Ryanair & Aer Lingus

ENTRY DETERRENCE AND EFFICIENCY GAINS MODELS
THE FIRST MERGER ATTEMPT AND TRIAL PROCESS
APPEALS OF BOTH PARTIES
SECOND AND THIRD MERGER ATTEMPTS
THE EVOLUTION OF THE MARKET AFTER DECISION

AGENDA

shareholding from 25% to 29% 

2007

Aer Lingus starts legal proceedings to force sale of Ryanair stake

Ryanair launches second takeover bid – half the value of its first offer

Ryanair abandons Aer Lingus takeover bid

Competition Appeal Tribunal rules against Ryanair 

Ryanair makes all cash offer and notifies European Commission

European Commission blocks takeover attempt by Ryanair prompting 

Ryanair shelves its attempt after Commission opens investigation

 Aer Lingus wins Court of Appeal decision forcing Ryanair to sell down its stake

Commission rules that concerns could be addressed by Ryanair selling its stake

27 January 2007

10 October 2007

January 2009

28 July 2011

19 June 2012

29 August 2012

27 August 2013

28 August 2013

12 February 2014

Bergamo and Stansted etc.)
More than 400 destinations in 40 countries
Fleet of 120 aircraft in 2006
Publicly listed

Ireland‘s old ”flag carrier“
3 bases (Dublin, Cork and Shannon)
Operated mostly a short-haul network on 70 routes between Ireland and the UK
Fleet of 28 aircraft in 2006
Publicly limited company
Privatized by the Irish Government in 2006

BACKGROUND INFORMATION ON THE FIRMS

ON THE MARKET

Combined market shares of Ryanair and Aer Lingus increased from 80% in 2007 to 87% in 2012

new competitors
The Irish market is a small peripheral market with limited growth
Aer Lingus and Ryanair have a strong base
newcomers would face substantial sunk costs for marketing, promotion, brand recognition
EasyJet has tried and failed
Several companies (e.g. BA) have left Dublin

was about efficiency by reducing cost and competition (especially increasing it by possibility of entry) we will consider models on this themes.

and Tirole (1984):
The model is developed into three stages:
1)incumbent decides about its strategic investments (in our case capacities and frequencies of flies, commitment for price) to prevent enter.
2)potential rival firm makes its choice whether entering the market or not
3)if the rival has entered, firms compete in quantities.
The game is solved by backward induction.
Note that Ryanair is the largest (and most profitable) European "low-frills" carrier with a clear price-aggressive airline profile and it invest a lot to prevent entry new firms.

Entry deterrence

is transformed into a monopoly and price increase from P1 to P2 (see the figure)
In some cases, the reduction at the cost AC can be such that A1

(2007):
Main idea – we can measure gain in efficiency from merger (that is cost reduction) by competitors’ stock price reaction at the date of the merger announcement.
This can be easily find from figure:
CS-consumer surplus, П is profit: m for merge,
c for competitors, e is cost reduction.
Giulia Sargenti at “Ryanair and Aer Lingus
Merger Cases” measured that price reaction in first
days is insignificant, that means that efficiency
gain is insignificant small. (The cost reduction was one of the main argument of Ryanair)

would rise:
Operational cost savings due to the Economy of scale effect
Better management of Ryanair
The application of Ryanair’s successful low-cost structure to Aer Lingus
Consumer would benefit:
The transition of raised effectivity to lower tariffs
Low-coster structure of the new firm implies lower prices
Possible commitments of the new firm:
Aer Lingus’ operations on 43 overlapping routes get transferred to Flybe
Some landing slots are delegated to IAG/British Airways on routes from London to Dublin, Shannon and Cork
Flybe and IAG/British Airways commit to operate the routes for three years

reductions evaluation:
Some efficiency improvement measures can be done with current management and are planned already
The proposed measures can only be achieved through an adaptation of Ryanair’s low-coster business model
On the consequences for consumers:
The formed firm would lack incentives to pass the efficiencies onto consumers due to increased market power on many routes
Time- and quality- preferring travelers on many routes would be forced to use Ryanair low-quality service in the absence of other options

Aer Lingus objections

evaluations don’t measure any post-merger market effects
Higher effectivity of Ryanair evidence omits quality of service measurement
Synergetic effect concerns:
Aer Lingus argues that it’s cost-efficient with their current business model and is planning further effectivity-improvement measures
The low-cost model of Ryanair is specific and cannot be easily imposed on another airline company
Consumers benefits concerns:
Absence of high-quality service on the routes under the merged firm monopoly
Lower competition and merged firm monopoly on 35 routes means higher prices
Commitments concerns:
The proposed measures are not sufficient to neglect the anti-competitive effect
Uncertainty about the continuation of commitments after the 3-year period
The measures could take much time and effort to be executed

European Commission disapproval

prohibition of the merger

Arguments:
The Commission pay attention only to market shares
“Selectively” used information from investigation
The qualitive and quantitative analysis sometimes indicated in different directions
Rejecting of remedies

Court’s answer:
The Commission made careful analysis
The weights of gathered information could be weighted by Commission
Partly persuasive evidence always could be accessory arguments
The remedies had unclear formulations (because they were made late)

Aer Lingus appeal the renouncement of Commission from ordering the Ryanair to divest its part of Aer Lingus’s shares

Arguments:
The Article 8(4) of the Merger regulation
The negative effect of the decision on competition
Ryanair’s shareholding (even minority) could lead to a control over Art Lingus

Court’s answer:
Ryanair is non-controlling minority shareholder
Ryanair hasn’t control share
Ryanair can’t seriously influence on a company with a current part of shares

APPEALS OF BOTH PARTIES

bid to of Aer Lingus (for € 748 million, €1.40 for a share) in January 2009
It supposed a plan, how to prevent concerns about violation of competition
The Aer Lingus rejected the offer (it was also rejected by most of the other shareholders)
The bid wasn’t supported by the Irish government, which had found that the plan is ineffective, and the bid is too small (the company is undervalued).
Raynair withdrew the bid
So in fact – no deal for the Commission

“The world has changed dramatically over the past two years, as high oil prices and deep recession have caused a flood of airline bankruptcies, consolidations and capacity cutbacks. Aer Lingus, as a small, stand alone, regional airline has been marginalized and bypassed as most other EU flag carriers consolidate” - Michael O'Leary

THE SECOND MERGER ATTEMPT (2009)

the Raynair made another bid to
takeover the Aer Lingus (for € 748 million, at €1.30 per share)
The Aer Lingus rejected the offer again
Raynair notified the European Commission about the takeover
The commission prohibited the takeover. Why?

2) Argument of the Commission:
The arguments of the Commission qualitatively were the same from the case one, but after a new investigation quantitively become even stronger:
Increased of the combined market shares of Raynair and Aer Lingues (from 80% in 2007 to 87% in 2012) for short-haul flights from Dublin
Increased number of overlap routes with high market’s share of the possible merged company (from 35 in 2007 to 46 in 2012)
High barriers of entering on the relevant market

3) Remedies proposed by Ryanair:
Transferring of Aer Lingus’ operations on overlap routes to Flybe
The cession of the slots at London airports for IAG
However, Commission’s investigation
had demonstrated, that these remedies
would be inefficient

4) Conclusion:
The takeover will harm consumers and decrease competition, the fares will increase

THE THIRD MERGER ATTEMPT (2012-2013)