Ryanair & Aer Lingus

1.

Ryanair & Aer Lingus
Merger Case
Evstafyev Dmitriy
Orlov Konstantin
Stefanov Kirill
Ponomarev Sergey

2.

AGENDA
SUMMARY
BACKGROUND INFORMATION ON THE FIRMS AND MARKET
BRIEF OVERVIEW OF THE 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

3.

SUMMARY
27 September 2006
27 January 2007
2007
Aer Lingus
floats on the
stock
exchange,
Ryanair
buys shares
Fair Trading
Office starts
investigation
into
Ryanair’s
Aer Lingus
stake
Ryanair
increases
Aer Lingus
shareholding
from 25% to
29%
European
Commission
is banning
Ryanair’s
takeover
Aer Lingus
starts legal
proceedings
to force sale
of Ryanair
stake
5 October 2006
20 August 2017
Ryanair
launches a
public bid
for the
entire share
capital of
Aer Lingus
September 2006
January 2009
28 July 2011
27 August 2013
28 August 2013
Ryanair
abandons
Aer Lingus
takeover bid
Competition
Appeal
Tribunal
rules against
Ryanair
European
Commission
blocks
takeover
attempt by
Ryanair
prompting
Commission
rules that
concerns
could be
addressed by
Ryanair selling
its stake
Ryanair
launches
second
takeover
bid – half the
value of its
first offer
Ryanair
makes all
cash offer
and notifies
European
Commission
Ryanair
shelves its
attempt
after Commis
sion opens
investigation
Aer Lingus
wins Court of
Appeal
decision
forcing Ryanair
to sell down its
stake
10 October 2007
19 June 2012
29 August 2012
12 February 2014

4.

BACKGROUND INFORMATION ON THE FIRMS
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
Europe‘s largest low frills carrier
51 bases (Dublin, Brussels South, Milan
Bergamo and Stansted etc.)
More than 400 destinations in 40
countries
Fleet of 120 aircraft in 2006
Publicly listed

5.

BACKGROUND INFORMATION ON THE MARKET
Actual Competition: Market Shares of
Passengers from and to Dublin
Combined market shares of
Ryanair and Aer Lingus
increased from 80% in 2007 to
87% in 2012

6.

BACKGROUND INFORMATION ON THE MARKET
Irish airports are hard to penetrate for
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

7.

BRIEF OVERVIEW OF THE RELEVANT THEORY
Because the main arguments of Ryanair was about
efficiency by reducing cost and competition
(especially increasing it by possibility of entry) we will
consider models on this themes.

8.

BRIEF OVERVIEW OF THE RELEVANT THEORY
Entry deterrence
Model of entry deterrence from Fudenberg 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 "lowfrills" carrier with a clear price-aggressive airline profile and it invest a
lot to prevent entry new firms.

9.

BRIEF OVERVIEW OF THE RELEVANT THEORY
Efficiency gains
• Model from Williamson (1968):
• A duopoly 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<A2, than the merger
increase social welfare.

10. Competition and efficiency

BRIEF OVERVIEW OF THE RELEVANT THEORY
Competition and efficiency
Model from Dusoet al. (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)

11.

THE FIRST MERGER ATTEMPT AND TRIAL PROCESS
Ryanair arguments and commitments
• The effectivity 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

12.

THE FIRST MERGER ATTEMPT AND TRIAL PROCESS
Aer Lingus objections
• On the Ryanair’s post-merger cost 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

13.

THE FIRST MERGER ATTEMPT AND TRIAL PROCESS
European Commission disapproval
• Evaluations validity concerns:
Cost reduction 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

14.

APPEALS OF BOTH PARTIES
Both companies appeal against Commission decisions in General Court
Aer Lingus appeal the renouncement of
Commission from ordering the Ryanair to divest
its part of Aer Lingus’s shares
Arguments:
Court’s answer:
The Article 8(4) of the Ryanair is nonMerger regulation
controlling minority
The negative effect of
shareholder
the decision on
Ryanair hasn’t control
competition
share
Ryanair’s
Ryanair can’t seriously
shareholding (even
influence on a
minority) could lead
company with a
to a control over Art
current part of shares
Lingus
Ryanair appeal the prohibition of the merger
Arguments:
Court’s answer:
The Commission pay
The Commission made
attention only to
careful analysis
market shares
The weights of gathered
“Selectively” used
information could be
information from
weighted by
investigation
Commission
The qualitive and
Partly persuasive
quantitative analysis
evidence always could
sometimes indicated
be accessory arguments
in different directions The remedies had
Rejecting of remedies
unclear formulations
(because they were
made late)

15.

THE SECOND MERGER ATTEMPT (2009)
The second attempt, result: withdrawing a bid
Overview:
The Raynair made a takeover 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
Share price (Aer Lingus), €
over the past two years, as high oil
3,5
3
prices and deep recession have
2,5
2
caused
a
flood
of
airline
1,5
bankruptcies, consolidations and
1
0,5
capacity cutbacks. Aer Lingus, as a
0
small, stand alone, regional airline has
been marginalized and bypassed as
most
other
EU
flag
carriers
consolidate” - Michael O'Leary

16.

THE THIRD MERGER ATTEMPT (2012-2013)
The third attempt of the takeover, result: prohibition
1) Overview:
At 19.06.2012 the Raynair made another bid to
takeover the Aer Lingus (for € 748 million, at
€1.30 per share)
2) Argument of the Commission:
The Aer Lingus rejected the offer again
The arguments of the Commission qualitatively were
Raynair notified the European Commission
the same from the case one, but after a new
about the takeover
investigation quantitively become even stronger:
The commission prohibited the takeover. Why?
Increased of the combined market shares of
Raynair and Aer Lingues (from 80% in 2007 to 87%
3) Remedies proposed by Ryanair:
in 2012) for short-haul flights from Dublin
Transferring of Aer Lingus’ operations on overlap
Increased number of overlap routes with high
routes to Flybe
market’s share of the possible merged company
The cession of the slots at London airports for IAG
(from 35 in 2007 to 46 in 2012)
However, Commission’s investigation
High barriers of entering on the relevant market
had demonstrated, that these remedies
would be inefficient
4) Conclusion:
The takeover will harm consumers and decrease
competition, the fares will increase

17.

THE EVOLUTION OF THE MARKET AFTER DECISION

18.

THANKS FOR YOUR ATTENTION!
ANY QUESTIONS?

19.

REFFERENCES
• “Yes, we can (prohibit) – The Ryanair/Aer Lingus merger before the Court” - Oliver Koch1 (Forthcoming
in Competition Policy Newsletter 2010-3)
• Press Releases of the three cases from European Commission:
http://ec.europa.eu/competition/elojade/isef/index.cfm?fuseaction=dsp_result&policy_area_id=2&ca
se_title=%20AER%20LINGUS
• https://dial.uclouvain.be/memoire/ucl/en/object/thesis%3A11481/datastream/PDF_01/view
• Timeline of cases: https://www.telegraph.co.uk/finance/newsbysector/transport/11408325/TimelineRyanair-vs-Aer-Lingus-the-decade-long-battle-of-the-Irish-airlines.html
• The history of Aer Lingus: https://en.wikipedia.org/wiki/Aer_Lingus