Flying into a new owner's arms.

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Ireland Should Jettison Aer Lingus

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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A battle over jobs is at the heart of Ireland's rejection of a bid from International Consolidated Airlines Group for Aer Lingus, the partially state-owned airline. The jobs at risk, though, are those of the country's politicians, rather than the airline's employees. The state should step aside, accept the guarantees it's already secured from IAG, the parent of British Airways, and get out of the owning-part-of-an-airline business.

The days of defending national champions, whether that's the airline business, banking or auto manufacturing, are over. The airline industry has already seen British Airways ally with Iberia, the Franco-Dutch merger of Air France and KLM, and the combination of German, Swiss, Belgian and Austrian carriers that formed Deutsche Lufthansa AG.

Michael O'Leary, the outspoken chief executive officer of budget carrier Ryanair Holdings, has predicted an "endgame" of European consolidation in the next half-decade, with weaker airlines going out of business, others merging, and everyone cutting back on short-haul flights. O'Leary's list of the vulnerable includes Scandinavian Airlines, Italy's Alitalia, Germany's Air Berlin, Greece's Olympic Airlines SA, Portugal's Transportes Aereos Portugueses -- and Aer Lingus, in which Ryanair has about a 30 percent stake.

IAG, the offspring of a 2011 merger of British Airways and the Spanish carrier Iberia, is offering about 1.4 billion euros ($1.6 billion) for Aer Lingus at 2.55 euros a share, a premium of about 14 percent to the current market price.  The stock is up more than 20 percent since IAG's interest was revealed; those gains presumably would disappear if IAG walked away, to the detriment of all the stakeholders.

The board of Aer Lingus, wary of the airline's future as an independent carrier, wants the deal to get done. Stephen Kavanagh, who takes over as CEO soon,  said this week that the transaction gives "additional opportunity for accelerated and increased growth, and obviously a level of de-risking our future prospects." Pat Rabbite, a Labor member of the Irish Parliament, warned last weekend that "if we don't take this opportunity, will another come along?"

The Irish government, which owns 25 percent of Aer Lingus after floating the other 75 percent in 2006, is blocking the takeover. It faces an election early next year, making the ownership of the national airline a potential election issue, so it wants guarantees on how many jobs will be lost. It's also anxious not to see a reduction of flights into and out of the island, given that tourism contributes more than 2.2 percent of gross domestic product. Ireland has made strides positioning itself as a gateway for transatlantic flights; Aer Lingus increased the number of passengers it transported on long-haul flights by 21 percent last year, progress the government is keen to extend.

IAG, though, has delivered sufficient guarantees. Its pledge to maintain existing routes to London for five years already involves a commercial leap of faith; no one can predict where the industry will be in half a decade, and any Irish government effort to add years to that promise risks undermining the commercial logic of the transaction. IAG also rightly claims Aer Lingus on its own can't match IAG's commitment to keep flying routes between London and towns such as Cork and Shannon.

On jobs, Aer Lingus told a parliamentary hearing earlier this month that the deal could generate more than 500 jobs in the coming five years. It also could nearly double the carrier's fleet of long-haul planes, from 10 now.

Irish Finance Minister Michael Noonan reckons Irish politicians can sell the merger to voters by highlighting the positive aspects for the country. "If they can go to the electorate saying we’re after putting 50 percent extra traffic into Dublin airport and there’s an awful lot of extra jobs and there’s a lot of extra investment and there’s a lot of extra tourists going through, that sounds to me like the thing I’d like to knock on the doors with,” he said Wednesday.

On its own, Aer Lingus is too small to survive. The Irish government should bow to the inevitable and get out of the way -- before IAG gets tired of waiting. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net