Data and references supporting the evidence are included in detailed notes at the end of the paper.

Introduction

For any country, easy and efficient access to others is an important contributor to its economy and quality of life. It is particularly so when the country is an island with no land or rail links to major trading partners or potential tourists.  In Ireland, this was recognised by earlier governments, who established and supported the establishment of State airline and shipping companies to ensure that such access was available. But these became State protected monopolies, with high costs and at times indifferent services. Some of us recall being frequent users of the Dublin to Brussels service offered by Aer Lingus in the 1970s and 80s, where flight availability was limited, and costs for a restricted economy ticket often fell in the range of €600-800 or even more.

But then came the competition revolution.

At its best, competition gives consumers choice, drives down prices, and encourages innovation. This has proven true of air travel. Ireland was one of the first movers in Europe to move from protection of a monopoly – the traditional ‘legacy’ airline which was shielded from competition by government – to allowing new entrants. The payoff was dramatic, and was extended to the rest of Europe with the implementation of full deregulation from 1997 at EU level.

The outcome has been documented by Barrett (1997, p.67) <1>.

The deregulation of air transport between Britain and Ireland in 1986 brought reductions in fares of over 50% and a doubling of passenger numbers in contrast to high fare increases and market stagnation before deregulation.

In Ireland, Ryanair, established in 1985, took first mover advantage of deregulation, to the extent that it is now ranked as the largest airline in Europe judged in terms of passenger numbers – carrying over 76 million passengers in 2011.  It offers over 1,500 flights daily serving 170 airports across Europe with 294 Boeing 737-800 aircraft; Ryanair is now the seventh largest airline in the world. The incumbent monopoly airline in 1985 (Aer Lingus) continues to operate, and carried 9.8 million passengers in 2011, of whom 8.9 million are short haul (Europe).

Together, the two airlines dominate Europe-based traffic into and out of Ireland. They account for over 80% of traffic out of Dublin. On July 24, 2012, out of 66 routes by Aer Lingus from Dublin, 31 are also contested by Ryanair; the average price for a contested flight is €125.75, compared to €145.76 for an uncontested flight <2>.

Figure 1: Price Comparison on Contested Routes

Figure 2: Price of Flying with Aer Lingus on Uncontested Routes

Ryanair has purchased shares in Aer Lingus, now amounting to 29.8% of the total, and has made successive efforts to buy the airline outright, the latest announced on June 19, 2012. In this commentary, we review the earlier refusal by the European Commission to allow the earlier bid to proceed, and then examine the latest proposal. The stakes here for Ireland are very high; any decision that results in increasing cost or reduction in quality of access would have hugely negative effects on economic performance and quality of life.

The European Commission Decision In 2007

In rejecting the earlier bid in 2007, the European Commission argued that the acquisition of Aer Lingus would have eliminated Ryanair’s main competitor in Ireland.

To address the EU’s antitrust concerns, Ryanair offered to sell as many as two-thirds of Aer Lingus’s landing slots at Heathrow and provide space for new entrants at the London airport, Europe’s busiest. It also offered slots at London’s Stansted Airport and airports serving Frankfurt, Paris, Milan, Rome, Barcelona and Bratislava, Slovakia. The Commission rejected the offers.

Nelli Kroes, the Commissioner for Competition argued that

The slots were not enough. The airline would have about 80% of the market at Dublin’s airport. That is such a dominant position that a newcomer is not interested in joining that play.

The Commission said the Ryanair case was the first time the regulator reviewed a proposed merger of two primary airlines operating from the same airport in one country.

The number of overlapping routes is unprecedented compared with previous airline cases.

The Commissioner pointed out that the combined airline would have had a near monopoly at Dublin, with no competition on 22 out of 35 routes.

Ryanair has provided customers with more competition and more choice. But it cannot now take away that choice.

The 2012 Bid

The Ryanair case for acquisition is based on the following propositions:

• In an era when airlines are merging and becoming bigger, Aer Lingus, as a small stand-alone airline –the Ryanair CEO Michael O’Leary calls it ‘a small regional airline’ and in the Ryanair bid document it is called ‘a sub-scale peripheral  EU flag carrier which has been bypassed by ongoing EU-wide flag carrier consolidation’ – will not be able to compete. He highlights industry consolidation that is leaving Europe with five big airline groups – Air France-KLM, Easyjet, International Airlines Group, Lufthansa, and Ryanair.

The Financial Times notes

Apart from Ryanair, it is difficult to see who would pursue a takeover of Aer Lingus. Air France-KLM, IAG and Lufthansa are seen as unlikely suitors. Etihad, the fast-growing Abu Dhabi-based carrier that announced last month it had bought a 3% stake in Aer Lingus, has held talks about buying the Irish government’s shareholding. But foreign ownership rules are likely to prevent Etihad from having a controlling stake in Aer Lingus.

• Since their last failed bid, the world has changed in terms of competition – “The most significant of these consolidations is the recent IAG (BA and Iberia) takeover of BMI, where the No.1 airline at Heathrow was allowed to acquire the No.2” and there are no barriers to new entrants at Dublin airport, which is operating at only 50% capacity.  Ryanair would keep the two airlines separate and competing subsidiaries of Ryanair Holdings.
• By lowering Aer Lingus unit costs and fares, growing its fleet and traffic at some of Europe’s major airports, and competing with high fare incumbents, Ryanair can significantly increase Aer Lingus’ profitability, and boost Aer Lingus passenger numbers from 9.5 million to 14 million over the next 5 years.
• Sale to a non-Irish investor would ‘lead to the inevitable break up of Aer Lingus on the basis that they are only interested in the Heathrow slots and the profitable US routes.
• Competition concerns can be addressed.

Ryanair believes that

any competition concerns which the European Commission may have can be addressed by Ryanair making appropriate remedies prior to the completion of this Offer and by significant synergies and cost efficiencies resulting from this combination.

Issues & Conclusions

Since the late 1908’s, consumers in Ireland, and especially in Dublin, have experienced a golden age of air travel, with expanding services and low prices, attributable mainly to competition.

Maintaining this competitive environment is critically important, and we should not take it for granted. (Access costs by air do not feature in the National Competitiveness Council’s otherwise very comprehensive Ireland’s Competitiveness Scorecard 2011.)

No definitive conclusions can be drawn from the data on all flights out of Dublin on one day. But it does not allow us to reject the hypothesis that competition is good for consumers, and reduced competition would be bad.

There are some issues arising from the most recent bid by Ryanair for Aer Lingus which require clarity and verification.

• As mentioned by the Financial Times, “foreign ownership rules are likely to prevent Etihad from having a controlling stake in Aer Lingus”. These rules are based on European regulations and are a hindrance to competition.  That the airline business should be run on the basis of nationality runs contra to its international nature.
• It is argued that there are now large economies of scale in airlines, hence the emergence of the ‘big 5’. What has changed since Ryanair started out with one plane in 1985? In what elements of the cost base – costs of capital, planes, fuel, people, marketing, access – are there significant disadvantages, and is the only solution a merger? This has now become part of the conventional wisdom, but Ryanair has demonstrated that the conventional wisdom is often wrong. Are there other means of driving down costs in some or all of these areas that would retain autonomy?
• Michael O’Leary argues that the European routes flown by Aer Lingus are unprofitable, that the main interest by prospective purchasers are the Heathrow slots and the US routes, and that the airline would be broken up by any purchaser. Evidence?
• If Ryanair take over Aer Lingus, will contestability problems arise?  In her 2007 judgment, Nelli Kroes thinks so: “That (80% of the Dublin market) is such a dominant position that a newcomer is not interested in joining that play”.

Whatever the choice that is made, we must not return to the monopoly that prevailed before 1986.

To quote Commission Kroes again

Ryanair has provided customers with more competition and more choice. But it cannot now take away that choice.

Notes

1. Barrett, Sean, 1997. The Implications of Ireland/UK Airline Deregulation for an EU Internal Market, Journal of Air Transport Management, Vol. 3, No.2, 1997.
2. The prices used here refer to the cost of a one-way ticket from Dublin airport on Tuesday, 24 July 2012 or the closest available flight if there were no flights on the 24th. Where there were multiple flights on the same day, the cheapest flight was chosen. The price data was taken from http://www.aerlingus.com and http://www.ryanair.com on 2nd and 3rd of July. Prices are inclusive of taxes but do not include opt-in fees such as charges for luggage. The routes were deemed to be competing if they serviced the same area e.g. Aer Lingus flights to Brussels National Airport compete with Ryanair flights to Charleroi Airfield.

Download this blog as a pdf – Airline competition in Ireland

Air Travel and Managing Climate Change

With the rapid expansion of air travel, flying has accounted for an increasing share of greenhouse gas emissions. However, since 2012, air transport has been included in the European Union Emissions Trading Scheme, which sets a declining cap on emissions up to 2020 and thereafter. This produces a price for CO₂ which will be passed through to travellers, with the extent of the pass through depending on the cost of CO₂ allowances, the load factor, and the efficiency of planes and how they are flown. This will penalise those airlines that use relatively fuel inefficient planes, fly them inefficiently, and have low load factors.

Annex 1 – Aer Lingus Prices

Annex 2 – Ryanair Prices

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