Reports that Aer Lingus owner International Airlines Group (IAG) could buy Spanish-based Air Europa for €500 million instead of €1 billion will not surprise industry observers.
IAG agreed to buy Air Europa for €1 billion in November last year, but since Covid-19 restrictions wrought havoc on air travel through 2020, the group has been trying to get that price reduced. Reports on Friday suggested that the deal may be done for €500 million, with payment deferred until 2026.
The reported takeover would add Air Europa to a stable already housing the Irish carrier, as well as British Airways, Spain's Iberia and Vueling. The original logic for the deal came from the potential savings and tie-ins it offered each party. It also increased the opportunity for IAG to develop Madrid as a hub with particularly strong links to south and central America. The group expected returns from its investment to materialise by 2025.
Air Europa's fleet is a mix of 45 Airbus and Boeing jets. As these manufacturers also supply IAG's other airlines, the takeover would have made IAG an even larger customer of both than it is now, giving it more clout.
The pandemic has changed all this. Before it struck, Air Europa was earning profits of about €100 million a year, but it has since received €475 million in Covid-19 aid from the Spanish government.
So it makes sense for IAG to seek a heavy discount on last November’s price. It also makes sense for Air Europa to throw its lot in with the much bigger IAG, whose resources, including €7.7 billion cash and €1.6 billion in undrawn credit, leave it well positioned to withstand further attrition and make the most of opportunities when travel recovers.
Those factors really point the direction of travel for aviation as a whole. Smaller carriers will remain more vulnerable even if a recovery begins next year, some will fail, others will be taken over. Covid-19’s lasting legacy may be that it accelerated the consolidation of Europe’s airlines.