IAG emerges as frontrunner for TAP stake, signaling European airline consolidation

Dublin, January 23, 2024 (Reuters) - IAG, parent company of Iberia and British Airways, is poised to acquire a stake in Portuguese carrier TAP, valued at approximately $1 billion, according to bankers and industry analysts. This potential transaction would mark a significant step in the ongoing consolidation of the European airline market.

Consolidation imperatives

Industry executives attending the Airline Economics conference in Dublin emphasized the urgent need for consolidation in the sector, which faces challenges such as rising costs and price-sensitive consumers. They believe that mergers and acquisitions will enable airlines to compete more effectively with rivals from the United States, the Middle East, and Asia.

TAP privatization process

The Portuguese government is expected to initiate formal discussions soon regarding the sale of a minority or majority stake in TAP. "The government continues to listen, assess market interest... but TAP's stake sale will happen this year," said a spokesperson for Portugal's Ministry of Infrastructure.

IAG's strong interest

IAG, with its successful operations in Madrid through Iberia, is seen as the most likely candidate to reach a deal with TAP. Analysts point to IAG's experience in establishing multi-hub operations in Southern Europe as a key advantage.

Other contenders

Lufthansa is also pursuing the acquisition of TAP, seeking to expand its footprint in Southern Europe following its purchase of a stake in ITA Airways. Air France-KLM has also expressed interest.

Minority stake or pathway to majority control?

IAG has indicated its willingness to consider both a minority stake and a "pathway to majority control," according to Jonathan Sullivan, the group's chief corporate development officer. Maintaining TAP's national identity is expected to be a key consideration for IAG, as it has been for Iberia and British Airways within the IAG group.

Political and regulatory uncertainties

Political uncertainty in Portugal and regulatory scrutiny by the European Commission could delay the privatization process. Goodbody aviation analyst Dudley Shanley anticipates a delay until early 2026. A partial sale of less than 20% would not require approval from Brussels, which could alleviate some regulatory concerns.

Competition issues and Lufthansa precedent

Iberia's ownership by IAG may raise competition concerns similar to those faced by Lufthansa in its acquisition of ITA. IAG may need to offer significant concessions, as Lufthansa did by relinquishing airport slots in Milan.

Conclusion

The potential sale of TAP to IAG is a testament to the ongoing consolidation trend in the European airline market. As airlines seek to address industry challenges and compete with global players, further mergers and acquisitions are likely in the future.