The Irish Government Wisely Agrees to Let IAG Buy Aer Lingus

Ohayou gozaimasu, everyone! I’m back from a week in Japan and it was fantastic. Stay tuned for trip reports in business class on an ANA 787 and Suites class on a Singapore A380. Both were excellent, as you’d probably expect. But those aren’t ready yet. For now, let’s get back to the business of airlines.

There were a lot of things that caught my eye last week, but I can’t write about them all. Today, I thought I’d talk about the culmination of a long process. IAG, parent company of British Airways, Iberia, and Vueling, has finally convinced the Irish government to allow it to add Aer Lingus to its trophy case. The deal really is a good one for both sides.

IAG has been trying to purchase Aer Lingus for quite some time now, but opposition from the government (which owns a quarter of the airline) was holding it back. It took some guarantees to maintain the brand and service levels into the UK in order to get the Irish government to come around. Yes, Ryanair still owns nearly 30 percent of the airline as well, but it has to sell all but 5 percent of that (though this is still under appeal). Regardless of what Ryanair decides to do, it likely won’t kill the deal.

That doesn’t mean that this is officially done though. The EU still has to sign off on it from an anti-trust perspective. But we’re at a point now where I’d be surprised if this didn’t happen. And it’s a good thing, for the most part.

There were three big concerns that were specific to this deal that caused some hesitation. Some of these were really unfounded.

1. Losing Its Airline
   One of the concerns was that Ireland would lose its national airline and would just become a set of routes in another airline based elsewhere. While that might make more sense if it were possible, that’s not how IAG’s model works. IAG prefers airlines to keep independent brands with separate management teams, as evidenced by the way it handles British Airways, Iberia, and Vueling.

   That doesn’t mean Aer Lingus will just do whatever it wants as a completely independent arm, however. We know that the deal is going to bring Aer Lingus into the joint venture with American over the Atlantic. Aer Lingus will also join oneworld and start using Avios as its frequent flier point currency. And you know there will be plenty of “synergies” along the way that will be discovered.

   To placate the government, IAG formally agreed to keep the Aer Lingus brand as an airline based in Ireland. This wasn’t a stretch anyway.

2. Slash and Burn
   Another concern is that Aer Lingus would see major cuts in the same way that Iberia did. But there’s a big difference here. Under its previous regime, Christoph Mueller already did the slashing that Aer Lingus needed to become viable, and it has been making money. Iberia was a bloated company that was in desperate need of change to even have a chance of profitability when IAG showed up. Aer Lingus is fairly well-positioned, so the concern about slashing and burning should be minimal.
3. Heathrow
   The last concern is probably the most valid. Aer Lingus holds a lot of slots at Heathrow and uses them to fly to various cities in Ireland. Some think IAG wants those slots for British Airways to use on other routes. That’s fair, but it should also happen to some extent. After all, if BA and Aer Lingus both fly Heathrow to Dublin, then why not fly fewer flights with bigger airplanes and then use the remaining slots for something else? I suppose the bigger concern from the government is that smaller cities will simply lose flights to Heathrow entirely. That’s a very fair concern.

   To compensate for that, IAG says it will commit to maintaining existing schedules between Heathrow and Dublin, Shannon, and Cork for 7 years. All other Aer Lingus Heathrow slots will be used for flights to Ireland for 5 years, though it doesn’t say on which routes. And that commitment was enough to get the Irish government to make a move.

Beyond that, of course, there are the usual merger concerns. Will this be good for travelers? Will it be anti-competitive? The EU needs to consider that now.

For passengers, there is a lot of good here. Joining the IAG empire will mean people in Ireland will have seamless access into a much bigger network. And the airline’s re-entrance into oneworld (it was a member for several years) is also going to bring more benefits. Plus, IAG expects to grow Dublin as a Transatlantic jumping-off point.

There are some areas of concern. First is Heathrow since there isn’t competition from there to Ireland if this goes through. But Ryanair has such an enormous presence from Ireland to other London airports and Europe in general that this should be a fairly minor concern.

Transatlantic competition may be another area to think about. After all, there are very few airlines outside of the big three alliances that fly over the Atlantic these days. Aer Lingus has been a lower fare carrier, especially in relation to one way pricing. It would seem likely that this would change, but then again, maybe not. IAG may find that the Aer Lingus strategy is a good strategy to use for that carrier. As we saw with Vueling, IAG isn’t necessarily looking to have a single strategy over every carrier it owns. It just wants the right strategy for that carrier.

Assuming this does go through, we’ll find out how this plays out soon enough. But I tend to believe this is a smart move.