Irish
Ryanair will clip Aer Lingus wings if bid fails with nightmare exploding all over them across Europe
By Finfacts Team
Oct 21, 2006, 14:28

Ryanair’s Chief Executive, Michael O’Leary

On 5 October 2006, Ryanair announced a Cash Offer of €2.80 per Aer Lingus Share, which values Aer Lingus at approximately €1.48bn, significantly higher than the €1.16bn IPO value of just 8 days previously.

Speaking on Friday, Ryanair’s Chief Executive, Michael O’Leary said:

“Ryanair believes that its Cash Offer represents excellent value for Aer Lingus Shareholders and offers significant attractions to Aer Lingus’ stakeholders. This Offer represents a unique opportunity to form one strong Irish airline group with over 50 million passengers per annum, capable of competing against the three European mega carriers. Ryanair’s strategy will be to expand, enhance and upgrade Aer Lingus’ operations. Without Ryanair, Aer Lingus will continue to be a small regional European airline which, because of its size and regional nature, is
unlikely to be of interest or relevance to the three major European airline groupings."

He warned that Aer Lingus staff should accept its takeover offer or they will be facing a new "nightmare" era of competition.

O'Leary said that if its bid failed, the future would be bleak for Aer Lingus and its staff. "Next year the Aer Lingus nightmare unfolds with Ryanair exploding all over them across Europe."

Europe's top low-fares airline was going to be massively increasing its services out of Dublin and the best chance for Aer Lingus was to come within the Ryanair structure. "There is going to be blood on the carpet out of Dublin next year," he warned.

O'Leary provided more details of Ryanair's bid, which now includes the alternative of receiving shares in Ryanair as an alternative to the original offer of €2.80 per share in cash. The share option would allow the employee trust that has about 13 per cent of Aer Lingus shares, to distribute the proceeds of the sale to its 4,900 members tax free.

The Ryanair Chief Executive also warned that job cuts would be required in catering, sales and marketing in the US and in clerical grades in Dublin.  He said there were 100 people working in sales and marketing in the US for Aer Lingus and 600 clerical staff in Dublin. He said these numbers seemed to him puzzling when Ryanair had fewer numbers but carried more passengers.

O'Leary said that if Ryanair's bid did not succeed, there would be very little chance for shareholders to exit with a profit: "Without our support for the existing share price, the price will fall significantly."

Excellent Value for Aer Lingus Shareholders

• 27% Premium on IPO: On 27 September 2006, the Government of Ireland, Aer Lingus and their respective advisers determined that €2.20 was an appropriate price at which to issue and sell Aer Lingus Shares pursuant to the IPO. The ESOT also agreed to this price. Ryanair says that its Offer of €2.80 is a generous premium of 27 per cent in just 8 days.
• Ryanair stakebuilding has supported share price appreciation since IPO: The price appreciation of Aer Lingus Shares post the IPO but prior to Ryanair’s Cash Offer on 5 October 2006 occurred over the same short period during which Ryanair was purchasing a 16 per cent. stake in Aer Lingus at an average price of €2.42. On 2 October and 3 October, days during which Ryanair was not actively purchasing Aer Lingus Shares, the average price per Aer Lingus Share fell back from €2.48 to €2.41.
• Volatile earnings record of Aer Lingus: Aer Lingus is an airline with a volatile earnings record which came close to bankruptcy four years ago, and whose cumulative losses (€616m) exceeded its cumulative profits (€433m) over the past 14 years by over €180m. By contrast, Ryanair has been profitable in every one of the past 14 years.
• Irish Government receives over €500 million and achieves its strategic objectives: If it accepts the Cash Offer the Irish Government will realise over €500 million from the sale of its Aer Lingus Shares whilst also achieving its stated objectives of retaining the Heathrow slots and the Aer Lingus brand, and securing the long term future of the airline.
• Aer Lingus employees realise an average of over €60,000 each – tax free structure for ESOT Members: If they accept Ryanair's Cash Offer, Aer Lingus employees will realise over €220m from the sale of their Aer Lingus  Shares. This represents an average of over €60,000 for each employee. Ryanair says that there is also a means by which Aer Lingus employees and former employees, who are ESOT Members, can realise the proceeds of the sale of the shares held by the ESOT in a tax free manner. Ryanair  says it believes that the consequences of its bid failing will be that Aer Lingus employees will hold a substantial minority shareholding, the value of which will have fallen significantly, in an illiquid company, and Ryanair would urge ESOT Members to bear this in mind in their consideration of the Offer and their communications with the ESOT trustees.

Good for competition and good for consumers

Ryanair says its Offer commits to maintaining Aer Lingus as a stand-alone separate airline. Because the two airlines will compete vigorously, this will not lead to a monopoly. In any event, the question of a monopoly does not arise as there are 50 other scheduled airlines competing with Ryanair and/or Aer Lingus at Dublin Airport, some of which (Air France, Lufthansa and British Airways) are significantly larger than Ryanair and Aer Lingus combined.

There is little crossover because Ryanair and Aer Lingus only compete on about 17 of more than 500 combined routes.

Whilst Ryanair and Aer Lingus have 61% of movements at Dublin Airport, this is not dissimilar to other large airline groupings at other European airports including SAS and its Lufthansa partners in Copenhagen (over 85% of seats), Austrian and its Lufthansa partners in Vienna (over 70% of movements), Olympic in Athens (over 73% of seats), TAP and its Star Alliance Partners in Lisbon (60% of seats), Air France and its Sky Team Associates in Charles de Gaulle (62% of movements), and Lufthansa and its Star Alliance Partners in Munich (67% of
movements).

During the 6 months to 30 June 2006, Aer Lingus’ average short haul fare increased by 2% to €86.49. This is in line with Aer Lingus’ strategy to ‘‘Maximise Passenger Revenues’’ (Source: IPO Prospectus, p71). Similarly, Ryanair says that Aer Lingus has refused to reduce its fuel surcharge despite recent falls in oil prices. Rising fares and high fuel surcharges are bad for competition and bad for consumers.

By contrast, Ryanair says that its Offer guarantees to reduce Aer Lingus’ short haul fares by 21/2% per year for a minimum period of 4 years and to reduce Aer Lingus’ fuel surcharges as oil prices fall. Lower fares and lower surcharges will be good for consumers. Ryanair’s Offer will therefore increase competition and lower prices which is good for consumers.

Good for the future of Aer Lingus

The board of Ryanair said that it believes that the Offer represents a unique opportunity to form one strong Irish airline group with over 50 million passengers per annum, capable of competing against the three European mega-carriers (Air France, British Airways and Lufthansa). Without Ryanair, Aer Lingus will continue to be a small regional European airline which, because of its size and regional nature, is unlikely to be of interest or relevance to the three major European airline groupings.

Ryanair provides Aer Lingus with a strong airline partner of substantial financial strength and access to low cost aircraft and financing. Ryanair’s strategy will be to expand, enhance and upgrade Aer Lingus’ operations. Ryanair intends to retain the Aer Lingus brand and operate the two airlines separately. Both companies will continue to compete vigorously in the small number of routes (about 17) where they currently compete, and will focus on reducing costs and lowering air fares.

If successful, the Offer will replicate similar airline consolidations in other European countries by the likes of British Airways (which acquired British Caledonian, Danair, and Cityflyer and invested in Iberia); Air France (which acquired KLM, Britair and Regional) and Lufthansa (which acquired Eurowings, Swiss, and Lufthansa Cityline and invested in SAS and BMI). This pan-European trend towards airline consolidation has seen the emergence of three ‘‘mega carriers’’, Air France, British Airways and Lufthansa.

A privatized Aer Lingus (without a strategic partner) will be unable to compete with these mega carriers because it has neither the scale nor the route network. Equally Aer Lingus will be unable to compete with low cost carriers such as Ryanair because it has neither the cost base nor the low fare structure.

Isolated as a small regional airline, Ryanair says that Aer Lingus will continue to be at the mercy of its controlling shareholders (the Irish Government and the workers/trade unions) whose de facto control over the airline in recent years has seen it:

• Lurch from crisis to crisis.
• Incur substantial cumulative losses.
• Suffer repeated strikes, work stoppages and industrial action.
• Discourage successful management.
• Preside over 3,000 job losses.
• Significantly reduce services on routes between Ireland and the UK.

Brighter future with Ryanair

Ryanair says that it offers a better, viable, financially secure future for Aer Lingus through its strategy which includes:

• Reducing Aer Lingus’ average short haul fare (€87.55 in 2005) by 10% over the next four years. These fare reductions will promote competition, will benefit consumers and will reverse Aer Lingus’ current strategy which is to ‘‘maximise passenger revenues’’. (Source: IPO Prospectus.)
• Reducing Aer Lingus’ fuel surcharges as oil prices fall (something that Aer Lingus recently refused to do).
• Retaining the Aer Lingus brand and continuing to operate the two airlines separately.
• Retaining all profitable routes currently operated by Aer Lingus.
• Reducing Aer Lingus’ costs through improved efficiencies, superior purchasing power and lowering overheads.
• Assisting Aer Lingus with its fleet expansion either by providing it with access to Ryanair’s lower cost aircraft, or using Ryanair’s purchasing power to negotiate lower costs with aircraft manufacturers.
• Upgrading Aer Lingus’ transatlantic fleet and updating its long haul product.
• Improving Aer Lingus’ inferior customer service by reducing delays, cancellations and lost baggage.