Aer Lingus and Iberia-owner IAG and Air Europa are looking at alternative ways to work together, with a deadline set for the end of January, after they cancelled a takeover deal more than a year after it was struck.

IAG, which also owns British Airways, said today it would pay €75m to Air Europa's privately held Spanish owner Globalia.

"IAG has also reached an understanding with Globalia to evaluate, before the end of January 2022, alternative structures that may be of interest to both companies and offer significant benefits for their shareholders, customers and employees," it said.

IAG had announced plans to buy Air Europa from Globalia for €1 billion in 2019, but the price was cut in half this year after the airline industry was sent into a tailspin by the Covid-19 pandemic.

The British airline group this week said it was set to cancel its takeover of Air Europa after European regulators indicated they would not allow it to go through without further concessions.

IAG said it would pay €35m, on top of the €40m break-up fee, after agreeing that the amount would be used to reduce any future purchase price if a new deal is reached and to avoid litigation.

European competition regulators were concerned that the takeover would reduce competition in the Spanish domestic market and on international routes to the country.

The remedies offered by IAG - to give up 13 short and medium-haul routes and two long-haul routes at Madrid and Barcelona airports - were not enough to assuage the concerns.

"It is very disappointing that we have had to terminate the current agreement to acquire Air Europa but the decision makes sense due to the market conditions, the deep crisis resulting from Covid-19 and taking into account our desire to maintain a disciplined approach to capital allocation," Luis Gallego, IAG's chief executive, said.

"However, we have committed to analyse alternative arrangements with Globalia that could deliver significant benefits. In the same way, we will continue to work with the Spanish Government to guarantee the connectivity of Spain and the development of the Madrid hub," the CEO added.

As well as BA and Iberia, which is the market leader between Europe and South America, IAG also owns Barcelona-based Vueling and Level.

"The in-depth analysis carried out during the phase II investigation indicated that the merger would have negatively affected competition on some domestic, short-haul and long-routes within, to and from Spain," said European Commission Executive Vice-President, Margrethe Vestager who has responsibility for competition.

"Our assessment fully took into account the impact of Covid restrictions on the markets affected."

"IAG offered remedies, but taking into account the results of the market test, the remedies submitted did not fully address our competition concerns. Competitive transport markets offer connectivity with a wide offering of affordable flights."

"This should be preserved for when demand returns fully and travelling picks up once again."