Wednesday, 4 February 2015

Aer Lingus Watch #3

Paul Sweeney: The government will not sell its stake in Aer Lingus. Taoiseach said that he wants “a cast iron guarantee” on the slots from IAG. That will not be forthcoming. Case closed (for now).

IAG has now offered what appears to be a short-term 5 year deal on the slots: AG is proposing to offer “legally binding commitments” to the Government and would give it “a role” in securing the future of Aer Lingus.

It proposes “The proposed commitments would ensure that, unless there is explicit Irish Government agreement:
  • Aer Lingus' 23 slot pairs at London Heathrow ("Heathrow Slots"), cannot be sold, including to other IAG airlines;
  • Aer Lingus' name, head office location or place of incorporation in the Republic of Ireland, cannot be changed.
  • In addition, IAG is prepared to offer a further commitment to operate the slots on Irish routes for five years. This is protection that the Government does not have today,” it asserts.
Willie Walsh, IAG CEO promised: "We are committed to maintaining and strengthening Aer Lingus. We want to develop air services that ensure Ireland's connectivity is enhanced. In seeking the support of the Irish Government, we propose to offer it legally binding commitments that go well beyond the protections currently available to it. These commitments would give the Irish Government an important role that they do not have today in securing the future of Aer Lingus."

It promised that “Aer Lingus would operate as a separate business with its own brand,” (worth a fortune) “management and operations,” (considerably slimmed down, no doubt) “continuing to provide connectivity to Ireland”, (while the slots at Heathrow remain in its hands) “while benefitting from the scale of being part of the larger group;” (this is an important point to which I will return in the next post).
  • “Aer Lingus would join the oneworld alliance, of which British Airways and Iberia are key members” (but Aer Lingus was a member of this Alliaance and decided to leave it because it was not working well for the company some years ago. It has tie-ins with various airlines which it would now lose); and
  • “Aer Lingus would join the joint business that IAG operates over the North Atlantic with American Airlines, leveraging the natural traffic flows between Ireland and the US” (to whose advantage – AA’s and BA’s?)

IAG are cleverly also trying to woo local business leaders by extending the short-term veto on the sale or shifting of the slots to the Dublin, Cork and Shannon Chambers of Commerce. All three Chambers would have to vote against any proposal to sell the slots in order to block it, it promises.

It is interesting that IAG is not giving such power of veto to the Dublin, Cork and Limerick Councils of Trade Unions, representing many more local people in each city than the Chambers. But they are only workers' representatives! And such people can be awkward and questioning at times.

It is important to see that there is a sting in the tail of this apparent “generosity”. After five years, i.e. in 2020, the deal is off. IAG said in a statement that it is also prepared to guarantee that the slots would be used to service only Irish routes for five years. The Irish Times says that the group may be prepared to increase that to longer. Clearly IAG can cope with fewer slots for long haul in Heathrow for a few more years.

An unwelcome alternative to IAG walking away would be if IAG buy the remaining 75%, where it would not get control of the slots but it would still pay out a lot for a regional airline. The government’s 25.1% plus another 5% blocks the sale of the slots. As the pilots have around 3% and as other patriots have a bit more, the block on the takeover of the slots remains.

The slots are estimated to be now worth up to €925 million. I had a figure of €400 million which was published in the Sun on Sunday, but it should have been corrected as up to €925 million is the upper bound from a new study by Deloitte.

If the slots are worth say €900 million, IAG's offer of €1.3 billion for Aer Lingus means they would get Aer Lingus for €0, as the company has cash reserves of €400 million!

The transatlantic route between Europe and North America is the most profitable aviation market in the world. BA is one of the biggest operators on these lucrative routes. It wants to be bigger on them. Aer Lingus provides a great opportunity to grow from Heathrow, one of the most profitable of all hubs.

In 2012, Ryanair told the European Commission that if it was allowed to take over Aer Lingus, it would sell 20 of Aer Lingus's 24 landing slots at Heathrow to British Airways. The company would do anything to get such clearance to take over Aer Lingus as then it would have a virtual monopoly in Ireland. That is what commercial companies will do. Fortunately there are competition rules which are now enforced [see NOTE below]. It is worth saying that many people have noticed that the low fares are more difficult to find in the past 6-9 months and this is reflected in the bulging bottom line of Ryanair.

I suggested in my last blog post that the Government up its stake in the company to 40%. A better idea comes from right-wing commentator and TD, Shane Ross, who, reading the popular mood, wants the government to keep its stake. Indeed he says Ryanair will be selling its 29% share and reducing it to around 5% because London is ordering it to do so on competition ground (where was our Competition Authority on this? Too busy chasing voice-over actors and freelance journalists for being in unions and so distorting competition!). Ross suggests the government buy the Ryanair stake and raise the state’s ownership stake to 55%. Ryanair holds 159,231,025 shares or 29.82% of the company.

This makes sense. The Government should buy at least 50.1%. If the government can invest vast sums of taxpayers’ money in bankrupt banks, it makes far better sense to invest in strategic infrastructure like our own aviation bridge to UK, rest of Europe and the US.

Interesting, last week as IAG was stalking Aer Lingus, Qatar Airways acquired a 9.99 per cent stake in it. Commenting on the share acquisition, Willie Walsh, IAG chief executive, said: "We're delighted to have Qatar Airways, one of the world's premier airlines, as a long term supportive shareholder. We will talk to them about what opportunities exist to work more closely together and further IAG's ambitions as the leading global airline group".

The predator is now stalked!

Etihad, another of the three rapidly expanding and state-controlled Middle Eastern airlines also has many stakes in other airlines, including Aer Lingus. Indeed its stake in Aer Lingus is its smallest at 4%. It also has 49% of Alitalia, 49% of Air Serbia, 29% of Air Berlin and 22% of Jet and 22% of Virgin Atlantic and 40% of Air Seychelles.

The biggest of the three is Emirates which has no stakes in other airlines, and which is growing rapidly organically so far. Qatar’s 10% of IAG - and thus BA and Iberia - is its first step towards ownership of other airlines. IAG do not pay dividends so Qatar is investing for reasons other than cash flow. EU rules prevent any non EU company from having more than 49% of an EU airline. Free marketeers and right-wingers want to change this rule.

Qatar Investment Holdings owns 20% of Heathrow Airport and its boss sits on the board. It actually owns the slots that we talk about which are traded on a grey market by those who hold them. Will Qatar be compromised with its holdings in both IAG the biggest customer of Heathrow and the airport?

These airlines have severely challenged the big European carriers on the profitable Europe-Asia long haul routes. They have vast, state-backed resources. The state is seen as an undesirable owner by ideologues in Ireland, UK and the US, but not in the rest of world.

It would be ironic if eventually Aer Lingus is fully privatised and eventually ends up state-owned, but by a Gulf state!

Aer Lingus may be only a regional airline but it happens to be our region which is also our island country, a point to be examined in the next Aer Lingus Watch.

NOTE: Aer Lingus was the first airline to exploit the liberalisation of what was incredibly tight nationalistic airline regulation in Europe. The new EU liberalisation measure was called Fifth Freedom Rights and it allowed an airline from one country to pick up passengers in another and bring them on to a third country in Europe. Aer Lingus did this from Dublin to Manchester to Amsterdam and I think from Dublin to Heathrow to Paris. In each case, KLM and BA stepped in with uneconomically low fares until the much smaller Aer Lingus was forced to abandon both of the new routes. The EU would have taken years to take action at that time to investigate abuse of dominant position. Governments also set all fares and did not like them to be reduced – only increased! Happily such bullying is no only illegal but now the rules are enforced.

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