IAG's shares climb after Air Europa deal ditched, analysts see TAP as next target

British Airways owner IAG's IAG shares rose more than 7% on Friday, after the company's strong second-quarter performance and its move to scrap a proposed takeover of Spanish airline Air Europa.

IAG's results outshone rivals which have had a more challenging second quarter marred by rising costs and a slow down in so-called "revenge travel" demand where people rushed to take foreign trips just after the pandemic.

The company's decision to abandon the Air Europa deal, which faced complex competition issues, was seen as a positive step.

"We had seen it difficult to envisage regulatory approval for this deal ... and find this development unsurprising," said Neil Glynn, director of airline industry analyst AIR Control Tower.

IAG shares were up 7.5% at 1035 GMT, topping London's benchmark index CURRENCYCOM:UK100 in contrast to other airline shares which have struggled.

IAG Chief Executive Luis Gallego on Thursday said the Air Europa deal was no longer in shareholders' interests after the European Commission said IAG's proposed concessions were not enough.

The European Commission in a statement said it took note of IAG's decision.

"Our in-depth analysis indicated that the merger would have negatively affected competition on a large number of domestic, short-haul and long-routes within, to and from Spain on which the two airlines compete closely", EU antitrust chief Margrethe Vestager said

"The remedies submitted did not fully address our competition concerns", she added.

IAG had announced it would buy out the 80% of Air Europa it did not already own for about 400 million euros. JP Morgan analysts said IAG would also save about 350 million euros in break-up fees, which could mean higher shareholder returns.

IAG's decision to drop the Air Europa deal was seen as negative by some analysts who were hoping for more consolidation, but there was still optimism about the group's strategy for the remainder of the year.

"Clearly, Q3 will be another test for the resilience of pricing and IAG doesn't guide on forward yields, but lower capacity growth and 'continuing strong demand' should bring comfort for now," analysts at JP Morgan said.

IAG's second-quarter operating profit of 1.24 billion euros ($1.34 billion) beat market expectations of 1.08 billion euros, driven by demand for travel in its primary North Atlantic market.

"This is a very solid set of results from IAG especially in the context of the profit warnings from Air France and Lufthansa which had investors speculating about a profit warning from IAG," Goodbody analyst Dudley Shanley said in a note.

WHAT'S NEXT FOR IAG?

Analysts and airline industry executives have long pointed to Portugal's national carrier TAP as the next potential takeover target on the European landscape, especially now that the European Commission has approved Lufthansa's stake in Italy's ITA Airways.

But political changes in Portugal have delayed a potential sale. Lufthansa LHA, Air France-KLM AF and IAG have all expressed interest, raising expectations that an offer for the carrier could emerge this year.

Industry executives have called for further consolidation in Europe's aviation industry as larger, more stable groups like Lufthansa and IAG compete with mid-sized national carriers and growing budget carriers like Wizz Air WIZZ and Ryanair RYAI.

($1 = 0.9258 euros)