O'Leary and Ryanair could find that breaking up its rival is hard to do

Thu, Feb 7, 2013, 00:00

Analysis:Good annual results from Aer Lingus will help it in its fight to ward off Ryanair

Aer Lingus's strong full-year results yesterday were timely as the airline battles to see off Ryanair's advances.

Michael O'Leary's offer to the European Commission is to break up a long-established, profitable and well-capitalised rival airline into three parts.

Half of the short-haul business would be put into a separate entity, comprising 43 routes and nine aircraft, and sold for a nominal €1 million to Flybe, a lossmaking UK regional airline.

To help it along its way, Ryanair has agreed to give €100 million in cash and to guarantee it a €20 million profit in year one.

Aer Lingus's profitable Gatwick routes would be hived off to British Airways, which would have an option to take over the Heathrow services if Ryanair can find a way around the Government's near veto on those prized slots.

The balance of the business, including long-haul, would be taken over by Ryanair.

Ryanair's thesis is that this radical remodelling of its Irish rival would be good for Aer Lingus and good for Irish consumers.

Narrative from Ryanair

The narrative around Aer Lingus from Ryanair has long been that it doesn't have a viable future as an independent, and that it needs to huddle for warmth with one of the big beasts of the industry in Europe, namely Ryanair, Lufthansa, Air France KLM or Willie Walsh's International Airlines Group. Otherwise, it will eventually go bust.

At the time of his first two bids for the airline, O'Leary argued that it would be Ireland Inc's best interests for Ryanair and Aer Lingus to merge under one umbrella rather than letting one of the big foreign carriers control its destiny.

Why? Because at the first sign of trouble, the foreign airline would retrench to its home market.

That argument didn't fly with the European Commission or the Government, hence O'Leary's current unique remedy package.

Aer Lingus might come a cropper at some point in the future but so might any airline.

In the here and now, the airline is performing strongly, having been completely turned around under the stewardship of German Christoph Mueller.

It is no longer chasing passengers for the sake of it, unprofitable routes have been dropped and work practices changed (again).

Aer Lingus's share price is again in the ascendant and the airline is even paying a dividend - four cents a share for 2012.

Mueller came out with all guns blazing yesterday to shoot down Ryanair's remedies.

He may have been over the top in characterising the Flybe remedy as a "shady deal" in an interview with Morning Ireland, but he is fully entitled to point out the potential pitfalls for all involved from this proposal.

Even if you set aside the question marks over Flybe's viability, what is to stop Ryanair aggressively targeting its Irish business after the dust has settled on its Aer Lingus takeover?

Nothing, is the answer.

The commission is being asked to take a large leap of faith that Ryanair, Flybe et al will do the right thing by Irish consumers into the future.

Is it really worth breaking up Aer Lingus on this basis?

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