Behind the spin: Aer Lingus

THE DILEMMA

by
Last Updated: 31 Aug 2010

Ireland's flagship airline is under attack from its no-frills home rival Ryanair. Last month, Ryanair, which owns 29.8% of Aer Lingus, launched its second hostile bid for the carrier in two years. CEO Dermot Mannion described Ryanair's EUR748m offer as 'a pathetic sum'. The Irish government, with a 25% stake in Aer Lingus, opposed the 2006 bid, but a sharp drop in tax revenues and soaring deficit spending makes Ryanair's cash more tempting.

THE SPIN

Mannion, new chairman Colm Barrington, and Irish transport minister Noel Dempsey met in mid-December to discuss the bid. 'Ryanair cannot spin away the fact that Aer Lingus is and will continue to be its fiercest competitor into and out of Ireland,' said Mannion afterwards. 'Aer Lingus remains a strong business with significant cash reserves and a robust long-term future.' In the short term, though things aren't so rosy. Aer Lingus expect to return to profit next year, thanks to substantial cost-cutting and a drop in fuel prices. Its CFO, Sean Coyle, announced that a package of cost-cuts and productivity measures had been backed in union ballots (Aer Lingus is highly unionised), and would secure the EUR74m of annual cost-savings needed, but up to 400 jobs could go.

THE STRAIGHT TALK

Ryanair's renegade CEO Michael O'Leary has said he intends to create 'one strong Irish airline group under common ownership'. His company has pledged to cut Aer Lingus fares by 5% for three years, a promise Barrington has dismissed as meaningless. To O'Leary's claim that the flagship airline is 'tottering from crisis to crisis', Barrington retorts that Aer Lingus has one of the strongest balance sheets in the industry, with gross cash of EUR1.3bn and net cash of EUR800m.

THE VERDICT

Barrington has vowed to find a friendly investor who'll take a majority stake in Aer Lingus, putting an end to further Ryanair bids. He told the Irish Times last month: 'If they don't get us this time around, they won't get us again, because I'm not going to stay as chairman for three years and have this hanging over me.' A number of strategic options are being examined, with analysts tipping Air France-KLM as a potential bidder. From a consumer and country point of view, Barrington says it would be a better option than Ryanair, 'but I haven't had a call yet'. A link-up with a PE group wouldn't be ruled out, nor would issuing new shares to dilute Ryanair's holding. But Barrington won't expect O'Leary to take either lying down.

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