In the very near future, Iberia should present an offer to purchase Spanair, the company owned by Scandinavian travel and airline group SAS. The company has been the main candidate in the running to acquire Spanair since Marsans gave up its bid. On 14 February, 2008, the company notified the Spanish Comision Nacional del Mercado de Valores (CNMV) as the board of directors authorised it to present, along with Spanish company Gestair, a purchase offer to SAS for 100% of Spanair's shares. So a new company joins as a partner in the operation and the intentions of Iberia over Spanair have been secured.

The official note shows that the offer follows the purchase schedule established by the SAS Group in this process. Nevertheless, the offer will be subject to the fulfilment of several conditions that Iberia did not specify. Iberia enlisted the services of Morgan Stanley in order to formalise the purchase offer.

About the companies

Spanair is Iberia's main competitor on flight services between Europe and Latin America. It was founded in 1986 by the owners of the Marsans group, operating as a charter company with only two aeroplanes at the beginning. The company is now a regular operator with 65 aeroplanes. The current owner of the company's shares (100%) is the SAS Group. In 2007, Spanair registered losses of SEK295m (£24m), impelled by the losses of SEK204m (£16.6m) in the fourth quarter, as opposed to the gains in 2006 of SEK237m (£19m). In addition, net profit was decreased in 2007 to €67m (£50m), almost seven times on average than the previous year.

Iberia has an aggregate turnover of more than €5bn (£3.5bn). In addition, Iberia represents an aggregated market share of around 50% with investee companies such as Clickair and Air Nostrum. However, the market share could be increased to 70% when the purchase plans become successful and competition authorities approve the transaction. Moreover, Iberia could reach higher market share in certain services, such as the shuttle service between Barcelona and Madrid. It is noteworthy that Iberia has already captured the market share for this particular service, followed indeed by Spanair.

The new partner in the transaction is the company Gestair, which has a turnover of €209.5m (£158m). This company is a Spanish airline specialising in executive and private aviation.

Depending on the analysis of the companies' aggregate turnover implied in the definitive offer, the compulsory notification will be submitted either to the European Commission (EC) or to the National Competition Commission in Spain, according to the provisions set forth in EC Merger Regulation (Council Regulation (EC) No 139/2004) and Spanish Competition Law.

Resolving the competition issues

One of the main difficulties which Iberia will face in this operation is the authorisation by competition authorities. Iberia will be required to notify the undertaking concentration to the competition authorities (either at European or national level, as mentioned), due to (i) increase of quota market percentage established in the Spanish competition law; or (ii) an aggregate turnover higher than the limits set forth in the EC merger regulation. The authorisation of competition authorities will set whether the operation is approved, forbidden or approved under restrictions.

Taking into account the circumstances of the companies, it is rather likely that in the event that the purchase is approved, Iberia should adopt strict restrictions. The restrictions might be settled considering the high market quote which Iberia would enjoy after the purchase of Spanair. Experts in the market have analysed that even if Iberia reduced half of the routes of Spanair, the resulting group would have a market share of around 60%.

It is predicted that the shuttle service between Barcelona and Madrid could yield Iberia with 80% of the market, leaving Air Europa as the only alternative to the airline, the third provider in the market of this service.

One of the main arguments Iberia will use in order to persuade the competition authorities about the advantages that this deal might bring to the market consists of the new high-speed train between Barcelona and Madrid that will come into service on 20 February this year. The new train line is deemed as a direct competitor of Iberia focused on the shuttled service of the airline. In this sense, when considering these two services like substitutes alike, the relevant market structure in this service would be broader and consequently market share would decrease. It is relevant to mention that intermodal competition is admitted nowadays in transportation activities by the competition authorities.

The competition authorities use criteria such as the market position of the undertakings concerned and their economic and financial power, the alternatives available to suppliers and users, their access to supplies or markets, any legal or other barriers to entry, supply and demand trends for the relevant goods and services (like, for example, the existence of a limited number of slots, as it is the case in the Canary Islands), the interests of the intermediate and ultimate consumers.

Thus, the competition authority will analyse the deal, taking into account the disadvantages and disturbance of the competition and balancing them with the advantages, such as contribution to enhanced development of technical and economic progress provided that it is to the consumers' advantage in offering more choice – and higher quality of service – for less money, without forming an obstacle to competition.

In this sense, it seems difficult to foresee that consumers will obtain more choice and higher quality services for less money after the deal. Especially taking into account that Iberia will not offer several of the services currently provided by Spanair, in order to limit the share of the resulting market. Iberia stressed that the company wants to maintain its leadership in the route service between Madrid and Barcelona. However, it is probable that the competition authorities will analyse each route on service to make a decision.

Juan Ignacio Alonso is managing partner and Irma Cebrian an associate at Salans in Barcelona.