IAG initially agreed to pay €1.0 billion just months before the Covid-19 pandemic broke out.
At the beginning of 2020 IAG said it had reached an agreement to cut that price in half and delay payment for six years, but the continued difficulties that airlines are facing have scuttled the purchase.
“Unfortunately, because of the devastating effect of the pandemic, the conditions are not favorable” for the deal to go through as is, said IAG chief executive Luis Gallego.
But as “Air Europa operations are very important from a strategic point of view” for IAG it would look at other ways they could cooperate, he said.
Air Europa’s current owner, Globalia, declined to comment when contacted by AFP.
IAG already owns two leading Spanish airlines, Iberia and Vueling.
It had hoped the acquisition of Air Europa would allow it to expand routes to Latin America and the Caribbean.
The deal faced potential objections from European regulators as it would eliminate competition on certain routes.