EU Airline Demands Could Halt Future Dealmaking

The European Union's strict requirements for airlines could impede future mergers and acquisitions within the industry. These demands, aimed at ensuring fair competition and consumer protection, may lead to a slowdown in dealmaking activities. As airlines navigate these regulatory challenges, the industry's growth and competitive landscape could be significantly affected. The stringent conditions imposed by the EU are seen as a major factor in the potential stalling of future deals and partnerships.

Boston Brand Media brings you the latest news - It took a year of negotiations with the European Commission for Germany's Lufthansa (LHAG.DE) to gain approval to buy 41% of Italy's ITA Airways, and only after agreeing to significant concessions.

While the deal increases Lufthansa's presence in the profitable southern European market, the combined group must relinquish some routes and slots to competitors to move forward.

Industry executives, investors, and experts believe that increased scrutiny by European regulators and demands for concessions could deter major airlines from pursuing further mergers.

British Airways-owner IAG (ICAG.L) has been under scrutiny since 2019 when it announced plans to buy Spanish carrier Air Europa, with an EU deadline of Aug. 20 for concessions. Regulators are also expected to examine Air France-KLM's plan to acquire 19.9% of Scandinavian carrier SAS.

Airline executives have long argued that consolidation is necessary to offset rising operating costs, helping carriers recover from the COVID-19 pandemic, which halted global travel and nearly collapsed the travel sector.

However, regulators are concerned that Europe's three largest groups, IAG, Air France-KLM, and Lufthansa, are becoming too dominant, potentially reducing consumer choice and making air travel 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 privatization is Portugal's TAP. But Lisbon's plans have been disrupted by political turmoil, despite interest from Air France-KLM, Lufthansa, and IAG.

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

This could alleviate concerns in Brussels about the industry being dominated by a few large airline groups.

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

Boston Brand Media also found that, more complex 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, viewing them as strategic assets too important to fail.

While Britain's Monarch collapsed in 2017 and FlyBe has gone into administration, 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 the market concentration of the big three.

This has been central to 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 pleased that the Commission recognized 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.

IAG controls 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 CEO Johan Lundgren told Reuters.

BUDGET CARRIERS

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

In Lufthansa's purchase of ITA, many point to Ryanair's dominance in Italy, where it holds over 40% market share.

However, competition authorities did not factor in the Irish budget airline 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, according to an IBA analysis. Lufthansa and IAG follow closely, with 9.54% and 8.2% respectively.

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Source: Reuters‍