There has been a huge amount of commentary in recent weeks around the proposed takeover of Aer Lingus by International Airlines Group (IAG) after much deliberation on the part of the government it now sadly looks like the proposal will be turned down by the government (and by default in totality as a result of the size of the government shareholding of 25%) Without getting too  much into the politics of my point of view (and in the spirit of full disclosure I would tend to lean just slightly to the right of centre politically…)  I just cannot fathom the logic of the really political nature of the decision to turn down the offer from IAG for Aer Lingus. I understand the question of jobs protection, having personally experienced the merger of businesses in the past, I know that it is absolutely unavoidable not to have duplication of some roles & efficiencies from economies of scale that will result in certain jobs being lost, neither am I naive enough to think that any Irish operations will have a competitive advantage in pure labour cost terms as part of a bigger group employing similar roles in cheaper economies but we really do need to look at the bigger considerations longer term…

So what are the arguments in favour?

I am not by any means arguing that this is a comprehensive list / assessment but the following are some (i believe) reasonably solid arguments in favour of the take over of Aer Lingus by IAG

The pure cost argument…

Running an airline costs quite a lot and whilst Aer Lingus is profitable currently it is not that long ago that they were loss making and in the cases where losses are being incurred then there is no payback to the shareholder community. Further, aviation is an expensive industry from a capital expenditure perspective and Aer Lingus’ incoming Chief Executive has already  stated this week that he believes that they will require a capital investment of $2 billion over the next decade, this investment will either come from loans which will need to be financed out of profits (and hence no dividends) or from further shareholder investment. This is where I have a real problem…what business does a state have in investing in the commercial drivers of a 75% private business and furthermore, how could a government with bigger investment challenges in terms of social services possibly prioritise investment in aviation CAPEX whilst our public health system crumbles under the pressure of years of underfunding and lack of investment resulting in intolerable suffering among society’s most vulnerable…..Sorry, no question for me where the priorities should lie! Cashing out now for the government would mean an immediate inflow for the government for investment where most needed.

“Landing slots”

There appear to be two problems here. Firstly, SAS got 50 million for a pair of these when they sold them recently and by that valuation those that Aer Lingus hold are worth (allegedly) €1.3bn but is it a problem is it that they are undervalued in the IAG bid or that they are of strategic value in terms of connectivity? If it is in fact the connectivity argument that is the be all and end all then how can any value be put on these slots, if not and everything has it’s value why would Aer Lingus market valuation not reflect this?

Secondly, I really have to take issue with the “importance” of the Heathrow slots. At a point in time, pre open skies, Heathrow was the be all and end all for connectivity for Irish air travellers, however, I am really struggling to see the value of Heathrow as a hub for Irish air passengers given the frankly enormous range of international routes now available out of Dublin (including to other major hub airports globally). From personal experience, using Heathrow as a hub is something I would avoid at all costs,  it has simply become too big and cumbersome and far too much hassle to make it usable without hours of changeover time. In terms of direct connectivity to what is unquestionably one of the world capitals, you have to go back to the open skies argument again, Dublin has never been as well served in terms of connectivity to all of London’s airports. There is huge capacity to serve the undoubted demand that exists on the route, apparently the second busiest in the world, so it is inconceivable that IAG would withdraw services with high load capacities, and even if they were to do so there are a string of other airlines looking to service Dublin to Heathrow, Gatwick, Stansted, Luton, London City and Southend, some of whom are increasing capacity and currently launching new services….

Ireland as a hub

Given the huge capacity challenges in some of the British hub airports, geographical proximity to Ireland of most of the UK’s major cities and towns, and US pre-clearance facilities, Irish airports are potentially a solution to major routing headache for IAG and an opportunity to add value to their services. It has been reported that there are already 1 million UK residents transiting through Dublin Airport T2 each year, imagine the potential for growth in that area with IAG’s support in terms of delivering the transit customers, indeed huge numbers of Spanish travellers to the US are already transiting in Dublin each year.

Connectivity for Shannon and Cork

This has repeatedly being highlighted as a challenge to any IAG takeover of Aer Lingus. However, it should be borne in mind that where there is a public service obligation, someone will always be able to service those routes and where there is commercial return or opportunity the commercial airline operators will seek to exploit them….simply look at the growth that Ryanair has been able to deliver to Shannon in recent years. If no commercial merit or public service subsidies are available on routes from these airports then its clear that Aer Lingus (as a commercial airline) is not going to continue to operate services from them.

Better the devil you know…

Lastly, it is unquestionable that IAG see Aer Lingus a true valuable addition to their stable of independent brands (BA, Iberia, Vueling) and that there are natural synergies in terms of the business reach of Aer Lingus to those of IAG. The alternatives for Aer Lingus are to attempt to stand alone in an increasingly consolidated space and try to compete against the buying power and economies of scale possible from the major international groups like Air France – KLM, Lufthansa etc or to put together a multitude piecemeal code share agreements with other international groupings, whilst attempting to fend off the threat of the budget carriers that have now got enormous scale…Considering all these likely scenarios it is difficult to see how Aer Lingus can confidently continue to operate in this space.

In all, there appear to be major compelling reasons for an acceptance of the IAG bid for Aer Lingus (particularly at the premium being offered on the share price in addition to the above). However, there is an election looming so it would appear that logic goes out the window in return for votes…or indeed an ability to stall the need to make a decision that could be contentious either way until after an election so as not to lose any votes…sadly it does smack of political rather than economically sound decision making…