAG.

The map shows that Madrid is strong across Central and South America regions, though less so in North America. It is fairly strong (and certainly more so than it was) in North Asia, but hardly at all in Southeast Asia and Oceania, and services to Africa are limited.

Even parts of Europe, such as the Baltic States, lack services, and services into the Nordic countries are limited to capital cities. It cannot genuinely be called 360°.

It is a question of what Air Europa can bring to the table.

As far as its current route network goes, Air Europa covers quite a lot in Latin America, where it has 22 cities - broadly 10 less than Iberia, though with some duplication - but it has hardly anything in North America, where it has just two cities, and a handful of Middle East and North Africa services. As for the Asia Pacific region, it has a solitary city - Shanghai.

Air Europa route map

Source: CAPA/OAG.

Air Europa could add short-haul connections to the enlarged hub if it avoids duplication

It has to be assumed, therefore, that the IAG-Air Europa combination would focus on the latter's role in Europe, where again it serves a modest number of routes - outside Spain and Portugal, there are only 16 cities served in the entire continent, including Istanbul and Moscow. There are no direct services to Austria, Hungary, Slovakia, Poland, or any of the Nordic and Baltic countries.

Services to the large industrial economies of northern Europe are limited to capital cities at the expense of large non-capital conurbations, except in Germany.

Clearly, therefore, there is a potential role for Air Europa to fill route gaps where the IAG companies Iberia, Vueling, British Airways, Aer Lingus and some other, smaller, airlines are not flying, but that also runs the risk of cannibalising some of the routes where they are.

Or Air Europa could focus instead on eastbound long haul

The other clear path is for Air Europa to bolster eastbound services, covering the Middle East and West Asia, East Africa and, most importantly, Southeast Asia, instead of overcompensating in Latin America where both airlines are already quite strong.

Does Air Europa have the fleet to do that? Not at the moment, but according to the CAPA Fleet Directory, it will have - the airline has 20 Boeing 737-8 types on order, which cover the short and mid-haul requirement, and 10 Boeing 787-9s for long haul.

Collectively, they would increase the fleet size from 42 to 72.

Air Europa fleet summary, as at 09-Dec-2019

Source: CAPA Fleet Database.

Iberia's fleet growth plan has 40 aircraft on order, 26 of which are A320/321neo and A321neoXLR models, together with 14 A350s. Vueling's 25 aircraft on order are all A320/321neo versions, while the LCC Iberia Express has no aircraft ordered.

The combined airline could put pressure on Heathrow to contain its pricing as a third runway opens

Allowing for aircraft retirements and existing route duplication, there would appear to be enough aircraft here to fulfil Madrid's hub potential and to offer the opportunity for its hub status to be ramped up further by IAG, should the cost of operating at Heathrow Airport spiral to unacceptable levels when (if) the third runway opens.

But just how these aircraft are deployed, and what marketing goes with it, will be the determining factors in Madrid's hub future.