(Bloomberg) -- Spain is considering taking a direct stake in Air Europa as part of a revised plan to rescue the troubled airline after the collapse of its proposed sale to IAG SA, according to people familiar with the matter.

Under a new structure under discussion, state-backed coronavirus bailout loans could be converted into a government holding of about 40% in the carrier, according to the people, who asked not to be named while negotiations are in flux. 

IAG, the owner of British Airways and Spanish flag-carrier Iberia, would also likely acquire a stake, leaving the Hidalgo family, Air Europa’s current owners, with a small holding, the people said. The talks are ongoing and there’s no guarantee an agrement will be reached, they said.

Representatives for Air Europa, which is owned by the Hidalgos’ Globalia Corp., declined to comment, as did a spokeswoman for IAG.

Spain has guaranteed 475 million euros ($544 million) in loans to Air Europa to keep it alive during the pandemic. About 240 million euros are participatory loans convertible into equity.

Nadia Calvino, Spain’s first deputy prime minister and economy minister, didn’t rule out such a conversion to protect the public interest.

“At this stage, we are exploring all available options,” she said in an interview Friday.

Competition Concerns

One consideration is whether any new proposal would withstand European Union antitrust scrutiny. The bloc’s competition chief, Margrethe Vestager, said in December that remedies offered by IAG in the aborted transaction weren’t enough to allay her concerns over the impact on the Spanish market. 

Saving Air Europa would further Spain’s interest in ensuring its citizens access to an ample supply of routes at competitive prices, Calvino said. She said the government also wants to make sure taxpayers are reimbursed.

“Those are the two principles that are guiding us throughout this whole process,” she said.

Operating out of its main hub in Madrid, Air Europa serves about 70 domestic and international destinations. 

Latin America

For IAG, moving forward with a new deal would strengthen its ties to Latin America after Chile’s Latam Airlines Group SA opted for new partners. 

IAG originally agreed to pay 1 billion euros for Air Europa in November 2019, just before the pandemic struck. The price was later lowered to 500 million euros, then scrapped altogether in December amid EU scrutiny. 

Air Europa has relied on the government-backed loans to keep it in business as it waited for the IAG deal to reach its conclusion.

When IAG announced the scrapping of the deal last month, it said it would pay the Spanish company 75 million euros to terminate the agreement, and explore alternative ways to work with Air Europa before the end of January. 

The payment would be used to reduce any future purchase price should a new agreement be reached, IAG said at the time.

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