IAG acquires Air Europa…and it’s much bigger than it soundsAG rachète Air Europa…et c’est beaucoup plus important que ça en a l’air

Yesterday we talked about Lufthansa’s renewed interest in Alitalia and the huge impact this would have on the battle for leadership in Europe and for the big alliances.

Only a few hours after writing this article a bomb fell, real and not potential: the acquisition of Air Europa by IAG (owner of British Airways, Iberia and Aer Lingus). Air Europa counts for nothing, you might say…well, in the end it’s an operation that can have much more impact than it seems.

What is Air Europa?

Air Europa is a Spanish airline founded in 1986 that operates mainly from Madrid to cities in Europe and South America. It has 66 aircraft ranging from the ART 42 and the B737 to the A330 and the modern B787 for long-haul flights.

It is a member of the Skyteam alliance. For a while its loyalty program was Air France-KLM’s Flying Blue before it launched its own four years ago, Suma.

Today, Air Europa operates numerous code-share flights to Spain on behalf of its Skyteam partner airlines, mainly Air France and KLM.

In medium-haul, Air Europa’s economy service is at the level of a decent low-cost airline but we were pleasantly surprised by its business class. Without having tested its long haul, it seems that everything is one or two notches above.

Last year Air Europa posted a positive result of 100 million euros.

The IAG deal between IAG and Air Europa

IAG is therefore committed to buying Air Europa for one billion euros. If the deal goes through (as we will see, it still may not), Air Europa would continue to operate under its own brand as a subsidiary of Iberia.

What are the consequences?

  • Air Europa leaves Skyteam
  • Air Europa joins IAG’s transatlantic joint ventures.
  • Air Europa would keep its frequent flyer program but align it with those of IAG, i.e. with the “Avio” as “currency”.
  • Code-sharing of course between Air Europa and IAG airlines.

From all this comes a host of side effects.

Consequences for IAG

It doesn’t take a rocket scientist to figure out that IAG is locking down access to Spanish destinations and to Madrid in particular. With Iberia, Vueling and Air Europa it is almost a monopoly. Today, an airline that wants to serve Spain without going there itself but with a code-share cannot do so by relying on a Spanish airline that will always manage to offer more non stop destinations than it does. This is especially true for Skyteam and Star Alliance members.

IAG is also recovering in the South American market after the exit of LATAM from OneWorld. It has acquired an airline that has a very good network to the destination, not through a partner but through its own routes. Well done.

It’s hard to believe that IAG executives didn’t have Brexit in mind. By strengthening the Madrid hub, the group is giving itself air to offer a maximum number of connections without going through London.

Does Madrid win? Not sure!

One of the arguments used by IAG is also to say that this way Madrid will enter the category of big hubs. Not sure!

The 2019 ranking of the best connected airports puts Madrid in 28th position and the fact that Iberia will take over Air Europa will not change anything, it’s just the game of communicating tanks. Ditto in terms of passengers. Dominated by Iberia, which owns its little cousin, the fact remains that the two airlines do not offer a sufficiently developed and varied network from Madrid and that this will not change anything. Asia is not part of their favorite hunting ground, so Madrid cannot claim to be a Global Hub like London, Frankfurt or Amsterdam.

On the other hand, Iberia, which has 46% of the airport’s flights according to the same ranking, will strengthen its domination over its hub. A victory more for the airline than for the airport, at least for now.

A hard blow for Air France-KLM

Big blow for all the airlines which used Air Europa to serve Spain in codeshare… Air France and KLM in the first place and maybe a little Delta. From now on, in order to offer a Spanish destination to their customers, these airlines will have to go there themselves (and no, Transavia will not fill all the holes because it does not correspond to all the customers).

In particular, this means redeploying aircrafts used for other destinations from Paris and Amsterdam and using valuable slots, whereas before Air Europa used its own. Choices will have to be made.

Air France saw it coming

So yes, it’s a real blow for Air France and KLM, but I don’t think that within the Franco-Dutch group anyone fell out of the cupboard yesterday afternoon on hearing the news. I would even say that they knew and anticipated.

Proof of this:

  • On October 28, Air France announced 12 additional weekly flights to Madrid from Paris Orly.
  • On October 22, Air France announced three new destinations in Spain from Paris for the next summer season: Malaga, Alicante and Valencia. Strangely enough, two of them are “ex Air Europa” destinations.
  • This follows the announcement of the opening of Seville under the Air France brand, previously operated by Transavia.

In short, certainly hit but not sunk and that’s good.

Is the worst to come for Skyteam?

If we think in terms of the alliance, OneWord is the winner, because even if it has not been said that Air Europa will join the alliance, it will at least join the transatlantic joint ventures, and on top of that the codeshare game will have its effect.

Star Alliance didn’t have a local partner so it doesn’t matter to them.

Skyteam, already weakly represented on the continent compared to Star Alliance, is losing out, with Air France and KLM finding themselves almost alone (without wishing to insult Tarom and Czech Airlines). This diminishes the alliance’s value proposition for its American and Asian partners. And nothing says that the loss of Air Europa’s South American routes will be compensated by the deal between Delta and a LATAM that will remain outside the alliance.

No, the worst thing for Skyteam would be, after Air Europa, to see Alitalia leave for other skies as mentioned yesterday. In terms of network but first of all as a symbol.

And IAG did not take over Air Europa?

Well yes, it is possible! There is even a clause to that effect in the agreement. IAG is committed to paying 40 million euros in this case. Why? Given the importance that IAG would take in Madrid, it is likely that the competition authorities will intervene and either block the sale or force IAG to give up slots, which would make the deal still interesting but less juicy.

Besides that, let’s not forget the Brexit. We are not experts in legal-financial mechanics but at our level of knowledge of the subject we can ask ourselves if with the exit of the (dis)United Kingdom from the EU Air Europa would not become a de facto British business. It is likely that, as in the case of Air France KLM’s entry into the capital of Virgin Atlantic, a clause to be activated in case of a “no deal” will be inserted somewhere.

Bottom line

What can we conclude from this? A great deal for IAG if the deal goes through! What about the others? Let’s not sell the bears before we kill them. We are in a domino game at least on a European scale in a sector in full consolidation and we are not at the end of our surprises. Maybe Skyteam and Air France-KLM will pull a rabbit out of their hat. Maybe Lufthansa Group will hit even harder than IAG.

Only one thing is certain: the landscape has not finished changing and there is a chance that one of the three big western Europeans (we keep Turkish aside) will emerge somewhat weakened.

Photo : A330 Air Europa by Vytautas Kielaitis via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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