Keeping Ireland flying key to an Aer Lingus decision

The Government needs to decide what its bottom line is in relation to its 25 per cent shareholding in Aer Lingus, with a fresh IAG bid on the table. It won't be about money, though of course the cheque would be welcome. The key policy questions are about connectivity for Ireland with Britain and the rest of the world. We know now how much IAG boss Willie Walsh will pay, but the battle now lies ahead as he seeks to get the two biggest shareholders, Ryanair and the Government, on board.

We must presume that Walsh has seen around this corner. The backing of the Aer Lingus board was the first key step. Now he will have to present his plans to all the shareholders. Most will only be interested in one thing – the price, valuing their shares at €2.50 or slightly more, But for the two biggest shareholders there are other issues at play.

Ryanair has failed three times to take over Aer Lingus and a UK competition ruling, currently under appeal, says it must cut its 29.8 per cent stake to 5 per cent at most. Ryanair boss Michael O’Leary faces three options – sell the shares, say no and hold on, or try to find a way to overcome the competition barriers and launch a fresh bid himself. Presumably his decision will be affected by what an IAG bid would mean for competition on Irish routes, But it will also be driven by cash and O’Leary will know that he might be waiting a long while before getting another offer of a similar price for his Aer Lingus stake.

If Ryanair and most of the other shareholders accept, then the spotlight will be shining firmly on the Government. It has some time to look at what is on the table, as an EU first phase competition review of a formal bid would probably take the best part of two months. But, unless O’Leary scuppers the bid, the Government is going to have to call it.

The money would be welcome to the exchequer. But while upwards of €300 million would have been significant for the public finances a few years ago, it is no big deal now. The exchequer has a huge pile of cash and can raise fresh funds at a very low cost. So for the Government this is all about the future of air services out of Ireland.

Heathrow slots This argument has tended to be boiled down in public debate to the "Heathrow slots " – the 23 take off and landing slots which Aer Lingus holds at London's biggest airport. These are , indeed, important and the Government would want reassurances that most of them would remain, providing services to Irish airports. However IAG already has a lot of slots in Heathrow – including those formerly owned by Iberia and British Midland – and it is not at all clear that it would profit from redirecting any of the Irish ones to other routes.

In any case Dublin-London is one of the busiest air routes in Europe and there is no reason why Walsh would not plan to continue to service it. Cork to Heathrow is also busy, though the Shannon lobby will seek reassurance on their flights to London.

So Walsh's wider plans for Aer Lingus and how it would develop as a stand-alone "brand" within IAG are the key issue. What is his view of the route network and potential development? Would he envisage growth of trans-Atlantic services? Would Aer Lingus continue to serve and develop routes in Continental Europe? What level of investment would be committed to the Irish airline? Airline experts believe that part of Walsh's motivation may be defensive – to stop anyone else getting Aer Lingus – but logic suggests he will also want to grow a business for which he is offering over €1.3 billion.

We can expect Walsh to be ready to outline his plans, now that he has the support of the Aer Lingus board. From his point of view he cannot, under Stock Exchange rules, negotiate with one shareholder to the exclusion of others in making any offer. All must be treated the same. But he will realise that plans for connectivity are vital for the Government and for wider public support in Ireland for the bid . And that plans for developing services out of Ireland would play well.

Independent airline The Government needs to realise that, one way or another, Aer Lingus is going to change. Ryanair will probably have to sell its stake sooner or later. The Government itself has said it will sell when the time is right. Aer Lingus has done well in the last few years under departing chief executive Christoph Muller, but a continuation of this growth might be hard won for the company as a smaller independent airline in a consolidating sector.

The Government’s position would be stronger if there was another bidder or strategic shareholder interested in putting forward a plan. However so far there is no sign of this happening and Etihad, the Abu Dhabi airline which holds just under 5 per cent of Aer Lingus has not made any move since the IAG interest arose, In any case, as a non European carrier, it could not hold a majority stake in Aer Lingus.

With opposition politicians calling on the Government to reject the bid – before even hearing what the plans are – the political temperature is rising. The Government needs to take an objective approach. Find out first what Willie Walsh is planning and how firm these commitments are, and then decide. The key issue is maintaining and developing services out of Ireland, not who owns the planes.