Viewpoint

An End To Shares In Rival Airlines?

Earlier this year Ryanair was refused permission for a third time to take over Aer Lingus; now the budget airline has been ordered to sell down its 30 per cent shareholding in Ireland’s flag carrier to five per cent over fears that the large minority stake has been or may be anti-competitive.

The UK Competition Commission (UKCC), the source of the recent ruling, claims that Ryanair’s 30 per stake could weaken Aer Lingus as a competitor in several ways, chiefly by restricting its ability to merge with other airlines.

Ryanair CEO Michael O’Leary called the decision “bizarre and manifestly wrong”, but also “entirely expected” given Ryanair’s belief that the UKCC’s stance had been determined prior to its investigation.

He has a point.

Firstly, Ryanair and Aer Lingus compete on a handful of UK-Ireland routes that touch a tiny fraction of British travellers. However, even if the UKCC is willing to make such a momentous ruling (which could have big repercussions across all areas of business) to protect that fraction, there is no evidence that competition has been harmed by Ryanair’s shareholding.

The European Commission found earlier this year (ironically, given that it was part of a decision to block Ryanair’s takeover of Aer Lingus) that the two carriers exerted important competitive constraints upon each other, and even the UKCC itself acknowledges that “competition between Ryanair and Aer Lingus has remained intense since 2006”.

So, the UKCC must be focusing on the possible future harm that Ryanair’s stake could do to Aer Lingus as a competitor.

Its main line of argument in this respect is that potential suitors for Aer Lingus would be swayed from bidding for the airline because of Ryanair’s equity presence, despite Ryanair’s repeated assurances that it would sell up to any buyer of Aer Lingus who secured majority shareholder approval.

Canvassing opinion among hypothetical buyers, the Commission found: that IAG would not usually contemplate majority takeovers were a significant minority interest to remain (which Ryanair has promised would not be the case); that Air France would be equally concerned by the Irish government’s 25 per cent stake in the carrier; and that Lufthansa would consider Aer Lingus a “rather less attractive” purchase due to the Ryanair stake.

Oddly, an opinion on the matter was also sought from Aer Arann, an Irish regional carrier with 14 turboprops that is in no position to purchase any local rival.

The UKCC also worried that the stake would: hamper Aer Lingus’s ability to issue shares to raise capital; influence Aer Lingus’s ability to manage effectively its portfolio of slots at London Heathrow; influence Aer Lingus’s commercial policy and strategy by giving Ryanair the deciding vote in an ordinary resolution; and allow Ryanair to raise Aer Lingus’s management costs or impede its management from concentrating on Aer Lingus’s commercial policy and strategy.

Only the last point holds much weight, given that Ryanair has dragged its feet as a powerful shareholder in the past, but there is scant justification for the other concerns and, indeed, the UKCC bestows only a cursory focus upon them.

Ryanair intends to appeal the decision and TP would expect it to win.

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