COMMENT: A Spanish step too far for Walsh?

Willie Walsh, IAG chief executive, is known for his love of Spain and all things Spanish. His British Airways chief executive, Alex Cruz, comes from Bilbao – in an earlier life Walsh ran the failed Majorca-based airline Futura. Vueling is Spanish and Level operates out of Barcelona.

Is the proposed purchase of Air Europa (see this issue) one Spanish step too far? Why was the deal not announced at the same time as the quarterly results?

Air Europa could be considered a rebound from an earlier “engagement”, of IAG to Norwegian, Norway’s largest airline, a low-cost carrier that is falling between two stools not knowing whether it is a European budget operator or a very innovative long-haul airline.

An abrasive character, Walsh joined British Airways in 2005 when actually out of work having been asked to leave Aer Lingus, where he was CEO, after leading an unsuccessful board coup. A short tenure between jobs at Virgin Atlantic did not work out.

At BA, Walsh instigated a ruthless cost-cutting regime which saw the airline with a much-augmented aircraft fleet, badly configured. He also led the badly-handled T5 move from T4 at Heathrow. It is only now, with Cruz in charge as we move into the 2020s, that at last something logical is emerging.

IAG says the Air Europa acquisition will transform Madrid’s Barajas Airport into a rival to Europe’s four largest hubs, Amsterdam, Frankfurt, Heathrow and Paris CDG. Air Europa operates scheduled domestic and international flights to 69 destinations in Europe, Latin America, the US, the Caribbean and North Africa. It carried 11.8m passengers in 2018 on a fleet of 66 aircraft.

Walsh says of the deal: “Acquiring Air Europa would add a new competitive, cost-effective airline to IAG, consolidating Madrid as a leading European hub and resulting in IAG achieving South Atlantic leadership.”

The big question is what will the competition authorities make of the merger? Madrid will become even more of an IAG airport. But it will be argued Heathrow is British Airways, Paris is Air France, Frankfurt is Lufthansa and Amsterdam is KLM. Add to that mix Stockholm (SAS), Zurich (Swiss) and Vienna (Austrian).

The takeover also comes as Virgin Atlantic, which calls itself Britain’s second international airline, is making strong noises to ensure a maximum granting of slots as Heathrow expands. Virgin’s CEO, the energetic Shai Weiss, will be looking closely at the deal.

The all-cash IAG-Air Europa offer is expected to complete in the second half of 2020, subject to approvals. The Air Europa brand will be retained initially as a stand-alone entity within Iberia and run by CEO Luis Gallego.

Gallego said: “Following this agreement, Madrid will be able to compete with other European hubs on equal terms with a better position on Europe to Latin America routes and the possibility to become a gateway between Asia and Latin America.”

Air Europa’s long-haul flights to Latin America operate out of the airline’s hub at Madrid Airport with short-haul services connecting from all over the continent including a twice-daily service from Gatwick, where it competes with BA/IB, easyJet and Vueling. Multiple code-shares and partnerships are also in place in order to increase connectivity further.

Air Europa surpassed the 11m-passenger mark in 2019, a figure that confirms the airline’s upward trend in recent years. This increase in passenger traffic was notable in both long-haul routes, which saw a rise of about 10% in comparison to the previous year and an average occupancy rate in excess of 85%.

Some will believe Walsh with this bid has again over-reached himself. The Iberia deal was less than warmly received in many quarters, the resultant IAG not as profitable as stand-alone BA and a drain on management and investment resources, with a non-revenue 100-strong administration set-up, at least now back at the possibly rent-free Waterside site.

Walsh clearly sees the take-over of Air Europa as the way ahead, although it could be a headache for his successor, now confirming at a capital markets briefing last Friday he has only two years to run as the head of IAG. At the event it was disclosed IAG was cutting back its forecast for capacity growth over the next three years. 

“We still see growth,” Walsh said, “but we are moderating our growth.” As noted, nothing was said at the quarterly results, then the bid for another Spanish airline, followed by the expansion projection plus a probable resignation. Three separate announcements and a revelation. It is all a bit odd. 

For the immediate future, the real question is what will the Competition Commission say? Is Air Europa a Spanish step too far for Walsh?

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