IAG Shares Down 7% On BA Demerger Rumour – Is This Right?

International Consolidated Airlines Group SA (LON: IAG) shares are down 7% in London this morning. The cause seems to be the realisation that European Union rules could mean that IAG has to demerge BA from the group. It’s possible to view this as an over-reaction.

The fuss started when HSBC released analysis on IAG last week, The weekend papers have then digested this and so the IAG share price reaction this morning. The base problem is that the European Union has certain rules about ownership of airlines that operate within the EU.

Flying in and out of the EU, those airlines can be owned by anyone. But if you’re going to fly within the EU – from Paris to Munich say, just as an example – then the airline must be owned and controlled within the EU. There are little get-out clauses for flights that are then going to go outside the EU and so on but the base calculation is that if you’re going to be a within the EU airline then you’ve got to be owned inside the EU.

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The reason for this is really just that the Americans do something similar over there and no one is ever going to accuse the EU of being less stupid than the US. Not successfully at least.

The effect though – this means that 50% of the shares of an airline have to be owned by folk inside the EU. Easyjet has got close to falling foul of this rule in recent years. Ryanair, being Irish, doesn’t really have this problem. The UK is now no longer in the EU, a large portion of IAG’s shares are owned by Brits, a result of IAG being that merger of BA and Iberia among others.

So, in order to be able to continue to run those inside the EU flights IAG needs to make sure that 50% (plus one share) of the company is owned by EU folk. Not, as now, by that large chunk of Brits. The only way anyone can see this actually being possible is to float off BA as a separate company onto the London Stock exchange. There would be a natural desire among British IAG shareholders to take the BA part, not the Iberia part. It might also be possible to skew the allocations to make that happen. IAG then continues as an EU airline shorn of the British shareholders.

Well, OK. But that then cuts across the base strategy of IAG, which is to integrate those varied brands into the one more cohesive whole. This is what IAG has been working toward for years. Thus the share price drop at IAG as those plans get wrecked by the EU spanner in the works.

As a trading position, this leaves us wondering about the reality here. Would a BA freed of the corporate HQ – and EU rules – thrive? Or does the implosion of the declared strategy mean a loss of value to shareholders? The IAG price is likely to bounce around as the market struggles to calculate the end effect here.