The IAG Deal That Will Create a New European Mega Hub

International Airlines Group (IAG) sees European authorities signing off on its renegotiated deal to acquire Air Europa later this year, as the conglomerate positions the acquisition as necessary to create a competitive alternative to other large European hubs.

The combination of Air Europa and IAG-subsidiary Iberia would turn Madrid into a "360-degree hub," as IAG CEO Luis Gallego described it, comparable to what KLM offers in Amsterdam and Lufthansa in Frankfurt. This is possible with the combination of the Air Europa and Iberia long-haul fleets, he added during the group's fourth-quarter earnings call on Friday. And, although unmentioned on the call, the deal would give the group a large hub in the European Union following the completion of Brexit that puts British Airways' London Heathrow base further outside of the Schengen area.

Based on 2019 schedules, Air Europa would boost Madrid departures for Iberia by nearly 50 percent to over 104,000 annually, according to Cirium data. The number increases to more than 123,000 departures when Iberia Express is included. KLM had nearly 127,000 departures from Amsterdam and Lufthansa over 154,000 from Frankfurt.

IAG first unveiled its plans to acquire Air Europa in late 2019 and the parties agreed to halve to purchase price to $606 million (€500 million) in January. The European Commission must sign off on the combo, something that Gallego expects later in 2021.

Consolidation is expected to boost IAG's financial position after a record $8.4 billion net loss in 2020. Revenues fell 69.4 percent to $9.5 billion on a 33.5 percent decline in expenses to $18.5 billion. Of the group's four main operating brands, Iberia performed the best, owing to its strength in the domestic Spanish market and non-passenger business lines. Vueling performed the worst, due to its many point-to-point routes in markets with severe restrictions and few other business lines, like cargo. Group passenger traffic fell 74.7 percent and capacity 66.5 percent.

In the fourth quarter, IAG revenues were down 79.1 percent to $1.6 billion and expenses were down 54.7 percent to $3.4 billion. The group's net loss totaled $1.6 billion.

Looking forward into 2021, Gallego said the outlook remains "highly uncertain." Capacity will be roughly 20 percent of 2019 levels in the first quarter and IAG has "very low expectations" for the normally busy Easter travel period. He did not provide capacity guidance for the rest of the year but cited expanding Covid-19 vaccination programs and the UK's reopening plans as bright spots. For example, on the day UK Prime Minister Boris Johnson unveiled a four-stage reopening plan flight bookings surged 60 percent and holiday bookings 200 percent compared to the prior week.

However, Gallego warned that any travel recovery could be stifled if vaccination programs are not coupled with an easing of border and quarantine restrictions.

IAG is embracing are digital health passports to speed the restart of travel. The multiple apps in development aim to facilitate travelers ability to meet country-specific Covid travel requirements and create an easy-to-use verification process for airlines and local arrivals officials. The group is working with IATA's Travel Pass, as well as trialling the VeriFly app.

“The future is vaccination, health pass and, in the meantime, we need testing regime to do the bridge," said Gallego.

On the fleet front, IAG plans to take delivery of 15 aircraft in 2021, said Chief Financial Officer Stephen Gunning. While he declined to say what those deliveries would be citing on-going discussions with planemakers, the group had outstanding orders for 121 aircraft, including 64 Airbus A320neo family and 26 Airbus A350 family jets, at the end of 2020.

No decision has been made on IAG's letter of intent with Boeing for up to 200 737 Max aircraft. The status of the deal is something the group needs to "consider for the future," Gallego said.