IAG faces serious problems with its European Airlines post-Brexit

Launch of new British Airways Aibus A380

International Airlines Group is about to face some serious issues over its ownership status of its European airlines post-Brexit.

Somewhat smugly, the group has long professed it sees no issues and has no problem with the continuity of its business in Europe and the UK.

British Airways, based at Heathrow in the UK is the one airline in the group that will suffer least of all, if at all, as its operations in and out of Europe are not at issue. The EU has already stated and the UK has agreed, that flights to and from Europe will continue as normal for the first 9 months after Brexit or until another arrangement is made.

However, IAG owns Barcelona based Vueling, Madrid based Iberia, Dublin based Aer Lingus and Barcelona/Vienna based LEVEL.

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All of these airlines rely to a huge degree – especially Vueling – on intra-EU travel, where, under EU Open Skies any EU owned airline (that is 51% financial and shareholdings control is based inside the EU), is allowed to fly to and from any location in the 27 member bloc to any other location in the bloc.

IAG has used some very complicated legal and financial structures including trusts, to hold ownership of the airlines in Europe, and is listed on the stock market in Madrid in Euros, and in London in Pounds.

It has relied on these to show its shareholdings make each of the individual airlines appear to be domiciled and owned in their home bases, and expected this to be sufficient.

The EU has been looking at overseas ownership and control of airlines for several years, concerned that regulations were being breached. Their point is the establishment of a controlling interest doesn’t necessarily just mean a share holding. They look at the issue more holistically – if an airline, say Delta is financing, say Virgin Atlantic, and the Delta members of Virgin Atlantic’s board are seen as effectively controlling the airline through financial pressure, then the “Control” regulation is breached.

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This is how they seem to be saying they see IAG. Despite it allowing the airlines to operate independently and be locally controlled day-to-day, it will still be a British controlled company that those airlines report to, and they are all subject to Group policies and strategic planning – for example purchasing aircraft.

The EU is very much leaning towards the view that the intent and fiscal control is as important as the actual shareholdings, and if they do, then IAG may have to transfer its ownership and corporate structure completely to the EU, as well;as change who controls the company day to day. Qatar and Air Italy may also fall foul of this. Delta and Virgin Atlantic would almost certainly done so, but will not be in the EU by the time it applies.

If IAG is forced to become European, British Airways part of IAG is unlikely to suffer. While the British public will balk at the prospect of its flagship airline being foreign-owned, UK Government draft policy states that the UK will in fact not be concerned over where an airline is owned or by whom, provided it’s safe and works within international and UK laws.

The bottom line for senior executives at IAG like Willy Walsh, is that he may no longer be able to control the group if it moves to Europe, and their is a vast amount of complex legal and financial work that will have to be done to rectify the airlines legal status. With less than 90 days to go, it’s going to leave IAG wondering what’s next?

In the worse case scenario, quite simply its airlines will be grounded.

 

 

 

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