IAG, the powerful International Airlines Group formed when British Airways took over Spanish national airline Iberia in 2011, last week announced a substantial €1.3 billion bid to buy Aer Lingus. This is the third attempt by Willie Walsh, the former Aer Lingus pilot who became the Aer Lingus boss, left to run British Airways, and now heads up IAG, to buy what we still like to call "our national airline" (even though it has not been owned by the nation for nearly a decade).
Previous attempts by British Airways and Ryanair to take over Aer Lingus failed, partly because they undervalued the company. But this one may succeed, even if it takes some time to complete.
Last year Aer Lingus shares were as low as €1.27 each. The new bid by IAG offers €2.55 a share. So you can be sure that small shareholders will be happy to sell, particularly those who were brave enough to buy into the stock at low prices in the past year.
Equally willing to sell is likely to be the biggest shareholder, Ryanair, which itself has been trying to take over Aer Lingus, building up a 30 percent holding in the stock in the process.
This was opposed by the EU for competition reasons and it has ordered Ryanair to cut its holding to five percent. The IAG offer means Ryanair will now be able to get out and still make a profit.
Other institutional holders of the stock are also likely to favor the bid because it's a fair offer and because there's not much future for Aer Lingus as a stand-alone business when airlines all over Europe (and the world) are amalgamating into large groups.
The board of Aer Lingus last week said it was in favor of shareholders accepting the bid. That only leaves the second biggest shareholder, the Irish government which holds 25 percent, to make up its mind.
Transport Minister Paschal Donohoe has said that the state's stake will only be sold if our national interests are protected and we get guarantees about the future.
When Bertie Ahern's government privatized the national airline almost a decade ago, it held on to this 25 percent stake. The purpose was to protect the national interest, an important consideration since we are an island nation.
Air links are vital for our tourism and business, as well as normal travel. And that is still the case.
In fact connectivity these days is more important than ever – not just into and out of Dublin, but Cork and Shannon as well – given the number of foreign companies who operate here and have executives who are coming and going all the time. Part of that connectivity are the 23 take-off and landing slot pairs that Aer Lingus holds in Heathrow, the most important hub for business travelers in this part of the world.
Slots in Heathrow are highly valuable since the airport is at full capacity. The Aer Lingus slots alone are worth around €700 million – more than half the value of the IAG bid – and the fear is that after a takeover IAG might decide to switch them to more lucrative long haul routes, perhaps run by British Airways. There are also concerns that IAG might cut the number of Aer Lingus flights, particularly from Shannon, and reduce the overall workforce in the airline.
On the positive side, there are compelling reasons why an Aer Lingus that is run under the umbrella of IAG could be much better for Irish interests. IAG is part of the One World alliance, which also includes American Airlines, Qantas, Cathay Pacific and half a dozen other big players in global aviation, and this could be used to drive a lot more traffic into and through Ireland. In particular, it could dramatically increase the number of tourists who come here via Heathrow.
That is one reason why last week the Irish Tourist Industry Confederation backed the IAG bid, saying that it would "for the first time provide Ireland with a global one-carrier network connected to all regions of the world, while securing the future of Aer Lingus as a national brand in stable ownership within the IAG group."
Walsh has stressed that the intention is to maintain the Aer Lingus identity as it already does with Iberia, for example. Although the government initially seemed to be positive towards selling its 25 percent stake – as long as guarantees about the future were provided by IAG – the indications over the weekend were that this has now changed.
The latest indications are that a sale of Aer Lingus is unlikely to happen this side of the election next year. The reason is simple.
The unions in Aer Lingus are strongly opposing the sale, and thousands of these workers live in constituencies (electoral areas) on the North Side of Dublin where the Labour Party and even Fine Gael are desperately trying to hold on to a few seats in the Dail (Parliament) in the upcoming election.
So despite all the public posturing about the national interest, the decision by the government is probably going to be all about their own political survival rather than what is best for the airline and the country.
IAG and Walsh are likely to start a fight back in the publicity battle about the proposed takeover this week, but the full details of whatever guarantees might be offered as part of a takeover may not be known for another few weeks.
Some legal experts have been pointing out that such guarantees may be of limited value anyway since they can become inoperable or unenforceable if other factors come into play, like substantial changes in the aviation market and/or corporate changes or further mergers involving IAG.
The best guarantee for the future of Aer Lingus is likely to be its performance as a business, and there are strong reasons for believing that that would be enhanced by a takeover by IAG. Even on the single question of financing new aircraft – which is an upcoming issue for Aer Lingus – being part of IAG looks like a positive.
There is also the hard fact that the state's 25 percent gives the government limited bargaining power, even on the sensitive matter of the future of the Heathrow slots. Donohoe made that clear last week when he admitted that the government even now cannot prevent a sale or leasing of the slots without the support of other shareholders.
It's also obvious that if all the other shareholders decide to accept the IAG bid, the government will be unable to block change.
The whole question of Aer Lingus is, of course, an emotional issue for Irish people. The big green shamrock on the tail, the full Irish breakfast on board, the smiling familiarity of the cabin crew and the Irish accents ... for all of us, getting on an Aer Lingus plane has always been something special.
If we're coming back from abroad, we all have that feeling of being "home" as soon as we are on board. That is important and it's not something that any of us want to lose.
But sentiment only counts for so much. Those of us with long enough memories can remember the pre-Ryanair era when the lack of competition allowed Aer Lingus (and its cartel partner British Airways) to fleece passengers to the U.K. with tickets costing well over £200 or even £300 old punts for flights that lasted an hour or so.
That was the era of high cost national flag airlines, and Aer Lingus was one of the worst of them. All that changed with the arrival of low cost Ryanair, and after privatization Aer Lingus had to compete.
But despite the reforms and efficiencies introduced in the last few years by Aer Lingus boss Christoph Mueller (now departed to run Malaysia Airlines) there is still a long way to go.
There are some telling figures in the Moneybags column in the latest Phoenix magazine here. These show that Aer Lingus still has 3,500 staff, the same as in 2009, with average pay of €64,000, compared with average pay in Ryanair of €45,000.
Dividing passenger numbers by staff numbers shows that each staff member in Aer Lingus handles 2,660 passengers a year, while in Ryanair each staff member handles 9,000 passengers.
What this proves is that despite all the talk about reform and cutbacks, Aer Lingus (like other former national flag carriers) is still overmanned and inefficient. And it's in that context that one needs to see the opposition from the unions to a takeover by Walsh, who turned around British Airways by making everyone work a lot harder.
The performance by Aer Lingus on its American routes in recent years is hardly inspiring either. It's been on again/off again on some routes, and the cost of tickets is not as competitive as it might be when you look at other carriers. This is something readers over there will know more about than this writer and all comments are welcome.
One of the concerns raised by the unions here is that the takeover might mean that IAG would start to route passengers from Ireland to the U.S. through the Heathrow hub or other British airports, thereby damaging the Aer Lingus presence on the Atlantic. That is possible.
But one can also see it the other way round. With U.S. pre-clearance in Dublin and Shannon, why should IAG not try to grow the trans-Atlantic business out of Ireland rather than the reverse?
The bottom line on all this, of course, is that the consumer will be made to pay for continuing inefficiencies in Aer Lingus. It's like the massive overspend on Terminal 2 by the Dublin Airport Authority, so excessive that Ryanair won't have anything to do with it. The consumer is paying for this in higher landing charges.
And it's like the massive €700 million black hole in the joint pension fund for Aer Lingus, maintenance and airport staff. Aer Lingus and the state have had to pony up millions to resolve this, with only very slight reductions in pensions for staff.
This is in stark contrast to the situation in so many private companies here in which bust pension funds have been wound up or workers have seen their pensions cut in half.
In the aviation sector, however, because it is still semi-state, it is the taxpayer and the air traveling public who must pay up to fix the shortfall.
Bringing Walsh in would put a stop to a lot of this nonsense, and it is noticeable that so far IAG has not given any guarantees about retaining staff numbers and pay and pension levels. For a lot of people here, a dose of private sector reality is what the aviation sector here needs as soon as possible.
Despite the fact that there would be a €350 million windfall for the state from a sale – money that would be useful for pre-election goodies – all the signs are that the government parties will be very cautious about agreeing to a takeover before the election. There are too many votes at stake on the North Side of Dublin around the airport.
Expect them to find all kinds of reasons for kicking the can down the runway.