Heathrow slots key if IAG wants to get Aer Lingus deal airborne

Coalition keen to protect slots as they are vital commercial links for State

An Aer Lingus plane passes a British Airways aircraft on the runway at London Heathrow – Aer Lingus owns 23 landing and take-off slots at the airport, worth between €770m and €925m.Photograph: Matthew Lloyd/Bloomberg

An Aer Lingus plane passes a British Airways aircraft on the runway at London Heathrow – Aer Lingus owns 23 landing and take-off slots at the airport, worth between €770m and €925m.Photograph: Matthew Lloyd/Bloomberg

 

Buying a landing and take-off slot at London Heathrow Airport will cost you between €33.5 million and €40.25 million according to a recent estimate from accountancy firm Deloitte. If these figures are right, Aer Lingus is sitting on a gold mine.

The company owns 23 such slots at the London hub. On the basis of the above estimates, they are worth between €770 million and €925 million in total, more than half the €1.36 billion that International Consolidated Airlines Group (IAG) is prepared to offer for all of Aer Lingus.

The reason for the high valuation is that Heathrow is facing serious constraints. The hub is at full capacity, with around 1,300 planes flying in and out every day. It is in a race with Gatwick to be chosen to provide a new runway for London, but that could take 10 years, if it happens at all.

That appears to be a big “if”. IAG chief executive Willie Walsh has been critical of the commission appointed by the British parliament to decide on where the new runway goes and IAG questions whether it will happen at all. Last year, Heathrow surrendered its position as the world’s busiest international hub to Dubai. It is unlikely to regain that, as the gulf gateway intends to grow its business from around 60 million passengers a year to 90 million.

This means the airport is not going to get any bigger in the near future. That underpins the slots’ value, but it could also have long-term ramifications for the Republic. Last year, Heathrow traffic out of the three State-owned airports totalled 2.28 million, with Dublin accounting for the bulk of this with 1.65 million. Around one in three of them – 760,000 – were transferring to or from other international flights. Access to those connections is what concerns many of the opponents to the IAG deal.

International access

Istanbul

Dublin also has other connections to international gateways, particularly Frankfurt, Paris and Schiphol in Amsterdam, along with direct transatlantic flights to North America, on which traffic grew by 14 per cent to 2.1 million last year. In summer 2015, the capital’s airport will have flights to 161 destinations.

Transatlantic routes

Europe

This week, IAG indicated that it intended to boost “natural” traffic flows from here across the Atlantic via the hub. This would involve tying in with the joint business operated by IAG subsidiary British Airways (BA) and American Airlines. This should bring huge benefits to Aer Lingus, IAG argues.

A spokeswoman for the group says that American Airlines has a sales operation on the ground to which Aer Lingus would have direct access, opening a potentially huge market to the Irish company.

Paul Hogan, publisher of industry newsletter Anna Aero, says that given everything that is happening at Heathrow, IAG is really much more interested in what it could achieve by working with the Irish airline at Dublin. He says Aer Lingus has harnessed traffic from regional airports that BA no longer gets coming through the London hub because of the constraints there. As a result, he thinks Aer Lingus would thrive as part of the bigger group.

Arguments like that are unlikely to quiet the misgivings about the future of Aer Lingus at Heathrow should the takeover go through. When the Government floated the airline in 2007, the State kept 25.1 per cent and included a complex provision in the company’s articles of association – its constitution – that gave it a veto over the sale of its slots at the London gateway.

It went to this trouble specifically to protect the airline’s rights at Heathrow, because they are seen as critical to the Republic’s links to international markets for inward investment, tourism and exports. If IAG buys Aer Lingus, the Government loses this control.

The prospect of this loss of control has sparked fears that once IAG takes over Aer Lingus, it will transfer those slots to one of its other subsidiaries, BA or Iberia, and use them for more lucrative long-haul routes.

IAG denies it intends to do this. It says Aer Lingus will be an independent company within the group with its own management and will keep ownership of all its Heathrow slots, in the same way that Iberia kept its rights following the merger with BA in 2010 that laid the foundation for the group.

Cork and Shannon

There is an argument that if it were that keen to use Irish slots for other routes, it could have switched these. “They don’t need to buy another airline for €1.3 billion to do it,” one source says. However, the focus of the concern is not so much on Dublin as on Cork and Shannon, whose Heathrow routes are seen as more vulnerable.

Aer Lingus switched its Shannon-Heathrow service to Belfast in 2007. It endured a campaign, including protest marches, by politicians, businesspeople and local lobby groups to restore the service – which it did in 2009. Recently, Shannon Group chief executive Neil Pakey warned that such scenes could be repeated if the airport were to again lose the route.

Shannon wants the commitment from IAG to continue to maintain the Republic’s air links to the rest of the world to go beyond a general promise and include protecting the slots at specific airports. Local Fine Gael TD Pat Breen says a lot of comment from the region has focused on the possible negatives of a deal. “But we have to look at it that way,” he says. “We’re concerned about the impact on industry here.” He adds that in 2007, replacing the service with a flight to Charles de Gaulle in Paris did little to repair the damage wrought by the loss of Heathrow.

Traffic to Britain

Cork is seen as less problematic. Heathrow traffic there rose 6,000 to just under 400,000 in 2014 which suggests that the routes are at least holding up.

It may not be that easy to switch Heathrow slots from one service to another. Rights there are governed by an independent company, Airport Co-ordinators Ltd (ACL), which allocates them from an overall pool according to capacity, demand and a range of other factors, including whether there are matching take-off and landing rights at destinations.

Any movement would have to satisfy the rules set by ACL, which are in turn partly rooted in EU regulations. As a result, it may not be possible for an airline to decide that a slot now used for short-haul routes can be turned around and used for long-haul services.

Also, BA may not necessarily have the planes as, thanks to the rapid expansion of Etihad and Emirates, there is a global shortage of long-haul aircraft.

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