The European Commission has just announced an investigation into the acquisition of Air Europa by IAG, through Iberia. It is an ex officio performance that Margrethe vestager, Vice President responsible for competition, has clarified: “We will carefully examine whether the operation would negatively affect competition on national, short-distance and long-distance routes with origin and destination in Spain, which could lead to higher prices and higher prices. lower quality for travelers ”.
The preliminary investigation reveals that IAG and Air Europa compete on several routes between Madrid and the United States and Latin America, as well as other national and short-haul routes, including connecting flights that bring passengers to Madrid to connect with other long-haul routes. The Commission is concerned that the operation could reduce competition on 70 frequencies where both offer services.
That is the picture. Iberia could have chosen to ask Brussels to carry out an analysis in Phase 1, but it missed the deadline, which ended on Tuesday, for Phase 2 to be launched, which it considers more decisive. At this point, a more in-depth investigation will provide solid arguments to curb the possible resources of other airlines that are lurking to avoid the creation of a power and a hub first level in Madrid and will speed up the process, since this phase starts automatically while phase 1 would have been extended in time. Therefore, he decided not to present the remedy (previous commitments) that the agreement that he delivered to the Commission on May 25 entails. The Commission now has 90 business days, until November 5, 2021, to make a decision.
That is where the game is played. Among the commitments that were not presented in Phase 1 are the memorandums of understanding that IAG and Air Europa reached with the airlines Volotea and World2Fly to keep the disputed routes. The Commission will have to analyze whether this agreement, which the companies deem reasonable, solves the ballot. If this test is not passed (that is, it is not admitted or left to a minimum), the operation would start to falter, which would be disastrous for Air Europa, which has had to ask SEPI for its rescue.
But it is not just IAG and Air Europa, which agreed to a disbursement of 500 million (before the pandemic they had agreed to 1,000) and the assumption of 600 million of debt. The Government of Spain, which has supported the operation from the beginning, is also at stake for the benefit that integration represents for Spain for the recovery of tourism and the economy. The merger would allow to take a giant step towards the creation of a great hub in Madrid that could compete with the greats of northern Europe. Having a large operations center in the capital would make it possible to free capacity and open new routes to Asia, the pending issue, in addition to consolidating those to America, where supply is now concentrated.
Creating this hub in Madrid, at the level of large Europeans such as Paris, Frankfurt or Amsterdam, it would also have a drag effect on the rest of Spain, generating connecting flights. A KPMG study on the impact of the merger estimates that it could generate an increase in GDP of up to 4,000 million and the creation of up to 60,000 jobs (direct and indirect) in the tourism sector.
For this reason, the Executive has turned to convince the Commission that its analyzes also contemplate the construction of that great hub in Madrid. But what is important is that it be studied from the European point of view, which would imply analyzing the current situation of disadvantage in Madrid. If, from the Spanish perspective, it is determined that the operation violates competition, preventing the union of the two companies, it would be impossible for them to compete as equals. That would condemn Madrid to continue as hub secondary compared to the large companies in northern Europe, where each one has its reference company.
The Executive is well aware of the importance of anchoring the IAG group (parent company of Iberia, British Airways, Vueling and Aer Lingus) to the Spanish aeronautical market: if the operation occurs, the Government expects IAG to commit to investing so much in the connectivity of Spain (including also the hub Barcelona) and in the development of its aeronautical activities in Spain (promoting Iberia’s aircraft maintenance business).