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Small airlines look to the big boys in survival stakes

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Aer Lingus

Aer Lingus

Aer Lingus

Commercial air transport used to be about linking country pairs - and both regulatory regimes and airline management thinking was structured accordingly. Aer Lingus, a product of that recent history, is now looking for the way ahead in a fast-changing, highly-competitive world.

Aer Lingus - being peripheral in Europe by virtue of aviation's highly-regulated history - has been working to make the best of its two advantages: its natural links with North America, and now its membership of the European Union with its huge domestic market.

But on its own it would tend to remain a niche player. It is instructive to contrast the structure of Aer Lingus with that of Ryanair: the former is a hubbed legacy carrier, the latter was born into a deregulated European domestic marketplace. Ryanair, starting with a clean sheet of paper, has become a truly Europe-wide business that just happens to have its headquarters in Ireland.

IAG's interest in Aer Lingus is natural in the geographical sense, but culturally they would make good partners too. The main IAG partners, British Airways and Iberia, are modernised legacy carriers like Aer Lingus. And, of course, IAG's chief executive Willie Walsh knows the Irish carrier well and understands its market. Both BA and Aer Lingus have reported improving results recently, suggesting they are well set to be survivors among the many struggling legacy airlines. The restructured Iberia is on the way down the same path.

Much has been made of the value of Aer Lingus' Heathrow slots to IAG, and that is undoubtedly an attraction for the group. In the event of a takeover some of the slots would certainly be "repurposed", but Irish travellers need not lose too much sleep over loss of access to Heathrow: the interlining feed from Dublin is too valuable to BA.

Worthy of consideration, both from Ireland's and the EU's point of view, is why an IAG/Aer Lingus merger might be acceptable on competition grounds when Ryanair was refused the chance to link up with its Dublin competitor. Frankly, IAG needs Aer Lingus because Ireland is an important market to which it has limited access under its own brand names, whereas a Ryanair that owned Aer Lingus - even if the individual brand names were retained - would have almost complete control of Ireland's commercial air transport market.

Europe's big commercial aviation success stories over the last two decades have been Ryanair and EasyJet. With their no-frills products and no historic hang-ups they marched into the EU domestic market and took it by storm. They have created a new product, providing low-cost access to air travel for more people enabling them to fly more often, rather than simply stealing customers from the old carriers. But they have forced the surviving legacy airlines to reconsider their short-haul service, lowering their prices and simplifying the product, but at the same time deciding whether they will retain some service differentiation on the grounds that many travellers will happily pay for a few frills.

Aer Lingus and BA have both survived this period of massive change, unlike a number of other European airlines such as Belgium's Sabena and Hungary's Malev, which both failed. Swissair exists only because it received government backing that could not have been provided by an EU state. Strategic alliances have been formed between big players such as Air France and KLM, Lufthansa and Austrian Airlines. And now, of course, between the members of IAG. Consolidation is the name of the game.

The EU is not the only market change relevant here. The emergence of the big Gulf carriers - led by Dubai's Emirates - has re-drawn the battle-lines in intercontinental air travel, affecting everybody in it. They are using an "open skies" principle established long ago by Singapore Airlines and KLM.

Those were both countries that had small domestic catchment areas, so they had to set up hubs that would draw in traffic from elsewhere if they wanted to offer a realistic choice of worldwide destinations.

They did this by liberalising, by opening up their hubs to the world in return for deregulated access by their carriers to new markets.

The world's travellers are benefiting from all this. But airlines - especially small ones, which aim to survive rapid change - need to be looking not only for new market opportunities, but for friends and allies to work with.

David Learmount is an editor with Flight International

Irish Independent