February 11, 2013 4:53 pm

Ryanair /Aer Lingus: crunch time

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Ever watched an airline passenger trying to cram an impossibly large bag into overhead luggage space? It feels a lot like that as Ryanair, in its third effort to take over rival Aer Lingus, seeks antitrust solutions to the carriers’ near 90-per cent share of short-haul routes into and out of Ireland. The current plan is to give 43 routes to Flybe, and provide the British discount carrier with €100m to set up bases in Dublin and Cork. International Airlines Group, meanwhile, is lined up to take over Aer Lingus’s Gatwick slots (or, if the Irish government ever permits, those at Heathrow). Formally, competition officials in Brussels have until March 6 to rule; in reality, an internal decision could be made this week.

For all the pushing and shoving, big problems persist. For a start, the business to be divested to Flybe isn’t one. It is a collection of routes which needs to morph into a coherent unit. That would only happen months after any bid is completed, during which time Ryanair would run the show (presumably with regulators’ oversight). Second, Flybe’s capacity to compete with Ryanair long-term is questionable. Market capitalisation is £50m; net debt (as of September) similar; consensus forecasts are for a small net loss in the year to March. The gifted €100m, moreover, would not ultimately be ringfenced from group finances. Flybe also has (limited) scope to drop acquired Aer Lingus routes, which could put Ryanair in a monopoly position on some city pairs. (The bidder argues that this can happen anyway through route churn.) Most bizarrely, the Aer Lingus brand could live on with Flybe and Ryanair both using it differently – not least, in the latter’s case, to run Aer Lingus’s Irish Heathrow routes in competition with its own existing Stansted ones.

Aer Lingus’ shares, at €1.37 and on a 12 times forward multiple, now top Ryanair’s earlier bid price. That partly reflects effective performance. The flag carrier should be allowed to continue delivering just that.

Email the Lex team in confidence at lex@ft.com

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