IAG/Air Europa: suave Latin cover
Deal makes good sense, assuming the buyer can squeeze out costs
Air Europa merits rebranding under its new owner. It is not focused on Europe. This Spanish low-cost carrier covers the same number of cities in the Americas, including the US, as it does across the Atlantic. That explains why International Consolidated Airlines Group (IAG) is buying the privately held business for €1bn from Globalia. This deal makes good sense, assuming IAG can squeeze out costs — and avoid the strikes that have hit its British Airways subsidiary.
Air Europa should fit well with IAG’s main Spanish airline Iberia. IAG wants to make Madrid a bigger regional hub to rival London, Paris, Amsterdam and Frankfurt.
Air Europa is no regional tiddler, busing passengers to local holiday spots. It flies into New York and Miami and cities across Central and South America. Those airports are the attraction. IAG’s main rival for those Latin American destinations so far has been Air France-KLM. That will change post-deal. IAG’s market share into Latin America from Europe will leapfrog Air France-KLM to a leading 26 per cent.
Yet IAG does not stretch its balance sheet unduly to do so. It will pay a low enterprise value to ebitda of 2.5 times. That is well below European peers which trade at more than 4 times, or even IAG’s own multiple of 3. This reflects profitability that is distinctly earthbound. Operating margins last year were below 5 per cent, less than half the figure for IAG and below those of Iberia and Vueling, IAG’s other regional carrier.
The deal will push IAG’s net debt up by a quarter. But the ratio relative to ebitda — 1.5 times post-deal — should not trouble credit analysts.
IAG promises to extract costs in the same way as in other transactions, but provides no targets. It will need to lift profitability at Air Europa to avoid margin dilution. In its favour, IAG has form having successfully integrated Iberia, British Midlands and Aer Lingus in the past decade.
IAG shares have taken flight in the past three months, up a third despite strikes. This deal should provide added lift in the months and years ahead.