Michael Harrison's Outlook: O'Leary's had his fun and made some money, but his bid for Aer Lingus is going nowhere

Fasten belt for BA pension punch-up

Michael O'Leary's €1.5bn bid for Aer Lingus was nothing if not audacious, coming as it did just one week after the airline floated in London and Dublin. The Aer Lingus defence document, published yesterday, is an equally inspired piece of work, arguing that the business is worth not only much more than Ryanair is offering to pay but a third more than the Irish government sold it for just five weeks ago.

This is not an ordinary takeover battle, however. Aer Lingus cannot roll out the usual defence mechanisms - such as a big repayment of capital to shareholders or a white knight. After all, it can hardly start handing cash back to investors having only just taken it from them. Nor can it go in search of another suitor as the whole point of the stock market listing was to give the airline its independence.

Nor, in the end, is this takeover about price, unless Mr O'Leary were to offer such an astronomic sum that the Irish government would be derelict in its duty to the taxpayer not to accept. Dermot Mannion, the Aer Lingus chief executive, virtually admitted as much yesterday when he said he could not conceive of a circumstance in which the board would approve the takeover. If that really is the case, then the 88 pages devoted to explaining how much more the airline is actually worth are a waste of paper.

Mr O'Leary says artlessly that he only wants to buy Aer Lingus because it is a better use of Ryanair's money than leaving it on deposit. He also promises to leave the airline alone and even says he would be happy with the Irish government remaining as a large minority shareholder.

But he knows the odds are heavily stacked against Ryanair already. Dublin, the butt of too many verbal assaults from Mr O'Leary to count, has nailed its colours to the mast, accusing him of trying to create a monopoly across the Irish Sea by eliminating a competitor. If the bid were to come back to Ireland for vetting, it would surely be killed stone dead. Nor can Ryanair rely on a sympathetic hearing from Brussels, which has suffered almost as many tongue lashings.

If, by some miracle, Ryanair got over the immense competition hurdles, it still has to persuade shareholders to sell and the fact is that nearly half of Aer Lingus is in friendly hands.

For these reasons, Mr O'Leary's chances of capturing his prey are vanishingly small. Perhaps that is just as well in the end for Ryanair shareholders for the deal makes precious little industrial sense anyway. Ryanair has no interest or experience in running the full-service, long-haul business which still makes up a large chunk of Aer Lingus. And shorn of many of its short-haul European routes from Dublin, what is left of the airline would not be worth buying.

Ryanair's cheekily-timed bid has served a purpose, however. Apart from the entertainment value, it has seriously distracted the Aer Lingus management just as it had hoped to take the fight to Mr O'Leary. Ryanair also stands to make a tidy profit, having bought a 19 per cent stake at a price considerably below that of the offer. Even if the bid lapses and the price falls, it is apparent that Aer Lingus was considerably undervalued on flotation.

Mr O'Leary should use the first closing date of the offer on 13 November to fold his tent, bank his profit and get on with running his own airline. If the surplus cash Ryanair is generating really is burning a hole in his pocket, he could always return it to shareholders.

Fasten belt for BA pension punch-up

Willie Walsh, that other Irish airline executive, is a man in a hurry. He is determined to sort out the legacy issues he inherited at British Airways in quick order. He remains confident that its £2.1bn pension deficit will be resolved before the end of the year and yesterday another bit of unwanted baggage was jettisoned with the sale of BA's regional operations to Flybe.

It is reminiscent of his predecessor Sir Rod Eddington's early actions at BA which included the sale of Go to its management and the withdrawal from Gatwick as a second London hub airport.

The disposal of BA Connect, as the regional service is known, makes sense. BA is increasingly turning itself into a long-haul, premium-class airline. As long as the short-haul European network does not lose money, it serves a valuable purpose in feeding customers on to jumbo jets at Heathrow. But the loss-making regional business, which operates from 13 provincial airports, has long seemed like an anomaly. The original plan was to give it until 2008 to begin to connect with profits, but BA has decided to cut its losses and sell early.

BA has found a good exit route. By swallowing up Connect, Flybe will double in size and become Europe's biggest regional airline with real scale and critical mass. There will be job losses but clearly not as many as there would have been were BA to have closed the business altogether.

The one-off cost to BA is £106m. But the upside is that it retains a 15 per cent stake in the enlarged Flybe, an airline that was already valued at around £200m before yesterday's transaction.

The pensions deficit looks like a harder nut to crack. But it is one which needs to be addressed if the company is to resume dividend payments and get on with its £10bn aircraft fleet replacement.

BA already pays £5 for every £1 employees contribute to their pensions - way above even the TUC's best practice guidelines. If BA were left to eliminate the deficit on its own, it would require an increase in annual contributions to nearly £500m. Put another way, that would equal £12 for every £1 of pay or more than half the yearly salary bill. For that reason, BA is looking for a contribution from the employees. Up until now, they have been able to look forward to being some of the most pampered pensioners in the land: retirement at 55 on a full, final salary, index-linked scheme.

BA is proposing to raise the retirement age to 65 and reduce the rate at which benefits accrue. In return for that, it will make a one-off cash injection and has already conceded it will need to be more than the £500m currently on the table. To most other employees, consigned to an uncertain retirement and a pension which relies upon the vicissitudes of stock markets and long-term interest rates, that would still look like a pretty good deal. But to BA's unions, it looks like a good reason for holding a strike ballot.

The last thing BA would relish is a fourth successive year of unrest, even though a strike now would be less damaging commercially than BA's traditional summer walkouts.

However, the chances of industrial action commanding any public support are somewhere between nought and zero, which is why Mr Walsh may just be tempted to stick to his guns.

m.harrison@independent.co.uk