Analysis-EU’s airline deal demands fuel doubts over further attempts

By Joanna Plucinska

LONDON (Reuters) – It took a year of wrangling with the European Commission for Germany’s Lufthansa to gain approval to buy 41% of Italy’s ITA Airways, and only after it accepted big concessions.

While the deal expands Lufthansa’s footprint in the lucrative southern European market, the combined group will have to cede some routes and slots to rivals for it to proceed.

Industry executives, investors and experts say greater scrutiny of such tie-ups by European regulators and demands for remedies could deter major airlines from further deals.

British Airways-owner IAG has been in the crosshairs since 2019 when it announced plans to buy Spanish carrier Air Europa, with an EU deadline of Aug. 20 for concessions, while regulators are also expected to probe Air France-KLM’s plan to buy 19.9% of Scandinavian carrier SAS. 

Airline executives have long said consolidation is needed to help offset soaring operating costs, helping carriers recover from the COVID-19 pandemic which brought global travel to a halt and the travel sector to the brink.

But regulators worry Europe’s three largest groups, IAG, Air France-KLM and Lufthansa, are becoming too dominant, potentially hurting consumer choice and making flying less affordable.

“We can see that Europe is becoming more and more cautious about this wave of consolidation,” said Piotr Grobelny at aviation data analysis firm IBA. 

The next candidate for privatisation is Portugal’s TAP. But Lisbon’s plans have been thrown off course by political turmoil, despite interest from Air France-KLM, Lufthansa and IAG.

TAP CEO Luis Rodrigues said last month that the new centre-right government should not sell 100% of the airline and should also bring in non-aviation investors, like private equity.

That could ease concerns in Brussels about the potential for an industry dominated by a handful of big airline groups.

One banker working on mergers said that airlines are wary of losing time, money in legal fees and having to give up valuable take-off and landing slots in order to get clearance for deals.

More complicated deals can take up to two years to complete, said Martina Farkas, M&A partner at Linklaters, adding: “Deals are taking longer and are becoming more complex and expensive”.

“It cannot be ruled out that strategically important deals attracting regulatory attention may have the potential to be delayed and face further hurdles,” Farkas told Reuters.

NO CONCESSIONS

Dealmaking can also be complicated because governments often hold stakes in national carriers which they view as strategic assets too important to fail. 

Britain’s Monarch collapsed in 2017 and FlyBe has gone into administration, but many other airlines were kept afloat with taxpayer funds, especially during the pandemic. 

Former EU antitrust commissioner Didier Reynders told the Financial Times last year that regulators would seek tougher concessions from those looking to merge to ensure fair competition and reduce market concentration of the big three.

This has been at the heart of IAG’s battle to buy Air Europa. It has offered more concessions, such as making 52% of Air Europa’s flights available to rivals, to ease concerns over its Iberian market dominance, and assuring regulators it will not reduce competition on long-haul routes to South America.

IAG said on Wednesday it was glad that the Commission recognised the benefits of airline consolidation. Its shares rose more than 5% on anticipation that the ITA deal approval made its takeover of Air Europa more likely to be given the green light.

IAG has 50% of slots at Madrid’s main airport and 47% at Barcelona’s main airport, according to an analysis of IBA data.

Executives worry that the Commission will make demands that are practically impossible to meet, halting dealmaking.

“The alternative to consolidation taking place is that airlines will continue to be funded by governments, and that’s just worse,”  easyJet (LON:) CEO Johan Lundgren told Reuters. 

BUDGET CARRIERS

Other analysts point to the rise of low-cost carriers as an area overlooked by competition authorities.

In Lufthansa’s ITA purchase, many have pointed to Ryanair’s dominance in Italy, where it has a more than 40% market share. 

But competition authorities had not factored the Irish budget airline into their assessments because they do not consider Lufthansa and ITA to be direct rivals.

Ryanair offers more flights than any other airline in Europe with 11.49% of the total, an IBA analysis shows. Lufthansa and IAG are just behind, with 9.54% and 8.2% respectively.