Saudia joins SkyTeam, aims at modernizing and privatization

Saudi Arabia's flagcarrier Saudia (SV), formerly known as Saudi Arabian Airlines, was accepted as SkyTeam's 16th member. SV is also the first member-carrier from the Middle East for SkyTeam which so far lacked presence in the region. The carrier used the opportunity to announce its return to Saudia name, which it used previously from 1972 to 1996.

SV's acceptance into SkyTeam marks another important milestone for the carrier. Being in a midst of restructuring and modernizing, all in the name of long-delayed privatization, the carrier made it clear that SkyTeam membership is an integral part of its long-term transformation strategy believing that it testifies that the airline is recognized world-wide, safe and that it can compete with more famous airlines from the region. The 4-year turnaround plan includes modernizing IT along with commercial, operational and financial platforms as well as renewing the fleet by acquiring 90 new aircraft. The carrier had to make these investments in order to make itself more interesting to private investors.

The privatization of SV is a very long running process and the carrier's management explains that it is so due to the carrier's size and complexity of its operations, among other reasons. Under the privatization guidelines, SV would become a holding company with subsidiaries providing catering, cargo, ground, and technical services to name a few. Once these subsidiaries find a new private owner or stakeholder, SV's mainline passenger business would undergo an IPO in 2H13.

The privatization is just one of the steps Saudi Arabia is taking to finally open-up its aviation market, domestic part of which seems to struggle in achieving profitability due to the imposed fare caps and service level requirements. This is true for both SV - in spite of governmental subsidies - and private LCC nasair, as well as Sama which ceased operations years ago. Saudi Arabia plans to issue allowances to both local and international carriers for cabotage operations.

Speaking of SV's modernization, one can not forget to mention developments in the carrier's fleet. SV's fleet of MD-90s was phased out and replaced with 50 Airbus A320 family aircraft. A330s, Boeing 777-300ERs and 787s will be used for long-haul expansion and the replacement of older 747s in the carrier's fleet. The airline currently operates around 140 aircraft.

SkyTeam welcomes the membership of SV as the alliance finally has a member in the region to compete with the two other airline alliances. Royal Jordain is a member of oneworld since 2007, while EgyptAir joined Star Alliance a year later. But this is not the end of SkyTeam's ambitions for the region; Lebanon's MEA is also on track to join this year.

SV already codeshares with a number of SkyTeam carriers and will now work on expanding its existing partnership agreements. The airline will introduce 51 new destinations to SkyTeam’s global network, including 23 within Saudi Arabia. The carrier's own network stretches throughout the Arabian Peninsula, the Indian Subcontinent, Northern Africa and Europe from its three hubs in Jeddah, Riyadh and Dammam.

SV seems to have its hands full with a reorganization and privatization almost simultaneously taking place, so it is good to see that the carrier manages to cope with it and delivers on its targets.

Four ex-Yugoslav flagcarriers agree on closer cooperation following merger recommendation from AEA

The Secretary General of the Association of European Airlines, Ulrich Schulte Strathaus, claimed back in March that ex-Yugoslav airlines, all of which are in poor financial shape, should merge into a single company in order to achieve profitability. Driven by AEA's proposal, CEOs of four national airlines in the region met in Montenegrin coastal town of Budva earlier this month to discuss future cooperation.

After the break-up of Yugoslavia in early 1990s, political climate in the region, today consisting of seven independent countries, remained volatile. Together with incompetent management, large number of potential hubs spread over a small population and different fleets, this is the primary reason why the creation of a single airline for the entire region is highly unlikely. Merger between the carriers was almost immediately ruled out by themselves, with an exception of Montenegro Airlines which seems to endorse the idea most.

CEOs of the four flagcarriers that participated in the meeting were from Adria Airways of Slovenia, Croatia Airlines, Jat Airways of Serbia and Montenegro Airlines. CEO of Bosnia and Herzegovina's BH Airlines, the smallest carrier in the region with only one ATR72, was not present, while Macedonia and Kosovo do not have a national airline.

After the meeting, the CEOs expressed their satisfaction with reached agreements. Merger itself is still favored by Montenegro Airlines' CEO who also pointed out the fact that market share held by these airlines shrinked since the days of Yugoslav carriers JAT and Adria. He is confident that the merger could become a reality in five to eight years time. The four sides agreed on closer cooperation in the form of more codeshare and interlining agreements, the implementation of a free skies agreement between the countries, a fleet exchange plan and a unified approach on the international market through unified representation of all four airlines. The CEOs will meet again next month when they will discuss the partnership further.

All four carriers finished 2011 with losses and all of them have a hard time competing in their markets. But although the idea about creating a single company based on these four is slowly fading away, a possibility still exists that the carriers might merge into two entities.

Merger between Croatia Airlines and Adria Airways, if carried out properly, could result in cost-savings and would not carry almost any political obstacles. These two airlines are both in Star Alliance, while their fleets are complimentary: both operate A320 family aircraft combined with CRJs at Adria Airways and Q400s at Croatia Airlines. Politically, Croatia and Slovenia are in good relations. Slovenia is also a member of the European Union, while Croatia is on its way to join the EU in 2013. This merger would not carry any uncertainties regarding future partners of the two airlines as they both belong to the same alliance and are closely tied to Lufthansa Group.

Similarly, a merger between Jat Airways and Montenegro Airlines could also yield good results. Politics would again hardly be an issue and in terms of airline alliances, both carriers are unaligned. Jat Airways' fleet is the oldest among ex-Yugoslav airlines and consists of Boeing 737 Classics and ATR72s. Montenegro Airlines' fleet of Fokker F100s and larger Embraers could be a good addition.

Unfortunately, harsh economic climate combined with high fuel prices and very price-sensitive market makes ex-Yugoslav carriers very vulnerable, so the fact that none of them are profitable is not surprising. But what makes things even harder for them is also lack of proper management teams which would be chosen based on their skills rather than memberships in ruling parties. Until then, it is questionable if cooperation agreements can drastically improve the carriers' finances.

Achieving profits is top priority for Adria Airways which was bailed out by the government in 2011 and is now undergoing restructuring. Croatia Airlines will also have to improve its finances since the European Union is not generous about governmental subsidies. The carrier has managed to reduce its losses by half in 2011 compared to the previous year and aims to at least break even this financial year.

New Air France-backed Ivory Coast flagcarrier Air Cote d’Ivoire to take off in summer

Air Ivoire left a gap in Ivory Coast's aviation market when it collapsed in March 2011 after close to 50 years in operation. Thanks to a number of investors, including Air France, the country will finally regain access to convenient air transport through its new flagcarrier Air Cote d’Ivoire by end-July. The government first announced its intentions to create the new airline in November 2011.

Airbus A321 in bankrupt Air Ivoire livery.

Air Cote d’Ivoire will be 51% owned by the Ivory Coast government, 20% by Air France, 15% by AKFED's holding company and finally 14% by local private investors. AKFED, or Aga Khan Fund for Economic Development, works in partnership with organizations and governments to stimulate the private sectors of developing economies, with the aim of generating capital for investment into long-lasting and sustainable development initiatives. Initial capital of the venture was set at around $5 million, but it will rise in the short term to close to $50 million.

The carrier will cooperate with Air Burkina and Air Mali - both controlled by AKFED - in order to secure technical, operational and commercial synergies, all of which emphasizes AKFED's goal of creating economically viable long-term models. The cooperation with Air France will also benefit the carrier through the introduction of two Airbus A319s along with technical advice provided by the French flagcarrier. It is not yet known whether the new airline will take over some of Air Ivoire's fleet, which consisted of a single Airbus A321 and 3 Boeing 737-500s.

Starting operations by end-July from its hub at Felix Houphouet-Boigny International in Abidjan, Air Cote d’Ivoire will concentrate on regional international destinations, while domestic services will be introduced by the end of 2012. This is not surprising as the prospects for growth in Ivory Coast domestic market remain limited.

It remains to be seen if Air France will take feed from Air Cote d’Ivoire as the French flagcarrier already serves Abidjan from its hub at Paris CDG. If so, the setup could be similar to the one between Brussels Airlines and its Congolese subsidiary Korongo Airlines which started operations only recently.

Mansvell's Skyways and City Airline file for bankruptcy following Cimber Sterling

May has so far been a sad month for Scandinavian aviation as three small but valuable regional carriers filed for bankruptcy. After Cimber Sterling earlier in the month, Swedish Skyways (JZ) and its subsidiary City Airline decided to discontinue operations on 22 May and subsequently filed for bankruptcy the following morning.

Both Cimber Sterling and Skyways were owned by Mansvell Enterprises, an investment vehicle of Ukrainian businessman Igor Kolomoisky. Mansvell become the owner of Skyways in 2010 and merged the carrier with City Airline. The plan was to later merge Skyways and Cimber Sterling and create the largest Scandinavian regional carrier. But due to the financial losses at JZ, Mansvell made a decision to no longer invest in the carrier, resulting in JZ's Board of Director's decision to ground the airline.

Skyways operated 11 Fokker 50s from its largest base at Stockholm Arlanda mainly on domestic services, and also offered mostly international services from Gothenburg utilizing six ERJ-145s and two ERJ-135 inherited from the merger with City Airline. In total, the carrier offered 13 domestic and eight international destinations.

City Airline operated under Skyways brand
after the merger in 2011.

While the reason for bankruptcy at JZ was identical to that of Cimber Sterling, the similarities do not end there. The worst affected airline in both cases is SAS Scandinavian Airlines, which thanks to codeshare agreements with JZ and Cimber Sterling enjoyed valuable regional feed into its hubs at Stockholm Arlanda, Gothenburg and Copenhagen. JZ operated on a number of routes over which it had monopoly. Both management teams insist that they did their best restructuring the carriers, but ran out of time as Kolomoisky decided to fold.

Sverigeflyg - the main brand for the six regional airlines Blekingeflyg, Flysmaland, Gotlandsflyg, Kalmarflyg, Kullaflyg, and Sundsvallsflyg - was quick in announcing its expansion by capitalizing on JZ's demise. Flybe Nordic is also likely to react as it strives to become the largest regional carrier in the region.

The bankruptcy of Cimber Sterling and JZ means the end of Kolomoisky's aspirations of creating Scandinavia's largest regional airline. But through PrivatBank, Kolomoisky also controls Ukrainian Aerosvit Airlines, Dniproavia and Donbassaero. The future of these airlines is now uncertain.

Qantas to split domestic and international operations, announces management changes

Australian flagcarrier Qantas (QF) revealed a controversial decision to split its domestic and international businesses, as well as a number of changes in its management structure. The airline explained that this move is part of its restructuring plan, even though dividing domestic and international operations was never mentioned before.

Only recently, QF's arch-rival Virgin Australia also decided to divide its domestic and international operations, which allows Virgin Australia to increase foreign ownership, particularly in its domestic holding. However, this is not possible at QF since foreign ownership, among other things, is regulated through Qantas Sale Act. Therefore, it is still very unclear what the carrier has to gain with the move.

QF believes that splitting the company will allow for more transparency through separate accounting among its two units. The carrier is also confident it will now have greater control and clearer picture about the performance of its domestic and international operations, which should especially benefit unprofitable international business whose return to profitability still seems to be far from reality. Brand will stay the same at both QF and its LCC subsidiary Jetstar.

Critics, who describe the move as "shifting the deckchairs on the Titanic",  warn that the division will only result in higher cost structure due to more management roles, which includes having two CEOs. QF already elected the two CEOs, both of which already worked for the carrier, while much-criticized Alan Joyce remains as Group CEO. The departure of Jetstar Group's CEO Bruce Buchanan was also announced, although he will stay in the group for another six months and then provide consulting for a further 18 months.

Rumors also surfaced that Emirates might be looking at a tie-up in the form of codesharing with QF. This could be described as QF's answer to Virgin Australia's division which could lead to Etihad's purchase of a stake. Etihad has previously confirmed its interest in Virgin Australia, while QF could benefit from cooperating rather than competing with Emirates. These rumors have so far not been confirmed by any side.

While the division might make little sense to analysts, it is possible that this will help QF in improving its profitability. The move will result in separate financial results of the two businesses, starting in July.

IAG and Lufthansa Group in battle for TAP Portugal

Portuguese national airline and Star Alliance member TAP Portugal (TP) is on the list of companies that will have to be privatized as part of Portugal's €78 billion bailout agreed by the EU and the International Monetary Fund. Having reported annual profits for three consecutive years so far, TP is in good standing, but financial performance is not what makes this airline so valuable.

So far, two of three European airline groups have showed interest in TP - Star Alliance chief Lufthansa Group and oneworld's International Airlines Group (IAG) consisting of British Airways and Spanish Iberia. While TP would be a great addition to both airline groups from most aspects, it is the carrier's route network that captured the eyes of IAG and Lufthansa Group. At its hub in Lisbon, TP created an efficient operation for Europe - South America connections, especially to Brazil where it is the dominant European carrier. Its route network stretches to North America and Africa as well, but those are not particularly important for the two groups.

IAG seeks to strengthen Americas - Europe triangle
IAG expressed great interest in acquiring TP, albeit its CEO Willie Walsh admitted during IAG's 1Q12 presentation that "our interest in TAP is significantly less today than it would have been 12 months ago". Nevertheless, it is believed that IAG is still very interested in TP and would make a bid when the privatization process starts.

IAG and oneworld already have a very strong presence on the Americas - Europe triangle. British Airways and American Airlines are the dominant players between North America and Europe with their shuttle-service profit-sharing joint venture in place, while American's Miami hub is a strong gateway from North to South America. Spanish Iberia with its Madrid hub connects Europe with South America, while Chilean LAN, also member of oneworld, has a strong network to both Europe and North America. Additionally, LATAM - which is a company that would be created after the merger of LAN and Brazilian Star Alliance member TAM whose final merger announcement is expected to come in a matter of days - is also expected to choose oneworld as the alliance of the merged entity.

Obviously, the group along with oneworld alliance already has a huge presence in the triangle. It is due to this that a regulatory approval for IAG's acquisition of TP would be hard to obtain, but IAG still seems to be confident that it would manage to pull it off. LAN and TAM were reportedly also interested in TP after they merge, but in recent times they became very quiet about it.

Lufthansa Group needs a strong player for South America and the Iberian peninsula
Hampered with bad financial performance of its recent acquisition targets together with a new less acquisition-centric management team and its own financial struggles, Lufthansa Group will likely be extra cautions with its future acquisitions and probably choose to carry out only those that are of large strategic importance to the entire group. And TP happens to fit into that category.

While it is obvious that TP would for IAG and oneworld be just another nice to have player in the market, the carrier is for Lufthansa Group and Star Alliance of huge importance. Not only does it currently represent the most valuable player on Europe - South America market for Star Alliance, but it is now also the only player with a larger coverage of the Iberian peninsula, where Star Alliance is now lacking after the demise of Spanair from earlier this year.

Lufthansa Group confirmed its interest in TP only recently to the public, but it was already expected that they would do it sooner or later by industry analysts. The group has quite a few reasons to believe that their acquisition of TP would be an easy maneuver. First of all, there would not be that much regulatory issues compared to IAG's acquisition proposal. TP is also already a member of Star Alliance and they would likely prefer to stay there since changing alliances is a costly and might also be a risky endeavor.

Basically, TP gets to choose between oneworld where they would be just another player in the market, and Star Alliance for who they would be an important asset and where they already are. It is logical that TP would prefer to stay in Star Alliance and be acquired by Lufthansa Group. However, it is questionable to which extent would TP be in the position to make a choice.

Even with the introduction of two additional airlines from South America - Avianca-Taca and Copa - TP's importance would likely remain unchanged. The two mentioned entities would probably already be in Star Alliance, but the alliance is likely awaiting TAM's confirmation of switching to oneworld before letting them in.

The privatization of TP is currently on schedule for this year. It will probably be one of the more important developments in the airline industry in 2012 since the result of this battle could long be felt. Until the privatization process starts, keep an eye on LAN and TAM's alliance decision - this might be the most important variable for all involved.

Sudden 9-month Berlin Brandenburg opening delay challenges Air Berlin and Lufthansa

Berlin Brandenburg Willy Brandt Airport (BER) is facing a long opening delay which will harm the airlines currently operating from Berlin's two other airports, particularly Air Berlin (AB) and Lufthansa (LH). BER was originally scheduled for opening on 3 June with the overnight transfer of operations from Tegel airport. However, it was revealed that the delay of at least a few weeks would be inevitable due to technical issues concerning fire protection installations.

It was then made public that the delay will be even longer than previously expected and a new opening date was announced - 17 March 2012. Analysts and the public no longer believe that only fire protection is at fault here, but rather blame the politicians for undercapitalisation, mismanagement and overall poor realization of the project.

After the Cold War, Berlin was left with three airports: Tempelhof which is closed since 2008, Schönefeld and Tegel. 2.5 billion euros worth BER was built alongside Schönefeld; in fact, Schönefeld's existing southern runway will become BER's northern runway. The plan is to close the two existing airports after BER opens, therefore simplifying Berlin's airport system.

The sudden and long 9-month delay will challenge all airlines serving Berlin, but particularly Air Berlin and Lufthansa for which the opening of BER on time was very important. Understandably, both airlines are frustrated over the delay and warned that they might seek compensation.

AB, as its business model evolves more and more from LCC to FSC, needs BER as a quality hub for connecting traffic. The carrier has designed a six-wave hub-and-spoke system for BER which can not be implemented at its existing Tegel hub. The delay represent a "huge" logistical and scheduling challenge for the carrier which will now have to find a way to overcome the issue, incurring additional costs while it is doing so. AB fears its brand is also at stake, with passengers from oneworld alliance and stakeholder Etihad being inconvenienced on their journey.

For LH, opening delay of BER is also an issue, but different from AB's. LH currently operates 9 Airbus A320s at Tegel and had plans to increase the number to 15 and add a considerable number of destinations with the opening of BER. LH wants to develop an operation at BER similar to Air France's regional strategy. The flagcarrier would not create a hub, but rather a base for point-to-point operations. Thanks to higher aircraft utilization as well as lower maintenance and staff costs, LH would - in theory - be able to stay competitive against lower-cost Air Berlin and LCCs present in the market. It is due to this strategy that LH will be less hit with the delay. But nevertheless, the large expansion which LH planned at BER will be seriously challenged as the carrier is forced to remain at Tegel.

The opening delay of BER comes as a surprise and seems to have caught everyone off-guard, even the people closely tied to the project including the Mayor of Berlin. Hopefully, the new opening date will provide enough time for the issues to be resolved. Until then, AB and LH will have to do their best rescheduling and utilizing the existing capacity at Tegel. Other airlines seem to be less hit with the delay, especially LCCs operating from Schönefeld.

Cimber Sterling goes bankrupt; Danish market unaffected traffic-wise

Small Danish regional airline Cimber Sterling (QI) filed for bankruptcy earlier this month. Although QI had a fleet of only 25 aircraft, it was an airline with a long history as it started operations back in 1950. It left only a small gap in the market, most of which was filled in a matter of hours by other carriers, indicating that bankruptcy of QI was expected due to the carrier's deteriorating financial shape.

It could be said that the main issue with QI was that it lost focus on being a regional carrier for short-haul, intra-Scandinavian routes. This began not that long ago - in late 2008 - when Cimber Air (as it was then called) took over bankrupt Sterling Airlines, which was largely an unprofitable operation, and acquired a fleet of 5 Boeing 737-700s. In order to improve its finances, QI soon after entered into a subscription agreement with Mansvell Enterprises, an investment vehicle of Ukrainian businessman Igor Kolomoisky. The deal finally resulted in Mansvell's acquisition of around 70% stake in the carrier in August last year. This provided QI with much needed capital and the carrier began restructuring under a new business plan, part of which was to return to regional turboprop flying, with CRJs and without 737s. Unfortunately, the carrier soon required another capital injection, but Mansvell refused to invest further. As QI's CEO Jan Palmer said:

The board of directors and the management team have worked intensely to ensure a turnaround of the company for several months, but unfortunately, we did not succeed before we ran out of time.

Cimber Sterling's Boeing 737-700 featuring a
retro livery illustrated the airline's long
history.

At the time of closing, QI operated a fleet of 25 aircraft: 3 ATR42s, 6 ATR72s, 6 Boeing 737-700s, 7 Bombardier CRJ-100LRs and 3 CRJ-200ERs. The carrier's management hopes to come to agreements with bankruptcy administrators and keep as much of the operations and value as possible under a restructuring plan. QI already managed to return portion of the CRJ fleet back in service for SAS Scandinavian Airlines which were on ACMI (wet lease) contracts - this part of operation was reportedly profitable.

SAS could be the worst affected by QI's demise as the airline had codeshare agreements in place on a large number of QI's services. This was what remained of the past partnership between the two airlines when SAS held a stake in QI (1998 - 2003). Although QI had Copenhagen as its largest base, it accounted for only 6% traffic at the airport. Copenhagen is confident that its traffic figures will continue the expected rise. And Copenhagen has full rights to think so, because a number of airlines already capitalized on QI's closure and filled almost all the gaps left. Namely: Danish Air Transport, Norwegian, Sun-Air, Skyways and Flybe Nordic.

Media reports on the carrier's bad financial state frightened the potential passengers which could often just as easily take QI's LCC competition instead. Those that were not frightened by the news were later demotivated to fly QI since the carrier over time earned a bad reputation for being unpunctual. Punctuality was very important on some of the QI's short hops where the hybrid/LCC carrier competed against ground transport. Lack of punctuality meant that the carrier was avoided by business travelers, while frequent delays demotivated everyone else.

Unfortunately, QI was bordering on bankruptcy for a long time. Lack of strategy and bad financial strength finally proved fatal for the carrier. Its management still hopes to revive the carrier scaled-down and with a good restructuring plan in place, but with a large portion of the gaps which the carrier left already filled, it is highly unlikely that QI will ever make a comeback.

Air France-KLM considering French LCC subsidiary amid growing losses

Franco-Dutch airline group Air France-KLM (AF-KL) revealed its financial performance in 1Q2012. The group has seen its operating loss in the first three months of this year increase considerably to €597 million compared to €403 million recorded in the same period last year. Net loss remained almost unchanged at €368 million, but this was influenced by close to €100 million gained from the sale of a stake in Amadeus. The group is focusing on cutting losses system-wide, but places the emphasis on Air France as Dutch KLM remains profitable.

One of the cost-cutting measures at AF proposed late last year was to create bases in French cities other than Paris. The move would help AF return its short- and medium-haul business to profitability, or at least reduce losses, while at the same time neutralizing competition from LCCs and high-speed rail. The reduction of costs would be possible thanks to higher staff productivity, higher aircraft utilization and lower maintenance costs at regional bases.

AF has already opened bases in Marseille, Toulouse and Nice, while bases in Paris Orly - which was announced only recently - and Bordeaux are also in the works.

However, AF recently announced plans to create its own LCC (or hybrid) subsidiary for short- and medium-haul, which is the most recent trend among larger European airlines. The French flagcarrier revealed it is examining the possibility of basing its LCC subsidiary on Transavia, which is a Dutch LCC owned by AF-KL. Transavia already operates in France, but that part of operation is considerably smaller in size than its Dutch side.

AF could not provide details regarding the proposed subsidiary, so it remains unclear if the flagcarrier would go for Transavia brand or if it would develop its own. It is also questionable if the new regional strategy would be abolished if AF creates the subsidiary, but it is highly likely that the new carrier would take over almost all of AF's short- and medium-haul operations. LCC subsidiary could be a very good move for AF since it is questionable if regional strategy would yield satisfactory results, especially since LCC competition in France is highly likely to grow.

Meanwhile, AF is working on reaching an agreement on cost cuts with its unions. Although the carrier is hoping for a speedy resolution, its hopes are perceived by many industry analysts as over-optimistic. What is making the situation even more complicated is the new French socialist President François Hollande. While Hollande is aware of the issues at AF-KL and would likely want to resolve them, it is unlikely that he will work against the unions, at least short-term. AF remains confident that the new President would not negatively impact the introduction and execution of the restructuring plan. AF-KL hopes to reach an agreement with its unions by the end of June.

AF-KL's talks with Etihad over a potential tie-up that were announced a while age are reportedly still active, but no details were revealed so far. The group recognizes the results for the quarter as worrying, but claims that they were "in line with [their] expectations". The benefits of Transform 2015 restructuring plan will start to be felt in 2H2012 according to the group.

Etihad acquires near 3% stake in Aer Lingus, in talks over larger stake

Irish flagcarrier Aer Lingus (EI) became the latest airline in which Abu Dhabi-based Etihad (EY) holds a stake after the two carriers announced EY's acquisition of 2.987% ownership in EI. Although the number might sound odd, it is just below the 3% holding that would require a stock disclosure. At first glance, the move looks similar to EY's partnership with Air Berlin in which EY today holds 29.2% stake, but which started after EY acquired only 2.2% stake. However, EY made it clear that it would not expand its stake in EI if the ongoing talks between them on reciprocal codeshare relationship do not come to fruition.

EY's already mentioned holding in Air Berlin is a great way to avoid bilateral restrictions and gain access to a large and valuable German domestic market, but something like that is not required to gain larger presence in more open Irish market. This is why Aer Lingus and Ireland seem to be an odd choice for EY - they do not come with as many obvious benefits. Ireland has a relatively small domestic market, while EI's Dublin hub is not the most convenient option for connections to the UK for travelers coming from east - it necessitates backtracking due to its geographical position. Another hurdle is EI's large pension deficit, an issue which will hopefully be resolved during the year. EY would likely want to see the issue resolved before expanding its stake in EI.

In spite of these shortcomings, EY could be aiming at EI's large slot portfolio at congested London Heathrow. The Irish carrier is among the largest slot holders at the Europe's largest airport, behind only British Airways and German Lufthansa.

In case the two carriers agree to expand their partnership, it will likely be an easy task for EY to purchase more shares. The Irish Government has expressed a desire to sell its 25% stake it currently holds in EI. The government did not specify when this would happen, but it is expected that the state would dispose of its holding in the next six to 12 months. Another 29% stake is held by domestic ULCC rival Ryanair which purchased the stake hoping it would take over EI and eliminate domestic competition. However, after two failed takeover attempts due to the concerns on competition grounds, Ryanair is now looking at selling its stake and is willing to sell to the same company that acquires the government's stake, but expressed concerns if that company would be EY.

Given that EY's CEO expressed interest in the government's stake earlier, it is hardly a secret that EY sees something of interest in EI. Whether it's UK market, slots at Heathrow, an important hub for connections to the US that EI could develop long-term, or something else that managed to pass under the radar of industry analysts, one thing is, based on EY's previous investments in Air Berlin and Air Seychelles, for sure: if EY does purchase more shares, it will ensure that the investment benefits both carriers.