Half of Spanish Internal Flights at Stake in Hard Brexit

(Bloomberg) -- A no-deal Brexit risks grounding half of Spain’s domestic passengers and a quarter of the total if British Airways parent IAG SA can’t show that its Iberia and Vueling arms are owned by European Union investors.

One of the licensing conditions for operations by EU carriers is that they be controlled by nationals of member states, or the states themselves, something London-based IAG has said it complies with via its own Spanish registration and the vesting of Iberia and Vueling voting rights in local holding companies.

The EU has said IAG needs to verify that the structure is compliant with requirements before Britain quits the bloc on March 29 or risk seeing its right to operate some services terminated. With the group itself headquartered at Heathrow airport and 21 percent owned by Qatar Airways with extensive U.K. and U.S. shareholdings, that may not be straightforward.

IAG reiterated Wednesday that it remains confident that it “will comply with the EU and the U.K. ownership-and-control rules post-Brexit,” following extensive engagement with all relevant regulators and governments.

Vueling, Iberia and Iberia Express together had a 47 percent share of Spain’s domestic passengers in March, according to the latest report from the ministry of public works. Combined with BA and Irish unit Aer Lingus the overall market share was about 25 percent.

Tourist Economy

That gives IAG leverage, with Spain relying on Iberia for global business links and Barcelona-based discounter Vueling vital to the Catalan economy. Spain is also more dependent on aviation than most countries since tourism accounts for in excess of 10 percent of GDP and close to 13 percent of employment.

The Spanish Aviation Safety and Security Agency, which reports to the ministry, may find itself in the unenviable position of having to rule on whether Iberia and Vueling flights should be grounded, since competence for evaluating compliance rests with national authorities, the European Commission said in an email to Bloomberg.

Even if AESA rules that flag-carrier Iberia and Barcelona-based discount specialist Vueling are sufficiently Spanish to keep their licenses, competitors such as Air France-KLM Group and Deutsche Lufthansa AG could object and the commission itself could intervene.

The public works ministry remains in talks with the EU and transport companies in the run up to Brexit, it said in an email, without commenting directly on the situation regarding IAG.

The airline has been warned that its plans to continue flying in and around Europe after the split do not work, the Financial Times reported earlier, citing a senior EU official it did not name. Spain’s El Pais said last week that IAG’s defense that Iberia is controlled by department store operator El Corte Ingles is under close scrutiny.

At the time of the merger, Iberia became fully owned by a company called Ib Opco, El Pais said. All the economic rights went to IAG, while the voting rights were split between IAG (49.9 percent) and Garanair (50.01 percent).

Until April, Spanish bank Bankia held 87 percent of Garanair’s control and department store operator El Corte Ingles held the other 13 percent. Today, Garanair is wholly owned by El Corte Inglés, according to the report.

©2019 Bloomberg L.P.