The coronavirus crisis couldn't have come at a worse time for the Hidalgo family and their Majorca-based airline, Air Europa. Shortly before the crisis hit, Air Europa was flying high enough that its shareholders could benefit from seven-figure dividends. The total dividend payout, it has been claimed, was 35 million euros, and it was for another part of the gradually disappearing Globalia empire as well - the Viajes Halcón travel agency.
The shareholders were members of the Hidalgo family plus Abel Matutes, a one-time Spanish foreign affairs minister (under Aznar between 1996 and 2000) and the owner, along with his family, of the Palladium Hotel Group. The dividend was despite Globalia having apparently returned only 32 million euros pre-tax profit in 2019. Still, there was - before the crisis - the prospect of the sale of Air Europa for 1,000 million euros to Iberia (IAG). The prospect remains, but the value is dropping by the day.
Earlier this week, Spain's transport minister, José Luis Ábalos, said that he has shown his willingness to rescue Air Europa - and it needs rescuing - but the "conditions" will be crucial. Ábalos doesn't want the Spanish government to get any flak for showing favourable treatment to a company that paid out the sort of dividends it did in February. If there is to be government help, Ábalos wants the family to put its hands into its collective pocket and "pitch in".
As it is, the Hidalgos have put in a request for 400 million euros from the Spanish government's 10,000 million euro fund for keeping strategic businesses afloat. Air Europa is the only business of a tourism nature to have applied for help from this fund. The government describes this funding as "temporary". In other words, it will have to be paid back, if and when the funding is made available. The 400 million would come on top of a 140 million euro loan from the ICO credit institute, an amount considered to be insufficient to satisfy liquidity needs and stave off potential bankruptcy.
Iberia and IAG aren't exactly in the best of financial health either, but the purchase of Air Europa continues to be on the table. The terms have, however, changed dramatically. Luis Gallego, who this week replaced Willie Walsh as the CEO of IAG, has said that the original agreement doesn't make sense in the current context. The outgoing president of IAG, Antonio Vázquez, said much the same thing on Tuesday at the last shareholders' general meeting that he and Walsh were attending as president and CEO.
Vázquez confirmed that Air Europa was still a "strategic acquisition", but the question is now how much Iberia will be willing to pay (the purchase will be channelled through Iberia). Gallego has previously said that Air Europa needs to be "cleaned" by the Spanish government before Iberia would contemplate going ahead with the purchase. The 400 million would go a long way in carrying out this cleansing, but Iberia, on top of Air Europa's mounting debts, could then potentially end up buying even more debt. Strategic acquisition or not, the 1,000 million original price is most certainly no longer justifiable; even 50% of this is looking overvalued.
There is an increasing possibility that the Spanish government could end up becoming Air Europa's major shareholder almost by default. The government needs to prop up what is deemed to be a strategic asset, but the debt to operating profit ratio is set to soar to such a level that banks won't lend (they've already stopped). Iberia are likely to press ahead because Air Europa is strategic to them as well, but certainly not at any price.
But, as Ábalos has noted, there is the worry about a political and indeed social storm were the government to become too involved with a company that was paying out the sort of dividends that it was just before the crisis. On top of this, there is the mounting opposition to a Spanish taxpayer bailout of Air Europa from within the airline industry. Ryanair is one rival airline looking at how to block or at least make difficult such a rescue.
The offensive from other airlines includes harking back to what has been described as the largest fraud ever perpetrated against the Spanish state. This had to do with a matter close to the hearts of many in the Balearics - the residents' discount. In April 2017, the Audiencia Nacional high court in Madrid fined Globalia 22.7 million euros for irregularities in respect of the discount.
That case and the dividend payout clearly don't play well in the eyes of the public. The Spanish government knows this, and so does the Balearic government. For both administrations, however, an Air Europa bankruptcy would potentially generate an even greater storm because of the loss of an important player in the Spanish airline industry and all the jobs.
The Spanish government has meanwhile been keen on the Iberia purchase going ahead, as this would secure the Madrid-Barajas hub in Spanish hands, with connections to Central and South America paramount. It is these connections which are of interest to Iberia and IAG; hence why a purchase is viewed as strategic. But the problem right now is that Air Europa, which generates the bulk of its income from these flights, is unable to fly, while a long-term contraction in demand is anticipated.
Given all this, there is the huge question mark as to the value of Air Europa. This is something for Iberia to determine, while for the Spanish government there are different values to weigh up.