When International Airlines Group (“IAG”) was formed a little under four years ago from the merger of British Airways and Iberia, it stated an ambition to acquire up to 12 additional airlines.
So far it has acquired two. These are bmi and Vueling. bmi has been integrated into British Airways (bmibaby was closed and bmi regional was sold). Vueling continues to operate on a standalone basis.
Today we learned of an approach by IAG to Aer Lingus. IAG confirmed in a statement to the Stock Exchange that it submitted a proposal to make an offer for Aer Lingus, which has been rejected by the Board of Aer Lingus.
Aer Lingus also formally acknowledged the approach, stating that the initial approach was preliminary, highly conditional and non-binding. Furthermore, in their view it under-valued the company.
What would IAG gain from buying Aer Lingus and why is it bidding now?
Aer Lingus is the fourth largest airline at London Heathrow with 3.1% of the airport’s departure and arrival slots. Acquiring Aer Lingus would give IAG member airlines nearly 56% of departure and arrival slots.
From London Heathrow, Aer Lingus flies to Belfast and Dublin (as does British Airways) and Shannon and Cork.
Furthermore, Aer Lingus has been steadily growing a transatlantic hub at Dublin airport (albeit from a very small base) serving destinations such as Boston, New York and Chicago. The Dublin hub has the significant benefit of US immigration pre-clearance.
Aer Lingus has also been upgrading its in flight product to include fully flat beds in business class and in-flight WiFi. It is now a very credible competitor on transatlantic routes with a hub that has significant advantages for transfer passengers over London Heathrow.
Assuming IAG makes a further bid, here are some initial predictions as to what may happen and the impact on London Heathrow. We should emphasise that this is all purely speculative!
1. IAG will be required (in theory) to forfeit slots on overlapping routes
An acquisition by IAG of Aer Lingus would result on a diminution of competition on overlapping routes to Belfast and Dublin. There is clear precedent that for any acquisition to receive clearance from the competition authorities IAG would have to agree to forfeit London Heathrow slots to a willing entrant. However, based on the performance of Little Red on slots forfeited by IAG as a condition of its purchase of bmi, the chances of this happening are low.
2. Consolidation of overlapping Aer Lingus routes
Inevitably, there will be a consolidation of the Aer Lingus and British Airways schedules on overlapping routes to Belfast and Dublin.
There is precedent from the merger between BA and Iberia for a route to be shared between the airlines with scheduling timed to maximise efficiency by eliminating “night stops” where aircraft and crews stay away from their home base overnight (thus reducing aircraft utilisation). This is the case for London Heathrow – Madrid. Alternatively, one route could be taken over by one airline. This is the case for London Heathrow – Barcelona.
3. Reallocation of Aer Lingus’ London Heathrow slots between IAG member airlines
There may also be an allocation of some of Aer Lingus’ London Heathrow slots to other IAG member airlines, principally British Airways. However, we do not foresee a wholesale slot-stripping exercise. There will be considerable political pressure from the Irish Government (a major shareholder in Aer Lingus) to maintain links between London and Ireland.
Furthermore, the most valuable slots to British Airways are early morning arrival slots between 5 and 8am which are well suited for long-haul routes. Aer Lingus does not have any such slots.
Considerable efficiencies can be gained simply by reallocating slots to optimise existing schedules.
4. Aer Lingus is likely to join the Oneworld alliance and the transatlantic joint-venture with British Airways, American Airlines and US Airways
Aer Lingus left the Oneworld alliance in 2007 and has since pursued an “alliance neutral” strategy of co-operation with a range of partners such as Etihad (which holds a small shareholding in the airline), United Airlines and KLM.
It seems inevitable that Aer Lingus will join the Oneworld alliance and the transatlantic joint-venture with British Airways, American Airlines and US Airways and others.
Update: IAG has confirmed Aer Lingus would rejoin Oneworld and join the transatlantic joint-venture.
This would give Aer Lingus a significant boost from the marketing and distribution network of its joint-venture partners and access to their corporate accounts.
Aer Lingus may end codeshare agreements with non Oneworld alliance member airlines. This could be detrimental to airlines such as United Airlines and Air Canada that codeshare with Aer Lingus and receive connecting passengers from Aer Lingus. This is particularly because these airlines have also lost transfer passengers from bmi.
5. Aer Lingus will gain efficiencies from IAG and co-operation with its member airlines.
There will be scope to generate significant efficiencies from merging back office functions with IAG and common procurement with IAG member airlines. IAG has recently announced a programme to standardise deliveries of new Airbus short-haul aircraft to the route which allows short-haul aircraft to be switched between member airlines in a week or less. Aer Lingus would no doubt gain from such a programme.
Whilst Aer Lingus has a long track record of co-operation with British Airways, it has much less so with Iberia and Vueling. There will no doubt be scope to increase co-ordination on routes from Dublin and from Iberia and Vueling’s hubs in Madrid and Barcelona respectively.
6. Aer Lingus new alliance partners may increase long-haul services to Dublin.
At the moment, BA’s transatlantic joint-venture and Oneworld alliance partner, American Airlines, flies to Dublin from Philadelphia and New York JFK (year round) and Chicago and Charlotte (summer seasonal).
It’s reasonable to expect that American Airlines may increase services to Dublin, particularly from its hubs in Dallas Fort Worth and Miami.
7. British Airways (through IAG) will regain a presence in a number of UK cities
Over the past 15 years, BA has been steadily reduced its presence in a number of UK cities. It has withdrawn entirely from cities such as Bristol, Birmingham, Newquay and Southampton. Furthermore, the only city BA serves from non-London cities is London itself.
Only in the past few years has the airline has added Leeds Bradford and Belfast to its network following the purchase of bmi.
IAG, will through Aer Lingus, regain a presence in cities such as Birmingham, Bristol and Newquay where there is currently no IAG presence.