Tuesday, 17 February 2015

IAG: Predator or Saviour?

An Lámh Eile: Once again the full privatization of a state company is on the agenda.

Much is being made of connectivity. Connectivity is an issue for two key segments, tourism and business. But will connectivity be affected by an IAG takeover? There is substance in the comments that argue that if the demand is there for connectivity, the market will provide it. And if that is true, the IAG takeover of Aer Lingus is immaterial to connectivity. Private airlines decide on the basis of the bottom line in initiating a new route or further development of an existing one. In the short-term, the bottom line rules in the market. But are there cases where loss-making connectivity should be sustained for some long-term broader reasons than short-term profit?

In the past, Aer Lingus has often sustained routes or frequency on the transatlantic route, even when not profitable, with a view to the connectivity issue and also because the transatlantic route is more volatile. This latter issue is particularly so in the tourist segment, super sensitive to any disturbance in international affairs that might have even a remote effect on flying or the safety of destinations. So there was a good bet business would pick up again. But it was an approach that often brought Aer Lingus close to the brink. A new parent will almost certainly take a more rigorous short-term approach.

Aer Lingus provision of connectivity to Ireland does relate to the business sector of US FDI companies in particular. Slots in Heathrow are also an important part of business sector connectivity. But tourist connectivity is now largely provided by Ryanair. And Ryanair also provides good connectivity for Irish and European emigrants and immigrants respectively. Thus, overall, the connectivity issue may be overstated.

The biggest issue and fear relates to what IAG will do with Aer Lingus in the long term. It is very clear that IAG wants a completely free pair of hands. They are not interested in a takeover where everyone else accepts their offer but the Government retaining its share and possible consequent constraints on IAG behaviour. This should raise alarm bells. To reassure the government, unions and a somewhat skeptical public, there is talk of guarantees, either on the employment front, on branding or other issues. But what is the value of these guarantees? How would enforcement be sought if they are breached five or ten years down the road?

Leaving aside Ryanair, IAG is the only suitor at the moment. But is IAG the best parent option if there is a decision to sell? IAG is a combination of British Airways, Iberia, the former BMI and sundry other elements. BMI was fully integrated into IAG in 2012 with the disappearance of the BMI brand. BMI at one stage had an annual passenger throughput of 10 million, approximately equal to that of Aer Lingus in 2014. A consistent pattern in the takeover of many companies, at international level, is due recognition of distinctive importance in the early years, including brand recognition, but ultimately the centralization to corporate HQ of better paid managerial jobs, slimming of operational staff numbers and integration of brand image to a single identity in the medium to long term. As the case of BMI demonstrates, this may happen very early, but later in other cases, depending on acceptability. The long-term result is the same.

The two largest elements of IAG, BA and Iberia, are airlines where long haul is of great importance. This is rooted in history, flights to former colonial destinations for British Airways and South America for Iberia due to historic and linguistic factors. Aer Lingus is dominated by short haul. Where exactly is the mutual benefit or synergy here for a Dublin-based largely short haul airline? In what way for example could Aer Lingus benefit from Iberia’s South American network?

It is argued that Aer Lingus needs a big kindly funding rich parent in case of future turbulence in the industry - almost inevitable. But shareholder driven companies are not in the business of bailing out loss making subsidiaries or refusing to wield the knife on subsidiaries that don’t fit into the global corporate plan. How often have we seen FDI parents shower us with praise when the Irish branch fitted neatly into the corporate plan? But this has never prevented closure of unprofitable subsidiaries when the corporate necessity arose. We have even seen them close profitable subsidiaries in Ireland because of lack of fit with some new global corporate strategic perspective.

In the long run IAG will make decisions in the interests of IAG. For example, over the past few years Aer Lingus has developed Dublin as an important hub for those who don’t wish to use Heathrow to fly to the US. The immigration clearance arrangements at Dublin have been important in this development. But would this hub role have developed to the benefit of DAA and Aer Lingus, if Aer Lingus had been acquired by an international airline company five or ten years ago?

Ultimately a key question is how often and for how long will the interests of IAG and the interests of Ireland coincide? The answer is probably on some occasions but it will be as a result of an unusual coincidence of interests, rather than a commitment to Ireland. It is almost certain there will be many decisions made by IAG that will be detrimental to Ireland’s interests.

No comments: