COMMENT: Aer Lingus – What happens next?

Aer Lingus is the de facto national airline of Ireland, although in truth far smaller these days than Ryanair.  Over the last bumpy 20 years or so it has been vastly less profitable as well.

Is it to be finally gobbled up by British Airways, but retaining its identity, or is it to remain an independent stand-alone?  IAG says all is secure, but for five years only.  What happens then?  Will the Irish contemplate a British backed European takeover?  Then there is the question of the Aer Lingus UK franchise operation connecting the US through Dublin, now said to be 25% of the transatlantic services?  Etihad hold 5.9% of Aer Lingus whilst Qatar has recently purchased 20% of IAG.  They are allegedly not the best of friends.

And where does Michael O’Leary and Ryanair stand with all this? 

Presumably he does not need the money which the sale of Ireland’s largest airline will realise.  The fact that he has appealed against the latest British High Court judgement when he must have expected the Aer Lingus board to recommend IAG’s share offer after a charm offensive by Willie Walsh, Chief Executive of IAG, indicates that he is perhaps not ready to sell.  (See in this issue  Ryanair Appeals – Again)

And what of Walsh, formerly a pilot with the Dublin-based airline?

Like most businessmen his track record is not perfect.  His first Spanish venture, Futura, where he was in charge for a short period, did not work out, the airline folding soon after Aer Lingus sold its investment.  Appointed Chief Executive of Aer Lingus in 2001 he started to copy the Ryanair low-cost model retaining the North Atlantic services and with it America’s fraternity to Ireland.   The company operating profits rebounded, but the cost of the write-offs and redundancies meant that net profitability was not as quick to recover.  Not all of Walsh's reforms were successful, such as the outsourcing of aircraft cleaning.  The contracting had not been agreed with Aer Lingus unions which led to large payments to the private contractor while Aer Lingus employees did the work.

By late 2004 he was ready to float off Aer Lingus on the stock market, which would have proved personally lucrative, but this was rejected by the Irish government.  Walsh and other senior executives resigned.  The airline was eventually floated in October 2006 by which time Walsh had been selected by Rod Edington as his successor, the Australian brought in as a short term leader by BA following the Robert Ayling leadership failure.  Edington had closely swotted up on Walsh.

At British Airways Walsh has seen boom years and times of major challenges including a global downturn, increased competition from low-cost carriers in Europe and the grabbing of much of the premium Far East market by quality Gulf State carriers.  He has retained BA’s lucrative hold on the North Atlantic.  An EI investment could build on that.  Increased productivity by staff has been pushed through.  A new cabin crew agreement was made, although the deal was finally thrashed out after the IAG introduction with Keith Williams as BA Chief Executive (and now Chairman too) seeing it through.

Walsh’s most controversial move has been a merger with the near bankrupt Iberia creating IAG at a time when Spain itself was in financial trouble.  This union was a convoluted process starting in November 2009 and not completed until January 2011 with an opening share price of 250p, now worth over double but somewhat volatile.  The successful Spanish airline Vueling has been gobbled up.  No dividend has ever been paid in the 10-year Walsh BA/IAG era which has upset many retired BA employees. 

Walsh announced to hub BA South American business through Madrid and embarked on a cost cutting process.  The turnaround has proved to be very slow but much is promised for 2015.  IAG has its own 100-strong expensive management centre away from BA Waterside fortress, some say a duplication of effort. 

EI could provide the additional protection to the BA/IAG US network offering more IAG branded connections from UK regions over the pre-cleared Dublin hub whilst key connecting, point to point and premium US traffic continues to be focussed over Heathrow (LHR).

BA itself now seems to be in a very good position with the fleet renewal well under way with a new 787 Business Class rumoured.  It is strong on the North Atlantic and getting better in the South Atlantic too.  It gobbled up BMI and will see more slots coming with the Virgin Little Red failure.  It could buy other LHR slots on an opportunity basis.  It has not got involved with the Air Commission controversy which some say is wrong for the airline that 'flies the flag'.  But why should it?  With around 53% of the Heathrow slots and more large aircraft on the way it can easily plan for the next 10 years.  A pure commercial rather than national decision.   The airline is increasingly dominant at London City, with Gatwick retained mainly for Europe and the Caribbean leisure traffic and a new lease of life planned in the South Terminal.  No connecting passengers seem to be sought, unlike Heathrow. 

However to get any news/explanation out of the Waterside press office these days is difficult with BA far from media proactive. 

The Ryanair and government stake in Aer Lingus comes to 55% plus Etihad with 5.9%.  Who holds the rest?  Details do not appear to be published?

James Hogan, President of Etihad, speaks at the Aviation Club on 26 March.  If the situation is still not concluded by then it could be a fascinating session.  Will IAG be on the top table?

It does look like we are in for an interesting few weeks with Aer Lingus.  O’Leary holds the cards!  What will happen next?  That is the question.

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