IAG Group, parent company of British Airways and Iberia, has made its third offer to acquire Irish flag carrier Aer Lingus, this time at €2.50/share. Irish news sources are reporting the Aer Lingus board is “set to accept” the latest bid, but details remain unclear of what IAG would do with Aer Lingus under its wings.
Longhaul vs. London Heathrow
Aer Lingus has a valuable route network to North America including service from Dublin to Boston, New York, Chicago, Orlando, Toronto and San Francisco as well as service between Shannon and Boston and New York. The carrier is introducing a new fully lie-flat seat in business class on its transatlantic fleet and has expressed interest in a further expansion in the lucrative North American market.
With Irish airport taxes dramatically lower than in the UK and with the perk of U.S. pre-clearance facilities, Dublin is an attractive launching point for this expansion. The Scottish government extracted promises from the UK during its failed 2014 bid for independence including assurances that it would have greater autonomy over its own airports. With promises by Scottish National Party to scrap the Air Passenger Duty (APD) that adds $150 the price of a longhaul economy tickets and $250 to a business class ticket, Edinburgh or Glasgow was seen as a potential site for IAG longhaul expansion but Dublin may now be an even better alternative.
But Aer Lingus’ real value, at least on paper, is its highly-coveted Heathrow landing slots. With shuttle service to Dublin and service to other points in Ireland currently operated ex-LHR by Aer Lingus, BA sees a potential solution to it inability to expand at Heathrow. Nevertheless, Aer Lingus losing its prime London slots as part of merger is unlikely, at least now.
Ownership Foretells Controversy
The Irish Government owns a 25% stake in Aer Lingus and is unified across party lines in promising that any acquisition of AerLingus will include protection for routes connecting Ireland to the rest of Europe and the world deemed vital for the growth of the Irish economy. Protection for Irish works and for the Aer Lingus brand are also not currently up for negotiation.
Irish budget carrier Ryanair, which failed in its hostile bid to takeover Aer Lingus, also has a seat at the table with a 30% stake in the company. It is actively looking to sell off its holdings, but in a strategic manner — it too is leery (did you get that?) of British Airways competing head-on its backyard.
Fianna Fáil, the center-right #3 political party in Ireland has come out firmly against the government selling of its share of Aer Lingus and though it appears likely that the government will give in this time around, the devil is in the details, here how restricted IAG will be in transforming Aer Lingus to a profitable airline subsidiary.
Necessary Post-Merger Cutbacks
Aer Lingus is profitable, but apparently not profitable enough. According to airline analyst Stephen Furlong, cutbacks will be necessary.
Mr Furlong is predicting a 2015 operating margin of 5.5% which falls well below that of IAG’s 10% to 14% target for the period 2016 to 2020, meaning that both revenue and cost synergies would be needed to boost Aer Lingus’s margin.
Revenue and cost synergies? We know what that means. While a sustained period of lower oil prices would more than solve this problem, the term “synergies” is code for cutbacks — and cutbacks rarely benefit consumers.
Return to oneworld for Aer Lingus?
Aer Lingus joined oneworld in 2000 but voluntarily left in 2007, seeing little value in alliance membership as it expanded its own network. Technology played a part in this decision, with the integration of new oneworld entrants JAL, Malev Hungarian, and Royal Jordanian deemed not worth the cost of re-configuring systems to accommodate these new carriers.
It is conceivable that Aer Lingus, as part of IAG, would seek to rejoin oneworld and offer a tremendous boon to oneworld transatlantic and intra-European flyers, but such speculation is premature. Vueling, a low-cost subsidiary of IAG, has not acceded to oneworld and Aer Lingus, with no frills service within Europe, may well be classified in the same category.
What Should I Do Now?
Nothing. Just wait and see what plays out. We may know as soon as tomorrow whether the Irish government will accept IAG’s offer. Any merger would be months away.