Why does IAG want to get its hands on Aer Lingus so badly?

Updated 12 February 7.30pm

AFTER TWO FAILED approaches, British Airways parent company IAG has made a third – and, so far, more successful – bid for Aer Lingus.

Since the offer on 26 January, the potential deal has been caught up in a political bun-fight amid concerns over what the deal would mean for the future of the national carrier, its workers and international links to Ireland.

Chief executive Willie Walsh will appear before an Oireachtas committee today in an attempt to push the deal over the line by convincing politicians that it is the best move for the carrier.

Yesterday, he claimed that if the takeover succeeds, Aer Lingus will both grow its transatlantic business and fleet. He also warned that suggestions of too much political interference in this matter is not a good PR message for doing business in Ireland.

Earlier this month, IAG tried to ease the numerous concerns outlined by various politicians by offering the Irish government some significant ‘legally binding commitments’ on three aspects of the business – namely, that its Heathrow slots cannot be sold, that they would operate on Irish routes for the next five years and that the firm’s headquarters and incorporation would remain in Ireland. Its name would also remain unchanged.

Since then, Walsh has clarified that the group cannot offer guarantees on the Heathrow slot routes for longer than five years as it would be bad business, impacting his bargaining power with various partners.

Ahead of his appearance in Leinster House at 2pm, we look at why IAG is so keen to snap up the airline.

TheJournal.ie talked to Merrion Capital’s head of research, David Holohan, about the potential buyout to unpick what we know about an Aer Lingus sale so far:

What’s on the table?

IAG announced it was prepared to pay €2.55 per share for Aer Lingus, a deal which would value the airline at about €1.35 billion. The British Airways parent has also stated its plans for Aer Lingus, including that:

• Aer Lingus would run as a separate business with its own brand, management and operations
• The airline would continue to “provide connectivity to Ireland” while taking advantage of being part of a bigger group
• It would become part of the Oneworld alliance, which includes British Airways, American Airlines, Qantas and others. Aer Lingus was a member but left in 2007
• Join IAG’s joint business with American Airlines over the Atlantic, benefiting from the “natual traffic flows” between Ireland and the US and Dublin’s “advantageous” position

Former Aer Lingus boss Willie Walsh, who is now head of IAG Leon Farrell / Photocall Ireland Leon Farrell / Photocall Ireland / Photocall Ireland

Why does IAG want Aer Lingus so badly?

The first reason, which has been on the tip of most analysts’ tongues, is the airline’s valuable landing and takeoff slots at London’s Heathrow airport – where British Airways has been unable to expand due to the capacity restraints. Irish Airline Pilots Association president Evan Cullen has said the only reason IAG wanted to get its hands on Aer Lingus was because of the Heathrow slots, adding: “Aer Lingus does not need IAG, IAG needs Aer Lingus.”

• READ: IAG is a ‘predator hovering over Aer Lingus’ >

But Holohan believes those slots weren’t the most important concern for IAG in terms of maximising its return from an Aer Lingus buyout, which would come amid a general trend in smaller airlines being swallowed up by big carriers.

“What is really attractive for IAG is that Aer Lingus is a very well-known brand and it has enormous potential to expand out of Dublin,” he said.

Ireland is uniquely positioned to grow the transatlantic route because of its pre-clearance arrangement. I think the goal for IAG will be to use Dublin as a connections hub – to fly passengers short-haul from London and then onto pre-clearance, long-haul flight to the US.”

The Dublin to London route is already the busiest in Europe and one of the most profitable due to the short flight time, which means lower fuel and staff costs compared to trips further afield. IAG boss Willie Walsh, the former head of Aer Lingus, previously told the Independent in October the value of the Heathrow slots was in using them on the Dublin-London route.

And while one of the concerns about a sale has been the loss of regional connections to London, Holohan said IAG was unlikely to rock the boat on what were money-making operations.

IAG has put connectivity as a very important part of their plans going forward and they’re unlikely to alter those plans. All of the Aer Lingus routes that flow to Heathrow are profitable and that includes the more regional routes.”

Sasko Lazarov / Photocall Ireland Sasko Lazarov / Photocall Ireland / Photocall Ireland

A guarantee has been made that the Heathrow slots will be used on Irish routes for at least five years after the takeover.

Who makes the decision on the deal in the end?

It’s important to note IAG’s approach was only a “proposal to make an offer” – and one which is subject to a few conditions. The first of these is that the Aer Lingus board give its approval for the deal – which it has done, subject to it being happy with the way IAG would “address the interests of relevant parties”.

Another condition is the suitor will still want to go ahead with the deal after taking a closer look at the Irish airline’s books and operations. But the key part of Aer Lingus’s statement on the possible offer is that it depends on: “…the receipt of irrevocable commitments from Ryanair Limited and the Minister for Finance of Ireland to accept the offer.”

These are the two, major shareholders who between them own nearly 55% of the airline’s shares – and neither the budget airline nor the government has publicly announced its intentions yet.

What does Ryanair say?

Michael O’Leary has called for a more common-sense approach from politicians, telling Newstalk Breakfast on 2 February that the focus on the Heathrow slots is largely irrelevant.

• ‘A small regional peripheral airline’ – Michael O’Leary dismisses Aer Lingus talk

In typical O’Leary style, he added:

Speaking personally, I think Aer Lingus would be better owned by an Irish group but I’ve tried that three times and been turned down three times. The good news for Irish people is that the future of Aer Lingus doesn’t matter because Ryanair is ten times bigger.”

The CEO said the board will consider the offer when it is tabled but the budget airline has widely been tipped to give its tick of approval. One reason for this is because the UK regulator has already ordered Ryanair to cut its stake in its Irish rival to 5% from its current level of nearly 30%. Ryanair has appealed and a decision is expected on that shortly.

Holohan said Ryanair wouldn’t make its position clear until a formal offer from IAG was on the table, but he expected the airline to be a “willing seller”. Ryanair currently stands to walk away with about €400 million for its Aer Lingus shares.

Ryanair has made several approaches to airlines seeking to dispose of its stake but it hasn’t been able to find a suitable buyer until now,” he said.

Ryanair's Michael O'Leary Niall Carson / PA Archive/Press Association Images Niall Carson / PA Archive/Press Association Images / PA Archive/Press Association Images

And what does the government say?

Here’s the tricky part. One of the conditions attached to the government’s 25% share in Aer Lingus, a legacy of its history as a state-owned enterprise, is that it couldn’t dispose of any shares in the company without Dáil approval. The key worries are jobs and connections – the former based on the likely cuts that would come with consolidation, the latter about international links to Shannon and other airports outside Dublin. This is TheJournal.ie political editor Hugh O’Connell’s take on the view inside Leinster House about the deal:

The potential sale of the government’s 25 per cent stake in Aer Lingus has caused a lot of unease in coalition circles. This is primarily within the Labour party, which now appears steadfast against it from the Tánaiste Joan Burton down to backbenchers. Labour, ideologically, would be against the sale of the government’s stake in the airline having previously opposed its privatisation in 2004 (it should be said that Fine Gael TDs voted against it too).

But there are local concerns too. Labour has a huge number of TDs in the north Dublin area where Aer Lingus is based, including the Tánaiste herself out in Dublin West, and they’ll be worried about their already precarious Dáil seats and their constituents, some of whom either work for Aer Lingus or know someone that does, and what impact any potential job losses would have on them and the local economy. Those worries aren’t confined to Labour, nor are they confined to Dublin.

Fine Gael TDs in the capital like Alan Farrell have publicly expressed doubt about their merit of any sale. In addition, Aer Lingus’ presence in Shannon and Cork has raised concerns among coalition backbenchers based there too. The view slowly starting to form in government and particularly on the Labour side is that a compelling case for the sale of Aer Lingus has not yet been made.

That’s not to say it will be made particularly once a cross-departmental, expert group issues its views in the coming weeks. But with an election just over a year away, a lot of upheaval and controversy could be caused by selling the State’s stake in Aer Lingus and would that really be worth it for a mere €340 million? 

Part of the reason the government has become so unpopular over the last year has been a serious of errors of judgement, particularly around Irish Water. The government’s ability to not screw up will be they key to its re-election, which is why it may well err on the side of caution and decide against selling.

Sam Boal / Photocall Ireland Sam Boal / Photocall Ireland / Photocall Ireland

So if it does go ahead, what would a sale mean for Irish passengers?

In Holohan’s opinion, passengers were likely to experience little difference in Aer Lingus operations after a buyout, although they would enjoy the benefits of tapping into a much larger airline network.

It will be the same planes, the same people greeting them and the same pilots flying them,” he said. “Where they stand to benefit is because they will become part of the One World alliance, which means they will have far more routes to choose from and options for transfers.”

IAG has left Spanish carriers Vueling and Iberia as largely independent operations after swallowing up, with their own staff, brands and decisions over routes. However the loss-making Iberia has been on the receiving end of severe job cuts, which has piqued concerns the same pattern would be repeated, to some degree, at the profitable Aer Lingus.

Steve Parsons Steve Parsons

So how likely is it that this deal will happen?

If the Dáíl does vote against the plan it could leave both potential buyer and seller in a tricky position. IAG has signaled it wants the government’s approval before it moves, but if the company decided to push the sale through then the Irish taxpayer would be left as a lame-duck, minority shareholder with no say in the airline’s operations or even what cashflow it received from the investment.

But despite the negative commentary coming out of political circles, Holohan believes a deal will eventually go ahead with political approval once IAG has finished its due diligence – even if it was impossible for the government to elicit any iron-clad guarantees the buyer would act on its intentions.

The rhetoric coming out of the government is very much parish politics, rather than working in the national interests,” he said. “I believe that will change (when) IAG will be able to provide more information about connectivity and any staff cuts – when when they are able to do that I believe it will shore up the deal.”

First published Friday 30 Jan, 4.20pm

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