Ryanair's colorful CEO Michael O'Leary is known for his ability to shock. He's poked fun at the Pope, lampooned Brussels bureaucrats, and driven a tank to a London airport. And on Oct. 5, the head of Europe's largest discount carrier proved he hasn't lost his knack for surprises. He launched an unexpected $1.9 billion bid for domestic rival Aer Lingus, just three days after Aer Lingus was privatized.
The first Aer Lingus knew of the bid was when Ryanair's chairman, Texas Pacific Group founder David Bonderman, placed a brief early morning courtesy call to his Aer Lingus counterpart. Ryanair, which has a 17% stake in Aer Lingus, is determined to snag the remainder. "This is a chance to have control over one strong Irish airline group with the financial strength and cost base to take on European and global competitors," O'Leary says.
The deal could redefine the industry. If successful, it would mark the first time a budget carrier has acquired a transatlantic long-haul airline. Even the granddaddy of the low-cost players, Southwest Airlines (LUV), has yet to make such a bold move. Together, Ryanair and Aer Lingus carry more than 50 million passengers each year to Europe, the U.S. and Dubai, and potentially other destinations in Asia.
Still, the move puzzled investors. O'Leary, a longtime critic of Aer Lingus and its "rip-off" fares, had always denied any interest in operating long-haul flights. O'Leary is quick to point out that this isn't about flying Americans into Dublin and Shannon via Aer Lingus, then feeding them on to Ryanair flights in Europe. For starters, Ryanair and Aer Lingus have very little overlap. Ryanair flies only from so-called secondary airports outside major cities where costs are lower, while Aer Lingus operates out of major hubs such as Heathrow. Moreover, although Aer Lingus flies long-haul routes from Ireland to the U.S. and Dubai, roughly 85% of its business is intra-European.
EXPANSION PLANS. O'Leary's plan is to keep the two businesses separate, maintaining Aer Lingus' brand, management, and business model but applying Ryanair's philosophy of low cost and low fares. Although Aer Lingus has aggressively cut costs and repositioned itself as a low-cost carrier, O'Leary believes there is a lot more that can be done, noting that Aer Lingus' average cost per passenger and its average fare are twice that of Ryanair. He plans to cut costs further by reducing overheads in Dublin where the two companies are based, and eliminating duplications in sales and marketing.
One of the biggest advantages will be in aircraft orders. Aer Lingus is planning to upgrade its fleet, and O'Leary noted that Ryanair could help either by diverting some of its planned purchases of aircraft to Aer Lingus or using Ryanair's purchasing power to negotiate better deals from Airbus and Boeing (BA). "This is simply a way for Aer Lingus to expand and expedite the execution of their existing strategy," O'Leary says. And for Ryanair? "Helping Aer Lingus improve their cost base and efficiency to significantly increase profits is a lot better use of our spare cash than putting it on deposit," he says.
But O'Leary will really need the luck of the Irish to succeed. In a statement, Aer Lingus Chairman John Sharman called the approach "unsolicited, wholly opportunistic" and claimed it "significantly undervalues the group's businesses and attractive long-term growth potential." At the same time, the Irish government, which owns 28.1% of the airline (12% is owned by employees) isn't ready to play ball either. Prime Minister Bertie Ahern announced that the government had no plans to sell its shares, claiming "it was always the intention to maintain a significant minority shareholding."
CONVINCING SKEPTICS. Analysts say Ryanair will need to raise its price to win control. The current offer is roughly a 27% premium over the price at which Aer Lingus shares were trading last week, before Ryanair began buying, and 12% higher than the share price the day before the bid. "If they up the price, then institutional investors, who own 45% of the shares, will be fairly easy to win over," says one aviation analyst.
The tougher bit will be convincing individual investors and Aer Lingus employees to tender their shares. Aer Lingus unions have spoken out against the offer, largely because Ryanair is known for its no-union policy. But with each employee standing to gain an estimated $76,000 from cashing them in, Ryanair just might be able to convince them.
Will Brussels go along with a deal? Although Aer Lingus noted in a statement that regulatory issues could be a stumbling block, Ryanair says it has consulted lawyers and problems aren't likely. O'Leary points out that a combined Aer Lingus and Ryanair would only have a 3%-4% share of the European aviation market. He adds there is precedence for such big mergers: KLM and Air France, after all, got the nod from the EU for their tieup.
The bid is O'Leary's boldest move yet. In his dozen years at the helm of Ryanair, he has transformed it from a money-losing local player into Europe's leading discounter, carrying 42.5 million passengers to 24 countries in Europe each year.
He did it by emulating the low-cost, no-frills approach pioneered by Southwest Airlines in the U.S. He gave it his own twists, from charging for water to the soon-to-be-launched inflight online gambling service. Ryanair has the best margins in the business. Its net margins per passenger are 18% compared to 7% at Southwest, 6% at British Airways, 4% at Air France, and 3% at Lufthansa.
Capell is a senior writer in BusinessWeek's London bureau
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