Friday, 29 May 2015

Aer Lingus banks towards IAG's ( and Qatar's?) flypaper.

The Irish Government has thrown in the towel on its 25.1%% share in Aer Lingus. It is prepared to sell out to IAG at 2.55 Euro a go. That will just leave a decision by RyanAir on its 29.8%% to come.

Ironically if Ryan do sell they become de facto Ireland's national carrier.

The deal comes with guarantees to the Irish Government that the key network structure of the high frequency London route and the use of Dublin as a trans Atlantic hub will continue for at least seven years and that Aer Lingus will remain a standalone brand in the same way as are BA, Iberia and Vuelling. Seven years is not a long time so while that is a short term comfort it gives no long term guarantees. Anything could  happen after that.

IAG's purchase follows its previous pattern of interests in geographical areas of which Chief Executive Willie Walsh has previous experience. It also continues the policy, other than in the case of Vuelling, of buying legacy carriers whose potential profits come from squeezing out inefficiencies and ancient working practices rather than necessarily route and revenue growth. The threat to any recalcitrants is that Vuelling can over time take over their short haul routes.  Indeed one can forsee Vuelling progressively becoming the operator of all the group's short haul network ,possibly on a pseudo franchise or codeshare basis, anyway.

Further afield IAG has been unsuccessful in persuading Boards to sell them their businesses. A very significant relationship has though developed with the extremely seductive Qatar Airways who recently purchased 10% of IAG in a move explained by its Chief Executive  as representing "an excellent opportunity to develop our westwards strategy". Here comes another development ? Qatar Airways (note the airline not the state per se)  would logically be interested in owning a higher percentage although the total of all non EU holdings is limited to under 50%.  Alone among the Europeans Walsh has recently come out fighting against USA and Europe moves to clip the wings of the Gulf carriers. Could we now be looking at a scenario where IAG finances the purchase of Aer Lingus by increasing its share capital via the issue and sale of additionally created stock to Qatar Airways? Even if it doesn't happen now this sort of progression has to be a long term strategic possibility with very deep and interesting implications.

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