LONDON— As Aer Lingus’s new CEO Stephen Kavanagh prepares to sit down behind his desk for the first time on 1 March, he faces an interesting short-term future.
The Irish flag-carrier is in the throes of a takeover bid by International Airlines Group (IAG), the parent company of British Airways, Iberia and Vueling. After rejecting two IAG bids as undervaluing the Dublin-based airline, its board is now recommending the acceptance of a third offer that would value it at €1.36 billion ($1.54 billion).
In an appearance before an Irish parliamentary committee on February 17, Chairman Colm Barrington said: “The Aer Lingus Board’s strongly held view is that a combination of Aer Lingus with IAG has a compelling strategic rationale and will deliver significant benefits,” not only to the airline, but Ireland as a whole.
Barrington listed a string of benefits, including an acceleration of Aer Lingus’s growth in the profitable trans-Atlantic market. “Growing our current share of this traffic from its current 2 percent level to even 4 percent or 5 pecent – an additional one to two million passengers per year through Ireland – will have huge positive benefits for Aer Lingus, its employees, and for Irish airports.”
In its attempts to win over wider Irish opinion – the Irish government holds a 25.1 percent stake in Aer Lingus – IAG has given a series of assurances as part of its bid. These include a commitment not to sell Aer Lingus’s 23 highly valuable slots at London Heathrow, where it is the fourth-largest carrier, and to operate UK-Irish routes on them for the next five years.
Barrington added that IAG had agreed to operate Aer Lingus as a separate operating business within the group, retaining its brand, management, head office and operations.
He also noted that Aer Lingus’s short-haul services would directly benefit from sales and marketing activity from IAG and its oneworld partner sales forces. This would particularly strengthen traffic to Cork and Shannon.
However, some members of the Irish government remain unconvinced, with one minister reported as saying on February 20 that the offer was “not persuasive enough.” IAG Chairman Willie Walsh – himself a former Aer Lingus CEO – still has work to do. Also uncertain is the position of low-cost behemoth Ryanair, which holds 29.8 percent of Aer Lingus’s shares.
Aer Lingus is a much more attractive prize for IAG than it would have been five years ago. Under outgoing CEO Christoph Mueller, it has transformed itself from one of those mid-sized European national carriers under existential threat from both the majors and low-cost carriers to a quietly profitable enterprise. Net profits for 2013 (the last full year available) were €34.1 million ($38.6 million) on revenue of €1.43 billion ($1.62 billion).
Long-haul services – which are almost exclusively to North America – are prospering, helped by the presence at Dublin and Shannon of U.S. immigration pre-clearance desks. These are becoming increasingly popular with UK-originating passengers, who can transit through Ireland, avoiding both Heathrow and long immigration queues once they get to the U.S.
Until recently, there were two financial clouds hanging over Aer Lingus. One, an interminable dispute over its staff pension scheme, seems finally to have been resolved with the pumping in of yet another tranche of funding to ease a deficit and a new, defined contribution pension scheme being put in place.
The other problem – a multi-million pound breach of contract claim by Belfast International Airport (BIA), which claims that Aer Lingus walked away from a 10-year deal to stay at BIA in favour of a move to Belfast City Airport – is due back in Belfast High Court in April. An airline spokesman said it would “vigorously contest” the claim.