VZCZCXRO0028
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHDL #1189/01 2890939
ZNR UUUUU ZZH
R 160939Z OCT 06
FM AMEMBASSY DUBLIN
TO RUEHC/SECSTATE WASHDC 7570
INFO RUCNMEM/EU MEMBER STATES
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 02 DUBLIN 001189 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR PREL ECON EI
SUBJECT: HOLDING PATTERN FOR RYANAIR TAKEOVER BID OF AER 
LINGUS 
 
REF: COLEMAN-YOUNG E-MAIL OF OCTOBER 10 AND PREVIOUS 
 
¶1.  (SBU) Summary: As Ryanair's takeover bid for Aer Lingus 
has slowed over the past week, Irish attention has focused on 
the approach that EU Commission competition authorities will 
take toward the envisioned merger.  Ryanair now holds a 
19-percent stake in Aer Lingus, with the Government retaining 
its 28-percent stake and employees buying additional shares 
to increase their stake to 15 percent.  Although Ryanair has 
not formally notified the EU Commission about its takeover 
bid, the Irish Government has started to prepare its case for 
DG Competition, with no apparent plans to request a referral 
to the Irish Competition Authority.  Ryanair remains 
confident that DG Competition will decide it its favor, while 
an Irish aviation consultant told Post that the two airlines' 
overlapping routes will make the EU's decision too close to 
call.  A Ryanair representative also criticized Irish 
Government comments questioning Aer Lingus' continued 
exercise of rights under the U.S.-Irish aviation agreement as 
an attempt to spook investors.  As the competition case takes 
shape, Ryanair CEO Michael O'Leary is in a strong position, 
having obtained, at least, a sizable stake in his primary 
competitor and additional leverage over decisions regarding 
the construction of Dublin Airport's second terminal.  End 
summary. 
 
Takeover Bid Update 
------------------- 
 
¶2.  (U) The overall stake held by low-cost airline Ryanair in 
the recently privatized Irish national carrier, Aer Lingus, 
has hovered just above 19 percent since Ryanair CEO Michael 
O'Leary announced a surprise takeover bid for Aer Lingus on 
October 5.  On October 13, Aer Lingus stock finished trading 
on the Dublin Stock Exchange at euro 2.90 per share, as 
compared to Ryanair's offer price of euro 2.80 and Aer 
Lingus' original flotation price of euro 2.20.  In an 
apparent move to obstruct Ryanair's takeover bid, a group of 
Aer Lingus pilots purchased an additional 2-percent stake in 
the airline on October 10, increasing the stake held by 
employees to nearly 15 percent.  The October 13 Irish Times 
reported that a separate group of employees was considering 
the use of pension funds to purchase an additional 6-percent 
stake.  The Government's stake remains roughly 28 percent, 
with both Finance Minister Brian Cowen and Transport Minister 
Martin Cullen reiterating in recent days that the Government 
would retain its shares in the interest of aviation 
competition.  (The Government reduced its 34-percent stake to 
28 percent within the first two days of Aer Lingus' 
flotation, although Government officials had stated that they 
would sell off this 6-percent stake slowly to ensure against 
volatile initial trading.) 
 
The Looming Competition Case 
---------------------------- 
 
¶3.  (SBU) The EU Commission's competition authorities will 
soon take center state on Ryanair's takeover bid, Noreen 
Mackey, the Legal Advisor to the Irish Competition Authority, 
told Pol/Econ Chief on October 13 (repeating press coverage 
on this likelihood).  Mackey explained that, under Ireland's 
1997 Takeover Panel Act, Ryanair had 28 days from the October 
5 date of its takeover bid announcement to mail a share offer 
to shareholders, a step that Ryanair had not yet taken. 
Ryanair would then be obligated to notify DG Competition 
about the bid, since the Ryanair-Aer Lingus entity would meet 
the necessary thresholds: operations in at least three EU 
Member States and combined turnover exceeding euro 100 
million.  DG Competition would have roughly four months to 
make a ruling, with no further recourse to Ireland's 
Competition Authority.  Mackey cited press reports that the 
Irish Government had begun to prepare a case for the 
Commission with help from Goldman Sachs, which had retained 
former Competition Commissioner Mario Monti as an advisor. 
In other words, the Irish Competition Authority had no plans 
at this point to exercise its right under EU legislation to 
seek referral of the Ryanair case from DG Competition. 
 
¶4.  (SBU) DG Competition's ruling on the Ryanair bid will be 
too close to call, Pol/Econ Chief was told on October 14 by 
John Finnegan, Principal Consultant for Goodbody Economic 
Consultants (an arm of the brokerage that advised the 
Government on the Aer Lingus flotation) and formerly an 
official in DG Competition's aviation office during 
Commissioner Monti's tenure.  Finnegan observed that DG 
Competition's instinctive opposition to airline alliances in 
the 1990s had given way to a posture supportive of carrier 
consolidation.  In approving the Air France-KLM merger, for 
example, DG Competition noted that the airlines had different 
hubs and that rail links between France and the Netherlands 
 
DUBLIN 00001189  002 OF 002 
 
 
provided consumers with transport options alternative to 
aviation.  The differences in the Ryanair-Aer Lingus case, 
Finnegan remarked, were that the rail link alternative was 
moot and that the two airlines together would have a 
strengthened position at Dublin, their shared hub.  Moreover, 
the two carriers had a number of overlapping city-pair routes 
(19 to the same airports and 26 to the same city, counting 
Ryanair's service to secondary airports for the cities in 
question).  Finnegan questioned whether DG Competition could 
use landing slot forfeitures as an effective remedy in 
approving the takeover, since it was unclear whether other 
airlines would jump onto the routes that the two airlines now 
serve from/to Dublin. 
 
¶5.  (SBU) Ryanair is confident that EU competition 
authorities will look favorably on the takeover bid, Ryanair 
Director of Regulatory Affairs, Jim Callahan, explained to 
Pol/Econ Chief on October 12.  He noted that DG Competition 
had demonstrated a consistent record in support of airline 
consolidation, such as in Germany, France, the UK, and 
Scandinavia.  Callahan observed that the takeover would serve 
consumer interests, as the application of Ryanair's low-cost 
model would help to reduce Aer Lingus' fares.  The takeover 
made sense in the context of relative size, with Ryanair 
carrying 42 million passengers per year compared to Aer 
Lingus' 8 million, and with Ryanair's fleet more than triple 
the size of the Aer Lingus fleet.  Aer Lingus, Callahan 
added, was a "small player" in the European and 
trans-Atlantic markets, and Government resistance to the 
takeover bid reflected an "emotional, politically driven" 
reluctance to lose control of the former national carrier. 
Because Ryanair CEO Michael O'Leary believed strongly in Aer 
Lingus' potential for enhanced shareholder returns, moreover, 
Ryanair would not sell its Aer Lingus shares even if the 
takeover bid were to fail, Callahan added. 
 
Questions about the U.S.-Irish Aviation Agreement 
--------------------------------------------- ---- 
 
¶6.  (SBU) Callahan described Transport Minister Cullen's 
October 6 comments questioning Aer Lingus' continued exercise 
of rights under the U.S.-Ireland air transport agreement in a 
takeover scenario as an attempt to spook investors and to 
distract attention from the Government's failure to 
anticipate the Ryanair bid.  (Cullen raised the questions 
after media reports noted that Ryanair might not be over 50 
percent Irish-owned.)  Callahan said that Ryanair was 54 
percent EU-owned, but "probably not" more than 50 percent 
Irish-owned.  Reiterating points made by Ryanair CEO O'Leary 
to the October 8 Sunday Business Post, Callahan said that 
Ryanair was nonetheless Irish-registered, Irish-regulated, 
Irish-headquartered, and Irish-managed and did not have 
rights to fly outside the EU from other EU Member States 
under existing aviation agreements. 
 
Comment: O'Leary Strongly Positioned 
------------------------------------ 
 
¶7.  (SBU) The famously flamboyant Ryanair CEO, Michael 
O'Leary, appears to be strongly positioned whether or not the 
takeover bid succeeds.  Ryanair reportedly had euro 2 billion 
in available cash to launch the takeover, and he should have 
sufficient reserves to improve its share price offer, up to 
euro 3.50 by some estimates.  If DG Competition approves the 
bid and if Ryanair can obtain a 51 percent stake, O'Leary 
will be the first low-cost airline executive in Europe to 
take control of a legacy carrier.  If DG Competition 
disapproves or if Ryanair cannot reach the 51 percent 
threshold, O'Leary will still have a sizable stake in his 
primary competitor, with the value of his investment having 
already increased 30 percent based on Aer Lingus' initial and 
current share prices.  Perhaps as importantly, O'Leary will 
have more leverage over decisions to be made regarding the 
planned construction of Dublin Airport's second terminal, 
which was to cater primarily to Aer Lingus.  O'Leary will 
likely highlight his strong position as he attempts to 
describe the wisdom of his gambit to Ryanair shareholders, 
many of whom are still reportedly skeptical about the 
envisioned merger. 
BENTON