Falling oil prices a bonus for airlines

If you run a car, you'll be feeling chuffed the price of oil is falling, but think how you'd feel if you ran an airline.

Remember there's no VAT on jet fuel; your biggest cost is falling like a stone.

Airlines are now built to make money with oil at $120 a barrel. With Brent Crude sub-$60 your only dilemma is how to spend all that cash?

IAG - which owns British Airways, Iberia and Vueling - has decided it likes the look of Aer Lingus, the Irish airline.

It's a relative minnow.

IAG carried 67 million passengers last year Aer Lingus carried 11 million, IAG has 464 aircraft, Aer Lingus only 50. Aer Lingus's shareprice jumped today but it's still worth a fraction of the £9.5 billion that IAG is.

So why the interest? British Airway wants to expand, Heathrow is full. Aer Lingus has 23 landing slots at Heathrow.

Perhaps more importantly Aer Lingus has developed a big and lucrative business flying passengers to-and-fro across the Atlantic to the US and Canada. So IAG would be buying new routes, a rival and greater control of the skies.

A bid was made on Sunday and rejected. Will IAG be back?

Well consider the following: IAG's boss, Willie Walsh, hates losing; the Aer Lingus's boss, Christoph Muller, is off to a new job (with no successor appointed); one of Aer Lingus's biggest shareholder, the Irish government (owns 25% of the company), would like to sell; the other, Ryanair (owns 29%) is being forced to by the competition authorities.

Ryanair has invested 400 million Euros building a stake in an airline it will never be allowed to own. Theoretically a deal is in everyone's interests.

The aviation analyst Douglas McNeil believes it's almost nailed on: "Aer Lingus is steadily becoming a significant force in the Europe/North America market - a market that is the engine of IAG's profits. IAG wants Aer Lingus on its side, not someone else's."

Would a deal run into competition issues? Possibly, but IAG has surely done its homework, concession will probably have to be made but, as with its takeover of BMI, only at the margins.

Tonight the Irish government told ITV News the IAG bid "fundamentally undervalues" Aer Lingus, but that it "remains open to the sale of its minority shareholding...but only when market conditions are favourable and on terms and at a price that are acceptable".

It sounds like an invitation to return.

It's worth noting that the Irish takeover code is different to UK's. There is no automatic "put up or shut up" deadline imposed once an approach is made public. IAG is free to return, or not, at its leisure.