When the Irish government decided to accept IAG's offer for its 25% stake in Aer Lingus, it ended months of tense negotiations and shuttle diplomacy between the two sides.
IAG chief executive Willie Walsh summed up the current position perfectly when he told analysts yesterday: "Clearly, there is a long way to go, but getting [the] agreement of the Irish government is a significant first step in the process."
Barring a highly unlikely move against the deal by the Irish parliament, set to vote imminently, IAG now has the backing of Aer Lingus's second-biggest shareholder for its takeover bid, but it still has a way to go before it completes the deal.
If IAG can convince 90% of Aer Lingus shareholders to sell their stock, it will automatically gain full control, squeezing out the remaining 10%. A key indicator of whether shareholders support IAG's bid will come in July, when the airline is to hold an extraordinary general meeting (EGM).
During this EGM, the Irish government will seek a change in the airline's articles of association to secure a veto to prevent a change in ownership of the airline's slots. If shareholders do not vote to support this change, it would be unclear where this left IAG's bid.
A more pressing issue for IAG is ascertaining the intentions of Aer Lingus's biggest shareholder: Ryanair, which holds a near-30% stake in its Irish rival.
IAG has openly stated that it will require an "irrevocable commitment" from both the government and the low-cost giant to sell their shares if a takeover is to be successful.
Walsh says Ryanair chief executive Michael O'Leary and his team have been "absolutely consistent" in their messages publicly and privately that the airline's board will carefully consider any offers it receives, and adds: "Hopefully, they will see that this is an attractive offer for their stake in Aer Lingus. We will wait to see what Ryanair says in respect to that."
Officially, Ryanair's position remains unchanged following the government's announcement, and is expressed by the budget airline thus: "The board of Ryanair has yet to receive any offer, and will consider any offer on its merits, if and when an offer is made."
What could muddy the waters is an ongoing legal battle between Ryanair and the UK's Competition and Markets Authority (CMA) over the future of the Irish carrier's stake in Aer Lingus.
In 2013, the CMA's predecessor – the UK Competition Commission – ordered Ryanair to sell its stake down to 5% in order to satisfy competition concerns.
Ryanair has launched several unsuccessful appeals against the decision, although it did manage to convince the CMA to re-examine the ruling this year in light of IAG's interest in taking over Aer Lingus – which Ryanair says constitutes a "material change in circumstances".
In an preliminary decision delivered in April, the CMA said it saw no need to change its original ruling. A final decision is to follow in June.
Ryanair still has one outstanding appeal lodged with the UK Supreme Court, which is poised to disclose shortly whether it will hold a hearing on the case.
Walsh says: "I am not relying on Ryanair being forced to sell down its stake in Aer Lingus."
Much will depend on the final result of that process, argues Peter Morris, chief economist with Flightglobal consultancy Ascend.
"If that [divestment order] is some way towards happening, then maybe Ryanair will be happy to take the profit," says Morris. "On the other hand, I am still not clear under what legal framework the UK CMA can enforce such an order.
"If it is going to drag out in the courts, then it is possible Michael O'Leary may enter 'make more mischief' mode and just bide his time. Not say yes and not say no, just wait."
The CMA has yet to appoint a divestiture trustee who would oversee the sale process, and indeed has been urged not to do so by IAG, which instead called for the body to "grant its written consent to Ryanair" having the opportunity to make "an irrevocable commitment to accept IAG's proposed offer in respect of the entirety of Ryanair's shareholding".
Flexibility has been built into the CMA's current draft final order, it says, to "take account of actual market conditions such as those that might arise from the current proposal from IAG". For example, the definition of the divestment period "allows for its possible extension by the CMA" and a delay to appointing a trustee if it chooses.
"For example, should Ryanair seek the CMA's consent to enter into an irrevocable commitment to sell its shareholding in the context of a public bid for Aer Lingus, the CMA could consider whether there was a valid reason to defer the appointment of the divestiture trustee for a short period of time."
This may go some way to convincing Ryanair that it has room to manoeuvre in order to sell down its stake in Aer Lingus at a good price. IAG's latest offer for Aer Lingus values the budget carrier's shareholding at around €406 million.
In its latest annual report, to March 2014, Ryanair valued the asset at €260 million.
If it can convince Ryanair to sell, IAG will gain a controlling stake in Aer Lingus, but other interested parties will then still need to be brought onside.
The European Commission says it has been notified of a concentration of Aer Lingus and IAG, and has begun a first-phase investigation into the proposed merger. It has set a provisional deadline to make a decision by 1 July, perhaps assuming that Ryanair will have come on board with the takeover deal before that date.
A legal source says the notification to the Commission means IAG and Aer Lingus will in all likelihood have entered into a confidential agreement for Aer Lingus shares to be acquired by IAG.
The source says the Commission will now examine the case under Regulation 139 to ascertain whether the merger would lead to IAG gaining a "decisive influence" over Aer Lingus and, if so, whether this would "significantly impede effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position", which would be "incompatible with the common market".
The companies can provide remedies at this stage, which the Commission would analyse to determine whether they are viable and sufficient to eliminate competition concerns. The views of what the Commission calls "market participants" will then be sought through a market test. If remedies are accepted, they become binding upon the companies. An independent trustee is then appointed to oversee compliance with these commitments.
The source says the questions now are what remedies IAG and Aer Lingus may have already offered and "if the European Commission has a grievance" at this stage – and, if so, "is the deal off or will IAG [act] like Ryanair has done and carry on right to the bitter end?"
He says the Commission will "presumably look at the London to Dublin, Shannon and Cork routes and the extent to which a combination of IAG and Aer Lingus would erode competition in these markets" – and how this can countered by new entrants on these routes and other remedies.
The source says IAG may offer slot releases, interlining, or access to its Avois frequent-flyer programme as remedies. But he stresses that these are "points of detail".
Walsh says he is "confident competition remedies can be resolved", but adds that it is likely the USA "will have a position on it" because of IAG's plans to include Aer Lingus in its transatlantic joint venture with Finnair and American Airlines. This will no doubt add the extra layer of a competition investigation in the USA at some stage.
While not necessarily a roadblock to IAG's acquisition of Aer Lingus, the support or opposition of the Irish airline's unions will be crucial if the group is to achieve its goals.
Late last year, Aer Lingus came to an agreement with unions that resolved a long-standing dispute over a pension deficit. The deal ended a round of industrial action at the airline, and IAG has since said it became interested in bidding for Aer Lingus after the resolution of "certain pension issues".
But pilot and cabin crew union Impact has come out in opposition to the Irish government selling its stake to IAG, accusing the two carriers of "refusing" to discuss commitments on pay and conditions.
IAG says it will honour the pension commitments made by the Irish airline, but Impact argues that "for the staff at Aer Lingus, there are genuine concerns of compulsory redundancies if the deal goes through, along with the prospect of a further erosion of terms and conditions in the inevitable restructuring of the company".
The union adds: "Any assurances on the future use of the Heathrow slots will evaporate once the seven-year period has elapsed, after which these vital connection points can be moved to where they will make larger profits for the airline. Thereafter, the interests of IAG shareholders will always trump the interests of the Irish economy and the Irish travelling public."
While Impact's members could certainly slow down attempts by IAG to restructure Aer Lingus, they should be mindful of warnings given by the Irish airline that it would need to consider "reducing staff costs" further if a deal cannot be done with IAG.
Source: Cirium Dashboard