February 27, 2013 2:52 pm

EU blocks Ryanair-Aer Lingus merger

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Ryanair bid for Aer Lingus©PA

Brussels formally vetoed Ryanair’s latest takeover attempt for Aer Lingus on Thursday, arguing it raised “very serious competition problems”, in the first ever case of the EU blocking a proposed merger twice.

Joaquín Almunia, the EU’s competition commissioner, said he had no choice but to block a deal that “would have directly harmed passengers who would have had to pay higher fares as a result”.

Ryanair, which has mounted three failed bids for the Irish flag carrier in eight years, denounced the move as “manifestly unjust” and politically inspired “to pander to the vested interests of the Irish government”.

It is appealing against the decision, which will set a new precedent in Brussels and leave Ryanair accounting for almost 10 per cent of all EU merger prohibitions. Ryanair was unsuccessful in challenging the EU’s 2007 prohibition, which was upheld by the courts.

In his latest bid to win over Brussels, Michael O’Leary put forward a “revolutionary” package of competition remedies, which involved the de facto break-up of Aer Lingus.

While this went well beyond past offers to win EU clearance for an airline merger, the European Commission still concluded the tie-up raised fundamental competition problems that would probably short-change consumers on choice and price.

The commission investigation found that a combined Ryanair and Aer Lingus group would have an even more dominant position in Dublin than in 2007, with an 87 per cent market share and a monopoly position on 46 routes.

Mr Almunia said the four sets of remedies proposed were “important” and attempted to address all the problematic routes. But he said the core issue remained – “the creation of a monopoly with a dominant position on these 46 routes”.

Brussels was unconvinced that Ryanair’s remedies would prove viable, particularly given the risks around its offer to hand Flybe, the lossmaking UK regional airline, the right to operate about 40 per cent of Aer Lingus’s short-haul routes out of Ireland.

Even though Ryanair proposed giving Flybe’s Irish business at least nine aircraft and €100m in cash, the commission was not satisfied that it would have the financial muscle or experience to compete effectively with the low-cost carrier in its home market.

It was also not satisfied by Ryanair’s offer to make slots available so IAG, the owner of British Airways, could operate London routes from Dublin, Shannon and Cork for at least three years. The investigation found that post-merger Ryanair would still have remained dominant in terms of numbers and frequency of seat capacity. The Commission also had doubts over IAG’s long-term commitment to these routes.

Ryanair lambasted the commission for singling it out while it was “rubber stamping” every other European airline merger with “considerably fewer and less effective remedies” than it proposed.

“Ryanair regrets that the EU commission has again failed to apply its own competition rules and precedents in a fair and dispassionate manner,” said Ryanair. “We regret that this prohibition is manifestly motivated by narrow political interests rather than competition concerns and we believe that we have strong grounds for appealing and overturning this politically-inspired prohibition.”

Ryanair’s long quest to control Aer Lingus has already proved painful and costly. Mr O’Leary spent €407m to become Aer Lingus’s largest shareholder, but has written down the value of that stake to €80m.

Ryanair regrets that the EU commission has again failed to apply its own competition rules and precedents in a fair and dispassionate manner

- Ryanair

Aer Lingus accused Ryanair of launching its third takeover bid as a legal ruse to stymie the competition commission probe into whether Ryanair’s stake served to weaken Aer Lingus as a competitor. The investigation was launched days before the bid.

Ryanair could potentially be forced by the UK regulator to sell its stake and realise a heavy loss, but it is likely to take several years to reach this point given Mr O’Leary’s willingness to prolong litigation.

The European Commission is also considering whether it should change its rules on minority shareholdings. Brussels currently has the power to unwind mergers, but cannot order the sale of a minority stake.

Christoph Mueller, Aer Lingus chief executive, said: “Aer Lingus’s position from the outset has been that Ryanair’s offer should never have been made. The series of inadequate remedy offers presented by Ryanair only underlines the view that Ryanair made its offer without any reasonable belief that it could obtain clearance.”

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