Longing for Lingus: IAG bids and re-bids for Ireland’s flag carrier, so far unsuccessfully. What’s next?

Just before Christmas, on Dec. 18, Europe’s third largest airline group tried to buy itself a gift. But International Airlines Group, offering to pay about $2.75 per share for Ireland’s Aer Lingus, failed to impress the latter’s board. So IAG, the parent of British Airways, Iberia and Vueling, raised its bid by 4% on Dec. 29. Again: rejected. The airline world now watches and waits for a possible third attempt.

Make no mistake: IAG chief Willie Walsh, himself a former Aer Lingus CEO, covets the Irish airline’s London Heathrow slots—it has more than any other airline save British Airways and Virgin Atlantic. And the timing sure seems right: the Irish economy is growing again (as are the U.K. and U.S. economies, to which Aer Lingus and Ireland’s economy are heavily exposed). Aer Lingus CEO Christoph Mueller is leaving (with no announced successor). The airline’s dollar revenues are growing (at a time when the euro is depreciating). Fuel prices are collapsing (even if heavy hedging reduces the benefits). And a long-simmering pension dispute was finally resolved (accompanied by new labor concessions that lock in future certainty and savings).

And unlike its 2012 purchase of unprofitable British Midland, which was little more than a Heathrow slots grab, in this case IAG would be buying an airline that’s profitable in its own right. Last week, Aer Lingus affirmed its earlier expectation of higher operating profits for 2014 than it earned in 2013. This would mark its fifth straight year of operating profits, no mean feat for a midsized, partly state-owned airline with restless unions, highly seasonal traffic patterns, a home economy that was badly battered by the financial crisis and heavy overlap with Ryanair, which also happens to double as a disruptive 30% shareholder. From 2011 through 2013, its annual operating margin hovered between 4% and 5%. And after a loss-making first half of 2014, it enjoyed its best Q3 summer peak since the start of the global recession in 2008, with operating margin reaching a sky-high 21%.

This 21% figure, incidentally, was identical to the Q3 operating margin posted by IAG’s Vueling unit, a fact surely not lost on Walsh. If Vueling has helped IAG lower its costs and increase its margins on the southern end of the group’s western European empire, then Aer Lingus might be just the airline to provide that same helpful boost at its northern end. Key to the Aer Lingus success story the past five years has been round after round of cost cutting. No, its cost base is not quite down to easyJet…

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