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After several unsuccessful bids to take over Aer Lingus, Ryanair is yet again stubbornly searching for “remedies”, as the airline’s CEO Michael O’Leary puts it, to explore new ways to obtain full ownership of the national airline of the Republic of Ireland. Instead, the airline would be better off seeking distinct growth opportunities in untapped markets such as Africa, which could boost its performance.

The point of interest

Aer Lingus Group Plc is Ireland’s largest airline with a market share of 15%, ahead of its rival Ryanair which commands a 6% share of Irish air travel, an industry which recorded value sales of €2.2 billion in 2011.

Aer Lingus pursues a mixed strategy of full-service flights on long-haul destinations as well as operating low-cost routes. 2008 and 2009 was a tumultuous loss-making period for the airline, although it was quick to improve its performance in subsequent years. The latest unaudited preliminary results for the year ending 31 December 2012 reveal that the airline registered a higher than 40% increase in its operating profit to reach €69.1 million compared to €49.1 million in 2011.

The ongoing drama

In June 2012, Ryanair tried to increase its stake in Aer Lingus, its third attempt since 2006, when it acquired 29.8% following the partial privatisation of Aer Lingus. However, the initial two hostile bids in late 2006 and 2008/2009 by Ryanair were both blocked by the European Commission to prevent the company from establishing a dominant position in the Irish air transportation market. For its third takeover proposal in 2012, Ryanair offered to pay €694 million for the remaining shares of Aer Lingus.

In February 2013, fearing that its latest bid will fail yet again, the budget operator put back on the table another proposition to the EU antitrust authorities, this time involving the financially struggling airline Flybe.

Trade sources reveal that in order to gain regulatory clearance Ryanair offered €100 million to Flybe to take over the routes of Aer Lingus from Ireland, thus creating a new arm – Flybe Ireland. In addition, it also approached IAG with the conditional offer to allow British Airways to obtain the highly prized slots of Aer Lingus at London’s Heathrow Airport.

Short-sighted decision

As Ryanair is reaching maturity from decade-long aggressive expansion and is minimising its operating costs in every way it can, the obstinacy with which the management of Ryanair is pursuing the bid for Aer Lingus is surprising, particularly as the deal is not expected to be financially viable considering the most recent proposal of Ryanair which inflated its expected expenses exponentially.

Both Aer Lingus and Ryanair shareholders are increasingly questioning the latest developments, pointing to unfavourable financial conditions with regard to their interests. In addition, the Irish government has been opposing the sale of its 25% stake in the national carrier to Ryanair, which is not expected to change in the long term.

Bullish approaches, but for how long?

Michael O’Leary, who is in favour of a more controversial and bullish approach towards rivals, is certainly hitting a brick wall with the Aer Lingus bid. The Irish national carrier is fighting back, although at a high cost (ie rocketing legal and consultancy fees).

With the last aircraft deliveries expected in 2013, and no fleet orders lined up after this period, Ryanair’s financial health, lean cost structure and aggressive expansion is under threat. The airline needs to push on with leasing its aircraft and boosting the secondary sales market to preserve its low-cost advantage through network optimisation and fleet modernisation rather than fighting lost causes such as the Aer Lingus bid, which the European Commission confirmed it will veto in March 2013.

Ryanair would be better diversifying through exploring opportunities in Africa instead where it could build itself a niche in the market. Africa is a continent which offers great potential with regard to air transportation and where schedule operators (eg Lufthansa, Air France-KLM) are all fighting to dominate routes and open new destinations.

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