Ladies and gentlemen, thank you for standing by, and welcome to the International Consolidated Airlines Group conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Monday the 4th of November, 2019. I would now like to hand the conference over to your speaker today, Willie Walsh. Thank you. Please go ahead, sir.
Thank you very much, and good morning, everybody. Thanks for joining us. I know you're all very busy, so we won't take too long with this presentation. We're delighted to announce this morning agreement to acquire Air Europa. If I just take you through the transaction, the acquisition will be by Iberia Opco Holding S.A., which is the parent company of Iberia, and acquire 100% of the air division of Globalia, which is the parent company of Air Europa. The purchase price is EUR 1 billion. We see it as a bolt-on acquisition, and initially, the Air Europa brand will be retained. It will increase Iberia's size by about 50% and IAG by about 10% in terms of traffic revenue. The cost and revenue synergies that will accrue will be in line with previous IAG transactions.
Significantly, it will be EPS accretive from year one and accretive to IAG's return on invested capital by year four. The funding for the acquisition will be with external debt, and we expect closing to be in the second half of 2020. Clearly, this is subject to regulatory approval. Now, for those of you not familiar with Air Europa, let me just give you some headline figures for the company. You can see their annual passengers for 2018, almost 12 million. ASKs of nearly 34 billion, 66 aircraft, revenues of EUR 2.1 billion and an EBITDA of EUR 392 million. These figures are Spanish GAAP. They've not been adjusted for IFRS 16. We see Air Europa's value carrier operating model similar to Aer Lingus, and it has been a full member of the SkyTeam alliance since 2010.
Looking at their fleet, it currently has a fleet similar to our own aircraft, actually, A330, 200s, and 300s. It has been transitioning to the Boeing 787, and the intention is to transition the fleet to an all-Boeing fleet of 737s and 787s. They currently also have some Embraers and ATR 72s on wet lease. We're familiar with all of these aircraft, and we see the fleet being very much consistent and in line with the plans of IAG. Globalia is a leading leisure and tourism group in Spain, founded by Juan José or Pepe Hidalgo in 1971, and he is the chairman of the group. It's one of the leading leisure and tourism groups in Spain, with annual turnover of EUR 3.9 billion. You can see on the right-hand side of the slide the transaction perimeter.
In effect, we're acquiring the airline, Air Europa, and some associated activities, but it's the airline that we're acquiring. Air Europa was Spain's first privately owned company to operate domestic scheduled flights when Globalia acquired a majority stake in 1991. We see this as being absolutely great news for Spain and for consumers. It will strengthen and make more relevant the Madrid hub. It's a sustainable investment by IAG. It will give us great opportunities to broaden the network and give further choice of schedules and flexibility for our customers and significantly providing job security and the opportunity as we see going forward for additional job creation. The Air Europa network is complementary to the Iberia network. You can see there it's principally flying to Latin America with some North American destinations, Europe, and a significant domestic operation as well. 24 destinations in the Americas.
It will improve IAG's position in the Europe-to-Latin America market. This chart shows the passenger market share for the trailing 12 months to August 2019. As you can see there, IAG would move from 19% pre to 26%. Just to reinforce what I said about the effectiveness of the Madrid hub, you can see here the hub and wave chart. When you put the Air Europa schedules together with the Iberia schedules at Madrid, this will give significant strength to the hub at Madrid, giving very significant additional choice to consumers in Spain and bring Madrid very much into line with the other major hub airports in Europe. I'll hand over to Steve, who will take you through some of the financial headlines.
Thanks, Willie. Good morning.
As we've touched on in the RNS, we expect the acquisition to generate significant synergies, both cost and revenue. In terms of cost, it's very much with regards to leveraging the scale of the group and the expertise in the group. With regards to revenue, there's a number of ways we think synergies will be produced. Clearly, codeshares within the group can be built up, optimizing the connectivity in the Madrid hub, aligning commercial policies and integrating sales forces, and also looking at the opportunities for joint business. Last but not least, using the Avios platform for loyalty as well. On both the cost and the revenue side, we think there's significant synergies to be achieved. We've got a good track record of doing this. We've done this a number of times, and we're confident in that.
We think these synergies will come in over a four-year period. As Willie said, we expect to be EPS accretive in year one, and we expect to be ROIC accretive for the group by year four. Overall, we think the level of synergies will be commensurate with transactions of a similar size. I turn to the next slide. I've probably dealt with most of these points. I think that the key additional point I would add here is we expect the transaction to move our net debt to EBITDA by about 0.3 turns. In calculating that, we've done an estimate of what we think the IFRS 16 lease liabilities are. We've looked at the debt that we're putting purchase, and then we've looked at the EBITDA of the target and the year one synergies. When we've worked that through, that's how we get the 0.3 movement.
Last but not least, Willie's mentioned the fact that we will be funding this with external debt. We have a lot of flexibility as to how we fund the acquisition. We are probably intending to fund it at the Iberia level. There's good appetite for Iberia paper. We also have the ability to use bank loans if we think that's the right way forward. This is a size of transaction that's very comfortable for us to absorb, both at a group level and an Iberia level. I'll hand back to Willie at this point.
Thanks, Steve. We see this a good fit with the IAG platform and portfolio, and we believe that we will be able to extract significant synergies, as Steve has said. The track record that we have in this area is very strong. Those of you familiar with us will know that we have pursued a number of transactions since we created IAG in 2011. All of them have been accretive and positive, and we continue to believe that there is scope for further consolidation within Europe, and this is the next step in that consolidation. Turning to our integration plans. As we mentioned, this will be a bolt-on acquisition with the Iberia corporate structure, so will come under the leadership of Luis Gallego. We will retain the Air Europa brand initially. The integration will be managed principally by Luis and his team with IAG.
Clearly, as a result of this acquisition, Air Europa will leave the SkyTeam alliance. The triggers to the synergies will be the quick integration into the IAG platform of common services, giving Air Europa benefits of the cost and scale of IAG. We will quickly move to create commercial links between Air Europa and the other IAG operating companies. That would also involve bringing Air Europa into our joint businesses and then integrating the Air Europa flying at the existing Madrid hub. The transaction does not require IAG shareholder approval. It is subject to relevant competition approvals, and we expect this deal to close in the second half of next year, 2020. All in all, a good deal for IAG, a good deal for Air Europa, good for Spain, and good for consumers.
We're very confident that this is the right move for IAG and look forward to completing the transaction in the second half of next year. On that basis, I'll hand back to the operator, and we can take some questions from you.
Thank you, sir. As a reminder, if you wish to ask a question, you may press star and one on your telephone, and please wait for your name to be announced. Should you wish to cancel the request, you may press the hash key. As a reminder, you may only ask two questions per participant. Thank you. We will now take our first question. It's from the line of Daniel Roeska. Your line is now open.
Good morning, gentlemen. Congratulations on the deal. Seems to be reasonably priced. Two questions, if I may. Number one, you now have kind of a multitude of brands active in the Iberian market, Vueling, Level, Air Europa, Iberia Express. Could you elaborate a little bit the logic behind that? You already said kind of retain the Air Europa brand for now. What would be the options you could be thinking about, and how does that also relate to the Level long haul, possibly, within Iberia? Secondly, of course, on competition authorities, you must have thought through that, and it seems that you don't expect competition authorities to be a major obstacle to the combination of those airlines. Could you please elaborate on that and kind of what you're expecting in terms of, let's say, possible remedies that will be required? Thanks.
Thanks, Daniel. Yeah, you're quite right. We would not see the business continuing with all of those brands. I think it gives us an opportunity to consider over a short period of time, the most effective use of brands. We do see that operating at least a dual brand strategy at the Madrid hub is an effective way of serving the different customer segments that we've previously identified at IAG, and we see this as an opportunity to do that in a more effective manner at Madrid. We will, in due course, rationalize the brands that we operate, but that will be done over a period of time. I see this as a significant opportunity for us to do some additional brand testing and research in the Spanish and Latin American markets before we move forward with that decision.
You should take it that it's not expected that we will continue to operate with all of those brands in the years ahead. We don't take the competition authorities for granted. There will be a process that we will need to go through, and that clearly will be a detailed process, and we would see engagement with the authority starting immediately. I'm not going to comment on any of the issues there, but clearly, we believe that this is pro-consumer, and we would expect to be able to convince the competition authorities in the relevant countries that that is the case. That process clearly will take a little bit of time. If there's any news or developments in relation to that, we will advise you as they occur.
We're not intending to predict or to suggest any particular outcomes before we have proper engagement with the relevant competition authorities.
Great, thanks.
Thank you. We will now take our next question. It is from the line of Jarrod Castle. Your line is now open.
Good morning, and thank you. Can you just talk a little bit about the balance sheet of Air Europa? Is the EUR 1 billion that you're paying a clean number, or is there some debt as well that we've got to think about? Secondly, can you just give some color why now? Has it got anything to do with what's going on in LATAM at the moment in terms of your attempt at JV there? Thanks.
Jarrod, it's Steve here. In terms of the balance sheet of Air Europa, as Willie alluded to in his intro, the balance sheet's constructed on a Spanish GAAP basis rather than on an IFRS, and IFRS 16 in particular, basis. We've had to do work to build up what we think the IFRS 16 adjustments would be and hence the debt. That is the principal debt that is on the Air Europa balance sheet. Otherwise, it's pretty clean.
On the timing, Jarrod, we had engaged before we heard news of the Delta investment into LATAM. It's just coincidence actually that they did their acquisition of the 20% in LATAM and we're doing this. It's not driven one by the other. These are completely independent decisions that just happen to have been reached in or around the same time.
Thank you.
Thank you. Your next question comes from the line of Neil Glynn. Your line is now open.
Good morning. If I could first ask a question with respect to Air Europa's financials to understand the starting point, because I assume that Air Europa will be held to the same targets as the other opcos. The margin was 5% operating last year, I think. Just interested in terms of the deficit to somebody like an Iberia. Would you consider it pretty broadly balanced between RASK and CASK, or is it lopsided in either direction? I calculated RASK of EUR 0.06, but that may or may not be correct. Second question, clearly Air Europa has played a major role for Globalia over the years. Will there be any IAG relationship with Globalia going forward, or should this represent a complete termination of the Globalia Air Europa relationship?
Thanks, Neil. I'll take the second question, comment on the first, and then I'll let Steve comment as well. It is intended to have a relationship with Globalia on ground handling and maintenance for a period of time. The relationship will be based on market rates. It's, if you like, a completely market-based approach to having the relationship with them. We see that certainly in the short to medium term as being the most effective way of dealing with this. In terms of the finances, you especially will be very familiar with the Aer Lingus results pre-acquisition and post-acquisition, and the benefits that accrued to Aer Lingus in terms of enhancement of all of their financial metrics once they became part of IAG. Clearly, we see that as being the path that we'll follow in relation to Air Europa. Maybe Steve, you want to comment?
I think, Neil, a few thoughts. One is, I see the opportunities on both the cost and the revenue side. It's neither one nor t'other. I think it's both. It's interesting, the EBITDA margin for Air Europa on the numbers we've disclosed to you is about 18.6%. For IAG as a group, we're about 22%. There's a ways to go to move it in line with the group targets. As we've said, I would expect this to be ROIC accretive by year four. Those synergies will build up over a four-year period. It will be revenue and cost. Ultimately, I do expect us to get to the IAG targets.
Great. Thank you both.
Thank you. The next question is from the line of James Hollins. Your line is now open.
Hi. Good morning. Two from me. Can you just let us know what the cost of moving from SkyTeam to oneworld will be? I think there's normally some sort of cost in that. Secondly, just run us through who you actually need approval from. Is it all the countries in which they operate? Particularly would it impact, obviously Spain will be one of them, but if we look at Madrid, I think IAG and Air Europa have about the same amount of slots as IAG has at Heathrow. Am I right in thinking it's probably not an issue anywhere? Thank you.
Thanks, James. We see the cost of exiting SkyTeam as no cost. In relation to the competition regulators, the principal ones would be the EU, U.S., Brazil, but there will be some others as well. They would be the principal competition regulators that we would need to deal with. As I said, we'll engage with all of these on a constructive basis. I don't want to make too many comments, obviously, in advance of having proper engagement with the regulators or to prejudge their views on this. We believe that there are a number of precedents that we can call on in relation to both the scale and the type of transaction that we're proposing.
Thanks.
Thank you. Your next question is from the line of Muneeba Kayani. Your line is now open.
Hi. Can you quantify the synergies that you expect over the next five years? Secondly, can you talk a little bit about the performance of Air Europa this year?
Thank you. Obviously, we're not going to give any details or quantification of the synergies. We have done detailed work in relation to that. As I said earlier, we need to properly engage with the competition regulators before we would be prepared to disclose any specific details in relation to that. I would describe Air Europa's performance this year as being similar to other airlines, in that clearly fuel has been a headwind for most airlines in 2019. We're giving you the 2018 figures here. We don't see anything unusual or out of line with the figures that we've seen for 2019 in relation to their performance relative to our own airlines or the industry in general.
Thank you. We will now take our next question. It is from the line of Malte Schulz. Your line is now open.
Hi. Good morning. Two questions from my side. First of all, if you look particularly on the long-haul side, on the route network, you have a lot of overlap with Iberia. Now with the new slots, do you also intend to go out of the primary focus of just LATAM and move also maybe Iberia platform or Iberia-Air Europa combined into other markets, Asia, for example? I think that's my primary question.
Yes.
Sorry. Yeah.
Yeah. I think it's a good point. Yes, we do see the opportunity, clearly, to strengthen the relevance of the Madrid hub and enable the new combined Air Europa-Iberia entity to more effectively serve Asia, and connecting Latin America to Asia over Madrid. That had been the ambition for Iberia. As you know, we have started flying to Asia with Tokyo and Shanghai. I think with this combined network and the better hub wave performance that we'll get at Madrid, it will give us additional opportunities that Iberia on its own or Air Europa on its own wouldn't have. Yeah, I think you're quite right to highlight that as an opportunity for us.
Yeah. Will you give more update on the capital market next week or shouldn't we expect anything?
Yeah, no. I think Luis Gallego is in Madrid, but will be with us in London on Friday. I think it'd be nice for me to give Luis an opportunity to give you a flavor of how he sees this would be operating. Luis will be with us, and we'll be able to give you, maybe not a lot more detail, but certainly give you an insight as to how he sees Iberia managing the integration of Air Europa. He'll do that at some stage during the presentation. My team are looking at me here smiling, saying that's another thing they've got to add to the agenda for Friday. Yeah, we will do that.
Okay. Thank you.
Thank you. Your next question is from the line of Johannes Braun. Your line is now open.
Yes. Good morning. Thanks. Two questions from me as well. Firstly, back on the synergies, you wouldn't quantify them, but would you tell us what the distribution between cost and revenue synergies is, roughly? Secondly, could you quantify in any way the implementation costs that we will see over the next five years?
We're not going to give those today, Johannes. As I said, I think we're very familiar with completing transactions like this. The critical issue is to engage constructively with the competition regulators at the earliest stage and not to prejudge or to try and put them in a position where they're responding to public comments that we've made. We want to do that first, and in due course, we will clearly give you more detail in relation to the synergies. What I would say to you is, we have done a detailed analysis. We're very comfortable with what it is we believe we can achieve. We're very confident that we will deliver on that, and I would once again point to our track record in terms of how we have delivered on both cost and revenue synergies with all of the transactions that we have completed since we created IAG.
Particularly if you look at our track record with the initial synergy targets that we gave you for IAG, the combination of BA and Iberia, and how we not just delivered on those but significantly exceeded those. We have ambition, clearly, in this area. We're very comfortable that the synergies are real, and we're very comfortable that we will be able to deliver on those, but we do want to have proper engagement with the competition regulators first.
Thank you.
Thank you. The next question is from the line of Jaime Rowbotham. Your line is now open.
Morning, all. Two quick ones from me. Firstly, are you in a position to say where Air Europa is in terms of its pilot and cabin crew agreements, and whether the change of control could lead to any issues there, please? Secondly, in terms of Air Europa's rankings in things like Skytrax, do you have a view on where it fits at the moment within the spectrum of performance at IAG and where it could go or something like that? Thanks very much.
They have collective bargaining agreements with their pilots and cabin crew and other staff. Those agreements are in place. Clearly, this will come as a surprise to the people in Air Europa. I believe it will be seen as a very positive development. I think Air Europa as part of IAG represents an opportunity for the employees of Air Europa that they would not have as a standalone. Again, I would point to what's happened with Aer Lingus. Aer Lingus as a standalone company had ambition. As part of IAG, not only have they been able to deliver on that ambition, but they've been able to do so much, much faster and also on a scale that would have gone beyond anything that they could have thought possible on their own. I see this as a very positive development.
We will clearly wait to see and interact with the relevant groups when appropriate. Where they sit, I've known Air Europa personally for over 20 years. I've flown with them many times. It's a good airline. We see it, in terms of performance, being consistent with what we've done with Aer Lingus, which is a four-star Skytrax airline, as is Iberia. So it's one thing looking at them as they are today. It's another thing looking at them as they will be in the future. My personal experience with the airline has been very positive. We think it's, as I said earlier, a great opportunity for Air Europa and a great opportunity for IAG.
Thank you very much. That does conclude our conference for today. Thank you all for participating.
Okay. Can I just say thank you. As I mentioned earlier, we will give you some further flavor in relation to this when we see you on Friday of this week at Capital Markets Day. Thank you for joining us this morning, and we look forward to seeing you on Friday.
Thank you very much. That does conclude our conference for the day. Thank you for participating. You may all disconnect.