Saturday, August 4, 2012

When an Airline Just Can’t Take A Hint: The Case Against Ryanair Buying Aer Lingus

It really is beginning to resemble a scene out of a high school movie. Time and again the big jock Ryanair comes up to the proper girl Aer Lingus: “Girl I’m the full package. I’ll make you feel good!”, all the time posturing like a safari animal at its potential mate. The girl snaps back that she is way too worthy to be wasted on with some big guy like him while all the time looking for that white knight to confront the jock and sweep her off her feet. However the jock just won’t get the hint and continues the pursuit while all the time the girl waits for her rescuer. What is one to make of it all and what will be the outcome? That is again the question we are asking ourselves these past few weeks as Ryanair makes yet another bid for its domestic rival Aer Lingus.

I shall first make an admission. Anyone who knows me is well aware of my distaste for Ryanair. While I give it respect for its prowess and vicious pursuit of markets and revenue, I just would prefer to fly someone, anyone other them. While Ryanair’s business model is admirable, cutting the costs to the bone, the incessant additional charges and penalties makes life confusing and frustrating. It has led in many cases to a narrowing in the gap of flight prices between the Irish no-frills airline and other airlines on numerous destinations. While once the vast discrepancy in price between Ryanair and airlines such as Aer Lingus meant it was sensible to take the former, more often than not it is no longer the case.

For this reason I would like choice going somewhere, that being with or without Ryanair. This is not just an issue of taste and comfort but a healthy means of fostering competition. For many in Ireland you have just one alternative to Ryanair and that being Aer Lingus. On flights between Dublin Airport and Europe, both airlines constitute an 80% share of traffic. This share is even higher in the other major airports in the Republic such as Cork and Shannon. It is without doubt a significant amount, which if under the control of one company would constitute a virtual monopoly. This would not only create a monopoly on air traffic on many destinations but for an island nation like Ireland an enduring, dominant control on travel in and out of the country.

Previous attempts to take control of Aer Lingus by Ryanair have for this reason been struck down by the government, who have a controlling stake. Competition authorities, domestically and in Brussels have also ruled against any form of merger. Furthermore Aer Lingus has always declined every offer by Ryanair as undervaluing the company and its future potential. This lady is not to be taken.

So why is the situation different now? There are a few reasons, two of which feel like a game of poker. First of all Ryanair can scent blood from a financially wounded government. Shorn of its fiscal independence under the bailout by the Troika of the EU, IMF and EU Commission and mandated to divest of stakes in companies, Ryanair sees that the coalition has a weak hand compared to before. The government in the airline’s opinion will sooner rather than later have no other choice to sell to whoever is interested, even if it is Ryanair. Second of all it sees this new offer as a way of smoking out other potential suitors lurking in the dark. This seems to be in relation to Abu Dhabi’s Etihad, which controls less than 5% of Aer Lingus shares but is increasing its co-operation with the airline. Ryanair has seen how Etihad has over the years increased its stake in Ryanair rival Air Berlin and fears a repeat with Aer Lingus.

However the main argument from the Ryanair camp this time is something completely different. It has advocated a tie-up with Aer Lingus as part of a necessary and unrelenting movement towards consolidation between multiple European airlines, which will benefit the industry and customers. Ryanair feels that it would be in the best interests of both companies and the country to tie-up. It points out to recent events in this regard, such as British Airways merging with Iberia, Air France with KLM and Lufthansa buying Swiss.

The major issue against this argument is that in virtually all these consolidations bar British Airways buying out BMI last year, they have been cross-border. There has been no precedent for the kind of purchase envisaged with Ryanair buying Aer Lingus. The issue of competition within the domestic Irish market continues and considering the economic situation, enticing other airlines to fly from airports in the Republic and creating new competition is slim to non-existent. Many would in fact be too fearful considering Ryanair’s history in relation to snuffing out rivals on many routes. Even if Ryanair promises to keep the two entities as separate with their respective business models as Michael O’ Leary has advocated, it is still not in the interests of competition.

It is however in the interest of the country and the government to refuse this recent offer by Ryanair for Aer Lingus. While Ryanair may think the government has a weak hand, in fact it has the opposite. Positive signals about more independence in fiscal policy by the Troika means the government may not have to divest of its stake in Aer Lingus right now, if at all. Aer Lingus has also begun to tackle structural weaknesses such as its pension deficit and also realized a profit of close to 50m euro in the last financial year. This should stand some way in the government’s favor in keeping a controlling stake in the company compared to other industries in which it holds a significant share of the market such as energy and forestry

 Furthermore, advocating the Troika’s stance on increasing competition in the domestic market to foster growth, it can argue that a tie-up between the two airlines would create the opposite of that in relation to air travel. Finally, people should have the choice of the kind of air travel they want, whether it be the basic no-frills style of Ryanair or the more comfortable Aer Lingus. If this third attempt fails to succeed, maybe Ryanair should finally take the hint and move on. 

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