If O’Leary gets Aer Lingus, he may demand control of airports as well

IN deciding to bid for Aer Lingus, Ryanair and its management were looking at three motivating reasons. All three made absolute sense from Ryanair’s point of view. All three demonstrate what a disastrous political decision it has been to sell off Aer Lingus.

Twice in the recent past I’ve written about the privatisation of Aer Lingus. And on both occasions I’ve wondered what, if anything, was to prevent Ryanair from buying it. I admit I didn’t think they’d move this fast, but it always seemed logical to me that Ryanair would move to eliminate competition.

That’s what smart entrepreneurs do. They talk up the need for competition when they want to get into the market, and they try to stifle it when they become powerful themselves.

And there are few smarter entrepreneurs than Michael O’Leary. I may not like his style — his ‘here’s a cheap ticket, now feck off’ approach — and I might strongly disagree with his attitude to unionisation. But no-one can deny that he has constructed a business model that works superbly.

Before he came along, it never seemed to occur to anyone else that a modern airline needs three characteristics, and that if you put them together you have a recipe for guaranteed success.

They are — the planes must be safe, the seats must be cheap and the passengers must get where they want to go on time. Very simple principles, and maybe it would only be possible to build an airline around them if you were building it from the ground up. But build it he did and, begrudger that I am, I can’t find it in me to begrudge him his success.

Of course, he got help, especially in his early days from a government decision that allowed him some of his early slots. But he built something extraordinary out of that help. And he built it while talking constantly about the merits of competitive pricing and business operation.

So it might seem somewhat ironic, even a tad hypocritical, that he now seems to be hell-bent on wiping out the competition within Ireland. And make no mistake about it, any notion that an Aer Lingus subsidiary of Ryanair would be allowed to compete effectively with its owner is an illusion.

The whole, in this case, will not be greater than the sum of the parts. Anything that Aer Lingus does that discommodes Ryanair will cease. That’s the first motivation, the stifling of competition. The second one is the price. The last time I wrote here about the potential privatisation of Aer Lingus, I said there were a number of questions to which we were all entitled to answers. (We, after all, are, or at least were, the owners of Aer Lingus).

Among the questions I suggested then were these: “If we sell it, who is going to own it? Will it still be Irish?

“What will be the long-term commitment of the new owners to Ireland and the tourist industry on which we rely?

“What will happen to Aer Lingus’s assets after it is sold — its routes, its slots, its airplanes, its subsidiary operations?

“Will it become no-frills, low-cost — and on the Atlantic as well as in Europe? How many staff will have to be let go to facilitate that?

“In all of that, will Ireland’s long-term strategic needs be protected? Does industrial development and tourism development depend on a guarantee that Ireland will always have an international airline?

“And how much is the airline worth? Will it realise full value (because Telecom, for instance, didn’t)?”

Notice that last question. They put the airline on the market at €2.20 a share, and the management of Ryanair nearly fall out of their chairs. Immediately, they start offering to buy shares at €2.80. A no-frills, no-nonsense businessman like Michael O’Leary reckons the airline is worth nearly 30% more than the Government does. It took the Government more than a year, and millions of euro worth of bought-in advice, to decide on a price and they got it woefully wrong. They got it wrong by the price of a couple of hospitals.

NOW, of course, it may be that they wanted to launch the airline onto the market at less than its market price because if everyone who buys shares makes an early profit, the flotation is deemed a success.

But that hardly applied in a situation where you’re not advertising to the general public. Institutional investors, by and large, don’t get into the airline business to make a quick buck. Hedge funds, which operate closer to the margins, often do. And once it became clear that the hedge funds were interested, it was obvious that shares were likely to turn over quickly.

So the second motivating factor was the price. Effectively, even though the Government would probably have been horrified at the thought of Ryanair owning Aer Lingus, they made it not just easy for Ryanair to contemplate a bid, but almost irresistible.

Because the third motivating reason springs from this thought — where next? If Ryanair does end up effectively controlling access by air to and from Ireland, thanks to the foolishness of the Government, why would they not want to control that access from their own airports? In other words, if the privatisation of Aer Lingus results in an effective private monopoly, how is the Government going to be able to resist whatever Ryanair wants to do next? The pattern would suggest that even in highly competitive situations, they seek to drive very hard bargains over the use of airports. In a monopoly situation, if they decide they have to own and operate Ireland’s airports themselves, who is ultimately going to be able to say no?

We know already that Michael O’Leary takes a very dim view of the management of our airports. He’s never made a secret of the fact that he doesn’t think they are run in the way he would like to see them run. There’s no doubt in my mind that if he acquires the leverage, he will make very heavy demands including, I suspect, ownership and control. It is the logical extension of his already successful business model.

When we sold Eircom, we sold a huge national asset. That sale didn’t produce more competition, lower prices or better service, even though all of that was promised at the time. Most of all, it certainly didn’t lead to the sort of investment that would catapult Ireland to the top of the broadband league. In fact we’re a lot lower down that league than we were when Eircom was a company owned by the people.

And now we’ve sold, or rather under-sold, Aer Lingus. With that sale we’ve given up not just a national asset, but possibly ultimately one of the best-known business brands in the world. The future of our tourism industry, and a considerable stake in the promotion and development of inward investment into Ireland, is going to end up in the hands of whoever owns Aer Lingus.

It’s too late now to do anything but hope that Michael O’Leary is not just a highly successful entrepreneur, but a genuine Irish patriot as well.