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Unfree Parking: Aer Lingus’ future is up in the air.

Call it the luck of the Irish. Shares of Dublin-based airline Aer Lingus plummeted this February on speculation that the Irish government would reject a €1.36 billion offer to purchase the company. The buyer was International Airlines Group (IAG), the owner of British Airways. It’s unsurprising that many of the concerns about the deal voiced by members of the Dáil, Ireland’s most powerful legislative body, revolve around jobs. More unexpected is the real stumbling block in the negotiations: Aer Lingus’ 23 pairs of parking slots at London’s Heathrow Airport. While fisticuffs over airplane parking slots might not seem to be the most significant conflict, it is reflective of both recent changes in the European airline industry and Ireland’s struggle to assess the economic and political benefits of giving up what is considered a national asset.

Started in 1936, Aer Lingus was primarily state-owned until 2006, when the government sold an almost-60 percent stake on the London and Dublin stock exchanges, leaving it with about a quarter of the company. Though Aer Lingus remains financially healthy in an industry rife with bankruptcy, the deal with IAG may nevertheless be a best-case scenario for the company. In recent years, many airline companies have transitioned from being state-owned carriers to seeking private sources of capital in order to compete with low-cost carriers. And Aer Lingus has not been spared: The airline faces competition from Ryanair, a low-budget Irish airline which holds a 29.99 percent stake in the company, and EasyJet, a British firm. Low-cost airlines like these have grown at double-digit rates over the past decade while the growth of established network and flag carriers has largely remained stagnant. Furthermore, when the EU deregulated its formerly strict market in 1997, allowing any European carrier to fly within any European country’s borders, low-cost carriers came to dominate shorter routes. With the rise of Ryanair and other low-cost competitors, it makes sense that the company itself is in favor of the IAG sale.

Airlines across the globe face an increasingly competitive landscape, and for many, consolidation has been the answer. This is not just a European solution, but also a global one: While 9/11 changed the face of air-travel drastically, with more passengers choosing to fly with low-cost carriers than before, so-called “mega mergers” have allowed US airlines to remain profitable. European airlines are beginning to follow the same trend, but with less success. Though it’s a tempting narrative, consolidation in Europe isn’t a foregone conclusion. In the United States, 95 percent of the market falls to just eight carriers; in Europe, two dozen European carriers carve up 80 percent of the market. Barriers like language, regulation and government-owned stakes still stand in the way of consolidating Europe’s diverse airlines. In addition to, and partially due to, being the most fragmented airline market worldwide, Europe’s is also the least profitable.

With IAG buying into the consolidation trend, Aer Lingus is a particularly valuable prospect for the conglomerate to acquire — not because of its profits, but because of its parking spots. In the world of aviation, parking slots grant airlines permission to land and depart during specific times. The slots in question are owned by Aer Lingus at Heathrow, one of Europe’s busiest and most overcrowded airports. Out of Heathrow’s 680 pairs of slots divided between two runways, Aer Lingus owns a coveted 23 pairs. Despite growing pressures to build a third runway at London’s flagship airport, plans for expansion have been bogged down in political debate, meaning the delay is likely to continue.

Unlike in the United States, where slots are allocated by the Federal Aviation Authority and are nontradable, the European Union has allowed airlines to swap spaces as airports across Europe have increasingly neared capacity. As a result, the secondary market for the trading of slots at Heathrow has skyrocketed in volume in the past few years. In 2005, 68 pairs of slots were transferred between airlines; in 2012, that number grew to 526. As the result of an aggressive trading campaign in 2013, British Airways now owns over half of Heathrow’s slots.

Given the limited supply, slots at Heathrow have become increasingly valuable. In early February, a pair of Scandinavian Airlines-owned slots in Terminal Two, a terminal Aer Lingus shares, went for $60 million. Even with conservative, back-of-the-envelope calculations — the values of slots are highly variable, though consulting firm Deloitte has estimated a typical slot pair at somewhere around $40 million — the airline could be sitting on about $1 billion in slots alone. Based on that figure, parking slots account for over two-thirds of IAG’s offered price, explaining its interest in the small airlines.

For the Irish government, however, the slots may prove even more precious than their nominal value in euros. Though it only owns a 25 percent stake in the airline, Ireland relies on the Heathrow slots for both tourism and business travel. Though the island nation may not seem like a major vacation destination, tourism accounted for a healthy 13 percent of GDP in 2008. Ireland’s proximity to the UK, combined with a lower cost of living, makes its cities economically attractive to visit. Furthermore, Aer Lingus’ business model relies on its London slots: One in three of the 2.28 million flights out of Irish airports to Heathrow last year were transfers for lucrative international flights. Their sale, therefore, would dramatically cut traffic through Dublin and would threaten the investment potential of cities like Shannon and Cork that rely on quick access to London. It’s not all about access, either. If Aer Lingus loses control of the slots, the airline could shrink, triggering the job losses that Irish politicians are publicly worrying about in the wake of the offer.

It’s plain to see why politicians have been scrambling to defend Irish ownership of these slots. Members of Fianna Fáil, one of the leading opposition parties, have outspokenly condemned the sale, warning that IAG could offer no long-term security for the slots should it be allowed to take over Aer Lingus. There is some truth to this claim: after Prime Minister Enda Kenny called for “cast iron permanent guarantees” from IAG, the company promised only that the slots would remain designated for Irish routes for the next five years. Unsatisfied, Irish politicians have demanded that the government receive veto power over any future sale of the slots, even after the sale of their entire stake in Aer Lingus. This tactic may be working. Given mounting political opposition to the deal, IAG has indicated that they are willing to put permanent protection for the slots on the table.

This isn’t the first controversy over airline parking. The merger between British Airways and Spain’s national carrier Iberia — the deal that originally formed IAG — sparked similar concerns in 2010. Five years later, Iberia has kept all its Heathrow slots despite the merger. If the deal were to go through, IAG would presumably choose to do the same with Aer Lingus’ slots. The larger company has already announced that Aer Lingus would remain headquartered in Dublin after the sale. This development, together with the fact that IAG is now offering to make a series of legally-binding agreements retaining Irish control of the slots, means that the rush to criticize the sale likely has more to do with Irish politics-as-usual than any real indication of IAG having nefarious plans for the Heathrow slots.

With Ireland’s 2016 elections just around the corner, endorsing the sale is viewed as political poison. As a coalition source said in January, “This is a year-one issue, not a year-five issue” — meaning it is elections, not economics, that are holding up the deal. The long-standing coalition government formed by left-leaning Labour and center-right Fine Gael parties has floundered in recent years, losing support in opinion polls by over 30 percent in the past year. Fianna Fail, formerly Ireland’s dominant populist party until a crushing defeat in 2011’s elections, is predicted to gain seats next year along with opposition party Sinn Fein. Independents and smaller parties have garnered as much as 29 percent in recent polls, leading to an increasingly fractured electorate. With the balance of government in a rather precarious place, such a touchy topic as the airline slots has not earned many champions from the Government and Opposition.

The fraught Irish political landscape might not make much of a difference. Even if no political party is willing to agree to the sale, the government may not have any say in it. Although IAG has stated it would only close on the sale if both the government and Ryanair agreed to it, both are short of the 30 percent stake it would take to block the deal. IAG is not known for playing hardball, but the current offer stands at a significant premium to the airlines’ share price, leaving institutional and retail investors more than happy to part with their shares. IAG could easily pick up the shares necessary to gain de facto control; furthermore, Ryanair has indicated that it is looking to dump its shares after seeing its own offers to buy Aer Lingus rebuffed one too many times over the past few years. Though unlikely, even if the government held on to its 25.1 percent stake and retained veto power over the sale of slots, IAG would still be able to lease or temporarily swap them. As such, the Irish government’s position of intransigence may be in vain.

However logical consolidation may be in an increasingly competitive market, and however IAG may sweeten the deal, the acquisition may be something that Irish politicians, and the country at large, are never willing to accept. As long as the public continues to feel that they still own Aer Lingus — and insists on claiming the Heathrow slots as Irish birthright — it may be impossible for the Irish to view the deal entirely objectively. The focus on slots has already overshadowed the handwringing around jobs in the public arena; IAG’s latest statement contained no reference to jobs, a fact that IMPACT, the trade union representing Aer Lingus pilots and cabin crew, was quick to point out. It remains to be seen whether the deal will ride out these political headwinds or be taken down by turbulence.

About the Author

Liz Studlick '16 is a staff writer for the Brown Political Review and former Layout Director.