International Airlines Group has reached a deal to acquire the rest of Air Europa for €400 million ($422 million) that it thinks will pass muster with European authorities.
Unveiled Friday, IAG would buy the remaining 80 percent of Mallorca-based airline from its owner, Globalia, in a deal that it hopes could close in the next 18 months. It has committed to retaining the Air Europa brand under the management of Iberia, and promised to launch new routes to Asia from Madrid — something the Spanish government is keen to see.
“This agreement will enable IAG’s Madrid hub to compete on an equal footing with other European hubs and consolidate its position in the South Atlantic,” IAG CEO Luis Gallego said. “Madrid is the main gateway between Latin America and Europe and there are opportunities to expand its network, providing significant benefits to our customers, employees, and shareholders.”
IAG aims to build on its leading position in the Europe-Latin America market by incorporating Air Europa into Iberia. But approval of its offer is far from assured. Rivals will argue that the combined Iberia-Air Europa will command excessive market power on south Atlantic routes, hurting competition and consumers. IAG, for its part, argues that Lufthansa dominates Frankfurt, Air France dominates Paris, KLM dominates Amsterdam, so what’s wrong with Iberia having a commanding presence in Madrid?
The group dropped a previous attempt to takeover Air Europa in late 2021 after objections by European authorities.
While Brussels and Madrid consider IAG’s new deal for Air Europa, the London-based group’s recovery progressed in the December quarter. It reported Friday a $237 million net profit for the period, which contributed to a full year profit excluding special items of $423 million. The company’s fourth-quarter operating margin was 8 percent, six points better than what rival Air France-KLM reported yet far short of IAG’s own 12 percent achievement three years earlier. Its full year operating margin was likewise worse, dropping to 5 percent in 2022 from 13 percent before the pandemic.
IAG’s 2019 margin ranked second best in the world behind only Delta Air Lines among carriers with large widebody fleets. British Airways itself, incidentally, was even more profitable than Delta — it was 2019’s most profitable full-service global airline, counting it separate from its sister airlines like Iberia.
Executives said Friday that IAG was “confident in returning to pre-Covid-19 levels of operating profit within the next few years.” Leisure demand is already back to its pre-crisis levels and continues to be strong. As for corporate demand, management doesn’t ever expect to see a full recovery. But demand is currently “steady” and growing.
Of all the group’s airlines, Iberia performed the best, posting an 8 percent fourth-quarter operating margin, which was slightly better than what it managed three years earlier. The Madrid-based airline capitalized on strong yields on both north and south Atlantic routes. It also operates a maintenance division that did well.
British Airways, the largest airline within IAG, encountered more difficulties last quarter. For one, its Asian routes were still mostly non-performing. It also faced operational constraints at London Heathrow. To be clear, it still managed a solid 8 percent operating margin; the result was just a tenth of a point less than Iberia. But this was half the lofty 16 percent operating margin British Airways earned in the fourth quarter of 2019. British Airways was the only IAG unit, by the way, where non-fuel unit costs rose more than unit revenues relative to 2019. This year, the airline plans new routes to Aruba, Cincinnati, and Guyana.
Aer Lingus delivered a fourth-quarter operating profit just barely above break even. And IAG’s Spanish discounter, Vueling, lost money, recording a negative 2 percent operating margin. Both airlines are highly seasonal, typically generating strong profits in the summer. Aer Lingus, for its part, is expanding its transatlantic franchise with new flights to Cleveland this year. That’s another sign of IAG reaching deeper into smaller and smaller North American markets by taking advantage of new, smaller long-range jets — particularly the Airbus A321LR and, in a few years, the A321XLR — and a joint venture with American Airlines. IAG separately runs joint ventures with Japan Airlines and Qatar Airways.
Looking ahead, bookings remain strong — especially for leisure travel — but IAG executives caution about risks tied to macroeconomic trends. IAG has nearly 200 aircraft on order, including the Boeing 737 Max and 777-9. Other initiatives to boost longterm earnings include inflight product upgrades and development of its highly profitable Avios loyalty plan.