Ryanair to help establish Flybe Ireland if it is able to acquire Aer Lingus

Ryanair (Dublin) is proposing to sell a new company and transfer Airbus A320 aircraft in order to establish Flybe Ireland (Dublin) as a new Irish competitor if it is able to acquire rival Aer Lingus (Dublin). The European Commission has previously denied the acquisition because of its competitive concerns for the Irish market.

Flybe‘s (Exeter) board has accepted the offer. The details have been announced by Flybe:

THE DEAL

Flybe has agreed to acquire a new company, Flybe Ireland, from Ryanair for €1 million.

Prior to its acquisition by Flybe, Ryanair has agreed to transfer to Flybe Ireland:

43 routes, all within Europe, many to or from current Flybe destinations;
The requisite number of slots and licences to operate the routes;
A minimum of 9 Airbus A320 aircraft;
The requisite number of flight crew, aircraft engineers, management and facilities to operate the business;
A cash injection of $135 million (€100 million);
All forward sales cash and liabilities, estimated at a further circa €50 million in working capital funding.

Ryanair in consultation with Flybe will undertake to develop a one year business plan 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. In the event that the business plan does not project €20 million in pre-tax profits, there is an agreed adjustment mechanism factored into the €100 million cash contribution referred to above.

FLYBE IRELAND

Flybe Ireland will:
- Operate from bases in Dublin and Cork.;
- Operate 43 routes to 34 destinations in Europe. Flybe currently operates to circa 50% of those destinations in its Flybe UK business;
- Deploy Flybe’s frequency model on the major city pairs, and its leisure model on the European leisure markets;
- Have the right to use the Aer Lingus brand for up to three years post the transaction. This will allow it to develop its own brand position in Ireland during a realistic transition period.

COMMITMENTS MADE BY FLYBE TO RYANAIR AS PART OF THE EC REMEDY PACKAGE

Flybe Ireland will be 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 pay a contractual penalty.

THE EXPECTED TIMETABLE

Outlined below is the expected timetable:

March 2013
- On 6 March 2013, EC is scheduled to give a decision on the competition aspects of Ryanair’s bid for Aer Lingus.
- If the EC gives the agreement for Ryanair’s bid for Aer Lingus to proceed, Ryanair may then re-activate its bid with a view to gaining sufficient acceptances from Aer Lingus shareholders.

May 2013
- If the Ryanair bid is reactivated and is successful, Flybe would expect the deal to close on or around mid May.

Summer 2013:
- If the Ryanair bid for Aer Lingus has been successful, Flybe will undertake due diligence on the new entity.
- It is expected that the Class 1 Circular will be completed and posted to Shareholders in August 2013, followed by an EGM for shareholders to vote.

October 2013:
- The effective date of the transaction is envisaged to be October 2013 with Flybe Ireland commencing operations under Flybe’s ownership at the beginning of the 2013/14 IATA winter season.

The Board of Flybe believes that the transaction offers the following benefits to its shareholders:

As stated at IPO, the Group’s strategy is to diversify away from its reliance upon UK revenue. This opportunity is a good mixture of diversification, and overlap with our existing route network, to fulfil this goal.

Flybe has existing presence and network points at circa 50% of the 34 destinations in the 43 route package.

Flybe Ireland will be a well-capitalised company, with circa €150m of cash on the balance sheet, including the one off capitalisation by Ryanair, and the transfer of the forward sales cash within Aer Lingus at the time of the transaction.

Flybe Ireland will increase Flybe’s ability to drive further economies of scale from fleet basing, suppliers and airports, as part of this transaction.

Flybe has proven expertise in the acquisition and turnaround of acquired entities:

In March 2007, Flybe acquired British Airways’ UK regional airline, BA Connect, a business losing £40m per year at acquisition. The business was fully integrated into Flybe within 12 months, and made profits by the end of its first year of ownership. At the time of its acquisition the business had 39 aircraft, 1,700 staff and £350m of revenue.

Ryanair’s motivation for this deal and transaction is to remove the last competitive concerns in the Irish market by the European Commission. Will it work?

Ryanair: