International Consolidated Airlines Group (LON: IAG) shares have a certain problem at the moment. There’s increasing realisation that European Union rules could mean that IAG must demerge BA as the only really viable solution.
Ryanair’s O’Leary has been saying this about IAG. He could even be right, and not just being the provocateur that O’Leary so often is.
The problem is the interaction of two different sets of rules. One is about the right to fly around within the European Union. This comes under the general term “cabotage”. Really, what this means is being able to fly from, say, Warsaw to Paris, as distinct from Warsaw or Paris to New York.
An airline – obviously, something properly licenced and all that – can do that second, fly from a place outside the EU to one inside. But to carry passengers from one place inside the EU to another inside it is that cabotage. This brings with it further restrictions.
The major one is that to be able to do this intra-EU travel then the airline must be majority-owned by EU citizens. Ryanair does this with its Irish base of investors. Easyjet just about manages it because its investor base is across the continent. But IAG doesn’t. It was, after all, largely the merger of BA and Iberia that created the company. So, most BA shares were owned by Brits and that’s still the majority of the IAG shareholder register (obviously, lots of institutions but most of those are British too).
To keep that EU licence IAG needs to – well, will have to, if the rules are to be enforced – reduce the number of non-EU shareholders and increase the number of EU ones. No one can really think of a clever way of doing this. Not in the sort of size that would be required to solve the problem.
Except, unless the solution is to spin BA off from IAG. The British shareholders in IAG get new BA shares, the continental shareholders stick with their IAG ones. It’s even likely that if everyone were given a choice, BA or IAG shares, then that’s how it would turn out anyway, the Brits electing the BA ones.
Now, of course, it’s ridiculous to have to do this because of some strange EU law but then that’s what the law is. And it’s thought likely enough that the EU is going to start insisting upon this soon enough. Being ridiculous hasn’t stopped the EU before now, has it?
The interesting part of this is going to be whether such a demerger increases, or reduces, enterprise value. It’s possible that it will increase it. But if that’s so then the entire merger which created IAG is shown to be wrong in the first place. Which could even be true.
There is going to be more speculation about this in the months to come. Now the airlines are past the immediate difficulties of covid and lockdowns it really could be true that the EU will start insisting that IAG solve this problem, the only realistic way of doing so being to demerge BA.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.