European Commission blocks Ryanair's bid for Aer Lingus

Posted in Europe , Asia | 28-Jun-07 | Author: Stephen Castle and Nicola Clar| Source: International Herald Tribune

BRUSSELS: A bid by the low-cost airline Ryanair to buy Aer Lingus, the Irish flag carrier, was blocked Wednesday as the top European regulator showed a willingness to intervene despite the overturning of past merger prohibitions in court.

The ruling from the European Commission prompted a robust reaction and the promise of a legal challenge from Ryanair's outspoken chief executive, Michael O'Leary, who accused Brussels of bowing to political pressure from the Irish government, which had opposed the deal.

In barring what would have been the first takeover of a national flag carrier by a low-cost rival, the European competition commissioner, Neelie Kroes, invoked her power to prohibit mergers for only the second time since taking office in 2004. The commission said the combination of the two Dublin-based airlines would have created a near-monopoly in the Irish market.

Competition lawyers argued that the commission was on relatively safe ground, having revised its procedures after a series of reverses in the European Court of First Instance in 2002.

"This is pretty much an open-and-shut case," said Catriona Hatton, a partner in the Brussels office of the law firm Hogan & Hartson. "The only question was whether the remedies offered by Ryanair could have been sufficient to bring in a significant new competitor on the routes."

Hatton said the effect of past reversals of European Commission decisions "was to require more and more information and evidence to establish a case."

"The burden on the commission in terms of the depth of the analysis has increased," she said.

In a rare departure, the executive body even commissioned an independent consultant to carry out a customer survey at the Dublin airport to track travellers' opinions.

Since taking office, Kroes has used her powers sparingly, though she did bar the merger of two Portuguese electricity and natural gas companies in 2004. Several other deals have been allowed to go ahead only under strict conditions.

However, the bare statistics disguise a growing trend of planned mergers being called off by the parties involved if they think they would receive a negative decision from the commission.

To try to win approval for its bid of €1.48 billion, or $1.99 billion, Ryanair had offered to lower Aer Lingus's short-haul fares by 10 percent for one year and to sell airport slots for a new rival operating as many as six aircraft.

But the commission said a merger would have created a monopoly on 22 out of 35 routes in or out of Ireland. It argued that the number of slots Ryanair offered to give up would not have permitted a viable competitor to emerge, and that the price cut would be limited in duration and difficult to enforce.

Even without the commission's intervention, Ryanair would have struggled to complete the takeover. The airline managed to amass only a 25 percent stake in Aer Lingus since it proposed the merger.

Ryanair promised to appeal to the Court of First Instance, saying in a statement that consumers would suffer from the denial of "the Ryanair guarantee of lower Aer Lingus fares and the elimination of fuel surcharges."

Aer Lingus, which was privatized in September - just days before Ryanair's hostile bid - welcomed the commission's decision.

"Air Lingus has said all along that the best way to serve the interests of consumers and our shareholders is for us to remain as an independent company," Dermot Mannion, the chief executive of Aer Lingus, said by telephone from Dublin.

Mannion said he was unconcerned by the possibility that Ryanair would appeal the ruling, saying that commission lawyers had closely scrutinized the market impact of the proposed deal. "The decision will stand, I have no doubt about that," he said. "The Ryanair takeover deal is over."

Some observers had expected the commission to try to force Ryanair to sell its 25 percent stake in its rival, but Kroes said the regulator was "not in a position to require Ryanair to divest its minority share."

She also said that she was open to considering a revised offer from Ryanair, arguing that hers was not "a never-ever decision."

Mannion said he did not expect Ryanair's stake to represent a significant impediment to managing the company. "There are almost no circumstances that I can conceive" that would require Aer Lingus management to obtain approval from 75 percent or more of its shareholders, he said.

The Irish government owns just over 25 percent of Aer Lingus, while the airline's employees, who rejected Ryanair's bid last year, hold about 13 percent.

Mannion noted that Aer Lingus had required only 50 percent plus one share approval from investors to sign a $2.4 billion deal earlier this month to purchase 12 new aircraft from Airbus, including six next-generation A350-XWB jets.