Exclusive-Turkey’s surprise Air Europa deal came down to one key thing: control

By Inti Landauro, Andres Gonzalez, Joanna Plucinska and Ceyda Caglayan

SEVILLE/LONDON/ISTANBUL (Reuters) -Turkish Airlines’ surprise deal for a stake in Spanish carrier Air Europa, outlasting European rivals Lufthansa and Air France-KLM, was in large part down to its willingness to share control of the carrier with the airline’s Hidalgo family owners, four sources told Reuters.

The deal, a rare stake inside Europe by a non-European carrier, comes as airlines are looking to consolidate the continent’s fragmented market and snap up smaller struggling operators like Scandinavia’s SAS and Italy’s ITA Airways.

Air France-KLM and Lufthansa, however, wanted more control of Air Europa, the sources close to the deal said. Turkish Airlines – looking to boost its global reach and with deeper pockets and political backing – was willing to stick with a smaller stake.

Turkish Airlines has agreed to invest 300 million euros ($355.11 million) in convertible debt, equivalent to a stake of 25-27% in Air Europa, Turkish Airlines’ Chairman Ahmet Bolat said on Wednesday, with no intention to increase that stake.

The crunch factor in talks – previously unreported – points to Turkish Airlines’ willingness to yield influence in order to gain a toehold in Iberia, which opens up important and fast-growing routes to regions such as Latin America.

A source with knowledge of the deal told Reuters that Lufthansa and Air France-KLM both demanded “a path to control” within a few years, which the Hidalgo family didn’t want to accept. The Turkish deal was a “better fit”, the source added.

Three other sources confirmed the issue of a controlling stake prompted both Air France-KLM and Lufthansa to drop out of the deal. One of the sources said Air Europa’s valuation of up to 1.2 billion euros was also seen as too high.

Lufthansa did not respond to a Reuters request for comment.

An Air France-KLM spokesperson said the carrier dropped out as no agreement on key elements could be reached with Air Europa’s owner Globalia, without commenting on whether it wanted a majority stake.

Globalia’s Javier Hidalgo, the son of chairman Juan Jose Hidalgo, declined to comment when approached by Reuters.

The deal with Turkish Airlines is unconventional – it’s rare for non-European airlines to take a stake in European carriers, particularly because European Union rules prevent them from taking majority ownership in an EU airline.

Air Europa was always a complex case to navigate in competition terms given British Airways owner IAG’s 20% stake, while the benefits for Turkish Airlines are less financial and more about geopolitics and connectivity, analysts and executives said.