Friday, October 6, 2006
We would like to thank Conor McAuliffe for providing us with our latest guest blog. Conor is Managing Director - European Affairs for United Airlines.
When asked to write a blog about the state and future of the US-EU open skies negotiations, I had resigned myself yet again to attempting to conjure up an original thought on the importance of Heathrow access. But Michael O'Leary came to the rescue yesterday with an audacious bid to purchase long-term rival Aer Lingus codenamed ‘operation bargepole’. Nobody in Irish political, union or industry circles, either during the public flotation of the airline or since, imagined that O'Leary would have the pure chutzpah to try to purchase the national carrier.
It must have given O'Leary enormous satisfaction to wake Martin Cullen, the Minister for Transport, at 7 am yesterday to announce that he had bought 16 percent of Aer Lingus and intended to offer a premium to shareholders to gain 51 percent control of the airline. He even had the cheek to offer to buy the Irish government's share.
O'Leary is doing what he does best - sticking it in the government's eye. For some time now, he has run a media campaign depicting Bertie Ahern, the Irish Prime Minister and his cabinet ministers as ditherers because of their failure to improve the infrastructure at Dublin Airport. Now, O'Leary has the Irish government where he wants them - in the open market - and he intends to pursue them and his economic agenda there with characteristic vim and vigor.
Having floated a majority stake in the airline on the open market just days earlier in the interests of competition, the government reacted to O'Leary's gambit with contradictory bluster. On the one hand, Cullen stated that the bid demonstrates the wisdom of floating the airline. On the other hand, he opined that the bid is bad for consumers and competition. It appears that Irish government wants to take the "free" out of "market" and dictate who will accompany the national flag carrier to the ball. The appropriateness of the proposed takeover should be decided by the competition authorities and not the Irish government.
The unions are understandably apoplectic. O'Leary has made his contempt for unions well known. To them, he is the Kaiser Soze of the aviation industry. The unions claim that his bid underscores the folly of privatization in the first place and have called upon the government to reverse the process. But any attempt to buy back the stock may well be political suicide with an election pending in the next several months. It would demonstrate political weakness and cost the taxpayer dearly because O'Leary's bid has significantly increased the airline's stock price.
No doubt, Willie Walsh, CEO of British Airways, is having the last laugh. When he was the CEO of Aer Lingus, the government rejected his effort of a management buyout of the airline and forced Walsh and his associates to leave. Now perhaps the Irish government may well live to regret the decision if O'Leary succeeds in securing majority ownership and navigates the regulatory obstacles, including the European Commission's Merger Task Force approval process (or the Irish Competition Authority if the matter is referred to it).
I began by stating that O'Leary's bid rescued me from the thankless task of discussing Heathrow access. But perhaps O'Leary's attempt to purchase Aer Lingus may be as centered on Heathrow as the US-EU negotiations. Aer Lingus is the third largest slot holder at Heathrow and slots there have significant value. Additionally, it will not be lost on O'Leary, who operates from several hubs in Europe, that he can use the Heathrow slots for transatlantic services if the US and the EU ever manage to conclude an agreement. The agreement would replace the traditional nationality clause with a Community carrier clause, thereby enabling any carrier that is owned and controlled by Community interests to operate to the United States from any point in Europe. Thus, Aer Lingus under O'Leary and Ryanair ownership could operate transatlantic services from Heathrow. In that event, O'Leary rather than Walsh may enjoy the last laugh if British Airways is faced with vigorous, low cost competition from Ryanair on the transatlantic market that currently accounts for 75 percent of British Airways' profits.
The Irish government still owns 28 percent of Aer Lingus. One of the primary reasons that it maintained this stockholding is to ensure that the owners of Aer Lingus would continue to operate Heathrow-Dublin services. It is unclear whether EU rules governing "golden shares" would allow the government, as a minority stakeholder, to dictate the fate of Aer Lingus' Heathrow slots. What better person than O'Leary to invoke EU law on this matter and enlist the help of his good friends in the Commission?