Oct. 5 (Bloomberg) -- Ryanair Holdings Plc, Europe's biggest discount airline, made a hostile 1.48 billion-euro ($1.88 billion) bid for Aer Lingus Plc to combine Ireland's dominant carriers and add routes to the U.S.

Ryanair acquired a 19.2 percent stake and offered 2.80 euros a share for the rest of Aer Lingus, 12 percent more than yesterday's closing price in Dublin. The Irish government, owner of 28.3 percent of the carrier, and Aer Lingus rejected the bid, which comes eight days after its initial public offering.

Given the opposition, Ryanair ``will have to increase the bribery and pay significantly more,'' said Mike Powell, a Madrid- based analyst for Dresdner Kleinwort with an ``add'' rating on Ryanair shares.

Chief Executive Officer Michael O'Leary said Ryanair would reduce fares at Aer Lingus and acquire planes at lower cost by combining orders. The enlarged group would have 50 million passengers a year, helping it compete with British Airways Plc and its partner Iberia SA, which have 63 million.

``It makes sense to combine the two Irish airlines so that we can compete with the likes of British Airways, Lufthansa and Air France,'' O'Leary said in an interview. ``We can boost Aer Lingus's growth and profits and produce a better return than putting our spare cash on deposit.'' The two carriers will have separate operations and brands, he said.

Shares of Ryanair, founded in 1985 with one 15-seat plane, fell 7 cents, or 0.8 percent, to 8.63 euros in Dublin. The stock is up 4 percent this year, giving the company a market value of 6.7 billion euros. Aer Lingus surged 16 percent to 2.90 euros.

Additional Shares

Ryanair said in a statement to the Irish stock exchange late today that its Aer Lingus stake is at 19.2 percent. Early, the carrier said it had acquired 16 percent.

Together, Ryanair and Aer Lingus handle about 70 percent of the passengers at Dublin airport. The takeover would face scrutiny from Irish and European regulators. Cathal Hanley, a spokesman for the Competition Authority in Dublin, declined to comment.

``The government is fully committed to competition in the aviation market and it will not be selling its shares in Aer Lingus,'' Irish Prime Minister Bertie Ahern told lawmakers in Dublin today. ``It was always the intention to maintain a significant minority shareholding.''

Aer Lingus's board unanimously rejected the offer, the company said in a statement. ``This approach is unsolicited, wholly opportunistic and significantly undervalues the group's businesses,'' Aer Lingus Chairman John Sharman said in the statement. ``The offer would raise significant regulatory issues,'' he said.

Ryanair Earnings

Ryanair on Sept. 29 raised its full-year profit forecast and ordered an additional 32 Boeing Co. planes. Discount airlines are expanding in Europe, with a 24 percent share of the market compared with 5 percent in 2001. Ryanair has introduced a new base at Bremen, Germany, and expansion of the Barcelona-Girona base in Spain in the past two weeks.

``We're happy to see this offer,'' said Colin McLean, managing director of SVM Asset Management, who holds shares in Ryanair and Aer Lingus. The airline ``might have to up their offer and there is the possibility of someone else entering'' with a rival bid, he said.

Aer Lingus Chief Executive Officer Dermot Mannion has said he plans to use the proceeds of the IPO to double Aer Lingus's long-haul fleet to 14 jets, expand the 28-plane short-haul fleet by 50 percent and spend about 2 billion euros adding U.S. and Asian routes.

Ryanair Strategy

Ryanair has a strategy of taking market share from national carriers, while defending its Irish market. Unlike Aer Lingus, Ryanair has no long-haul routes. The Ryanair bid would be the largest airline transaction in the past 12 months if successful, according to Bloomberg data.

``It's hard to see how the Irish competition regulator can permit such a concentration of capacity at Dublin airport,'' said Chris Avery, an analyst at J.P. Morgan with an ``overweight'' rating on Ryanair stock. ``If the regulator objects, it is then hard to see what Ryanair hopes to achieve.''

The combined group would operate on about 500 routes, competing on only 17. Ryanair would combine purchasing with Aer Lingus to drive down fares and costs. The airline had about 2.2 billion euros of cash before buying a stake in the carrier, said O'Leary.

``We can comfortably fund this from our own resources,'' said O'Leary. ``We're happy to work with the Irish government as a significant minority shareholder if they decide not to sell,'' O'Leary said, adding he didn't anticipate antitrust or regulatory difficulties.

Ryanair History

O'Leary joined the Dublin-based company in 1988 from accounting firm KPMG LLP. Ryanair for the first time in August 2005 carried more passengers than British Airways.

When O'Leary was asked to head what was then an unprofitable local airline, he said it should be shut down. He changed his mind after flying to Dallas to pick Herb Kelleher's brain on how he built Southwest into the world's largest low-fare carrier. O'Leary typically targets his route expansion at state-owned or former national airlines which often struggle with higher costs.

O'Leary and Ahern's government have had a strained relationship, particularly over landing fees at state-owned Dublin airport. O'Leary said Ahern was treating Irish people as ``fools'' for allowing the Dublin Airport Authority to raise car parking charges by 50 percent, the Irish Times said on April 1 2005. He has routinely described Ireland as ``Bertie's blunder land,'' citing overruns on infrastructure including the Port Tunnel in the capital.

Aer Lingus Plan

Aer Lingus, founded in 1936, slashed 2,100 jobs, more than a third of the workforce, to avoid bankruptcy and return the carrier to profit after the Sept. 11, 2001, attacks on the U.S. hurt demand for trans-Atlantic travel.

Aer Lingus operates nine long-haul routes to the U.S. and one long-haul route to the United Arab Emirates, as well as short-haul routes to the U.K. and Europe. Ryanair operates short- haul services to the U.K. and Europe.

Ryanair plans to accelerate Aer Lingus's strategy of cutting fares on short-haul routes, as well as adding beds on transatlantic routes, O'Leary said.

``Our strategy for Aer Lingus is to speed up their own business plan, which has already been signed off by the Irish government,'' he said. Ryanair has no plans to start its own long-haul service, he said.

Union Reaction

``Ryanair has a well-known history of hostility to its staff and shabby treatment of its customers,'' IMPACT, a Dublin-based union which represents about 2,000 airline employees including pilots and cabin crew, said in a statement. The union said it was opposed to the proposed takeover.

``If accepted, the government will have realized over 500 million euros from the sale of its shares in Aer Lingus just four years after the company nearly went bankrupt,'' said O'Leary. ``The staff would realize over 220 million, which averages just over 60,000 euros.''

Aer Lingus and the Irish government raised an additional 96.6 million euros by selling extra shares on Oct. 3, taking the total raised by the airline's initial public offering to 740.7 million euros.

To contact the reporter on this story: Matthew Fletcher in London at mfletcher4@bloomberg.net.

Last Updated: October 5, 2006 13:38 EDT