irishguy28

But once IAG buys Aer Lingus, Aer Lingus ceases to be the "competition".

Not everyone who flies across the Atlantic can always be accommodated on BA, EC* or IB. So, by adding carriers, IAG can increase their share of the "pie".

And remember - this idea of "competition" is incorrect, given the immunised joint venture across the Atlantic. They would apply for permission to include EI in their joint venture. Each of US, AA, BA, IB, EC* and AY already participate in this, and share all costs and revenues and profits. They are effectively just one single airline across the Atlantic - just like the Skyteam joint venture, and the Star Alliance joint venture, also operate each as a single, virtual airline across the Atlantic.

To add Aer Lingus to this joint venture, therefore means that they have a profitable, and growing, airline added to the venture. Dublin also offers them far more scope for adding flights/Destinations. Heathrow is full but they can add flights from Dublin (whether operated by EI or BA, or IB, doesn't really matter) and help drive customers to Dublin - with each of BA, IB, and maybe even AY advertising/selling tickets to new North American destinations via a quick and handy stopover in Dublin.

(*I'm not entirely sure if BA's Openskies is part of the JV)

MeltingAlf

Indeed, what irishguy28 says is quite right.

One of the main reasons (I believe) why IAG is doing a whole lot better than Lufty Group or to a smaller extent, AF-KLM is that each unit operates independently without interference from the other, yet interdependently on areas where they overlap. (Correct me if I'm wrong ) Each unit is supposed to prove their own worth independently without cross-feeding of funds, which is why BA and Vueling were buying shiny new planes at a time when IB weren't, when IB was still losing money.

Also, I would suppose an acquisition of EI in the long run would be better for Ireland as a whole. Rather than just looking at the short term which the TDs and the Upper House are doing that "EI sold to BA -> slots gone -> connectivity gone", I would believe an acquisition of EI would allow IAG to tap its untapped potential to transform DUB and maybe even SNN into TATL hubs.

As we all know, LHR is full and there's worse-than-parish-politics regarding the building of a new runway in LHR/LGW (along with the Boris Island nonsense that no one's buying, of course). If IAG can utilise EI to open up more DUB TATL routes to more places, the slot problem regarding Heathrow would be diminished since there's no need to head to LHR to fly TATL direct when you can do it via DUB (with pre-clearance too).

Of course, I'm presuming IAG's going to buy over EI not to bankrupt it (doesn't make economic sense), after all... Else everything here does not apply!

ferg01

OK - thanks irishguy and MeetingAlf for helping me out with my admittedly limited understanding of the broader picture. While all the above points make sense (qualitatively at least), tthere's still niggling doubt in my own mind though. If you could further educate me I'd be grateful.

EI would remain a "competitor" because even if it were to be brought into the fold, it would still potentially take from BA TATL business. For instance, where does EI fly to in the US that isn't serviced by AA or BA already? There's still too much overlap in my mind for EI to add any value whatsoever, what's to stop BA from buying EI and then cutting its TATL capacity to ensure higher prices? There are no guarantees to any TATL routes as far as I'm aware?

On the adding flights through Dublin point - ok good point but I still have to get it clear in my mind how this doesn't come at the expense of the existing BA business? Is it only because LHR is full? What about LGW?

Finally, I'm unclear about the use / value of SNN and ORK for BA.

Can you give me precedents where an acquisition similar to this has happened and the seller ends up in a better position?

Happy to be corrected by more intelligent analysis however!

irishguy28

Yesterday, IAG sold more EI shares than they bought.

I'm not sure what those derivatives transactions imply, though.

irishguy28

As long as the business "taken" from BA doesn't go to Skyteam (Delta, Air France, KLM, Alitalia, Air Europa) or Star Alliance (United, Lufthansa, SWISS, Austrian, SAS, etc) or one of the few remaining unaligned carriers (Icelandair, Norwegian, etc) then the business hasn't been "taken" from BA, at all. It's as if BA operates all oneworld services across the Atlantic. Everytime a passenger travels on American Airlines, or on US Airways, or on Finnair, or on Iberia, BA pays a share of the costs associated with carrying that passenger, and receives a share of the revenue generated by that passenger. All of the joint venture partners share all costs and all revenues on transatlantic routes. There is really no such thing as a "BA passenger" or an "AA passenger" across the Atlantic - they are only "oneworld JV passengers". Of course, the money is not shared evenly 5 ways between the partners - it is presumably shared in a ratio that reflects the number of people each carrier carries, but everytime a passenger books a flight to the States on, say, Finnair, BA (and IB, and AA, and US) will receive a share of the money.

Remember that, for every passenger travelling on Aer Lingus across the Atlantic, BA suddenly gets part of the profit generated by that traffic. Aer Lingus carried a record 1.324 m passengers across the Atlantic in 2014 - an increase of 20.6% on the previous year. For oneworld to suddelny have 1.5million (let's be optimistic for 2015!) extra passengers travelling on an annual basis, thanks to the entry of EI into the JV, is something that all the JV partners will be happy about. One of their competitors is suddenly a friend, strengthening their offering and making the whole stronger.

Therefore, to have a fast-growing transatlantic carrier like Aer Lingus in the fold would be very good news - not just for IAG, but for the other joint venture parties. Every passenger travelling on EI to North America would have the same effect as every passenger travelling on their own flights, effectively.

Indeed, all of EI's ports in North America are served by BA. However, that does not necessarily mean that this is undesirable, or something that needs to be changed.

LON-NYC is, understandably, far and away the busiest transatlantic route, and a premium-heavy route that yields good margins. London and the South East themselves generate lots of passengers for these services, and of course, BA offers connections from points across the UK and Europe.

However, BA flies to remarkably few British airports, so it cannot offer flights to large sections of the British public (those that either don't want to travel large-ish distances to the nearest BA airport, or those that simply don't want to deal with a Heathrow transfer). BA is sometimes disparagingly referred to as "London Airways". KLM serves more British airports than any other airline - and therefore, they cream off a lot of the British market who simply don't have the option of connecting in Heathrow, unless they take a long surface trip to the nearest "BA airport". After KLM, Aer Lingus is the airline that has the best UK coverage. And having EI in IAG would therefore suddenly give EI's connections from the UK perhaps a greater pull - full BA Avios and Tier Points, preclearance, shorter travel times (other carriers require a first short flight going in the wrong direction), etc. At long last, there would be an IAG/oneworld option for a larger segment of the British market to travel to the US.

Given that EI has been adding capacity on its existing routes (by as much as 20% in the past year) there clearly is sufficient demand for BOTH carriers to continue operating, side by side, in parallel on the existing routes. In fact, by working together, and actively selling tickets on each others' services, they could both help drive passengers to each other, stimulating traffic more than they can alone.

EI has looked at opening other routes, but given that it is now serving the most in-demand locations in the US and Canada, it would mean that, trying to "sell" a new destination on its own, it could take a long time to take off. However, with IAG's backing, it can count not only on picking up its own, EI-originating customers from the UK and Europe, but also receive strong backing from BA and IB, who would also sell/market flights operated via Dublin on their own websites, and with AA/US on the other end [EI's relationship with jetblue and United would, almost certainly, terminate on entry to oneworld. EI would instead co-operate with AA/US in the US, and perhaps also route customers via LHR onto BA (all bearing EI codeshares) for some destinations]. There are frequent "Why doesn't BA operate to Portland?" and "Where will BA's next destination be?" threads over on the BA board. It's difficult for BA to add new longhaul destinations, predominantly because they don't have the slots. These "lesser" destinations could more easily be added, getting EI to operate them from Dublin, and with the combined might of EI, BA and IB marketing these new routes heavily, at least in the UK and Spanish markets.

Of course, BA wants to run services to lots of Chinese, Asian and South American destinations but it might make less sense to route these via Dublin. But there certainly is potential for adding new routes from Dublin - perhaps to brand-new destinations not served by IAG airlines, but perhaps also adding capacity on existing BA/IB routes (not served by EI).


The whole idea of the immunised joint venture is to let the participants "collaborate" in this manner - they set the prices jointly; they co-ordinate their timetables jointly; in ways that, without this dispensation, would be deemed anti-competitive.

It doesn't really make sense for BA, IAG, or any of the oneworld partners - and certainly not for Aer Lingus - to have IAG buy EI only to sabotage the most profitable, and strongest-growing, part of EI's business. I'm sure that Star Alliance and Skyteam would love to see that happen - but why would oneworld hobble its chances by buying a larger share of the transatlantic pie, only to chuck it immediately into the bin, uneaten?

Adding EI to oneworld increases the competitive pressure on Skyteam and on Star Alliance. It reduces the competitive pressure on oneworld. It also means oneworld gains market share, frequencies, additional revenues, additional passengers, extra transferring passengers, benefitting all the JV partners.

Again, when talking about transatlantic routes, you must "forget" about the individual identities of the oneworld airlines. When flying across the Atlantic, and being part of one of these joint ventures, there is no AA, no BA, no IB, no AY etc - there is just "oneworld". On these routes, it does not matter which individual airline operates which individual service. All airlines profit, or lose, on each flight and each passenger.

Therefore, your envisaged scenario where BA forces EI to price their flights uncompetitively damages ALL oneworld-JV airlines. If a passenger that was considering booking with EI finds them too dear, they may decide to travel with Lufthansa, or Air France, instead. There is NO COMPETITION WITHIN THE JOINT VENTURE. There is NO REASON why BA would suddenly get Aer Lingus to, say, increase fares from the UK-USA routes by 20%. Aer Lingus's prices may indeed change, but they will be seat in consultation with all of the other Oneworld-JV member airlines.

Except for Shannon airport - whose original raison d'être was to service transatlantic routes - that's not really a consideration at all. There will (presumably) ALWAYS be direct flights from Dublin to parts of the USA. OK, some industries like it when there are direct links to certain places - the most notable being the direct DUB-SFO route. But it's not such a "tragedy" if Dublin lost its direct EI links to, say, New York. You can still fly from Dublin to New York direct with a number of other airlines outside of EI - such as Delta, US, AA, or with one stop on several more. An Aer Lingus-operated direct service between Dublin and New York (or any other US port) is not VITAL for the connectivity of the island. Dublin is rather well connected as regards the US, even without Aer Lingus. The issue of guarantees on routes really only arises on the HEATHROW routes. Less so for Dublin - which is served by numerous other flag carriers and major airlines (and meaning that transfers are available on other carriers, even if EI was to suddenly disappear overnight), the same is not really true of Cork and Shannon. There are really no other airlines providing connecting services to either of these airports - a journey to anywhere not served directly by EI will typically involve flying to Heathrow on Aer Lingus where you swap to the other airline (or, from Cork, flying on Aer Lingus to Amsterdam where you can also change airlines). The link to Heathrow therefore opens up the world to ORK and SNN in a way that is far more important than is the case from DUB.

So, TATL links are less of an issue here.

This is not a zero-sum game. IAG, as it stands, faces competition from Aer Lingus. Currently, any passenger who chooses to fly with Aer Lingus (or with Star Alliance, or with Skyteam), is a "loss" to IAG. But it's like saying BA loses business when a customer flies LHR-MAD with Iberia rather than with BA. Technically correct - but actually meaningless. You might as well say that EI's DUB-BRU route loses a customer when they instead book EI's DUB-AMS service instead. Technically correct, but rather meaningless overall.

Put EI into IAG, and then suddenly that growing number of passengers who fly with Aer Lingus no longer represent a "loss" to IAG. And given that BA (and IB, though I expect the synergies/relationship between EI and IB may not be as broad) can coordinate and work with EI, the "offer" presented by BA can suddenly be made more appealing. For instance, passengers flying from Britain's second largest city - Birmingham, which has had no BA services in years - can suddenly be presented with an IAG route to North America, and BHX becomes an option for lots of US-based oneworld frequent flyers. BA benefits from adding Aer Lingus's network to its own. Aer Lingus can reach more customers in the UK than BA itself can. Of course, I'm not saying that BA will suddenly stop flying to loads of destinations, or start funneling all of their passengers via Dublin. But the two together can offer more than either can, on its own.

As for Gatwick - LGW isn't truly a "hub". The long-haul destinations served from LGW tend to be more leisure and holiday destinations, and may not always be served as frequently as those served from LHR. BA's representation at Gatwick has been falling, over the years. It used to be the biggest tenant, and now it plays second fiddle to an ever-expanding Easyjet. BA is even being turfed out of the North Terminal in the coming years.

The whole issue of London's new runway and the air connectivity debate for London is still up in the air. BA may not be using Gatwick optimally, but that's a whole other debate outside the scope of the current discussion, I think.


SNN and ORK are just airports. They have nothing to do with Aer Lingus, per se (other than that Aer Lingus are probably their most important customers). The issue at stake is the uncertainty as to what Aer Lingus' commitment would be to these airports, going forward.

But as I've said numerous times, the current Aer Lingus can't be depended on to keep services from these places. They shut the Shannon link for almost two years recently. Aer Lingus should be free to decide how best to allocate its resources, rather than being "forced" to keep unprofitable routes open merely for the sake of regional or local pride. That's, of course, not what the local populations, TDs, chambers of commerce, airport workers, etc, want to hear, but it's bad business to "force" an airline to maintain loss-making routes. That said, I'm pretty sure that ORK would have nothing to fear, but that SNN may be a candidate for future cuts.

If the government is *that* worried, perhaps they could come up with some kind of PSO-like thing (they currently subsidise the Dublin-Donegal and Dublin-Kerry routes - these routes would probably NOT be flown without this subsidy). I don't know if EU rules would allow such state subsidies on non-domestic routes (though Dublin-Derry was one PSO route until recently) but there may be other ways to "maintain" connectivity if it is so politically vital.


Iberia was, reportedly, losing a million Euros a day around the time it was taken over by IAG.

It went through painful cuts and a lot of strikes (but, then, so has Aer Lingus in recent years - and so has pretty much every established/flag carrier in Europe).

MeltingAlf

I believe irishguy28 has covered a lot of grounds in his reply. Let's see what I can say to make myself useful.

While to some extent that is true - that EI will invariably eat into a portion of BA's TATL business, I would expect the benefits to be greater than the downsides.

By making DUB a second TATL hub alongside LHR, customers are given more choice and flexibility in their routing - say if they would wish to avoid LHR and get through preclearance, DUB would be a good choice versus LHR. Furthermore, for those living north of London, heading to DUB to take a TATL flight would make more sense then heading down to do so since you are indeed moving towards the Atlantic.

An interesting observation would be the AF-KLM tieup. While AMS and CDG are both quite substantial and close hubs in themselves, the merger of AF and KLM did not - so to speak - bring detriment to either hubs. Both AMS and CDG continue to maintain their position - and maybe even stronger as usual as it gives passengers the ability to use either hub to fit their purpose. This is also replicated to a smaller extent, with the GVA/ZRH/MUC/FRA airports within the Lufty group.

If I'm right too, the Irish Examiner did quote that a third of Ireland's passengers to LHR are connecting. If IAG can create DUB into a decent hub and EI to have enough routes, the importance of LHR to Ireland would have diminished - allowing BA to free some of their LHR slots for Dublin routes for more profitable longhaul routes that expands BA's network.


IIRC, both LHR and LGW are quite full, LGW less so compared to LHR.

I remember one of the EC documents stating that LHR is irreplaceable by other London airports in TATL (I think it was the Virgin complaint about the oneworld JV), and hence LGW-NYC is not equal to LHR-NYC, and rightly so. Transferring would be difficult via LGW anyway for BA.

Furthermore, having a dual hub strategy in the same city for business passengers is detrimental for BA - they know that LGW is never going to be good enough and hence only their leisure routes originate from LGW.


I don't think SNN/ORK comes into play as strongly as for the Irish Government. I would expect IAG to ensure that the SNN/ORK market is captured into their own network rather than having AF/KLM or some other carrier taking that market and feeding into their own network, though.

About seller - do you mean carrier? I'd expect those selling to take the money and run away.

I think LX was able to expand quite a bit and establish their own niche after being subsumed into the Lufty Group, which to me is a success story since they expected it to disappear into irrelevance if they don't sell it.

I would call Dragonair an iffy case - since CX uses it primarily for the Chinese market after being bought. Dragonair however, has a very strong brand name recognition in China (more so than CX), which well, should make it a success story too.

Similar for SriLankan - the days when it was under EK management and minority ownership it has improved from the ghasly Air Lanka reputation it had developed. Not too sure, though.

Unfortunately case studies are few and far in between largely due to the restrictions placed by respective governments on airline ownership...


Odd. Could it be a sale to another holding company? The sale price doesn't look right given that the prices are about the same as what they are buying.

lwildernorva

A quick observation/question about SNN. In a longer-term strategy that envisions using DUB as a hub for intercontinental flights, doesn't SNN offer potential as well? In other words, it's easy to see that IAG could gain by getting a dominant position in DUB but, given SNN's position and BA's familiarity with the operations there, perhaps there's a thought that SNN could offer another, smaller hub that could eventually yield the benefit of additional TATL slots? Or am I just overestimating the amount of business that IAG might intend to run through DUB?

irishguy28

Other than EI's flights to LHR, SNN has no year-round short haul destinations other than the routes flown by Ryanair.

This limits SNNs usefulness - it really is only for those wishing to travel to Ireland, or to spend some time in Ireland before flying on, most likely from a different airport [or on a completely separate ticket].

SNN cannot function as a "hub" without onward European connections.

It's unlikely that BA would, for instance, want to ramp up the existing connections from LHR to SNN to support new flights/frequencies - because the Shannon and Heathrow hinterlands are unlikely to be able to support these flights, and no-one would be delighted about having to transfer twice - in LHR and in SNN - to make a SNN hub viable. I don't see the point in setting up an EI short-haul network from SNN to support this, either. DUB already serves this purpose for EI - so why would BA/IAG think any differently?

You just have to look at BA's ops at LHR and LGW to see that operating from 2 hubs can be problematic. I see no reason why IAG would favour SNN over DUB given that DUB can be reached by so many more passengers from all over the UK and Europe. Particularly now that full preclearance is in DUB as well.

lwildernorva

I probably wasn't very clear in my initial post. I'm not thinking that SNN would take anything away from DUB (or LHR for that matter). I'm looking longer term and thinking that with the likely limitations on LHR (and the likelihood that it may be decades before any new plans work for expansion or any other option that might be pursued), IAG could hedge bets by using SNN should DUB ever become maxed out--although I understand that expanding DUB might be considerably easier than doing anything at LHR (and maybe at SNN as well).

I guess if I were WW, I'd be hinting to the Irish government that while EI couldn't really find a way to use SNN much, IAG might be interested in bringing its resources to bear to make SNN a player eventually. Given the roadblocks thrown up so far, I'd try to create any leverage I could to make the deal look like a winner for Ireland.

irishguy28

I'm just not sure that IAG would really want to appreciably "grow" Shannon. To do so, they'd have to do far more to connect it to Europe - IAG has very little scope for getting any passengers to/from Shannon (there are only 3 daily flights -some days just 2 - between Heathrow and Shannon. Aer Lingus Regional abandoned the airport last month). As I said before, Shannon really only caters for customers from, or wishing to visit, Ireland. It's not really an airport where passengers transfer. SNN is effectively a terminus - not a hub.

Heathrow is full yet they have not started adding lots of capacity out of Gatwick, let alone restarting transatlantic flights from MAN, or any other base in the UK. I really think it is unrealistic to think that IAG (whether as BA, or forcing EI to do so) would start using SNN as a foil for DUB or LHR.

rcurry01

It is interesting how few people in this forum are against the IAG deal. While there are some concerns, the general consensus is that this deal is the best possible outcome for EI.

ferg01

Both irishguy and MeltingAlf I think need to apply for a job in EI's PR department stat! I'm now convinced, thanks for the very informative responses.

pauldb

These transactions are not related to IAG. They are Barclays' or Barclays' other clients' trades, disclosed because Barclays has an advisory role to IAG.

irishguy28

Thanks for clearing that up.

Is IAG allowed to deal in EI stock while awaiting an answer to its proposal?

stifle

It has already received a positive response to its proposal from the board of Aer Lingus, although the absence or presence of this does not affect IAG's rights to deal in EI shares. It and its connected parties need to disclose trades over a certain size as long as its stake is above 3%.