Ryanair Bids for Aer Lingus--Again

Posted by: Kerry Capell on December 01

Will it be second time lucky for Dublin-based airline Ryanair? Two years after its failed bid for rival Irish carrier Aer Lingus, Ryanair is back with a new all-cash offer that values the struggling airline at $950 million, around a 28% premium to Aer Lingus’ average share price for the last month. Ryanair already owns 29.82% of the former state carrier. Since Ryanair’s previous bid, Aer Lingus’ share price has fallen from a high of $3.80 in Dec. 2006 to a low of $1.27 in November 2008.

Ryanair CEO Michael O’Leary said in a statement: “This proposed merger of Ryanair and Aer Lingus will form one Irish airline group with the financial strength to compete with Europe’s 3 major airline groups - Air France, British Airways and Lufthansa.”

Ryanair says it is seeking “early meetings” with the Irish government, which holds about 25% of Aer Lingus shares, the airline’s management, and representatives of the Aer Lingus employees, who control another 14% of the shares. Aer Lingus has urged its shareholders to take no action, noting it will issue a statement shortly.

Two years ago, Aer Lingus rejected Ryanair’s first takeover attempt on the grounds that it was “ill-conceived, contradictory and anti-competitive.” Regulators at the European Commission seemed to agree, blocking the deal on competition grounds in 2007. Their judgment said that the combined airline would have controlled more than 80% of European flights to and from Dublin airport.

Although some aviation analysts reckon Ryanair is unlikely to succeed, O'Leary claims the problems facing the aviation industry have changed the game.

“The world has changed dramatically over the past two years, as high oil prices and deep recession have caused a flood of airline bankruptcies, consolidations and capacity cutbacks," he said in a statement. "Aer Lingus, as a small, stand-alone, regional airline has been marginalized and bypassed as most other EU flag carriers consolidate."

With an estimated 30 airlines having failed this year alone, much of the aviation industry is in crisis. Consolidation is for many airlines, their best chance of survival. That's why O'Leary is betting that this time around competition authorities are likely to look more favorably upon Ryanair's bid.

Indeed, there has been a move toward consolidation among European airlines this year. To date, the following consolidations have been either announced, proposed or are being considered according to Ryanair:
Easyjet – GB Airways
ClickAir – Vueling – Iberia
Alitalia – Air One
Lufthansa – SN Brussels
Air France/KLM – VLM

Never one to mince words, O'Leary reckons Aer Lingus'days as an independent carrier are numbered. Ryanair accuses Aer Lingus' management of failing to deliver. In a statement laying out the bid proposal, Ryanair documents a litany of examples including: how Aer Lingus spent more than $30 million on its defense of Ryanair’s 2006 bid; increased fares, management compensation and fuel charges; experienced yield declines on short-haul and long-haul routes; and, is on track to post operating losses this year and next.

If successful, Ryanair claims there will be a number of benefits for Aer Lingus’ employees and the Irish government. O’Leary says the two airlines will continue ot be run as separate companies with separate brands. Ryanair plans to double the size of Aer Lingus’ short haul fleet from 33 to 66 over the next five years, creating 1,000 jobs. Ryanair also claims that if the bid is successful, the cash-strapped Irish government will receive $238 million.

Aer Lingus management may be against any deal but its shareholders don't seem to have ruled anything out. In early trading on the Irish Stock Exchange, Aer Lingus shares soared by 17% to $1.66. And even if the deal fails, Ryanair's shareholders can take some comfort from the fact that in the current climate the airline even has the cash on hand to make such an offer.