A new dawn for Air Europa?

ON Tuesday, the Spanish government, as had been expected, rubber-stamped the approval of the 475 million euros bailout of Air Europa. But it is a bailout which comes with strings attached. The government will appoint two directors to the board and the position of CEO is likely to be the subject of discussion; Maria José Hidalgo is the current CEO.

In addition, the government will be able to decide on what spokesperson Maria Jesús Montero described as “higher-level operations”, and these mean the sale of Air Europa to Iberia (IAG). With the funding, Montero observed, comes “the ability to give an opinion and to establish criteria” in respect of the sale. The government’s principal objective is “to guarantee that public money is used with the greatest efficiency” and to ensure the “best transformation of Air Europa in adapting to circumstances”.

The government has been willing to cover Air Europa with funds from its 10,000 million euros pot for strategic businesses precisely because it considers the airline to be a strategic asset. This much was made clear when Iberia’s proposed takeover was first known about. The combination would mean Madrid-Barajas becoming Europe’s fifth largest hub and in direct competition with Frankfurt, Heathrow, Paris Charles de Gaulle and Schiphol; fifth largest, and firmly in Spanish hands.

Strategically, therefore, there are similarities from the perspectives of both Iberia and the government. But the purchase by Iberia is now being placed ever more in question. Air Europa’s debt is one element, and it is understood that Iberia are looking for the government to alter the conditions for repayment (on the assumption that Iberia would acquire the debt).

Were Iberia to go ahead with the purchase, the debts from government aid (which also include the 140 million euros from the ICO credit institute) would still have the same terms attached. But for Iberia to effect the purchase, it would not want the government being involved with the airline’s management, an aspect of which would concern restructuring.
Despite promises about jobs when the purchase was first mooted, well before the pandemic, the circumstances have now changed. The government would be most reluctant to sanction redundancies - in fact it’s almost impossible to believe that it would - but Iberia, adopting a hard-nosed business approach, would consider these inevitable.

A further point to take into account is the capacity of Air Europa operations, as they stood before the pandemic, to pay off the debt to the government. Heaped on top of everything else are the massive losses being incurred because of the pandemic, and so there is a huge question mark hanging over the wherewithal to pay off the debt (the period is six years), which brings Spanish government direct share ownership into the equation if the debt isn’t paid.

Where Iberia are concerned, much may well depend on how the debt is to be treated. Negotiations will be tough, but the government - for all it might want to play hardball in some regards - must be aware that the current lending will likely prove to be insufficient and that more may well be necessary to keep Air Europa afloat. In this respect, there is an advantage were Iberia to step in and take over.

As if these complications weren’t enough, there is still the EU angle, given the amount of the bailout and the charges by the likes of Ryanair that it is illegal and excessive for an airline the size of Air Europa. Above 250 million euros, and Brussels does have to say yes or no and be presented with the viability plan, and that - as I have previously noted - had to be redrafted because the government’s SEPI Sociedad Estatal de Participaciones Industriales (the body making the loan) believed that it was too optimistic.

And critics like Ryanair do have a point when it comes to size. Unlike strategic airlines in other countries being bailed out - Air France and Lufthansa - Air Europa’s market share is small by comparison; it is less than ten per cent of the whole Spanish market. These other airlines can point to fifty and even sixty per cent share of their home markets.

However this all pans out, it is looking more and more as if the Hidalgo family’s control of Air Europa is being loosened and that what the family might hope to obtain from a sale is being slashed. As has been suggested, Iberia might offer a symbolic one euro and assume the debt, but it now has to factor in what the government’s “criteria” are as well.