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 I must advise you that this conference is being recorded today, Monday, 4th 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. And I know you're all very busy, so we won't take too long with this presentation. So we're delighted to announce this morning, agreement to acquire Air Europa. And if I just take you through the transaction.
The acquisition will be I Iberia Opco handling. Sorry, holding, yes, sir, which the person Viberia and acquire 100 percent of the Air division of GLOBALIA, which is the parent company of Air Europa. The purchase price is €1,000,000,000, We see it as a bolt on acquisition. And initially, the Air Europa brand will be retained. It will increase Iberia size by about 50% and IAG by about 10% in terms of traffic revenue.
And the cost and revenue synergies that will crew will be in line with previous IAG transactions. And significantly, it will be EPS accretive from year 1 an accretive to IAG's return on invested capital by year 4. The funding for the acquisition will be with external debts and we expect closing to be in the second half of twenty twenty. And clearly, this is subject to regulatory approval. Now for those of you not familiar with, area Europa, let me just give you some, headline figures for the company.
You can see there are annual passengers here for 2018, almost 12,000,000, ASKs of nearly 34,000,000,000 66 aircraft revenues of €2,100,000,000 and an EBITDAR of 392,000,000 These figures, our Spanish cap, have not been adjusted for, I have I FRS 16, We see Aerie Europa's value carrier operating model, similar to where Lingus. And it has been a full member of Sky Team Alliance since 2010. And looking at their fleet, it currently has a fleet similar to our own aircraft, actually 8330, 200, and 300. It has been transitioning to the, Boeing 787, and the intention is to transition the fleet to an all Boeing fleet of 7 37s and 787s. They currently also have some, embraers and AT or or 70 twos, on wetley.
So we're familiar with all of these aircraft, and we see that it's been very much consistent and in line with the plans of IAG. Now GLvalia is a leading leisure and tourism group in Spain founded by Juan Jose or Pepe Hidalgo in 1971, and he is the chairman of the group. It's one of the leading leisure and tourists and groups in Spain with annual turnover of $3,900,000,000. And you can see on the right hand side of the slides, the transaction perimeter. So in effect, we're acquiring, the airline area some associated activities, but it's the airline that we're acquiring.
Air Europa was Spain's 1st privately owned company to operate domestic schedule flights when Globally acquired a majority stake in 1991. And we see this as being absolutely great news for Spain and for consumers It will strengthen and make more relevant to Madrid Hub, 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, your open network has 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.
So 24 destinations in the Americas It will improve IAG's position in the Europe to Latin American markets. This chart shows the, passenger market to share, for the trailing 12 months to August 2019. I didn't see their, IAG would go from 19% pre 26%. And just to reinforce what I said about the effectiveness of the Madrid hub, And you can see here the Hopin Wave, charts when you put the Europa Europa schedules together with the Iberia schedules at, Madrid, this will give significant strength to the hub at Madrid, giving very a significant additional choice to, consumers in Spain and bring Madrid very much into line with the other major Health Airport 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, co chairs within the group can be built up, optimizing the connectivity and the Madrid hub, aligning commercial policies and integrating Salesforce is, and also looking at the opportunities for joint business. And last but not least, using the Avios platform for loyalty as well.
So on both the cost and the revenue side, we think there's significant synergies to be achieved. And 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 4 year period, but as Willie said, we expect to be EPS accreted in year 1. And we expect to be ROIC accretive for the group by year 4.
And overall, we think the level of synergies will be commensurate with transactions of a similar size. I'll 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, we expect the transaction to move our net debt to EBITDA by about 0.3 turns. So 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 And then we've looked at the EBITDA of the target and the year 1 synergies. And when we've, worked that through, that's how we get the point 3 movement. And last but not least, Willie has mentioned the fact that we, will be funding this with external debt 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, ideas of paper.
We also have the ability to use bank loans if we think that's the right way forward. So 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. So we see this a good fit with the IG, platform and portfolio. And we believe that, we will be able to, extract significant synergies as Steve has said. So And the track records that we have in this area is very strong. Those of you familiar with us will know that we have pursued a number of transact and since we created, IAG in 2011, all of them have been, accretive and positive and we continue to, believe that there's scope for further consolidation within your And this is with the Iberia corporate structure.
So we'll come under the leadership of Luis Gallego. We will retain the Europer brand initially. The integration will be managed principally by Luis and his team with IAG. And, clearly, as a result of this acquisition, area up, but we'll leave the Sky Team Alliance. So the, triggers to the synergies will be the quick integration into the IAG platform of common services, giving area of the benefits of, the costs and scale of IAG.
We will quickly move to create commercial links between Air Europa and the other IAG operating companies. And that would also involve bringing Air Europa into our joint businesses. And then integrating the aerial profile at the existing Madrid Hook. So the transact does not require IG shareholder approval. It is subject to relevant competition approvals.
And we expect this deal to close in the second half of next year, 2020. So all in all, a good deal for IAG, a good deal for Air Europa, good for Spain and good for consumers. And so we're very confident that this is the rights move for IAG and look forward to completing the transaction in the second half of next year. So on that basis, I'll hand back to the operator and we can take some questions from you.
You. Thank you. We will now take our first question. It's from the line of Danielle Roska. Your line is now open.
Good morning, gentlemen. Congratulations on the deal. Seems to be reasonably priced. Two questions, but if I may. Number 1, you now have kind of a multitude of brands active in the Iberian market, volume, level, europa, Iberia, Iberia Express.
And could you elaborate a little bit the logic behind that? And you already said kind of retain the Are 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.
And secondly, of course, on competition authorities, you must have thought through that, and it's that you don't expect competition authorities to be a major obstacle to the combination of those airlines. Can 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, Daniel. Yeah, you're quite right. You know, 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 previously identified at IAG, and we see this as an opportunity to do that in a more effective manner at Madrid.
So we will in due course rationalize the brands that we operate, but that will be done over a period of time. And 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. But, you should take it that it's not expected that we will continue to operate with all of those brands in years ahead. We don't take the competition as ours is for granted. There will be a process that we will need to go through That clearly will be a detailed process, and we would see engagement with the authority starting immediately.
So 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, but that process clearly will take a little bit of time. And if there's any news or developments in relation to that, we will advise you, as they occur, but we're not intending to predict or to suggest any particular outcomes before we have proper engagement with the relevant competition authorities.
Thank you. We will now take our next question. It's from the line of Jared Castle. Your line is now open.
Good morning, and thank you. Can you just talk a little bit about, the balance sheet of a europa? Is the 1,000,000,000 that you're paying a clean number, or is there, some debt as well that we we gotta think about? And then Secondly, can you just give some color why now? You know, 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.
Steve here. In terms of the balance sheet of Aueroper, as Willie alluded to in his intro, the balance sheet is constructed on a Spanish GAAP basis rather than on an IFRS and, IFRS 16 in particular basis. So we've had to do work to, build up what we think the IFRS 16 adjustments would be and hence the debt. But That is the principal debt that is on the Air Europa balance sheet. Otherwise, it's pretty clean.
And on the the timing, Jared, we we had engaged, before we heard news of the delta investment, into LatAm. So it's it's just coincidence actually that, they did their acquisition of the 20 percent in LatAm and where during this, it's not driven, one by the other. So these are completely independent decisions that, just happened to have been reached in or around the same time.
Thank you. And your next question comes from the line of Neil Glynn.
Oh, good morning. If I could first ask a question with respect to Air Europe as financials to understand the starting point, because I assume that Air Europe will be held the same targets as the other opcos. So the margin was 5% operating last year, I think. Just interested in terms of the deficit to somebody and Iberia, would you consider it pretty broadly balanced between RASK and CASK? Or is it lopsided in either direction?
I calculated last of $0.06, but that may be, may or may not be correct. And then second question, clearly, Aire 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 A Europa relationship?
Thanks, Neil. I'll take the second question comment on the first and then I'll Steve comment as well. So it is intended to have a relationship with, Globally on ground handling and maintenance for a period of time. The relationship will be based on market rates. So let's say, it's a, if you like, a completely market based approach to having the relationship with them, but 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 Erlinda's results pre acquisition and post acquisition and the benefit of that accrued to Erlinda's in terms of, enhancement of all of their financial metrics once they became part of AAG.
And clearly, we see that as being, the, the path that we'll follow in relation to where you're open, but maybe Steve Futes for the moment.
I think, Neil, a few thoughts. One is, I see the opportunities on both the cost and the revenue side. So if it's neither one nor teller, I think I think it's both It's interesting the EBITDA margin for europe from the numbers we've disclosed here is about 18.6%. For IAG as a group, we're about 20 2%. So, you know, there's there's a ways to go to, to, to move it in line with the group targets.
But as, as we've said, I would expect this to be ROIC accretive by year 4. So, you know, those synergies will build up over a 4 year period. It will be revenue and cost. But ultimately, I do expect us to get to the IAG targets.
Thank you. The next question is from the line of James Holland.
Hi, good morning. 2 for me. Can you just let us know what the cost of moving from Sky team to 1 what will be? I think there's normally some sort of, cost in that. And secondly, just want to see who you actually need approval from.
Is it is it all the countries in which they operate? And and particularly, would it impact. Obviously, Spain will be one of them, but if we look at Madrid, I think it's got about the same IAG and a Europe would have about the same amount of slots as, as I IAG has a Heathrow. So am I right in thinking it's probably not an issue anywhere? Thank you.
Thanks, James. We see the cost of exiting Skyteam's no cost and in relation to the regulators. The principal ones would be the EU, U. S, Brazil, but there will be some others as well, but that would be the principal competition regulator we would need need to deal with. And, you know, 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 engagements with the regulators or to prejudge their views. On this, but we believe that there are, you know, a number of precedence that we can call on in relation to the both the scale and the type of transaction that we're proposing.
Thanks. Thank
you. Your next question is from the line of Mani Baliani. Your line is now open. Hi, can you quantify the synergies that you expect over the next 5 years? And 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, quantification of the synergies we have done details work in relation to that. But as I've said earlier, we need to properly engage with the competition regulators before we would be prepared disclose any specific details in in relation to that. I would describe your Opus performance this year as being similar to other airlines, in that clearly fuel has been a headwind for most airlines in 2019. So we don't see, we're giving you the 2018 fixed 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.
You will now take our next question. It's from the line of Malte Schulz. Your line is now open.
Hi, good morning. Also, two questions to from my side. First of all, I mean, if you look particularly on the long haul side on the route network, you have a lot of overlap with IBS is now within New Zealand, do you also acquire to sorry, intend to get out of the primary focus of just LatAm and move also maybe Iberia platform or Iberia, you're well combined into other markets Asia, for example, So I think that's my primary question. Yes.
I think it's a good point. And yes, we do see the opportunity early to strengthen the relevance of the Madrid hub and enable the new combined area rope, Iberia entity to more effectively serve Asia, and connecting Latin America to Asia for Madrid that, that had been the ambition for, Iberian, as you know, we have started flying, to ensure with Tokyo and Shanghai But I think with this combined network, I'm the, better, wave, performance that we'll get at Madrid, it will give us additional opportunities that I build on its own or in Europe, and 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 for next week? Or should we expect anything?
Yeah. No. I think, Luis, Daneco is in Madrid, but will be with us in London on Friday. And, 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. So Luis will be with us and we'll be able to give you, some, maybe not a lot more detail, but certainly give you an insight as to how he sees Iberia and managing the integration of, Air Europa.
And, he'll do that at some stage during the presentation. My team were looking at me here smiling saying that's another thing they've got to add to at the agenda for Friday. But yeah, we will do that.
Okay. Thank you.
Thank you. And your next question is from the line of Johannes Braun. Your line is now open.
Yes. Good morning. Thanks. Two questions for me. So firstly, back on the synergy, if you wouldn't quantify them, but would you tell us what the distribution between costs and revenues synergies is roughly?
And then secondly, could you you quantify any radio implementation costs that we will see over the next 5 years?
We're not going to give those today, Johannes, as I said, I I think, you know, we're 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. So we wanted to do that first And in due course, we will clearly give you more detail in relation to synergies. What I would say to you is We have done the details analysis. We're very comfortable with what it is we believe we can achieve.
We're very confident that we would deliver on that. And I would, once again, point to our track record in, in terms of how we have delivered on both costs and revenue synergies with all of the transactions that we have completed since we created IAG, and 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. So we have ambition clearly in this area. We're very comfortable that the synergies are 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
Great. Thank you.
Thank you. The next question is from the line of Mister Robertson. Your line is now open.
Morning, all. 2 quick ones from me. Firstly, you in a position to say where your Opre is in terms of its pilot and cabin crew agreements and whether the change of control could lead to any issues there? Please. And secondly, in terms of how europe is sort of rankings in things like SkyTrax, you have a view on sort of where it fits at the moment within the spectrum of performance at IAG and where it could go or something like that?
Yeah. And they have collective bargaining agreements with their, pilots and cabin crew and other staff. Those agreements are in place. You know, clearly, this will come as a surprise to the people in Are Europa. I believe it will be seen as a very positive development I think Aerie Europa as part of IAG represents an opportunity for the employees of Aerie Europa that they would not have as a stand alone Again, I would point to what's happened with Erlingus.
Erlingus as a standalone company has ambition, but as part of IAG, only has they, have they been able to deliver that ambition, but they've been able to do so much, much, much faster and also on a scale that would have gone beyond anything that they could have thought possible, on their own. So, I see this as very positive development. We will clearly, wait to see and interact with the relevant groups of when appropriate And where they sit, I've I've known area open 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 Erlingus, which is a force our SkyTrax Airline message, Iberia. And so, you know, it's one thing looking at them as they are today. It's not that they're looking at them as they will be in the future. But, you know, my personal experience with the airline has been very positive, and, we think it's, as I said earlier, a great opportunity for Air Europa, a great opportunity for our energy.
Thank you very much. And 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? Coxel Marcus Day. But 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 today. Thank you for participating. You may all disconnect.