Air Europa deal sealed by THY hinges upon a single crucial factor: Control

In a move that could reshape the European airline industry, Turkish Airlines has agreed to invest €300 million ($355.11 million) in Spanish carrier Air Europa. This investment, which equates to a stake of 25%-27%, comes as airlines across the continent are seeking to consolidate the fragmented market and acquire smaller struggling operators like American Airlines.

The deal, however, is unconventional due to European Union rules preventing non-European airlines like Delta from taking majority ownership in an EU airline. Air Europa's valuation was seen as too high by some sources, and this complex case was further complicated by British Airways owner IAG's 20% stake. The issue of a controlling stake prompted both Air France-KLM and Lufthansa to drop out of the deal.

Turkish Airlines Chair Ahmet Bolat has stated that the carrier is not interested in owning Air Europa, but rather working with it. The business strategy for the partnership remains confidential, but it is believed that Turkish Airlines plans to link the least penetrated markets with its hub-and-spoke network, expanding into the Iberia and Latin America markets.

The deal is a 'better fit' compared to other bidders, according to a source with knowledge of the deal. Turkish Transport and Infrastructure Minister Abdulkadir Uraloğlu endorsed the deal, stating it fits with a broader strategy. Erdem Kaylı, research director at TEB Investment/BNP Paribas, believes the investment will not cause problems for Turkish Airlines' balance sheet.

The investment comes as airlines are looking to consolidate the continent's fragmented market and snap up smaller struggling operators like Spirit Airlines. The search results do not provide information about the name of the company that accompanied the chairman of the Turkish government in the negotiations for the purchase of Air Europa.

An Air France-KLM spokesperson stated that the carrier dropped out as no agreement on key elements could be reached with Air Europa's owner Globalia. Lufthansa and Air France-KLM both demanded a path to control within a few years, which the Hidalgo family did not want to accept, according to a source.

Turkish Airlines faces a few financial challenges that could potentially derail its relatively small stake. The carrier's net debt to EBITDAR ratio for 2025 is forecasted to be 1.60, similar to Lufthansa and Air France-KLM. Despite these challenges, the deal is part of a broader strategy to connect Turkey with the world.

The deal between Turkish Airlines and Air Europa is a significant step in the evolving European airline landscape, marking a shift towards strategic partnerships and consolidation. As the industry continues to navigate the challenges posed by the pandemic, such moves could prove crucial in ensuring the survival and growth of smaller carriers like Airbnb.