Ryanair Offers €1.48 Billion for Aer Lingus

The Irish flag carrier, Aer Lingus, had a fairly successful IPO a few days ago, priced at €2.20 a share. Then, along comes Michael O’Leary, founder of private Irish carrier Ryanair, with an offer to buy Aer Lingus to create a huge Gaelic airline, at a price of €2.80 a share. Mr. O’Leary said, “This offer represents a unique opportunity to form one strong airline group for Ireland and for European consumers.” Aer Lingus said it would make a statement later, but for now it was “considering” the offer “in the meantime, Aer Lingus Group shareholders are strongly urged to take no action.” Taking the money and running isn’t a bad idea.

Aer Lingus isn’t all that big, with 35 planes. It has 11 routes from Eire to the UK, 57 from the Irish Republic to the European Continent, and it has some service to the US and the United Arab Emirates. Ryanair, by contrast, has a fleet of 107 planes, orders for 281 more (Boeing 737-800s), 372 routes and almost 39 million passengers in the first 9 months of 2006.

Ireland is a decent-sized country, but there aren’t enough people and the distances aren’t so great that an air carrier can make it flying just domestically. Any successful airline will have to fly into the UK and Europe, and that means competing against a huge number of airlines. Size, here, matters a great deal. While a combined RyanAer would lock up 78% of the Dublin-to-London traffic, it would be on a pretty level playing field throughout Europe. The situation would be far better than Aer Lingus on its own can do.

The Irish government still owns 28.3% of Aer Lingus and doesn’t seem to want to sell, but Mr. O’Leary, who holds 16% of Aer Lingus already, has no problem with that. He said he’d be “more than happy” to have the Irish government as a partner. Mr. O’Leary realizes that, in fights over intra-European air travel, having a member state’s government as a shareholder will boost his chances of getting his way. If the deal does go through, the value of the Irish government’s stake goes up half a euro a share, and the workers at Aer Lingus, who now own almost 10%, would be €200 million richer.

The only flaw in Mr. O’Leary’s plan is his statement that the two would operate as separate entities and compete on the 17 routes they both use. This may look plausible in theory, but in practice, it doesn’t make much sense. Still, Mr. O’Leary has proved the world wrong before since launching Ryanair in 1985. Since he has said he’s quitting in 2008, this would be a crowning achievement, and one that makes business sense.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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