Wednesday, 27th June 2012
Why has Ryanair bid for Aer Lingus?
Ryanair launched an all cash bid for Aer Lingus of €1.30 per share, a 38% premium to the previous day's closing price of 94c. This unexpected move came at the same time the UK Competition Commission started its investigation into Ryanair's existing 29% holding in Aer Lingus.
Given their relative sizes Ryanair does not require shareholder approval for this deal. Technically, it does not need the Irish State's 25% holding either, to secure majority control.
Ryanair stated it is looking to acquire Aer Lingus and to operate two competing airlines within one group. It wants to use Aer Lingus to compete more aggressively with existing European airlines at large primary airports, where Ryanair is not based. It would target reduced unit costs and increased Aer Lingus traffic figures from 9.5m passengers to 14m over a five year period. It would also look to expand Aer Lingus' transatlantic operations.
Ryanair's previous bid was blocked by the European Commission (EC) in 2007 on the grounds it would impede effective competition. It cited how, at the time the two airlines competed directly on 35 routes and if the merger was approved there would be a monopoly on 22 routes, with the merged entity holding 60% market share on the remainder.
Ryanair was prepared to offer slots to new entrants at Dublin airport, but the gesture was considered insufficient. The EC market investigation revealed that most airlines were unlikely to take on Ryanair in its home market. It's doubtful if this has changed.
Ryanair believes that circumstances have changed with more airline mergers in the EU, such as BA's recent acquisition of British Midland. It points out that Dublin Airport is operating at 50% capacity and the Irish government no longer considers its stake as strategic.
While Ryanair's arguments are logical, it would be surprising if the EC reversed its previous decision. However, if Ryanair can address the EC's concerns and convince them that there will be meaningful competition out of Dublin, its offer would have greater chance of success.
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