Flybe Ireland Could Emerge from Ryanair – Aer Lingus Deal

UK low-fare carrier Flybe has revealed it has reached a formal agreement with Ryanair to establish a new Irish division in the event that the budget carrier receives the green light for its proposed takeover of Aer Lingus from European competition regulators. The new business, Flybe Ireland, would acquire control of a number of aircraft and operating routes currently served by Aer Lingus and Ryanair as part of the package of remedies that Ryanair has submitted to the European Commission.

The proposed transaction is fully contingent upon the European Commission's approval of Ryanair's proposed remedies and a successful bid for Aer Lingus. If Ryanair's acquisition of Aer Lingus is completed, Flybe expects to seek formal shareholder approval for the acquisition of Flybe Ireland from Ryanair in early Autumn 2013. It has already received irrevocable acceptances representing 64 per cent of the shareholders in support of this possible transaction as the European Commission had insisted on the pledging of irrevocable acceptances by over 50% of Flybe's shareholders as a condition precedent for the deal to create Flybe Ireland proceeding.

Flybe already has a presence in the Irish market but this arrangement will see it significantly increase its presence in the country. Under the terms of the arrangement with Ryanair, the carrier will secure slots and licences to operate 43 routes within Europe using a fleet of at least nine Airbus A320s with crews, engineers and management also being transferred to the venture at start-up. The Flybe Ireland venture will initially be managed by Ryanair and a joint one-year business plan will be developed to deliver a cost structure that based on the assumption that the preceding year's revenue remains the same, would provide €20 million in pre-tax profits in the 12 months following the transfer to Flybe Ireland. Ryanair will also make a cash injection of €100 million into the airline and manage all forward sales cash and liabilities, estimated at a further circa €50m in working capital funding.

The business will be subsequently acquired by Flybe for €1 million. “The Board believes that the opportunity to serve the Irish aviation market is in line with its published strategy, and its previous solid track record of successful acquisitions,” said Flybe in a formal statement to the London Stock Exchange.

Flybe Ireland will operate from two bases in Dublin and Cork and its network of 43 routes to 34 destinations will bring between 15 and 20 new points to the Flybe Group’s operation. The new airline also holds rights to use the Aer Lingus brand for up to three years post completion of the transaction. This will allow it to develop its own brand position in Ireland during a realistic transition period.

Flybe says it intends to deploy its frequency model on the major city pairs from Ireland, and its leisure model on the European leisure markets. As part of the agreement it is committed to operating an agreed frequency on routes, with the ability to terminate a certain number of routes per year whilst maintaining stable capacity in the Irish market. If Flybe Ireland exceeds the route termination threshold, it will be liable to a contractual penalty.

At the current stage the formation of Flybe Ireland remains in the hands of European politicians. The European Commission is scheduled to give a decision on the competition aspects of Ryanair's bid for Aer Lingus on March 6, 2013 and if this remedy package is deemed acceptable for the bid to proceed, Ryanair will then have to re-activate its bid for Aer Lingus with a view to gaining sufficient acceptances from Aer Lingus shareholders.

If the Ryanair bid is reactivated and is successful, the deal could close on or around mid May when Flybe will then undertake due diligence on the new entity ahead of a likely shareholder meeting in August 2013. If enough support is reached then it is envisaged that the transaction could be closed in October 2013 with Flybe Ireland commencing operations under Flybe's ownership at the beginning of the 2013/14 IATA winter season.

This will not be the first time that Flybe has integrated enough business into its activities. In March 2007, it acquired British Airways' loss-making UK regional airline, BA Connect and in August 2011 the loss-making Finncomm Airlines, successfully integrating the former and restructuring the latter for business gain.

Flybe is seeking to diversify away from its reliance upon UK revenue and this opportunity in Ireland is a good mixture of diversification, and overlap with its existing route network, to fulfill this goal. Flybe Ireland will also increase Flybe's ability to drive further economies of scale from fleet basing, suppliers and airports, as part of this transaction.

"Flybe would be delighted to be granted the opportunity to service the Irish aviation market through Flybe Ireland, an airline which would be based in Ireland and dedicated to developing a broad range of scheduled services for business and leisure markets,” said Jim French, Chairman and Chief Executive Officer, Flybe Group.

"This development of creating a Dublin based airline is in line with the Company's stated strategy at the time of IPO - which was to diversify away from reliance upon the UK economy. The terms of the deal negotiated ensure that Flybe Ireland will be a well-capitalised, well-funded company, enabling us to deliver upon that strategic aim. Flybe has a history of acquiring businesses of scale, restructuring and refocusing them and as a result delivering profitable returns. This opportunity plays clearly to that corporate strength,” he added.

Flybe currently offers flights to Donegal, Dublin, Knock and Waterford in Ireland and recently revealed plans to launch a new link to Shannon from Glasgow. In the table below we highlight the largest international airport markets from Ireland by seat capacity. Unsurprisingly, the UK market dominates these figures, holding the top five and seven of the top ten positions. In terms of airlines, Aer Lingus had the dominant share of international capacity in 2012 with 40.2 per cent of the available seats, just ahead of Ryanair with 38.7 per cent. The Aer Lingus total can be increased through the third position carrier Aer Arann (5.3 per cent) which operates as a franchisee under the Aer Lingus Regional brand.