Monday 24 October 2016

Curious behaviour may have scared off other airlines

The antics around the Aer Lingus sale clearly shows the folly of having politicians as minor shareholders

Published 31/05/2015 | 02:30

Willie Walsh
Willie Walsh
Willie Walsh, CEO of International Airlines Group pictured earlier this week when he held a press conference at the Westbury Hotel, Dublin (Colin Keegan)

If the Ryanair board agrees to sell its 29.8pc stake, Aer Lingus will become the fourth member of IAG, the International Airlines Group, along with British Airways and two Spanish carriers, the former state airline Iberia and the low-cost operator Vueling.

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The Middle East carrier, Qatar Airways, is a 10pc shareholder in IAG and the group also cooperates closely with American Airlines, as well as with numerous other airlines around the world through the Oneworld alliance. Aer Lingus will continue to operate as a distinct company but will become the latest recruit to one of the major international groupings in an industry experiencing rapid consolidation.

At one time, each European government owned its own national airline, many of them established in the 1920s and 1930s. The governments participated, quite openly, in a fare cartel and opposed the entry of low-fare carriers. Routes were parcelled out between the government-owned airlines and fares were kept at very high levels.

The cartel arrangements began to break down in the 1980s, targeted by the European Commission and by consumer-oriented politicians. The trade unions defended the state-owned cartel, which made perfect sense from their standpoint. Fare-fixing and the prevention of competition meant a quieter life for airline staff.

The demise of the state-airline cartel signalled the launch of numerous low-fare airlines in Europe, North America and elsewhere. Most of them failed but one of the most successful was Ryanair, based here in Ireland. The state airlines faced intense competition and many governments decided to privatise them. Several national airlines went bankrupt and disappeared. Some privatised airlines have prospered while others have struggled.

The Irish Government was slow to get out of the airline business. Aer Lingus was finally privatised in 2006, by which date most European governments had exited the industry. The State retained 25pc of the shares but no meaningful control over the company's decision-making.

In the light of Thursday's government decision to sell this 25pc stake, it is fair to ask what useful purpose was served by retaining an interest without influence. Subsequent to the 2006 privatisation, Aer Lingus re-allocated Heathrow routes away from Shannon Airport in County Clare and suspended Shannon transatlantic flights. There were predictable protests but the government's 25pc shareholding could not prevail against the company's decisions, both of which were reversed when commercial conditions changed.

Owning 25pc of the shares in a company does not confer the right to dictate any aspect of its commercial policy. There is no excuse if anyone in Irish politics misunderstood this elementary point: it had already been demonstrated prior to IAG's initial bid approach.

There were just two plausible reasons for the Government to decline IAG's offer. The first would have been a belief that the airline, small by today's standards, would have done better in the longer term as an independent carrier. The record of small independent airlines in Europe, even of carriers free of political interference, is not encouraging.

Swissair, Sabena of Belgium, Malev of Hungary and Olympic of Greece have all fallen by the wayside. Even Alitalia, a larger operation, has struggled through numerous rescues, the latest courtesy of the Gulf carrier Etihad. Aer Lingus was itself rescued by the Irish taxpayers in the early 1990s and the 2006 flotation saw a substantial portion of the proceeds injected into the airline's balance sheet rather than into the Exchequer.

The acquisition by IAG will, according to the report of the expert panel released on Thursday, strengthen the airline's prospects through access to the marketing power of British Airways and other partners in Europe, and through the link-up with BA's partner American Airlines.

Aer Lingus has been building its long-haul business to North America: Dublin is a natural connecting point for this traffic and there is unexploited potential, particularly given the endless delays in expanding runway capacity at Heathrow. IAG cited this consideration as a key attraction of the Aer Lingus acquisition and there is no reason to disbelieve them.

As to services to Heathrow, the Ireland to London market is the biggest city-pair in Europe and the notion that IAG was acquiring Aer Lingus in order to discontinue profitable services in this key market was always implausible. The IAG subsidiary, British Airways, is not short of slots in Heathrow: they control about 350 daily slot-pairs and have never sold any.

The commitment to retain the 23 Aer Lingus slots and to deploy them on Irish routes is a promise to do something that they would have chosen to do anyway.

It is an enduring myth, dearly held by politicians lobbying for smaller airports, that routes generate traffic. In a business where mistakes in route planning inflict rapid and heavy losses, it works the other way round. Traffic generates routes.

The source of IAG's commitment to the Cork and Shannon services to Heathrow is their belief that sufficient traffic volume, at decent yields, will continue to be available.

Their commitment to the expansion of transatlantic services from Dublin is based similarly on the identification of a commercial opportunity. IAG's promises are credible because they must have been easy to make.

For any selling shareholder, a perfectly valid reason to reject an offer is the expectation that a better price might soon become available.

Whether this is realistic depends on the emergence of a second bidder without which the selling shareholder will see the price collapse when a bid is rejected. Aer Lingus shares were trading in 2011 at one-third of today's price, a figure to which they could return if potential acquirers are spurned.

In the end, there was no second bidder, but if airlines such as Air France/KLM, easyJet or Lufthansa took a look, and I imagine they must have done, they will have been scared off by the curious behaviour of the seller.

Instead of lauding the virtues of the item for sale, the political system, and the trade unions, spent the best part of six months seeking to impose constraints on the purchaser. This is not the way to encourage a second bidder.

The antics and play-acting since the first offer, on December 14 last, has placed clearly on display the folly of politicians as minority shareholders. Both the Aer Lingus board and the advisers retained by the Government have indicated that IAG's final offer is a fair valuation of the shares.

In the absence of a second bidder, they are doubtless correct in this assessment. But the absence of a second bidder may have something to do with the dysfunctional performance of the politicians as shareholders. This is no way to sell a horse.

The deal is not done until Ryanair's board make their decision. Ryanair has indicated recently that the company might consider interlining passengers with other airlines, that is, affording them the facility to book through-tickets onto other carriers.

To date, most low-cost airlines have stuck with the point-to-point model, so connecting passengers must buy two separate tickets.

If this changes at Dublin, the potential feed to Aer Lingus long-haul services could double in the years ahead. An interlining deal between Aer Lingus and Ryanair would be a considerable bonus, on top of the extra marketing benefits from the IAG tie-up.

Sunday Independent

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