The European Union is preparing a review of airline ownership rules to prevent foreign investors from gaining effective control of carriers, an EU official said, a move that could complicate U.S. bids for low-cost airline easyJet EZJ.L.
The possible result of the EU review, previously unreported, would "protect strategic autonomy" to ensure control of regional carriers remains within the bloc, the official said. It comes amid a bidding war between two U.S. investment firms for the control of major European budget airline easyJet, which is likely to test the limits of EU rules that demand majority local ownership and control.
Broader questions for airline ownership models
Airline ownership restrictions are common worldwide because governments see them as strategic assets, although that has prevented consolidation and made some airlines more vulnerable to shocks such as the Iran war.
EasyJet is headquartered in Britain but it relies on EU licences to operate bases and routes across the bloc. It has capped non-EU ownership at 49.5% to comply with EU rules post-Brexit.
Industry insiders have said its U.S. suitors could gain full economic control of the company, while using EU proxies to satisfy current regulations, while a partnership with a European airline group would face antitrust scrutiny.
Apollo has until August 7 to formalise a deal and has not yet disclosed how it plans to comply with the regulations.
Castlelake's offer would hand 51% ownership to a vehicle comprising former Malaysia Airlines CEO Peter Bellew and senior industry executive Mark Breen, both EU nationals, and potentially other undisclosed investors.
New regulations to prevent these trust structures would leave open questions about ownership structures in other airlines such as Wizz WIZZ.L and Ryanair RYA.I, and would likely take years to be approved, said aviation analyst James Halstead.
Potential impact on ownership structures across Europe
The official said that the review, likely in the autumn, would look to clarify which kinds of corporate structures were allowed, especially around control and ownership.
The official said Apollo, Castlelake and easyJet had not spoken to the European regulators about the details of their proposed deals.
EasyJet, Castlelake and Apollo declined to comment.
Goodbody Stockbrokers analyst Dudley Shanley said the share drop shows investors are concerned the review may delay or block the potential easyJet takeover deal, though the latter is unlikely.
"The issue seems to be that while the two bidders seem willing to allow 51% of the voting rights to remain with European investors, the EU is concerned that the effective control of the company would be outside of the EU," he said.
Shares fall as Apollo and Castlelake bids face scrutiny
EasyJet shares, which have soared in recent months on rising hopes of a deal, fell as much as 15% after the Reuters report and were on track for their worst day since late 2021.
"This is to ensure that foreign investors don't have full control," the official told Reuters, asking not to be named due to the sensitivity of the matter. "We need to make sure we have sufficient headroom when it comes to control."
EasyJet earlier this month backed a £5.7 billion ($7.65 billion) offer by Apollo Global Management APO.N, which trumped an earlier £5.5 billion bid by Castlelake, but did not explain how it plans to meet EU majority ownership requirements, a key hurdle for any non-EU acquisition of a European airline.
If the deal went through, it could set an important precedent for European airlines, opening the door to private equity buyouts in a closely regulated industry where takeovers usually involve another carrier, often with government backing.
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