Airline Industry Insight:
Why Aer Lingus Shareholders are Right to Rebuff Ryanair
03 December 2008
Executive Summary
* Ryanair's latest hostile takeover bid has been rejected by Aer Lingus shareholders
* The EU Competition Commission is not likely to have changed its view on EI/FR, even in the new economic climate.
* This latest offer is financially competitive for the shareholder, but ultimately not for the Irish and EU Consumer.
* Consumer choice would be limited even under plans to operate Aer Lingus as a separate brand
* New market entrants may have challenges establishing viable routes into/out of Ireland
* Any deal for Aer Lingus needs to include cash for the ailing pension plan
* Will the Irish Government have to examine the Italians' Alitalia playbook for alternate answers?
* The Aer Lingus union Siptu has already voted to accept concession, IMPACT representing cabin crew is set to vote 07 December.
LONDON: On Monday, Aer Lingus (EI) rejected the latest hostile takeover bid from its largest rival Ryanair (FR). Michael O'Leary and his team had offered €748m, which represented a € 0.25 per share premium over the previous closing price of €1.12. Some onlookers called Ryanair's timing "opportunistic."
Currently, Aer Lingus operates a schedule of 111 daily arrivals and the same number of departures from Dublin. They compete with Ryanair on a total of 41 routes (19 directly, with a further 22 in the same region).
While Aer Lingus does face some serious difficulty in the near future, this can also be said of many other carriers, of varying size and network. Aer Lingus, the Irish Government, and EU Competition regulators should be wary of Ryanair's cash, proximity, and sheer size. This latest offer is financially competitive for the shareholder, but ultimately not for the Irish or EU consumer.
One fresh twist to the deal has been that Ryanair would run the EI operations as a separate entity, and add aircraft, which it claims would add over 1,000 new jobs. When viewed against the backdrop of Aer Lingus unions holding votes to examine the future of its 4300 strong workforce, this prospect seems unlikely. Given the current financial and operating climate, our analysis shows that while the intention to add staff and aircraft may be sincere, there remain some key facts and figures that cast some doubt on their ability to deliver on the deal in its current form.
The EU Competition Commissioners would also have to approve any new deal, and again study the impact on the consumer and competition, and potentially suggest a new set of remedies for Ryanair to meet prior to winning any approvals. Historically in airline cases these have included the substantial disposal of slots, routes, and gate access. We advocate the healthy free movement of markets, and market-driven pricing.
When the Aer Lingus staff were told potential reductions could be as high as 1300 staff, the ground handling staff union, Siptu et al, held a vote to work with the struggling carrier to avoid such a large number of layoffs. At the time of this writing, union members should just be advising the carrier on how many people wish to accept redundancy and wish to be re-employed under different terms and conditions.
Aer Lingus and its unions Siptu and IMPACT should be applauded for their efforts to work together during this latest downturn. Divisions between airlines and their union- represented staff often run deep, no where more so than in America where you do not always see this same spirit of co-operative self-preservation between management and those represented. On Sunday December 7, IMPACT, the union representing Cabin Crew are set to vote on their ballot measures. We can only wait to see if Aer Lingus gains the further support from its Cabin Crew union for its restructuring plans.
What makes these union votes so remarkable, and also causes the recent Ryanair claims of 1000 new jobs seem unlikely, is the large obstacle of pension costs. Aer Lingus shares a pension plan with the Dublin Airport Authority and SRT Technics, with the bulk of retirees in the past five year period coming from the Aer Lingus side. What is at issue here is any pay reductions or outsourcing of staff which does not address the estimated €300M - €600 needed to stabilise the pension plan. Early retirement plans such as those being discussed may add an even further burden to the pension plan. Even if some of Siptu's, and eventually IMPACT's, agreed-to cuts include early retirement options, this may save the airline money on labour costs, but will also cause a cost at the pension level.
Until a deal for Aer Lingus can be reached- with Ryanair, or another suitor- these pension issues must be examined and proper pension plan top-up provision must be front and centre in any true deal. Otherwise, the Irish Republic could lose a great airline, while at the same time gaining a potential pension nightmare.