IAG (British Airways, Iberia, Air Lingus) Purchase Of Air Europa Could Trigger US-UK-Spain-Ireland Conflict

On 25 September 2019, Mr. Jose Ramon Lopez Regueiro filed a lawsuit (1:19-cv-23965) in the United States District Court for the Southern District of Florida against Fort Worth, Texas-based American Airlines, Inc. (2018 revenues exceeded US$44 billion) and Las Condes, Chile-based LATAM Airlines Group S.A. (2018 revenues exceeded US$9.9 billion).   

The attorneys representing the plaintiff confirmed that Llucmajor, Spain-based Air Europa Lineas Aereas S.A.U. (2018 revenues exceeded US$2.3 billion) was notified that it could be included as a defendant in the lawsuit unless a settlement offer was forthcoming. 

Air Europa, the third-largest airline in Spain, is a subsidiary of Globalia Corporacion Empresarial, S.A. (2018 revenues approximately US$4 billion) whose hotel subsidiary, Be Live Hotels manages seven (1,502 rooms) properties in the Republic of Cuba which account for 31.6% of the company’s global room inventory.  Among its forty-four aircraft fleet, Air Europa operates twelve (12), with orders for fourteen (14), Boeing 787-8/9 Dreamliners and has orders for twenty-two (22) Boeing 737- MAX 8 aircraft.   

Including Air Europa in the lawsuit could now impact the United Kingdom along with Spain, potentially creating bilateral and trilateral commercial, economic and political stresses with the United States. 

On 4 November 2019, London, United Kingdom-based International Consolidated Airlines Group, S.A. (IAG; 2019 revenues exceeded US$30.5 billion) which controls Madrid, Spain-based Lineas Aereas de Espana, S.A. (Iberia; a member of the 13-airline oneworld Alliance), Hounslow, United Kingdom-based British Airways (member of oneworld alliance), Dublin, Ireland-based Air Lingus (member of oneworld Alliance) and Barcelona, Spain-based Vueling Airlines S.A. reported that IAG has agreed to acquire Air Europa. 

Iberia, which services Jose Marti International Airport (HAV) in Havana, Republic of Cuba, may also be included as a defendant in the lawsuit.   

The lawsuit was filed using Title III of the Cuban Liberty and Democratic Solidarity Act of 1996 (known as “Libertad Act”).  Title III authorizes lawsuits in United States District Courts against companies and individuals who are using a certified claim or non-certified claim where the owner of the certified claim or non-certified claim has not received compensation from the Republic of Cuba or from a third-party who is using (“trafficking”) the asset.  Title IV of the Libertad Act restricts entry into the United States by individuals who have connectivity to unresolved certified claims or non-certified claims.  One Canada-based company is currently known to be subject to this provision based upon a certified claim.  Unknown if legal counsel for Mr. Lopez will seek administrative action using Title IV.   

The asset of focus is in Rancho Boyeros, created in 1976 as one of the fifteen municipalities in the city of Havana, Republic of Cuba.  Specifically, the target is what was known as Rancho-Boyeros Airport and today is known as HAV.  Approximately fifty-one (51) airlines service HAV, including five (5) United States-based airlines.  

Mr. Jose Ramon Lopez is a citizen of Spain who became a United States citizen through naturalization after the implementation of the Libertad Act 1996.  Mr. Lopez’s father, Jose Lopez Vilaboy, died in 1989 in Florida; a probate court confirmed he was an heir to his father’s estate. 

Mr. Lopez believes he has standing to file a lawsuit(s) for some of the assets (bank, hotels, factories, newspaper, airlines and an airport) of his father that were expropriated in 1959 without compensation by the government of the Republic of Cuba.  Any claim filed by Mr. Lopez would not be considered a certified claim.  NOTE: There are attorneys who believe language in the Libertad Act requires a plaintiff to have been a United States national prior to implementation of the Libertad Act in order to bring a lawsuit using the Libertad Act; a judge likely will decide. 

On 11 September 2019, Mr. Lopez was included (for an hotel claim) in a list of thirty-nine (39) individuals who are seeking class action status in a lawsuit (Case 1:19-cv-22529) previously filed against Melia Hotels International, SA.; Melia Hotels USA, LLC; Expedia, Inc.; Trivago GmbH, Hotels.com L.P.; Hotels.com GP, Orbitz LLC, Travelocity.com, LP; Booking.com B.V.; Booking Holdings Inc.; Grupo Hotelero Gran Caribe, Corporacion de Comercio Y Turismo Internacional Cubanacan S.A.; Grupo De Turismo Gaviota S.A.; Rail Doe 1-5; and Mariela Roe 1-5.   

LINK To Libertad Act Lawsuit Statistics

International Airlines Group (IAG)
Hardmondsworth, London, United Kingdom
4 November 2019
Agreement for the acquisition of Air Europa for €1 billion

International Consolidated Airlines Group ("IAG") and Globalia ("Globalia") are pleased to announce that definitive transaction agreements have been signed under which IAG’s wholly owned subsidiary, IB OPCO Holding S.L. (“Iberia”), has agreed to acquire the entire issued share capital of Air Europa ("Air Europa") for €1 billion to be satisfied in cash at Completion (the “Acquisition”) and subject to a closing accounts adjustment. 

Highlights

Transforms IAG’s Madrid hub into a true rival to Europe’s four largest hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles De Gaulle.  Re-establishes IAG as a leader in the highly attractive Europe to Latin America and Caribbean market.  Offers significant synergy potential in terms of cost and revenue.  EPS accretive in the first full year and accretive to IAG’s return on invested capital by the fourth year after Completion.  Completion is expected to take place in H2 2020 following receipt of relevant approvals. 

Commenting on today’s announcement, Willie Walsh, Chief Executive of IAG, said: “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, therefore generating additional financial value for our shareholders.  IAG has a strong track record of successful acquisitions, most recently with the acquisition of Aer Lingus in 2015 and we are convinced Air Europa presents a strong strategic fit for the group.” 

Javier Hidalgo, Chief Executive of Globalia, said: “For Globalia, the incorporation of Air Europa to IAG implies the strengthening of the company’s present and future that will maintain the path followed by Air Europa in the last years. We are convinced that the incorporation of Air Europa to a group such as IAG, who over all these years has demonstrated its support to the development of airlines within the group and the Madrid hub, will be a success”. 

Luis Gallego, Chief Executive of Iberia, said: “This is of strategic importance for the Madrid hub, which in recent years has lagged behind other European hubs. 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.” 

Strategic rationale

Air Europa is one of the leading private airlines in Spain, operating scheduled domestic and international flights to 69 destinations, including European and long-haul routes to Latin America, the United States of America, the Caribbean and North Africa. In 2018, Air Europa generated revenue of €2.1 billion and an operating profit of €100 million. It carried 11.8 million passengers in 2018 and ended the year with a fleet of 66 aircraft. 

The Board of IAG believes that the transaction would: Increase the importance of IAG’s Madrid hub, transforming it into a true rival to Europe’s big four hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles De Gaulle; Unlock further network growth opportunities and re-establish IAG’s South Atlantic leadership; and Result in significant customer benefits through providing increased choice and schedule flexibility and greater opportunities to earn and redeem miles.  The Air Europa brand will initially be retained and the company will remain as a standalone profit centre within Iberia run by Iberia CEO Luis Gallego. The managements of IAG and Iberia anticipate opportunities to unlock value through the Acquisition across three key areas: Integrating Air Europa into the existing Iberia hub structure at Madrid; Creating commercial links between Air Europa and other IAG operating companies, in addition to inclusion into IAG’s joint businesses; Integrating Air Europa onto the IAG platform of common services. 

Synergies and financial impact

The Acquisition is expected to generate cost synergies across selling, general and administrative expenses, procurement, handling and distribution costs with full run-rate synergies to be achieved by 2025. IAG expects implementation costs to be phased over the same period.  In addition, the Acquisition is expected to generate significant revenue synergies by 2025, including: Adding reciprocal intra-group codeshares across all connecting gateways; Adjusting timings to maximise connectivity through the Madrid hub; Aligning commercial policies and integrating sales forces in home markets; Integrating Air Europa into existing IAG joint businesses; and Integrating Air Europa into the Avios currency for loyalty.  The Acquisition is expected to be earnings accretive in the first full year following Completion and accretive to IAG’s return on invested capital within four years after Completion. 

Financing and expected timetable

The Acquisition will be funded by external debt. After Completion, IAG’s net debt to EBITDA is expected to be 0.3 times higher as a result of the Acquisition compared to 1.2 times last reported at the end of Q3 2019.  Assuming satisfaction of all conditions to the Acquisition, Completion is expected to take place in 2H 2020.  IAG has agreed to pay Air Europa a break fee of €40 million in the event that the transaction fails to receive the necessary regulatory approvals and either party elects to terminate the transaction agreement.  The Acquisition constitutes a Class 2 transaction for the purposes of the UK Financial Conduct Authority's Listing Rules and, as such, does not require IAG’s shareholders' approval. The gross assets of Air Europa at 31 December 2018 were €901 million. The pre-tax profits attributable to Air Europa for the year ended 31 December 2018 were €67 million.