Aer Lingus folly may forever mark O'Leary

Business Opinion:As an act of corporate vandalism, Michael O'Leary's assault on Aer Lingus takes some beating. Nine months and more than €16 million in fees later there is very little to show for shareholders in either Aer Lingus or Ryanair.

The European Commission administered the coup de grace to Ryanair's bid last week when, as expected, it blocked the takeover on competition grounds. Aer Lingus shares, which have been falling steadily from their high of €3.27 since it became apparent in the spring that the deal had very little chance of getting through Brussels, are now back in the neighbourhood of €2.60. It is a reasonable but not spectacular premium to the €2.20 level at which they floated last September. But one presumes this level is justified by the fundamentals of the business and not the premium that Ryanair would have to pay for control. Some investors, including Ryanair, have made a tidy profit out of the shares in the intervening period, but the episode has done Aer Lingus no favours.

It has spent €16 million - the equivalent of half its 2006 operating profits - defending itself against an unwanted bid that it turns out was never going to succeed. While this leaves Aer Lingus open to accusations of profligacy, it really was not in a position to take any chances. There is also the cost in terms of management time and general corporate focus.

Ryanair shareholders could also be forgiven for wondering what they have got out of the last nine months of theatrics. The group may be sitting on a handy paper profit on its 25 per cent stake in Aer Lingus, but turning that into cash is another job entirely.

So, why did Ryanair pursue this ill-conceived venture to such lengths, and why will it even now not let it go, with an appeal to the European courts being mooted?

The explanation proffered by O'Leary last week does not really stand up to any detailed scrutiny. By pursuing the issue to the extent that it has, Ryanair was really just getting the paperwork in order for another bid, he explained. The presumption being that once O'Leary has a judgment in his favour from the European courts, Ryanair's future overtures will be irresistible.

This is somewhat simplistic. For a start it assumes Ryanair will win the appeal. It also ignores the reality that a 25 per cent blocking stake is held by the Government, which can rely on the support of other shareholders, including the airline's pilots and Denis O'Brien.

It also seems pretty obvious that if Ryanair makes another bid for Aer Lingus it will have to jump through all the regulatory hoops afresh, as the competitive landscape will have changed. Open skies, for example, will probably have been implemented.

The explanations put forward by O'Leary's legion of admirers similarly do not hold water. These include the attractive proposition that O'Leary is where he always expected to be. At no cost, he has disrupted his biggest competitor in his most important and profitable market, while ensuring that none of his other competitors could take Aer Lingus over.

For those who think that O'Leary can do no wrong, this sort of Machiavellian explanation obviously makes sense. But again, there are some flaws in the argument, not least that there was no need for Ryanair to buy into Aer Lingus as a defensive move.

As Ryanair has found, the Government's shareholding has proved to be an effective bulwark against unwanted suitors. Any attempt to take over Aer Lingus would require the support of the Government, and it is hard to see it supporting even a friendly approach unless the airline was in severe difficulties.

There is also a presumption that Aer Lingus under different ownership would be a bigger threat to Ryanair on routes to and from Ireland than under the current owners.

In the absence of any really compelling explanation for why Ryanair embarked on this doomed frolic, maybe it is time to confront the "appalling vista". Perhaps this whole thing has been what it actually looks like - the capricious whim of a chief executive who has started to believe his own press clippings, all 460 volumes of them.

It is hard to believe, however, that a Ryanair board made up of people of the stature of David Bonderman of Texas Pacific and Kyran McLaughlin would be railroaded into something as apparently ill-conceived as the assault on Aer Lingus. They are not yes-men.

But it is plausible that, given his impressive track record, they decided to once again trust O'Leary's judgment and give him his head.

If so, then the Aer Lingus debacle may well mark a turning point in the career of Ryanair's chief executive.