Friday 23 March 2018

Where next for Aer Lingus?

Willie Walsh's latest offer for Aer Lingus appears to be falling apart. Could this be a massive mistake? We asked hard nosed business leaders to cut through the waffle and explain whether a deal would be worth doing

The Aer Lingus/IAG bid is far from a done deal.
The Aer Lingus/IAG bid is far from a done deal.
John McCarthy
Michael O'Leary

Nick Webb, Sarah McCabe and Paul O'Donoghue

IAG's latest offer for Aer Lingus seems dead in the water. The airline's share price closed at €2.15 on Friday, a full 40c below the €2.55 on offer for the former state carrier.

Political considerations may have put the kibosh on any future sale to the owner of British Airways led by former Aer Lingus boss Willie Walsh. With an election just 14 months away, the sale of Aer Lingus and its impact on connectivity between Ireland and Heathrow became a political football. With the state owning 25pc of Aer Lingus, any future sale will be difficult to push through. Are we making a huge mistake?

It would be "a national tragedy" if this deal falls apart, says Conor McCarthy, who has held senior management positions with both Ryanair and Aer Lingus over the years and helped to launch some of the world's fastest growing airlines. The future of the Aer Lingus Heathrow slots after a buyout is the potential dealbreaker.

For McCarthy, this doesn't make sense.

"I can't see what is the largest route out of Dublin suddenly being closed down for the sake of a flight to Szenghdou or Ulan Bator from British Airways... British Airways has quite a decent presence on the Heathrow route, Aer Lingus has a significant presence.

"I think you could see them say, hang on, let's get a larger aircraft that can service this route so we're not doubling up on flight times, but what we will do is put on a more efficient aircraft with 240 seats or 220 seats, rather than operating aircraft with 150 seats within 10 minutes of each other.

"I think that's probably one of the attraction for Ryanair. Ryanair would see a sale to British Airways as being one which enables them to focus on the leisure and price-sensitive end of the market with a lot less pressure from a combined Aer Lingus/IAG entity.

"I don't think connectivity will suffer, not at all. It's a question of what connectivity would be added. A lot of people think a code share with another airline is enough - well that's great, but you are only getting access to their higher fares. That's really not connectivity.

"You can argue that you can connect to anywhere from Dublin, but if you are tied in to one of the major networks and you have access to their lowest fares, well now you can offer people in Ireland a really low price - and more importantly, offer people in foreign countries really low prices to Ireland and improve tourism."

Ryanair's Michael O'Leary agrees that it's not all about Heathrow.

"This obsession that without Heathrow we will lose our connectivity to the civilised world and we'll just be some kind of backwater… connectivity now arises through Stansted, through Schipol, through Frankfurt, through Paris, through the US carriers in New York and through the Gulf carriers in the Gulf," says the Ryanair chief executive

But IAG will do whatever suits IAG if it is successful in its bid for Aer Lingus, O'Leary adds.

"If IAG acquires Aer Lingus it will be run in the best interests of IAG, it wont be run in the best interests of Aer Lingus or Ireland.

"I think Ireland will be a very very small consideration in IAG's overall global business and global developments.

"We would certainly be fortunate that the current chief executive of IAG is Irish but at some point in time in the future when he is replaced by somebody English or some other nationality, I think Ireland would be a very small consideration in their strategy.

The Government has no hope of getting promises on the Heathrow slots, O'Leary believes.

"At the end of the day the only decision the Irish government can make is do you want to accept a price for your shares in Aer Lingus or not. The idea that somehow the national interest will be preserved in some other way is bogus.

"All this nonsense about getting assurances… you can't get assurances. The Irish government is in the same position as we are, it is simply a shareholder. It is against the law of takeover rules to make different offers to different shareholders. You can only make the same offer to all shareholders. So the only offer that can be made is: 'Here's a price, Irish government - do you want it or don't you?'"

Aer Lingus has 23 runway spaces at the world's third busiest airport are highly valuable. Deloitte values them between €30m and €40m each, meaning the slots alone could be worth about €900m.

While O'Leary and McCarthy believe that the slots and future connectivity will not be an issue, others in business disagree. Losing flights between London and Dublin, Cork or Shannon would have a savage impact on commerce and investment.

A host of multinationals - Pfizer, Bristol Myers Squibb, Icon, Telecity, Element Six and others - told the Sunday Independent of their concerns about the re-purposing of Aer Lingus' Heathrow slots, or if some of its less lucrative transatlantic routes are cut.

"Heathrow services over 40pc of all business travellers in the UK - and is a major stopover for international connecting flights. It is absolutely critical that senior executives in multinationals can travel here with ease," said Maurice Mortell, country manager for TelecityGroup Ireland.

"The Government, as a significant shareholder and in recognition of the threat this represents to the national interest, must reject any bid put to the board unless the contract of sale includes a clause that ensures existing services between the three Irish airports and Heathrow are protected," says Element Six's executive director Ken Sullivan. "This must be the very minimum the Government insists on."

The companies that rely on Cork and Shannon airports are particularly vulnerable, says Anne Heraty, chief executive of listed recruiter CPL. Any reduction of flights on less-profitable routes to and from Cork or Shannon "wouldn't be good for the regions" she said.

"Both have large MNCs operating out of them and there needs to be access, [a reduction] wouldn't be good for business."

Younger, more vulnerable companies are also worried. Companies like Intercom.

One of the country's most exciting start ups, it employs close to 100 people between Dublin and San Francisco.

"The direct Dublin-San Francisco route, which the Government lobbied for strongly, is having a massive impact on Ireland's viability as a EU base for Silicon Valley companies," says chief executive Eoghan McCabe.

Any promises that the Government receives from IAG will amount to no more than a weak gentlemen's agreement, he believes.

"Whatever reassurances IAG may give the Government about their plans for and interests in Aer Lingus ahead of any sale will be irrelevant once the sale is complete. They will have every right, and in fact a duty to their shareholders, to do whatever is best for the IAG business - including re-purposing Heathrow or other slots if that makes sense for them, now or in the future."

But even assuming that the issue of slots can be resolved, would selling Aer Lingus to IAG still make any sense?

"At this stage in their development Aer Lingus are to some extent landlocked in Ireland. They have attempted to break out before in both Gatwick and Manchester and to grow their business model outside of Ireland and it hasn't worked. Without a strong partner in the UK, which is their natural market, it is very hard to see how Aer Lingus could grow," McCarthy suggests.

"And without growth, it's very hard to see how they would resist an attack by one of the biggies. Whether that's Ryanair, deciding next year to double its fleet to be based in Dublin, or British Airways or Star Alliance deciding they're going to come into Dublin and do something big here, either way it wouldn't take a huge amount of pressure, without a partner, for Aer Lingus to be very heavily exposed.

IAG, he says, is absolutely the best choice for Aer Lingus of any potential owner on earth.

"IAG bring a recognition of the value that the different brands in their group offer. They own Iberia and Vuelling in Spain and have kept the two brands separate. They have kept British Airways separate to those other two airlines too.

"They recognise there is an embedded value in the national brands and they try to foster that while at the same time getting the best value from having a large airline group when it comes to buying aircraft or training their pilots or whatever in terms of cost synergies," says McCarthy.

"I still think that the proper long-term home for Aer Lingus was as part of a bigger Irish airline group, as part of Ryanair - but I've been unable to persuade the Irish Government or the European authorities on three separate occasions of that," Ryanair's O'Leary retorts.

That's something we should be thankful for, says McCarthy.

"Without any doubt I'd say IAG will be a better partner to Aer Lingus than Ryanair. It is a cultural fit. I have worked in both firms and I can tell you that the only common thing between Ryanair and Aer Lingus is the fact that they both fly planes.

"Beyond that they are completely different. I often said after I joined Ryanair that it was like joining a different industry. Very enlightening and very refreshing, but completely different in its approach to the business, investment, customer base… they are two very different entities. Within the four walls of each company, the way they work is very different."

IAG's offer is a good one for Ryanair, he adds.

"Ryanair bought in at a price which is lower than the current offer price. They have since written down Aer Lingus' value every year, so in book value terms they stand to gain a significant upside by selling it. The Competition Authority in the UK have told them they have to sell it anyway.

"They stand to gain something like €400m or €450m profit from such a disposal. Michael O'Leary is probably driving a deal on price, and I suspect he might have already done a deal. Either way, if he sells he comes out of this looking good. Not only does he sell at a good price but he sells to someone who is serving a completely different travel market to other potential suitors for Aer Lingus like Norwegian or Easyjet.

"He'd be acting differently if it was Easyjet's board looking at buying Aer Lingus."

While the sudden drop in the Aer Lingus share price on Friday indicates that the market believes that the current offer is toast, McCarthy is still hopeful a deal will happen.

"I think the €2.55 offer is very close to probably optimum. Personally, if it was my company or my shareholding, or if I was sitting in Michael Noonan's seat, I'd be asking could we get another 10pc out of them - could we do the deal at €2.75? I think there is a lot of value in Aer Lingus.

"But you also have to recognise that a year ago, shares in Aer Lingus were worth half of that price. If you were a shareholder in Aer Lingus then and someone said 'I'll give you double your money next year', you would have jumped at it.

"People forget that very easily, and I think if this offer was to go away tomorrow, most people would say that the value of Aer Lingus is likely to drop to close to 50pc. I think that's what happened in the past when there was nearly a deal done - after Ryanair's bid it dropped close to nearly €1. So it's very clearly a good price," McCarthy said.

"Only a horse trader would know whether it's the best price… at the end of the day it would be a national tragedy if people told them to go away, that we are not interested."

Local politicking and the need to get re-elected will have the biggest bearing on the future of the airline.

Sunday Indo Business

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