Scrappy Ryanair Targets Aer Lingus
Parmy Olson, 10.05.06, 11:30 AM ET
Ryanair Holdings shocked the aviation industry on Thursday by launching a 1.48 billion euro ($1.88 billion) takeover bid for Ireland's flagship airline, Aer Lingus, after taking a 16% stake in the company.
Shares in Aer Lingus shot up 14.7%, to 2.89 euros ($3.67), in early afternoon trading on the London Stock Exchange, while Ryanair (nasdaq: RYAAY - news - people ) was up 3.33%, at 9 euros ($11.42) per share. Aer Lingus said it was considering Ryanair's announcement and urged its other shareholders not to respond to the offer before it made a statement.
Ryanair's previous record for a takeover was its relatively piddling 5 million euro ($6.3 million) absorption of Buzz, previously a unit of KLM Royal Dutch Airlines (nyse: AKH - news - people ). The company is now offering 2.80 euros ($3.55) per share in cash for the remaining shares in Aer Lingus, which listed on the London and Dublin stock markets at the beginning of this week at 2.20 euros ($2.79) per share.
Michael O'Leary, Ryanair's fiery and outspoken chief executive, said in a statement that the offer represented "a unique opportunity to form one strong airline group for Ireland and for European consumers."
"'If accepted, the Irish Government will realize over 500 million euros ($634 million) from the sale of their Aer Lingus shares and the employees will realize over 220 million euros ($280 million), which equates to an average of over 60,000 euros ($76,140) per employee," he said. Ryanair pledged that Aer Lingus' average short-haul fare of 87.55 euros ($111) in 2005 would fall by 2.5% each year for a minimum of four years.
It may sound a tempting offer for Aer Lingus' shareholders and workforce, but some observers are scratching their heads as to Ryanair's intentions. "I think it's opportunistic," said Nick van den Brul, an aviation analyst with BNP Paribas. "It calls into question where Ryanair is going to go with it, and represents a change in their business model."
A big change. While Ryanair is Europe's biggest low-cost airline, specializing in short-haul flights between second-tier airports, Aer Lingus is a far more traditional carrier which offers long-haul flights, including routes from Dublin to the United States.
Ryanair insists that a takeover wouldn't spell an integration of Aer Lingus into Ryan Air, since Aer Lingus would keep its own brand and continue to execute its current business model.
But van den Brul calculates that a takeover of Aer Lingus would mean a margin dilution at Ryanair from 21% to 18%, not great news for investors who bought shares in Ryanair because of its combination of growth and high profits. "The key question is: What is the growth for the low-cost European model, relative to higher-cost long-haul model?"
Another key question is, why takeover Aer Lingus at all? Doug McVitie, an analyst at aerospace consultancy Arran Aerospace, believes O'Leary’s bid is "purely and simply a political move to gain leverage with the Irish government."
"O'Leary's not interested in finesse or Aer Lingus' business-class economics, he just wants to have more say in the future of aviation in Ireland, which starts at Dublin Airport," McVitie said.
Earlier this week O'Leary had been so irked at the predicted cost of the new Terminal 2 at Dublin Airport, that he has offered for Ryanair build it instead for 250 million euros ($317 million), far less than the 600 million euro ($760 million) budget that the Irish government had forecast.
Ryanair might want a greater say in how the Dublin Airport expands, including making sure that the new Terminal 2 is filled with ramps for Ryanair aircraft instead of Aer Lingus planes, as is currently expected. "If Ryanair was the dominant carrier at Dublin through the acquisition of Aer Lingus, it could rearrange take-off and landing schedules much more to its own convenience," said McVitie.
"O'Leary firmly believes the Irish government doesn't know what it's doing at Dublin Airport, or in aviation in general, and he's prepared to go to some lengths to show it," added McVitie. "They're politicians, after all, not aerospace specialists, so he has a point. It's just his manner of getting that point across which is a little 'unconventional.'"
A spokesman for Ryanair said that Aer Lingus also did not approve of the "overly high" landing fees charged at Dublin Airport, and the two airlines therefore had a similar agenda. But he did not wish to comment when asked if, following a takeover of Aer Lingus, Ryanair would lobby for more slots at Dublin Airport.
It's possible that a takeover of Aer Lingus is so illogically divergent from Ryanair's traditional business model that the bid is more of a warning shot at the Irish government than a serious offer. "Only Michael O'Leary could come out with a stunt like this," said McVitie.
That said, the fact that Aer Lingus shares are trading above the Ryanair bid indicates that investors think further offers may be coming. |
