Two airlines set to have a dogfight for dominance

Aer Lingus is looking better-placed than most airlines to weather any economic storm, writes Ciaran Hancock

THERE'S RARELY a dull moment in Aer Lingus's orbit. So it proved in 2008. If it wasn't struggling with rocketing fuel prices or a slump in consumer demand, it was having to circle the wagons to defend another raid from Ryanair.

This time around, the mood music from Ryanair is completely different.

Gone is the aggressive talk of redundancies and sweeping changes to Aer Lingus, which sent a shiver up the spines of workers in 2006. In its place are soothing words about recognising trade unions, retaining the shamrock and green uniforms and adding 33 aircraft and 1,000 new jobs to Aer Lingus as part of a major expansion of the business throughout Europe.

Happy days, you might think, and with Aer Lingus having radically altered the terms and conditions of workers at the airline since Michael O'Leary's last bid two years ago, the differences between the two airlines has narrowed considerably.

Aer Lingus has described the €1.40-a-share offer from Ryanair as "outrageous" and a "rip-off", and stated that the competition hurdles which saw the European Commission reject the proposed bid in 2006 still exist.

It argues that the monopoly the pair would have out of Ireland is actually greater this time round, due mainly to the demise of other airlines operating here. Aer Lingus has produced figures showing that a merged entity would have a monopoly on 28 Irish routes at present, compared with 22 in 2006.

Ryanair counters that the aviation landscape in Europe has changed utterly over the past 12 months with the credit crunch swallowing many rival airlines.

It has pointed to the proposed merger of Alitalia and Air One in Italy, British Airway's bid to acquire Spain's Iberia, Lufthansa's takeover of Austrian Airlines and proposed buyout of BMI in the UK. Competition rules are being torn up around Europe.

O'Leary has talked of a new order that will involve a Big Four - British Airways, Lufthansa, Air France-KLM and Ryanair in Europe. "By merging Ryanair and Aer Lingus, we would create a Dublin- based airline that could be part of that Big Four," he has said. "If Aer Lingus remains independent, it will just wither away."

This is probably an exaggeration. The key to Ryanair's latest bid is Government support, given that it owns 25.1 per cent of Aer Lingus. O'Leary has been careful to lace his offer with several guarantees to assuage Government concerns.

He has offered to post separate €100-million guarantees if he doesn't axe the fuel surcharge and doesn't reduce Aer Lingus's fares by 5 per cent annually for three years.

O'Leary has offered the Houses of the Oireachtas greater control over the use of Aer Lingus's Heathrow slots, which were the subject of much controversy last year when the Shannon slots were moved to Belfast.

In 2006, the Government was quickly out of the traps in rejecting Ryanair's then €2.80-a- share offer. This time around, Minister for Transport Noel Dempsey has played his cards close to his chest, adopting a "neutral" stance publicly. Minister for Finance Brian Lenihan said the Government would "consider carefully" Ryanair's offer but he has left the running on this issue to Dempsey.

At time of going to press, Dempsey was not expected to show his hand until early in January.

There is also the employee Esot, which owns 14 per cent of the airline. Persuading the workers to throw in their lot with Ryanair looks like a remote possibility although in the current economic climate anything is possible.

With the State in dire need of cash to prop up worsening exchequer finances and the Government still smarting from the fallout of the axing of the Shannon-Heathrow route in 2007, a nod in the direction of a takeover is possible.

O'Leary knows the deal needs political support for it to have any chance of flying with the European Commission.

In spite of his public protestations to the opposite, O'Leary would be prepared to raise his cash offer if he can get the green light from Government.

Aer Lingus has €801 million in net cash balances and a fleet that has been independently valued at €601 million, to say nothing of the value of its brand and its various airport slots. While there is no chance of Ryanair's offer flying at its current level, increasing the bid price is the least of O'Leary's concerns.

Aer Lingus has made a spirited defence this time around. Restoring Shannon-Heathrow was a clever move. Its announcement of a new base in London Gatwick, its first outside Ireland, has also been timed to indicate that the airline has a growth strategy in place as an independent carrier.

With fuel back below $50 a barrel and staff agreeing to €50 million in annual cost cuts, Aer Lingus looks better-placed than most small airlines to weather whatever economic storm emerges on the horizon.

Colm Barrington is also arguably more politically attuned as chairman of Aer Lingus that his predecessor, Englishman John Sharman, was in 2006.

He has given a robust defence to date of the reasons why Aer Lingus should be allowed to fly solo.

In the heel of the hunt, however, Dempsey's decision will be crucial. A failure to get clearance from the Minister would leave O'Leary's latest bid grounded - possibly indefinitely.