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Irish Government Set to Sell Aer Lingus Stake

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Irish Government Set to Sell Aer Lingus Stake

Irish Government Set to Sell Aer Lingus Stake
May 27
14:00 2015

MIAMI — Negotiations over the future of Aer Lingus appear to be nearing the finish line as the Irish government has signaled it is ready to sell the 25.1% stake of the carrier. The purchase by IAG, parent company of British Airways, Iberia and Veuling, has been under debate since the Board of Directors for Aer Lingus indicated its willingness to accept such an offer in January of this year. The government did not agree quite so quickly, holding out for better guarantees on the future of the Aer Lingus brand and operations as the merger is effected. Recent additional promises on that front from IAG have secured the decision.

Like many airline deals one of the main sticking points was related to departure slots at London’s Heathrow airport. The value of these slots has been contested throughout the negotiations and there was concern that IAG might pull them from the short-haul service in order to add more long-haul routes and flights. Aer Lingus currently holds 23 slot pairs and the government wanted assurances that these slots would continue to be used for connecting Ireland to London and beyond. IAG’s initial offer was a 5-year guarantee on that front while the government sought 10; the reported deal settled on 7 years.

Beyond the Heathrow slots the real reportedly includes an additional 4 transatlantic routes for the Aer Lingus operation, eight new aircraft and more than 600 new jobs by the end of the decade. The employment is also a significant one for the company but CEO Stephen Kavanaugh, in a letter to Irish Transportation Minister Paschal Donohoe, suggested that the use of Irish crew bases “will remain our preferred operating model provided that Aer Lingus continues to be competitive and efficient (as it is today).”

Adding the financial and operational support of the IAG behemoth offers plenty of potential for improvements and efficiencies in the Aer Lingus brand, particularly in the face of pension funding demands and fleet renewal efforts. The company has seen operating profits return as the Irish economy improves but that is unlikely to be enough to buoy the carrier as an independent operation long-term without significant capital investments. Upgrades to long-haul premium cabins have just started to fly, for example, allowing Aer Lingus to compete better in the transatlantic markets. Continuing that growth will further aid in improving the revenue and profit numbers for the company. Although it has not yet been discussed it seems likely that Aer Lingus would also aim to join the transatlantic joint venture with IAG and American Airlines to further allow for coordination of pricing and schedules on those routes.

Adding Aer Lingus to the IAG family also allows for more of the US-bound, non-London passengers to connect in the much smaller and easier Dublin or Shannon airports rather than via Heathrow, especially as additional westward routes are launched. This sort of synergy – using the smaller airport for connections while the larger focuses on origin & destination (“O&D”) traffic which is typically higher yielding. Plus the Irish airports offer pre-clearance of immigration and customs for US-bound passengers, further improving the travel experience. The east-bound passenger connections from Ireland would still flow via London but the shift would allow more efficient and higher yielding use of the Aer Lingus Heathrow slot portfolio while still expanding the Dublin-based operations.

Of course, this all depends on the deal actually closing and all parties holding to their word, but it appears that is the direction the business is headed.

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