Simply by running Aer Lingus more effeciently, Michael O'Leary could squeeze out more profits. If Ryanair takes over the former State-owner airline, it will not necessarily be bad for the consumer, concludes Marc Coleman
Ryanair's unexpected bid for Aer Lingus is beginning to look like something out of Monty Python sketch. Or should I say Monti Python? The spelling change has some significance: Aer Lingus has hired former EU commissioner Mario Monti in an attempt to get the EU Commission to block Ryanair's bid for the company on the grounds that it might be bad for consumers.
But only three years ago, Aer Lingus' former Chief Executive Willie Walsh admitted that Aer Lingus had been "ripping off its customers for years" through its fares policy. By contrast - and however controversial may be its approach to industrial relations - the impact of Ryanair on consumers has been overwhelmingly positive.
In the days before the liberalisation of the Dublin-London air route, Aer Lingus' monopoly allowed it to push up its fares by 75 per cent between 1980 and 1985. And this extent of increase was measured in real terms, in other words stripping out the impact of then rampant inflation. As a result, passenger numbers on the route declined, in spite of massive emigration.
Following the deregulation of the route, prices fell in real terms by 65 per cent between 1985 and 1990, significantly boosting passenger numbers.
Ryanair's strategy of low fares and no frills has seen it become Europe's largest airline. Aer Lingus management, trade unions and the government have been unanimous in warning that a takeover of Aer Lingus by its rival could undo some of the benefits that competition has done.
At the Dublin Economic Workshop's annual conference in Kenmare last weekend, leading economist and former Chairman of the Competition Authority Pat Massey contrasted the new found enthusiasm of government and unions for competition in air travel with their strident opposition to competition in Dublin's bus market.
For Michael O'Leary, the fact that Ryanair is in the dock of opinion for attempting to curb competition must appear somewhat Kafkaesque. But however hypocritical he might feel his critics to be, the question they ask needs answering: Could a Ryanair/Aer Lingus merger drive air fares back up?
A market share of 40 per cent is usually seen by economists as the threshold above which dominant firms can throw their weight around. An example of this was in 1992 when Aer Lingus' market strength allowed it to restrict British Midland's entry into the Irish market by refusing to process tickets on behalf of British Midland - thereby preventing travel agents from issuing tickets combining flights by both airlines. In that instance, however, the Commission was able to act and fined Aer Lingus for the practice.
Taking Dublin airport as an example of how a merger might impact, Aer Lingus and Ryanair together account for 61 per cent of passenger movements.
But while this is far above what the Commission considers to be a threshold defining 'dominance', it is considerably below the market shares of several existing alliances of airlines in other major European airports. In Copenhagen's Kastrup airport, the Scandinavian airline SAS/Star alliance has 85 per cent of market share. In Athen's the Greek airline Olympic has 73 per cent of market share and in Vienna, Munich and Paris incumbent airlines - or alliances thereof - have shares of 70, 67 and 62 per cent respectively.
Ryanair claim that unlike these alliances, Aer Lingus and Ryanair will - even if joined at the hip - still behave like two different companies and will compete 'vigorously' with each other. Even if they don't, the customers for the two airlines want different things: Aer Lingus customers like its reliability, traditions and long haul capacity whereas Ryanair customers want to get from A to B as cheaply as possible within Europe.
But this still begs the question. Why would Ryanair want to takeover a company that will compete with Ryanair?
O'Leary's move is definitely motivated by the opportunity of greater profits. After all, compared with Ryanair's margin of 22 per cent, Aer Lingus posted an 8 per cent margin in 2005. From O'Leary's point of view - and in spite of Willie Walsh's cost cutting some years ago - Aer Lingus remains overweight
. Whereas O'Leary's airline employs 3,063 employees and carries around 35 million passengers, Aer Lingus employs 10 per cent more employees, 3,475 to be precise, but carries just 8 million passengers, less than one quarter of Ryanair's passenger complement. With numbers like that, O'Leary won't need to raise fares to increase profits.
While Aer Lingus green uniforms and shamrock would stay under him, he would be likely to make significant changes. By cutting Aer Lingus hierarchy and transforming its management culture, he would cut staff numbers.
Aer Lingus turnaround times - the time an aircraft stays on the ground between flights - remain high by Ryanair standards and would probably be reduced. Some of the frills of an Aer Lingus service - such as seat reservations - might disappear. But Aer Lingus lite, rather than Ryanair mark II, still seems the most accurate description of what O'Leary would create if his bid succeeds.
Nonetheless, one potential danger of a merger deserves attention. Between them, Aer Lingus and Ryanair will control a majority of the so-called 'slots' for take off an landing at Dublin airport. A merged airline might have more power to control the regime by which competitor airlines - such as low fare airlines like Hapag Lloyd - can compete for flights out of Dublin.
If the EU Commissions endorsement of Air France taking over KLM is anything to go by, a Ryanair takeover of Aer Lingus is unlikely to be vetoed. But in doing so, the Commission is likely to ensure that competitor airlines are not deprived of the means to compete.
If that happens and if the two companies merge, then customers may have little to worry about (although the same cannot be said for some Aer Lingus staff). For as well as pioneering a new approach to flying, Ryanair has been the most successful pioneer of a new business model for European airlines, one that has weakened forever the grip of incumbents.
Using less hierarchical management and staff structures and the ability to market air fares cheaply afforded by the internet, O'Leary has not just reduced airline costs, but also shown competitors how they can cut their barriers to entry: If it behaves like Aer Lingus two decades ago, Ryanair will meet its own Ryanair.
Marc Coleman is Economics Editor of The Irish Times