Wednesday 17 December 2008

Ryanair Bid for Aer Lingus

OK, so the Ryanair bid for Aer Lingus is old hat at this stage, even the second offer, which, based on Aer Lingus' current share price of €1.45, is obviously a long way short of its original offer, which was made at €2.80. It is a sign of the times and the amazing change in fortunes of the Irish government in the intervening two years that the government is now 'contemplating' accepting an offer that is almost 50% of the last one, which it deemed to be inadequate.

In case you're out of the loop on the current Ryanair bid for its rival Irish airline, here is a brief recap from France 24.

"Irish low-fare airline Ryanair said Monday it had launched a 748-million-euro (950-million-dollar) offer for rival Aer Lingus, in which it already has a near 30-percent stake.

The offer is a renewed bid by Ryanair after the group was refused ownership of Aer Lingus in 2006 on competition grounds.

"The board of Ryanair proposes to merge the two airlines into one strong Irish airline group under common ownership," Ryanair said in a statement.

It added: "Both airlines would operate as separate companies, with distinctive brands, thereby preserving the best features of both."

Ryanair failed in a bid to buy Aer Lingus in 2006 after the latter had been partly floated on the London and Dublin stock exchanges.

The bid had faced stiff opposition from major Aer Lingus shareholders, including the Irish government, company employees, pilots and their pension fund.

In December 2006, Ryanair withdrew its takeover bid after European regulators launched an in-depth competition probe.

The European Commission vetoed the takeover on the grounds that the merger of Ireland's two biggest airlines would have given the combined carrier a crushing grip on 35 routes."

The question we would have to ask, as an overseas property portal, is obviously whether a merger of our two main airlines is in the best interests of Irish travelling consumers or not. When all is said and done it is difficult to see how a single airline entity, particularly one as focussed on cutting costs as Ryanair is, could do anything other than remove all that is good in Aer Lingus and leave just a hollow shell.

You have to hand it to Michael O'Leary, he's a hell of a businessman - whether you love him or loathe him. He and his team probably deserves a lot more credit than they've ever been given for taking Ryanair from the bottomless money pit that it had been into one of the world's most profitable airlines (one of very few that actually makes a profit). But for all that you would have to remember that, being such a canny businessman, O'Leary isn't chasing Aer Lingus for the good of his health or simply to offer more people cheaper flights. It is widely known that all he wants out of this deal is access to Aer Lingus' more lucrative landing slots, particularly at currently impregnable UK and US airports.

O'Leary understands better than anyone that an airline only works if it's got a 'destination'. In Dublin, and particularly London, he's got two such destinations that will attract traffic. He also understands that Dublin will probably attract proportionally less traffic in the coming years, whereas cities like London and New York will hold their own a lot better. In tougher economic times Ryanair could actually make hay offering cheap flights to main hub airports as no other airline can match its low cost base. Unfortunately for O'Leary, his current London hub is Standsted, which with the best will and cheapest flights in the world is not the London airport to which most people wish to fly. He needs access to Heathrow, and Aer Lingus is the key to this access. At current market valuation this would seem like a very opportune moment to make a predatory bid. Although Ryanair has been absolutely slaughtered on its 30% stake in Aer Lingus, most of which was purchased between €2.50 and €2.80 per share, it has very deep pockets and will simply write it off as an investment in the future. If O'Leary can convice the government to sell its 25% share close to current values he would consider that Ryanair has, overall, made a very wise investment. And he'd probably be right.

The upshot would be that we would initially end up with a schizophrenic Ryanair, keeping costs down assiduously in its original entity and firefighting the unions on the Aer Lingus side. This would obviously not be good for the Aer Lingus side of the equation and you can be sure that this portion of the company would be radically restructured. Eventually it would be subsumed into Ryanair, with the excuse that it was not profitable as it stood. Aer Lingus would exist in name only and Michael O'Leary would have achieved the object of his unquenchable lust - Ireland's flagship carrier - the bane of his life in his early years at Ryanair. What a trophy.

With the best will in the world there is a certain cheapness and nastiness about Ryanair, which O'Leary admits probably reflects his own personality somewhat. Having that ethos seep into Aer Lingus would not be an attractive prospect. At the moment we have a balance - cheap and cheerless v's more expensive but with at least a passing nod to customer service. The two can, and should be allowed to, survive side by side.

Aer Lingus is by no means perfect, but for all that it is Aer Lingus and if its ownership should ever transfer to Ryanair it will be Aer Lingus no more, and that would be a huge loss to Ireland. The country needs a strong Aer Lingus as much as it needs a strong Ryanair. What we need is for the two of them to compete viably for routes to bring extra passengers to and from Ireland.

As an aside, Ryanair will be absolutely cock-a-hoop that it has won its battle against the European Commission (another of O'Leary's foes) on the terms of its agreement with Waloon regional airport, Charleroi (usually referred to by Ryanair as Brussels). You can see a report on this from RTE here.

"In its judgment the Court of First Instance said: 'The Commission's refusal to examine together the advantages granted by the Walloon region and by Charleroi Airport, and to determine whether, taken together, those two entities acted as rational operators in a market economy, is vitiated by an error in law.'"

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