Regulators have ordered Ryanair to cut its 29.8 per cent stake in rival Aer Lingus to just 5 per cent on the grounds that its shareholding has led or could lead to a substantial lessening of competition between the two on routes between Ireland and Britain.
The UK's Competition Commission today issued its final report on an 11-month investigation, prompted by the Office of Fair Trading in the UK, into the impact of Ryanair's stake in Aer Lingus on rivalry between the two on services between Ireland and Britain.
The move comes the day before Ryanair is free to launch another bid to take over the airline under Irish Takeover Panel rules. Aer Lingus earlier this year lost a High Court action to prevent its rival from launching another takeover move until February next year.
The British watchdog's report confirms the provisional findings of the inquiry, published in May.
Ryanair has a 29.8 per cent shareholding in its rival, and was blocked earlier this year by the European Commission from buying the rest of the airline.
The UK authority said Ryanair must reduce its stake to 5 per cent. It added that this would be accompanied by obligations on Ryanair not to seek or accept board representation or acquire further shares.
"The importance of scale to airlines is clear from evidence of widespread industry consolidation in recent years," the report said. "Against that background, the (competition commissioner) formed the view that Aer Lingus's commercial policy and strategy was likely to be affected by Ryanair's minority shareholding, in particular because it was likely to impede or prevent Aer Lingus from being acquired by, or combining with another airline."
Dismissing the claim as "baseless", Ryanair said it would appeal the ruling and claimed the report directly contradicted a ruling by the European Commission in February that competition between the airlines has intensified since 2007.
Chairman of the inquiry Simon Polito said the commission recognised that both airlines "compete intensely" for passengers travelling between Great Britain and Ireland.
"However, we consider that there is a tension between Ryanair's position as a competitor and its position as Aer Lingus's largest shareholder, and that Ryanair has an incentive to weaken its rival's effectiveness as a competitor," he said. "Ryanair's minority shareholding affects Aer Lingus's commercial policy and strategy in various ways that could be crucial to Aer Lingus's future as a competitive airline. We were particularly concerned about Ryanair's ability, either directly or indirectly, to impede Aer Lingus from combining with another airline to build scale and achieve synergies to remain competitive."
Ryanair accused the UK inquiry of dismissing a remedies package that the airline had suggested to address concerns, including an offer to sell its stake to any airline that made a bid for Aer Lingus that could get the acceptance of more than 50 per cent of shareholders.
"This report by the UKCC is bizarre and manifestly wrong but also entirely expected," chief executive Michael O'Leary said.
He claimed the investigation was unfair and omitted evidence that disproved the case against Ryanair, branding it a "charade".
Mr O'Leary said the case was "another enormous waste of UK taxpayer resources", and the airline would lodge its appeal with the Competition Appeal Tribunal in the coming weeks.
Since issuing a preliminary ruling last May, it was widely expected that the watchdog would order Ryanair to dispose of all or most of its stake in Aer Lingus.
Brussels-based competition lawyer, Alec Burnside, of multi-national firm Cadwalader, which advises Aer Lingus said that the ruling was a "significant milestone" in the legal battle between the two.
He pointed out that the stake had been the platform for Ryanair's failed bids to buy its rival and said that the commission has now ruled that those bids have harmed competition between the two.
Aer Lingus welcomed the ruling. Chairman Colm Barrington said the report confirmed that Ryanair's stake was anti-competitive and contrary to the interests of passengers.
"It was unacceptable that our principal competitor was allowed to remain on our share register with a shareholding of 29.82 per cent and interfere with our business despite the European Commission blocking both Ryanair's first hostile takeover attempt six years ago and its most recent hostile takeover attempt earlier this year," he said. "The implementation of the Competition Commission's decision that Ryanair must reduce its anti-competitive shareholding will position Aer Lingus for future growth and opportunities which will make it an even stronger competitor in the market."
Ryanair is also appealing the February decision that blocked it from taking over Aer Lingus. The airline said it cannot be forced to sell its stake in its rival while its appeal is ongoing.