International Airlines Group (IAG), one of the world’s largest airline groups that consists of airlines such as British Airways, Iberia, bmi, Vueling, and Aer Lingus announced the acquisition of Air Europa for €500 million.
“With the acquisition of Air Europa now agreed but subject to regulatory and other approvals which could take around 18 months, we are intending to welcome another leading airline to the Group. This acquisition will enable us to grow Madrid as a hub, offering a gateway to Latin America and beyond, with benefits for customers, employees and shareholders,” said Luis Gallego, IAG Chief Executive Officer.
“2022 was a year of strong recovery, driven by sustained leisure demand and markets reopening. At this point of the year we continue to see robust forward-bookings, while also remaining conscious of global macro-economic uncertainties. We are transforming our businesses, with the intention of returning IAG to pre-COVID levels of profit within the next few years, through major initiatives to improve customer experience and operational performance. Our unique group structure allows us to maximise revenue and cost synergies, and invest capital to achieve strong returns, whilst continuing progress towards net zero by 2050,” added Gallego.
IAG agreed with Globalia to acquire the remaining 80 percent equity of Air Europa, following the acquisition of a 20 percent equity stake in August 2022. In March of 2022, IAG entered into a convertible loan with Globalia for €100 million, convertible into an equity stake in Air Europa Holdings of 20 percent. The transaction is subject to regulatory and other approvals which could take around 18 months, IAG announced in its full-year results 2022 statement.
Air Europa is the third-largest Spanish airline after Iberia and Vueling. Air Europa is a member of the SkyTeam alliance. The Air Europa fleet is one of the most modern on the continent. It is made up of 47 aircraft whose average age does not exceed 4 years. Air Europa flies to over 44 destinations in Spain, the rest of Europe, South America, North America, the Caribbean, Morocco and Tunisia.
IAB’s Investment in Air Europa Holdings
On June 15, 2022, the Group entered into a financing arrangement with Globalia Corporación Empresarial, S,A, (‘Globalia’), whereby, the Group provided a €100 million seven-year unsecured loan, which was convertible for a period of two years from inception into a fixed number of the shares of Air Europa Holdings, S.L. (‘Air Europa Holdings’). The loan was accounted for at fair value through the Income statement and recorded as an Other non-current financial asset.
In determining the fair value of the financing arrangement, the Group utilised the income approach, whereby, the financing arrangement was valued using observable market data by which to determine an interest rate that a market participant would require to provide a loan with the same tenor and amount. This interest rate was then used to discount back the existing contractual cash flows to derive the fair value.
On August 16, 2022, the Group exercised its exchange option with Globalia and converted the Other non-current financial asset into an Other equity investment.
Immediately prior to exercising the exchange option, the fair value of the Other non-current financial asset was €65 million, representing a decrease from inception of €35 million, which has been recorded within Net change in fair value of financial instruments in the Income statement.
The Group determined the fair value of the investment in Air Europa Holdings using both the market approach and the income approach, whereby the Group used both observable market data and unobservable inputs. The fair value was determined on the stand-alone basis of Air Europa Holdings without consideration of potential synergies that could be obtained if the Group were able to obtain control over the operations of Air Europa Holdings. The results of these valuation approaches resulted in a fair value of €22 million, representing a difference of €43 million from the fair value of the Other non-current financial asset prior to exercising the option. This loss, which derives from the derecognition of the loan to Globalia prior to the recognition of the investment in Air Europa Holdings, was recorded within Net change in fair value of financial instruments in the Income statement.
At December 31, 2022, the fair value of the investment in Air Europa Holdings was €24 million, representing an increase of €2 million since August 16, 2022, which has been recorded within Other comprehensive income.
