IAG takeover of Air Europa faces fresh challenges in Brussels

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Brussels is preparing to lay out objections to International Airlines Group’s second attempt to buy Spanish carrier Air Europa in a move that signals significant competition obstacles to the deal.

IAG, which owns five airlines including British Airways and Spanish flag carrier Iberia, agreed in February last year to buy the 80 per cent of Air Europa it does not already own for about €400mn, after abandoning an earlier effort at the height of the pandemic.

The European Commission last month opened an in-depth investigation into whether the new deal would harm consumers by stifling competition and is due to decide on whether it meets EU merger rules by June 7.

But it is poised to detail objections as early as next month, according to three people with knowledge of the matter, who said such a move would amount to a warning that the transaction faces a veto unless credible concessions are made.

Regulators fear the deal will reduce competition on Spanish domestic and international routes, and have been studying whether the merger would make it difficult for rivals to offer their services or have other indirect effects such as raising prices.

They are concerned that the remedies discussed so far to enable proper competition are weak because the airlines face only small competitors with no credible rivals on the routes they both fly, two of the people said.

Europe’s other two major long-haul airline groups also turned to consolidation as the industry emerged from the disruption of the pandemic.

Lufthansa has agreed to take a 41 per cent stake in ITA Airways, the successor company to Italy’s Alitalia, while Air France has taken a 20 per cent stake in struggling Scandinavian airline SAS. Brussels opened an in-depth probe into the Lufthansa deal in January.

Consolidation allows large airlines to expand their networks in a region where opportunities for organic growth are limited at a time of growing competition from low-cost rivals in the short-haul market.

But the EU’s executive has said it will tighten rules for airline mergers, including demanding tougher concessions. There has also been a push from consumer groups and airports to stop the wave of consolidation, amid questions over whether airline takeovers in the US have benefited consumers.

The commission sees IAG’s new deal to buy Air Europa as even “more problematic” than its first, said two of the people familiar with the matter, because the Spanish target is now in a stronger financial position than during the pandemic.

“It’s even worse this time,” said one person with direct knowledge of the probe.

While the airlines could still offer last-minute remedies to secure the EU’s approval, the chances are slim, two of the people added.

Globalia, Air Europa’s owner, did not immediately reply to a request for comment. IAG declined to comment but pointed to a statement last month by chief executive Luis Gallego, who said the company was readying remedies to appease the commission’s concerns.

“We remain committed to closing this transaction as quickly as possible in 2024 to start delivering the deal’s benefits for consumers and the wider Spanish economy, and increase Madrid’s competitiveness with other European hubs,” he said in a statement.

The commission declined to comment.