Aer Lingus: Dublin-Heathrow route could soon be IAG monopoly
Willie Walsh's IAG airline group could conceivably end up being the only operator between Dublin and London Heathrow because of the way the European Commission assesses airline mergers and takeovers.
IAG is expected this week to make another indicative offer to buy Aer Lingus, raising its possible bid for the Irish airline from €2.40 to between €2.50 and €2.60 a share.
At €2.60 a share, a deal would value Aer Lingus at just under €1.39bn. It would see Ryanair's 29.8pc stake valued at €414m, more than the €407m it paid in total for its stake. The Government's 25.1pc would be valued at €348m.
Activist investor Crystal Amber, which owns 2.8pc of Aer Lingus, has said that IAG could need to pay as much as €3 a share for Aer Lingus.
But analysts think the figure is not realistic and that the acceptable ground lies somewhere between the €2.50 and €2.70 a share level. The Government declined to comment on the specifics of the bid because the Takeover Panel has now deemed Aer Lingus to be in an offer period.
However, the Department of Transport said it is "continuing to manage its shareholding in a responsible manner to protect the State's interests and with the aim of maximising the value of the shareholding".
However, the Department will undoubtedly seek assurances about connectivity between Dublin, Cork and Shannon airports and Heathrow if it is to throw its weight behind a deal.
The European Commission would probably assess a possible takeover on a number of levels, including how it would affect air travel competition between Ireland and London, and specifically Dublin and London, rather than examining competition at specific airports such as Heathrow.
That's one of the criteria on which it assessed the last Ryanair effort to buy Aer Lingus.
The competition watchdog could look for signals that other carriers would be interested in flying between Dublin and London, for instance, rather than Dublin and Heathrow per se. IAG could also offer to yield some Heathrow slots to rivals, however.
With Ryanair already serving airports including Stansted (its biggest base), Gatwick and Luton from Dublin, and Flybe and CityJet serving London City Airport, there's a possibility that the European Commission might not have an issue with British Airways and Aer Lingus, as part of IAG, commanding all passenger traffic between Dublin and Heathrow.
In 2013, the latest year for which full-year figures are available, 1.66 million passengers flew between Dublin and London Heathrow.
There were 975,000 between Gatwick and Dublin that year and 726,000 between Dublin and Stansted. Just 169,600 flew between Dublin and London City Airport.
Aer Lingus may end up a spinster if it rejects IAG proposal, analysts warn
Aer Lingus is unlikely to be approached by any other potential suitor in the medium to long-term if it rejects IAG's takeover bid, analysts believe.
They also predict that while Aer Lingus has a reasonably strong cash position now, that buffer will come under pressure as it starts a fleet renewal programme in the next few years.
"Aer Lingus has benefited from a capital expenditure holiday," said Davy Stockbrokers analyst Stephen Furlong, who suggested it would be "unwise" for the Aer Lingus board to reject a third approach from IAG.
He believes a bid of around €2.50 a share should be sufficient to give it a decent chance of success.
David Holohan, the head of research at Merrion Capital, said he thinks that a range between €2.60 and €2.70 would focus the minds of the Aer Lingus board, which is headed by chairman Colm Barrington.
Ryanair, meanwhile, is awaiting the outcome - probably this week - of a UK Court of Appeal ruling regarding its Aer Lingus stake. It's already been told by the UK's Competition and Markets Authority that it has to cut its stake to no more than 5pc, but appealed that.