Thursday 22 March 2018

Heathrow slot sale shows hidden value in Aer Lingus

SAS sale suggests Aer Lingus slots alone are worth €1.2bn

SAS sale suggests Aer Lingus slots alone are worth €1.2bn
SAS sale suggests Aer Lingus slots alone are worth €1.2bn
Sarah McCabe

Sarah McCabe

A pair of slots at Heathrow airport sold recently for $60m (€52m), valuing Aer Lingus' 23 pairs at Europe's busiest airport at up to €1.2bn.

The sale of the slot casts new light on IAG's bid for the airline. Former pilot Willie Walsh is offering just €1.4bn for the company, which also has €500m in cash reserves on top of its 23 Heathrow slots and a fleet of valuable aircraft.

Heathrow's runway slot pairs, which permit airlines to land and depart a plane and use Heathrow's infrastructure, are highly coveted. There are just 680 slots available in each working day at the airport.

IAG's intentions for Aer Lingus' valuable Heathrow slots have come under heavy scrutiny in recent weeks. Many are concerned that if it successfully takes over Aer Lingus, IAG will give the slots over to other more lucrative routes in its group and reduce connectivity between Dublin and London.

To allay fears, this week IAG promised that it would operate the slots on Irish routes for five years. The slot that sold was owned by Scandinavian Airlines (SAS). It was bought American Airlines.

Donal O'Neill, aviation analyst at Redburn, described the deal as "a very positive development for BA", since British Airways will have access to the slot pair as part of joint business arrangement with American Airlines.

The pair were similar to the Aer Lingus slots because they are suited to smaller aircraft and based at Terminal Two, where Aer Lingus' slots are located.

"It demonstrates the value that is embedded in the Aer Lingus offer from IAG" said one industry insider. "Even if we say the Aer Lingus slots on average are worth just €40m - that puts a value of €900m on them together. Add on its €500m in net cash and you reach the IAG offer price even before taking into account the profit multiple or its owned aircraft."

Other sources pointed out that not all slots are worth the same amount. Peak hour pairs are worth more - ones that permit an early morning arrival slot and mid morning departure, facilitating European passengers who want to connect to later international flights.

The sale of a Heathrow slot pair is a relatively rare event. Under competition law the slots are managed by an independent body, Airport Corporation Ltd, which also manages slots at Dublin Airport as well as Warsaw, Dubai and all of the other major UK airports.

Merrion Capital aviation analyst David Holohan said Heathrow slots should not be the main focus in the sale of Aer Lingus.

"If you were to break up Aer Lingus and sell it then you would get a higher amount" Holohan said. "The sum of its parts is worth more than the whole. But you could also make that argument about IAG, based on the value of its slots. Airlines don't necessarily work like that. They slot pairs are only valuable if it can sell them, and it can't, because Aer Lingus is hugely dependent on those slots. They are core to its ability to generate profit" he added. "I think Aer Lingus's shareholders will be better served by keeping the airline profitable rather than breaking it up and selling off its slots, even if the latter would give them a big one-off payment.

"If IAG can double Aer Lingus profits they will get returns over many years, so it is a question of patience and timing as much as anything."

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