Monday 11 December 2017

Aer Lingus's big brother

The Etihad boss has made his plans for the Irish airline clear, and by keeping rivals at bay, both stand to gain from a tie-in

BY snapping up a 2.9pc stake in Aer Lingus, Etihad boss James Hogan has made his intentions about the former state-owned carrier crystal clear.

Five-and-a-half years after it was originally floated on the Stock Exchange, it seems as if the battle for control of Aer Lingus has finally begun. The company was barely a wet day in the private sector before Ryanair, its main domestic competitor, struck.

Taking advantage of the fact that the shares had been under-priced in the flotation, Ryanair launched a first bid at €2.80 a share, which valued the whole of Aer Lingus at €1.5bn. That bid was rejected by shareholders.

Then in 2008 Ryanair launched a second bid at just €1.40 per share. That bid was also rejected by Aer Lingus shareholders. Further complicating matters was the ruling by the European Commission in 2007 that Ryanair could not acquire the whole of Aer Lingus.

This ruling was upheld by the European Court of Justice in 2010. However, the ruling allowed Michael O'Leary's firm to retain the 29.8pc Aer Lingus shareholding it had already accumulated.

The result for the past six years has been deadlock with Ryanair on one side ranged against the State, which retained a 25.2pc Aer Lingus stake after the flotation, and the airline's employees with a 14.9 stake.


While both camps were strong enough to block the other, neither had sufficient shares to win outright control.

Late last year, the first signs emerged that the deadlock might be about to break at Aer Lingus. Just before Christmas, the employee stake was distributed to individual serving and retired staff members.

Then in February, as part of a wider programme of state asset sales, the Government announced it was seeking a buyer for its Aer Lingus stake.

With Ryanair excluded from selection, a new player would have to enter the game. That player was Etihad, the national airline of the Gulf state of Abu Dhabi.

Etihad, which was founded as recently as 2003, has been an interested observer of events at Aer Lingus for a long time.

It appointed its first Irish representative as far back as 2007, while in 2008 it became one of the sponsors of the All-Ireland Hurling Championship. With daily flights between Dublin and Abu Dhabi, Etihad has worked hard over the past five years to nurture its Irish links.

Even before the Government put the State's Aer Lingus shareholding up for sale almost three months ago, Etihad had made it clear that, in the event of it being sold, it was a potential buyer with a spokesman stating it was "monitoring" the situation.

A possible template for an Etihad/Aer Lingus tie-up is provided by Etihad's investment in low-cost German carrier Air Berlin last December.

After acquiring an initial 2.9pc stake in Air Berlin, Etihad increased its shareholding to 29pc just before Christmas.

Etihad now has two seats on the 17-man Air Berlin board with Mr Hogan being vice-chairman. Soon after the deal was consummated, Air Berlin announced it would be switching its Gulf hub from Bahrain to Abu Dhabi.

The two airlines also announced a code-sharing agreement, which would allow passengers who had booked with one airline to travel on flights operated by the other.

Aircraft orders

In March, the two airlines announced they would combine their orders for Boeing's new 787 Dreamliner. This will see Etihad and Air Berlin share infrastructure, pool maintenance and develop joint training programmes for the new aircraft.

With a combined 56 firm orders and options for a further 25, Etihad/Air Berlin is the single biggest customer for the 787, the long-range passenger aircraft that is vital to Boeing's future.

If Etihad were to purchase the State's Aer Lingus shareholding, it is not difficult to envisage the two airlines also combining aircraft orders.

By teaming up with Etihad -- which in July 2008 placed a massive order for 205 aircraft with a combined list price of over $43bn -- Aer Lingus would be in a better position to maximise the discount it could obtain from the aircraft manufacturers Boeing and Airbus when buying new aircraft. While there are some superficial similarities between Air Berlin and Aer Lingus -- both were first floated in 2006 -- the differences between the two airlines are probably more important.

For a start, carrying over 40 million passengers a year, Air Berlin is a much bigger airline than Aer Lingus, which carried just 9.5 million passengers last year.

As against that, the Aer Lingus balance sheet, with net cash of €320m, is much stronger than that of Air Berlin, which had net debts of over €640m before the Etihad deal.

While Etihad paid just €73m to increase its Air Berlin stake from 2.9pc to 29pc, it also agreed to lend the German airline up to a further $255m over the next five years to buy new aircraft.

Another important difference between the two airlines is that, while Air Berlin has been consistently loss-making since its flotation, Aer Lingus has been turned around under its current boss Christoph Mueller and has recorded pre-tax profits of €84m in 2011.

However, for a Government desperate to avoid an outright takeover of Aer Lingus by one of its rivals -- something that would almost certainly be quickly followed by the disappearance of the Aer Lingus brand along with its Heathrow slots -- cutting a deal with Etihad has a lot of attractions.

As a non-EU airline, Etihad is barred from taking majority control of Aer Lingus, while as a Middle East-based carrier its main focus is on long-haul, meaning that there is only limited overlap with the Aer Lingus flight schedule, which is predominantly short-haul.

This means that politically unpalatable route closures and job losses could be kept to a minimum.

An Etihad tie-up with Aer Lingus might also suit Ryanair. The last thing Michael O'Leary wants is one of his major European rivals, such as Willie Walsh's IAG, getting behind the controls at Aer Lingus.

Far better to allow a non-EU airline, such as Etihad, to assume the role of Aer Lingus' big brother instead.

Even better, as Etihad is prohibited from acquiring Aer Lingus outright, Ryanair gets to keep its blocking 29.8pc stake.

INDEED Mr Hogan, whose forebears come from Co Tipperary and who visits this country regularly, has met Mr O'Leary on some of his previous Irish trips. Could the two men come to a mutually-beneficial accommodation on Aer Lingus? Stranger things have happened.

In the meantime, Mr Hogan will have to begin to earn a return on the huge investment Abu Dhabi's ruling Al Nahyan family have made in his airline.

It was not until 2011 -- more than eight years after it was first founded -- that Etihad recorded its first profit, issuing a 30-word statement on February 9, announcing earnings before interest and taxation of $137m and total sales of $4.1bn.

Unfortunately, the statement provides no information on the state or composition of the Etihad balance sheet.

Sparse as it was, the February 9 statement represented a major step forward by Etihad when it comes to disclosure.

In 2010, it issued a 33-page 'business review' that incredibly managed not to disclose its sales, profits or borrowings.

What the document did reveal was that Etihad carried seven million passengers in 2010. Aer Lingus carried 9.3 million passengers the same year, making it -- at least in terms of passenger numbers -- a bigger airline than Etihad.

Irish Independent

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