IAG calls for EU to relax ownership laws as Brexit concerns mountUK’s departure could force British Airways’ owner to buy out shareholders or risk break-up
International Airlines Group has pleaded for the EU to overhaul its “arcane” airline ownership laws, which rivals and analysts warn could force the owner of British Airways and Iberia to buy out a quarter of its shareholders or risk being broken up after Brexit.
Willie Walsh, chief executive of IAG, told the European Parliament on Tuesday he was “confident” the company’s structures would survive Brexit and meet the EU’s strict licensing rules.
But, in his first admission of potential challenges ahead, Mr Walsh called for the UK and EU to reach a comprehensive air transport agreement that “should also clarify” that UK nationals would count towards the EU ownership requirements, even after Brexit.
Speaking to a group of MEPs, Mr Walsh said the EU “operates under an arcane system regulating the ownership and control of airlines”, and called for the rules to be relaxed.
“Those structures are unnecessary,” he said. “I would prefer to see a situation whereby we don’t have to replicate [them].”
For an airline to operate routes within the EU, it must demonstrate that it is effectively owned and controlled by EU nationals, with at least 50 per cent of its shares held by EU nationals. This poses a problem for UK airlines after Brexit, when their UK shareholders will no longer be classed as EU shareholders.
Several independent estimates all point to IAG falling below 50 per cent after Brexit, a problem shared with other airlines.
Senior EU officials, analysts and rivals of IAG have told the Financial Times that, unless the UK and EU reach an agreement to waive the issue, IAG will be forced to spin off part of the group or buy out up to a quarter of its shareholder base in order to maintain lucrative EU flying rights.
Andrew Lobbenberg, head of transport equities at HSBC, told the FT: “After Brexit, we think IAG will need to be demonstrably an EU-owned and controlled airline. But it is unclear how that gets to be the case.”
Michael O’Leary of Ryanair, an outspoken critic of IAG and its Irish carrier Aer Lingus, said the airline was “in complete . . . denial” about the ownership challenge.
“They’re hoping that it’ll go away,” he told the FT. “They’ll have to front up to how catastrophic it is at some point though. They don’t know themselves [how to solve it]. But their shareholders will have to sell, and the group has to get broken up.”
Brian Havel, a professor in aviation law at the University of Oxford, also told the FT that IAG “could not exist in its current form” after Brexit.
Mr Walsh has in the past said he has “absolutely no concerns” about the IAG structure, which ensures all three of its carriers are able to maintain their national flying rights in Spain, the UK and Ireland, and has denied that the group will need to be broken up. A spokesperson for IAG said it would “continue to comply with all the relevant ownership and control regulations”.
Unlike some other airlines, IAG has refused to reveal what proportion of its current shareholders would still be EU nationals after Brexit. A clause in the company’s bylaws allows the IAG board to determine which “bona fide” interested parties can be given information on the group’s shareholder breakdown on request. The FT asked for such information, but was told its request was not “bona fide”.
Stephen Furlong, an aviation analyst at Davy, estimates that the group will be 20 percent owned by EU nationals in 2019, and Bloomberg data also suggest that only one-fifth of the group’s shareholders will be EU nationals after Brexit. One independent financial analysis circulating in the industry suggests that, even in the best-case scenario, where all those shares whose ownership is difficult to trace are classified as belonging to EU nationals, IAG remains 6 per cent short of the 50 per cent limit.
IAG has provisions in its bylaws to force non-EU shareholders to sell their shares if the company is at risk of losing its flying rights. The EU takes the issue of ownership requirements seriously, and has previously investigated airlines where it suspects non-EU ownership has dropped below 50 per cent.
UK airlines were hoping that a set of guidelines on ownership and control issued by the European Commission last month would loosen the rules. Instead, they merely reinforced the status quo and confirmed that the EU will consider “effective control” — specifically, the entities or persons who ultimately own the shares — when deciding if an airline is majority controlled by EU nationals.
Other airlines have been more explicit about the challenges that ownership rules will pose after Brexit. EasyJet has said it will be 49 per cent owned by EU nationals after Brexit, while Ryanair said 38 per cent of its shareholder base would EU owned and controlled.
Mr O’Leary told the FT on Tuesday that he hopes to make up some of the shortfall by encouraging pension funds to switch from holding shares in the UK to the EU, but warned that up to 10 per cent of his non-EU shareholders — potentially including UK nationals — “may be forced to sell their shares or be disenfranchised.”