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Report from the Government Steering Group on the State’s Shareholding in Aer Lingus May 2015

1. Executive Summary

Introduction

In the context of a potential offer for Aer Lingus Group plc (“Aer Lingus” or the “Company”) by International Consolidated Airlines Group S.A. (“IAG”), an inter-Departmental Steering Group (the “Steering Group”)1 was requested by the Minister for Transport, Tourism and Sport (the “Minister”) to review the value of the State’s minority shareholding in Aer Lingus as well as the potential impact of a sale of the State’s shareholding on connectivity, competition and employment, being issues of strategic importance to Ireland.

The Steering Group held a number of meetings with IAG in order to clarify IAG’s proposal and future plans for Aer Lingus and the commitments offered by IAG in relation to the future ownership and operation of Aer Lingus’ Heathrow slots and other matters. The Steering Group also met with Aer Lingus in order to clarify Aer Lingus’ view in relation to IAG’s proposal. The Steering Group has been assisted in its role by external financial and legal advisers.

The issues considered by the Steering Group and its advisers included:

- Developments in the global and European airline industry;

- The commercial and strategic merits of the potential IAG offer from a national aviation policy perspective, particularly with regard to connectivity, employment, brand and competition;

- The value of the State’s shareholding in Aer Lingus and whether the proposed IAG offer price for the Company represents fair value to the State as a shareholder; and

- An assessment of the legal commitments offered by IAG on Heathrow slots and other matters relative to the State’s current rights as a minority shareholder in Aer Lingus.

Steering Group Recommendation

Having engaged with IAG and carefully considered its proposal, and informed by the analysis and advice received from the Steering Group’s external financial and legal advisers, the Steering Group concludes that in its view:

- There is a strong commercial and strategic rationale for an IAG takeover of Aer Lingus from a national aviation policy perspective;

- The proposed IAG offer price is acceptable (represents a premium of c.37% to Aer Lingus’ share price on the day prior to the announcement of IAG’s initial approach);

- IAG is a logical partner for Aer Lingus;

- There is less apparent strategic rationale at this time for other market participants to make a bid for Aer Lingus; and

- The proposed legal commitments negotiated and agreed with IAG provide:

- Stronger protection to the State in relation to the ownership of Aer Lingus' current Heathrow slots than the protection that exists today whereby the State needs the support of greater than 5% of other Aer Lingus shareholders in order to block a disposal of Aer Lingus' Heathrow slots;

- New protection to the State in relation to the future operation of Aer Lingus’ Heathrow slots that does not exist today; and

- New protection to the State in relation to the retention of the Aer Lingus brand and head office location in Ireland that does not exist today.

1 The Steering Group comprises representatives from the Department of Transport, Tourism and Sport, the Department of Finance, the Department of Public Expenditure and Reform and NewERA and was also assisted by external financial (Credit Suisse and IBI Corporate Finance) and legal (McCann FitzGerald) advisers.

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Accordingly, the Steering Group recommends that Government should, subject to and following the satisfaction of the conditions set out below, accept an offer from IAG for the State’s shareholding in Aer Lingus.

The conditions to be satisfied before Government accepts the IAG offer are:

- The approval by Dáil Éireann of the general principles of the disposal;

- The IAG offer being made on the terms and conditions discussed and agreed between IAG and the Steering Group, including conditions relating to European Commission merger clearance of the transaction and the passing of Aer Lingus shareholder resolutions required to implement the connectivity commitments, and those conditions being satisfied on terms satisfactory to Government before Government would accept the offer; and

- The position regarding Ryanair’s acceptance of the Offer being clear.

The State’s Role in Aer Lingus

The airline industry is strategically important to Ireland from a public policy perspective in providing connectivity to international markets which is critical for business, trade, tourism and employment on both a national and regional level. Aer Lingus plays an important role in this regard.

As a 25.1% minority shareholder, under Irish company law the State has a degree of influence over Aer Lingus but this influence comprises mainly a range of negative or “blocking” rights in respect of Aer Lingus’ ability to implement certain measures. The State does not have any express right or power to direct Aer Lingus in the conduct of its business. (See Table 1: Summary of State Powers on page 4.)

Under a mechanism included in the Company’s articles of association before the 2006 Initial Public Offering (“IPO”), subject to securing the support of more than 5% of other Aer Lingus shareholders, the State can currently block a disposal by Aer Lingus of those Heathrow slots that were owned by Aer Lingus in 2006. Therefore, the State does not currently have a unilateral ability to block a disposal. Further, the State cannot prevent a re-allocation, re-assignment or cessation of use of the Heathrow slots by Aer Lingus.

Airline Industry Considerations

Consideration of the future ownership of Aer Lingus should be made in the context of what has historically been a volatile sector, with evolving industry and competitive dynamics, recognising the importance of air connectivity to an island such as Ireland and the desire to ensure that Aer Lingus is best placed to continue to grow and compete in this market thereby preserving and growing Ireland’s connectivity.

The airline industry is inherently cyclical and has been severely impacted in the past by a number of global shocks. It is currently in an upswing phase with 2014 being the fifth consecutive year of positive global airline profitability.

The rapid emergence of low cost carriers such as Ryanair and easyJet as well as the expansion of the middle eastern hub operators (e.g. Emirates, Qatar Airways and Etihad) has driven intense competition in the European airline industry, which in turn has been a driver of consolidation in recent years.

Aer Lingus is significantly smaller than Ryanair which would be considered to be its main short-haul competitor and which is becoming a greater competitive threat to Aer Lingus since its strategic repositioning to a more “upmarket” carrier.

Aer Lingus’ recent financial performance has been positive and it currently has a strong balance sheet relative to its peers which would provide it with potential for growth and some protection in the event of a future decline in profitability. However, Aer Lingus has experienced periods of unprofitability in the past (most recently in 2008-09 during the financial crisis). As a relatively small airline in a volatile and currently consolidating industry, there is a risk that in future

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adverse market circumstances Aer Lingus’ viability could be impacted, potentially requiring deeper restructuring measures, which could in turn impact on connectivity and jobs.

Over the long term, Aer Lingus is arguably more vulnerable to future industry “shocks” or aggressive direct competition than its larger peers.

The Board of Aer Lingus has expressed strong support for the IAG proposal and has indicated its view that, as part of the IAG group, it would have improved opportunities to de-risk and accelerate its growth plans and should be in a stronger position to meet the commercial challenges of increasing competition than as a standalone airline.

The IAG Proposal

The following summarises the Steering Group’s views on IAG’s proposal:

Connectivity

IAG and its partner airlines could bring additional marketing and financial support, network reach, feeder traffic and new growth opportunities to Aer Lingus.

This would create the potential:

- for acceleration of Aer Lingus’ own transatlantic growth plans to expand international connectivity options for Aer Lingus passengers;

- to expand further Dublin’s role as a hub for transatlantic traffic;

- to provide additional opportunities for Aer Lingus to grow its short haul network at Dublin, Cork, Shannon and other Irish airports; and

- to expand Ireland’s export options through the increased reach of IAG’s air freight network.

IAG has indicated that two new transatlantic services could be added for the 2016 summer season and that by 2020 up to 2.4 million more passengers, 4 additional destinations in North America (including the two new transatlantic destinations to be added in 2016) and 8 additional aircraft could be delivered.

IAG’s proposed offer includes a legal commitment to give the State an ability, having considered certain agreed connectivity considerations, to block any proposed future disposal of Aer Lingus’ Heathrow slots for an unlimited time period.

IAG’s proposed offer includes a legal commitment in relation to the maintenance by Aer Lingus of its 2014/15 winter and 2015 summer daily schedule frequencies between Heathrow and each of Dublin, Cork and Shannon for a period of 7 years (with the final 2 years of this period being subject to a condition in relation to the level of airport charges). This is a protection that the State does not have at present.

IAG has indicated that its intention is to sustain and grow Aer Lingus’ business at each of Cork, Shannon and Knock airports and that it would intend for Aer Lingus to actively work with tourism and business interests to explore the new growth opportunities at these airports that would be available as part of the IAG group.

Competition

As part of the IAG group, Aer Lingus should benefit from IAG’s additional scale and synergies which would place it in a stronger position to compete with its larger rivals.

No significant adverse impact on existing competition is likely to arise given the relatively limited overlap of Aer Lingus and IAG’s current route networks. This issue will be subject to review by the European Commission under the EU Merger Regulation, if IAG proceeds to make a formal offer.

Employment

Aer Lingus has, as a standalone airline, implemented significant reductions in employment levels over recent years (and is currently implementing a further restructuring programme entailing voluntary redundancies) and future employment levels in Aer Lingus as a standalone airline are by no means guaranteed (or subject to control by the State as a minority shareholder).

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In this context, while employment levels will be a matter for Aer Lingus and IAG, IAG has provided positive indications on its plans to grow employment at Aer Lingus which include that by end 2016 there could be a net 150 new direct Aer Lingus jobs created in Ireland and that by 2020 up to 635 direct jobs could be created, primarily as a result of investment in Aer Lingus’ fleet and route expansion.

Aer Lingus Brand

IAG’s proposed offer includes a legal commitment in relation to the maintenance of Aer Lingus’ brand, company name, head office location and place of incorporation in Ireland for an unlimited time period. This is a protection that the State currently does not have2.

Summary of Protections

The table below summarises the protections currently available to the State and the protections offered by IAG.

Table 1: Summary of State Powers

Protection Status Quo IAG Proposal

Governance and policy setting

The State does not have any express right or power to direct Aer Lingus in the conduct of its business.

The State has a degree of influence as a 25.1% minority shareholder. The Board of Aer Lingus is legally obliged to consider whether any action it may take is in the best interests of all shareholders.

The State is entitled to nominate up to 3 non-executive directors to the Board of Aer Lingus.

The State, as the holder of 25.1% of Aer Lingus, has negative or “blocking” rights available under Irish company law in respect of Aer Lingus’ ability to implement measures that require the passing of a special resolution of shareholders.

No change - the State would continue not to have any express right or power to direct Aer Lingus in the conduct of its business.

The State would no longer have a 25.1% shareholding.

The State would no longer have a right to nominate directors.

The State would no longer have a right to block special resolutions as it would no longer have its 25.1% shareholding.

Disposal of Heathrow slots

Disposal of slots may not proceed if opposed by shareholder vote greater than the State’s 25.1% shareholding plus 5%.

The State does not currently have a unilateral ability to block a slot disposal.

Restriction on disposal of Aer Lingus’ Heathrow slots for an unlimited time period.

The State would have a unilateral ability to block a slot disposal.

A re-allocation or re-assignment or cessation of use of Heathrow slots

The State cannot prevent a re-allocation, re-assignment or cessation of use of the Heathrow slots by Aer Lingus.

Aer Lingus commitment to operate its current daily winter and summer scheduled frequencies between Heathrow and Dublin, Cork and Shannon for 7 years post-acquisition.

Aer Lingus commitment to operate its other Heathrow slots on routes to/from airports in the island of Ireland in the first 5 years post-acquisition.

The State would have an ability to block any proposed cessation or reduction of these services during this period.

Retention of brand and location

The State does not have the power to restrict Aer Lingus’ ability to change its brand or re-locate its head office.

Aer Lingus commitment to maintain its brand, company name and head office location and place of incorporation in Ireland for an unlimited time period.

The State would have an ability to block any proposed change in these matters.

2 The State, by virtue of its 25.1% shareholding, could at present block a change in Aer Lingus’ company name or place of incorporation as such a change would require the approval of shareholders by special resolution (i.e. 75% of votes cast) under Irish company law. However, the State could not block a change in Aer Lingus’ brand or head office location as these are not matters that require shareholder approval under company law.

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Proposed Offer Price

IAG’s proposed offer price is a cash payment of €2.50 per share.

- The proposed offer would also refer to the payment of a cash dividend of €0.05 per share3.

The cash payment of €2.50 per share would generate proceeds for the State of c.€335 million.

The proposed offer price of €2.50 per share would represent a premium of c.37% to Aer Lingus’ share price on 17 December 2014 of €1.82 (the day prior to the announcement of IAG’s initial approach). Prior to the IAG approach, Aer Lingus’ share price had not traded at this level (c.€2.50) since late 2007.

The Board of Aer Lingus has publicly stated that the financial terms of the IAG proposal are at a level which it would be willing to recommend to Aer Lingus shareholders.

The Steering Group has received detailed valuation advice from its financial advisers and, based on and consistent with that advice, has received a formal fair value opinion from its financial advisers.

2. Introduction

Following the announcement on 18 December 2014 of a possible offer for Aer Lingus by IAG, an inter-Departmental Steering Group comprising representatives from the Department of Transport, Tourism and Sport (“DTTAS”), the Department of Finance, the Department of Public Expenditure and Reform and NewERA was requested to review the potential sale of the State’s 25.1% shareholding in Aer Lingus in the context of a possible offer from IAG (the “Transaction”). The Steering Group was requested by the Minister to consider in its review the value of the State’s minority shareholding in Aer Lingus as well as the potential impact of a sale of the State’s shareholding in Aer Lingus on connectivity, competition and employment, being issues of strategic importance to Ireland. The Steering Group has been assisted in its role by external financial (Credit Suisse and IBI Corporate Finance) and legal (McCann FitzGerald) advisers (together the “Advisers”). To assist the Steering Group in its review, the Steering Group requested that the Advisers provide a detailed report covering the following issues:

The global and European airline industry, with a focus on the key current and emerging industry trends and their relevance to Ireland;

Aer Lingus, its positioning within the industry and the likely impact of the identified industry trends on the Company’s future;

The potential implications from a public policy perspective of a sale of the State’s shareholding in Aer Lingus; in particular having regard to connectivity, national airport and regional policy, competition, employment and the Company’s brand; and

The State’s level of influence on Aer Lingus today, how the State’s level of influence might be affected by a change in ownership and what protections may be available to the State to preserve or strengthen its current position following a sale by the State of its shareholding in Aer Lingus.

Following engagement between the Steering Group and the Advisers over a number of weeks, the Advisers’ report was substantially completed in February 20154. While the Advisers’ report does not contain any recommendation as to whether or not the Government should sell its shareholding in

3 The €0.05 per share dividend was approved at Aer Lingus’ AGM on 1 May 2015 and will be paid on 29 May 2015 to Aer Lingus shareholders who are on Aer Lingus’ share register on 1 May 2015 irrespective of whether the proposed IAG offer proceeds or not. 4 The Advisers’ report is confidential and is subject to restrictions on disclosure in whole or in part (which includes excerpting or quoting from or referring to the report) without their prior consent.

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the Company, it provided the Steering Group with relevant information and an independent analysis of the above issues and was used to inform the Steering Group’s consideration of the Transaction and subsequent discussions with IAG, and ultimately assisted the Steering Group in forming its views and recommendation as set out in this report. The Advisers have also provided the Steering Group with ongoing advice and assistance during this process, including advice in relation to valuation and IAG’s proposed offer price and the terms of, and mechanism for delivery of, the commitments offered by IAG. The Steering Group held a number of meetings with IAG in order to clarify IAG’s proposal and future plans for Aer Lingus and IAG’s proposed commitments in relation to the future ownership and operation of Aer Lingus’ Heathrow slots and other matters. The Minister also attended a number of these meetings. The terms of IAG’s proposed commitments have also been reviewed and negotiated by the Steering Group (in consultation with the Minister) and its Advisers. The Steering Group also met with Aer Lingus in order to clarify Aer Lingus’ view in relation to IAG’s proposal and future plans for the Company and its assessment of its own prospects absent an IAG takeover. The purpose of this report is to set out the conclusions of the Steering Group’s review in relation to a sale of the State’s shareholding in Aer Lingus to IAG and a recommendation to Government in relation to IAG’s proposed offer. 3. Overview of the State’s role in Aer Lingus

The airline industry is strategically important to Ireland from a public policy perspective in providing connectivity to international markets, which is critical for business, trade, tourism and employment on both a national and regional level. Aer Lingus plays an important role in providing this connectivity: As Ireland’s second largest airline accounting for c.45%5 of passenger traffic at Dublin, Cork and

Shannon airports;

In providing access from these three airports to Heathrow Airport (which is an important hub for onward connectivity);

In providing direct transatlantic services from Dublin and Shannon;

In providing competition for Irish consumers in the air transport market; and

Aer Lingus also provides or facilitates important regional connectivity through its service from Knock to London Gatwick and through its Aer Lingus Regional franchise (operated by Stobart Air) which provides services from Dublin and Cork predominantly to UK regional airports and services from Donegal and Kerry to Dublin under the Government’s Public Service Obligation scheme.

Following the IPO of Aer Lingus in 2006, the State, through the Minister for Finance, retains a 25.1% minority shareholding in Aer Lingus. As a 25.1% shareholder, the State has a degree of influence over Aer Lingus both under Irish company law and under specific provisions included in the Company’s articles of association. This influence comprises mainly a range of negative or “blocking” rights in respect of Aer Lingus’ ability to implement certain measures. Specifically, the State’s 25.1% shareholding in Aer Lingus entitles it to:

Block any measures for which Aer Lingus would require the approval of shareholders by special resolution (i.e. 75% of votes cast) under Irish company law (e.g. changes of share rights and issue of new shares on a non-rights basis for cash);

5 Source: Aer Lingus results announcement H1 2014.

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Block a takeover of Aer Lingus where the bidder was seeking to acquire 100% ownership. However, the State could not prevent a bidder from acquiring the 74.9% of the shares not held by the State (which would give such bidder a significant degree of control over Aer Lingus);

Nominate up to three non-executive directors for appointment to the Board of Aer Lingus (out of a maximum of 15 directors permitted by Aer Lingus’ articles of association), noting that all directors have a legal duty under company law to act in the best interests of the Company; and

Block, with the support of more than 5% of other Aer Lingus shareholders, a disposal by Aer Lingus of those Heathrow slots that were owned by Aer Lingus in 2006. However, the State’s current powers cannot prevent a re-allocation, re-assignment or cessation of use of the Heathrow slots. Therefore, the State is not in a position to prevent a repeat of the situation that arose in 2007 where Aer Lingus decided to switch Shannon-Heathrow slots to Belfast.

The State does not have any express right or power to direct Aer Lingus in the conduct of its business, which is a matter for the Board of Aer Lingus. 4. Airline Industry Considerations

Consideration of the future ownership of Aer Lingus should be made in the context of what has historically been a volatile sector, with evolving industry and competitive dynamics, recognising the importance of air connectivity to an island such as Ireland and the desire to ensure that Aer Lingus is best placed to continue to grow and compete in this market thereby preserving and growing Ireland’s connectivity. The airline industry is inherently cyclical, with its performance strongly correlated to economic growth and fuel prices, and has been severely impacted in the past by a number of global shocks such as 9/11 and the 2008 financial crisis. The industry is currently in an upswing phase with 2014 being the fifth consecutive year of positive global airline profitability6. There are a number of key industry trends which in the Steering Group’s view may impact on Aer Lingus in the future:

European and transatlantic airlines have maintained a level of discipline in recent years in deploying new seat capacity on routes which has been supportive to industry profitability. However, as a relatively small7, albeit currently well capitalised, airline Aer Lingus is dependent on the capacity decisions of its largest competitors (e.g. Ryanair) and may be more vulnerable to future industry shocks or aggressive direct competition than the larger airlines.

Dominance of low-cost carriers in European short-haul markets. Aer Lingus has implemented a series of restructuring plans over recent years in order to reduce its cost base8. However, Aer Lingus continues to operate with significantly higher unit costs than its closest short-haul competitor Ryanair, which is becoming a greater competitive threat since its strategic repositioning to a more “upmarket” carrier.

Expansion of middle-eastern airlines (e.g. Emirates, Etihad, Qatar Airways). This has created new hub opportunities for eastward long-haul travel from Europe which is reducing the importance of traditional European hubs such as Heathrow.

The European airline industry remains relatively fragmented (compared to the US) and many of the European legacy carriers have been forced to implement significant restructuring plans in recent years. This has also driven consolidation amongst European airlines with many formerly State owned airlines either becoming part of larger groups (e.g. British Airways/Iberia, Air France/KLM, Lufthansa/Austrian/Swiss) or having failed (e.g. Cyprus Airways, Malev, Hungarian Airlines). A number of European airlines remain under State control although some of these

6 Source: IATA. 7 2013 passenger numbers: Aer Lingus c.11m, Air-France KLM c.78m, easyJet c.61m, IAG c.67m, Lufthansa c.105m, Ryanair c.81m (source: company information). 8 Aer Lingus’ cost base currently compares favourably with other legacy carriers. Cost Per Available Seat Kilometre (excl. fleet and fuel costs in € cents last financial year) in 2013 – Legacy Carriers: Aer Lingus c.4.5, Air-France KLM c.6, IAG c.4.5, Lufthansa c.8 / Low Cost Carriers: easyJet c.3.5, Ryanair c.1.5 (source: company information).

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have been undergoing significant restructuring and/or are the subject of potential disposal (e.g. TAP Portugal, SAS, Finnair). In this context, Aer Lingus remains a relatively small independent carrier competing against what are generally significantly larger carriers.

The growing importance of airline alliances (e.g. oneworld) and transatlantic joint ventures (e.g. British Airways/Iberia/American Airlines) in driving the sharing of risk and growth opportunities and creating global networks for connectivity. Aer Lingus is currently not a member of such an alliance but maintains a number of bilateral partnerships with carriers such as British Airways, Jetblue and Etihad. Aer Lingus has indicated that it considers its future entry into such an alliance to be an important strategic step for the Company, particularly in maintaining and growing its position in the transatlantic market9.

Following the negative impact of the 2008 financial crisis10 and the subsequent implementation of a revised strategy and restructuring plan by a new management team in 2010, Aer Lingus’ recent financial performance has been positive11 and the near term outlook of equity research analysts for Aer Lingus’ profitability is also positive12. Aer Lingus has a strong balance sheet13 relative to its peers which would provide it with potential for growth (e.g. it would also be anticipated that Aer Lingus will require future re-investment in its aircraft fleet) and some protection in the event of a future decline in profitability. However, Aer Lingus is a relatively small airline in a global industry which is highly cyclical (and currently consolidating) and as such its financial performance is somewhat dependant on the actions of larger competitors and volatile market conditions. There is a risk, as for any airline, that in future adverse market circumstances Aer Lingus’ viability could be impacted, potentially requiring deeper restructuring measures, which could in turn impact on connectivity and jobs. There is also a risk that if Aer Lingus were to fail to grow and re-invest in its business that its future viability could be also impacted. The Board of Aer Lingus has expressed strong support for the IAG proposal14 and has indicated that, as part of the IAG group, Aer Lingus would have improved opportunities to de-risk and accelerate its growth plans and should be in a stronger position to meet the commercial challenges of increasing competition in both long-haul and short-haul market segments than as a stand-alone airline. In addition, Aer Lingus has indicated that it expects that the competitive pressures on the Company will increase over the medium term and that becoming part of the IAG group would provide it with greater financial resources and opportunities to benefit from revenue and cost synergies to assist it in withstanding these pressures (e.g. both Aer Lingus and IAG have indicated that there would be substantial benefits to Aer Lingus from procurement of new aircraft through the IAG group). 5. Overview of IAG and Potential for Other Bidders

IAG is a multinational airline portfolio holding company headquartered in London with its registered office in Madrid, Spain. IAG differs from the other two main legacy carriers in Europe (Lufthansa and Air France-KLM) as it is not an operating airline, but combines operating airlines under a holding company structure. It was formed in 2011 by the merger of British Airways and Iberia and subsequently acquired bmi in 2011 and Vueling (a Spanish low-cost airline based in Barcelona) in 2013. IAG reported revenues of c.€20.2 billion and transported c.77.3 million passengers and c.897,000 tonnes of cargo on 459 aircraft to 248 destinations globally in 201415.

9 Aer Lingus appearance at Joint Committee on Transport and Communications 17 February 2015 and meeting with Steering Group. 10

Aer Lingus operating loss (before exceptional items) €20m in 2008 and €81m in 2009 (source: Aer Lingus 2009 Annual Report). 11 Aer Lingus operating profit (before exceptional items) €61m in 2013 and €72m in 2014 (source: Aer Lingus 2014 Annual Report). 12 Average of equity research analysts’ operating profit estimates for Aer Lingus €88m 2015, €104m 2016 (source: Advisers). 13 Aer Lingus net cash c.€355m at 31 December 2014 after deduction of €191m contribution to IASS pension scheme (source: Aer Lingus Annual Report 2014). 14 Aer Lingus announcement 13 February 2015 and meeting with Steering Group. 15 Source: IAG 2014 results announcement and website.

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British Airways, Iberia and Vueling are maintained as standalone airlines within the IAG group. Since their merger, British Airways and Iberia have both increased their profitability, with c.€633m of gross synergies realised by the group by 2014 (65% additional revenue / 35% cost savings)16. There has been some public commentary on the potential scale of Aer Lingus jobs that could be at risk in the event of a takeover by IAG, which estimates appear to be based on a simple like‐for‐like analysis of Iberia following the merger with British Airways17. In the Steering Group’s view, drawing a direct comparison between Aer Lingus and Iberia is not appropriate, as the respective position of the two companies is different - Iberia was in financial distress at the time of the merger and had been loss making for several years. See Section 6 below for further comments on the potential impact on employment at Aer Lingus as a result of an IAG takeover. Since its acquisition by IAG, Vueling has been maintained as a standalone airline within the IAG group, has increased its market share at its main Barcelona hub, its fleet and its operating profit (from €36m in 2012 to €141m in 2014) and appears to be a key part of IAG’s future strategy18. In the case of the acquisition of bmi which was a loss-making airline acquired from Lufthansa, IAG had indicated at the time that part of its rationale for this acquisition was bmi’s slot portfolio at Heathrow and that it intended to integrate bmi into British Airways19. IAG has stated its intention that (similar to British Airways, Iberia and Vueling) Aer Lingus would continue to operate as a separate business with its own brand, management and operations, continuing to provide connectivity to Ireland, while benefiting from the scale of being part of the larger group. The Steering Group considers that there is likely to be less strategic rationale at this time for other market participants to make a bid for Aer Lingus. Ryanair has had three previous failed takeover bids for Aer Lingus. A number of the other main European airlines appear to be focused on their own restructuring plans and non-European airlines are restricted from acquiring control of a European airline given EU nationality restrictions. It is noted that it has been approximately five months since IAG’s initial approach to Aer Lingus was announced and no other bidders have emerged. 6. Steering Group Views on the IAG Proposal

Having engaged with IAG and carefully considered its proposal, and informed by the analysis and advice received from the Steering Group’s external financial and legal advisers, the Steering Group considers that there is a strong commercial and strategic rationale for an IAG takeover of Aer Lingus from a national aviation policy perspective, for the following reasons: Connectivity The potential to accelerate Aer Lingus’ own transatlantic growth plans through the additional

marketing and financial support that IAG and its partner airlines could provide.

Specifically, IAG has indicated that two new transatlantic services could be added for the 2016 summer season and that by 2020 up to 2.4 million more passengers, 4 additional destinations in North America (including the two new transatlantic destinations to be added in 2016) and 8 additional aircraft could be delivered.

The potential to expand international connectivity options for Aer Lingus passengers through membership of the oneworld alliance and the British Airways/Iberia/American Airlines transatlantic joint venture.

16 British Airways operating profit (before exceptional items) £197m in 2010 and £975m in 2014. Iberia operating loss €28m in 2010 and operating profit €50m in 2014. Source: IAG Annual Reports 2014 and 2011. 17 Iberia has implemented a restructuring plan with a target overall headcount reduction of c.25% which represents an overall headcount reduction of 5,471 (source: IAG Capital Markets Day 2014). Other European airlines such as Air France-KLM, Lufthansa, Air Berlin, Finnair, SAS, and indeed Aer Lingus, have also implemented significant restructuring plans in recent years. 18 Source: IAG Capital Markets Day 2014 and IAG 2014 results announcement. 19 Source: IAG announcements and investor materials.

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The potential to expand further Dublin’s role as a hub for transatlantic traffic through additional feeder traffic from IAG’s network (particularly in the UK regions).

The additional sales and marketing network of IAG and its partner airlines, and additional traffic potential from connections to/from the wider IAG network, could potentially provide additional opportunities for Aer Lingus to grow its short haul network at Dublin, Cork, Shannon and other Irish airports.

Access to IAG’s global cargo network could expand Ireland’s export options through air freight. IAG has indicated that by 2020 it is expected that Aer Lingus’ cargo capacity will have increased by 50%.

IAG’s proposed offer includes a legal commitment to give the State an ability, having considered certain agreed connectivity considerations, to block any proposed future disposal of Aer Lingus’ Heathrow slots for an unlimited time period (see Section 8 below).

IAG’s proposed offer includes a legal commitment in relation to the maintenance by Aer Lingus of its 2014/15 winter and 2015 summer daily schedule frequencies between Heathrow and each of Dublin, Cork and Shannon for a period of 7 years from completion of the Transaction (“Completion”) (with the final 2 years of this period being subject to a condition in relation to the level of airport charges). (See Section 8 below). This is a protection that the State does not have at present.

IAG has indicated its intention to sustain and grow Aer Lingus’ business at each of Cork, Shannon and Knock airports and that it would intend for Aer Lingus to actively work with tourism and business interests to explore new growth opportunities at each of these airports that would be available as part of the IAG group.

Competition As a member of the IAG group, Aer Lingus should benefit from IAG’s additional scale and

synergies and would therefore be in a stronger position to compete with its larger rivals.

No significant adverse impact on existing competition is likely to arise given the relatively limited overlap of Aer Lingus and IAG’s current route networks. The primary overlap is on the Dublin-London city pair which is also well served by Ryanair. The European Commission may also examine the impact on competition between British Airways and its rivals in feeder traffic from Ireland to UK airports (particularly Heathrow) to inter-continental or other routes. The impact on competition will be subject to review by the European Commission under EU Merger Regulation, if IAG proceeds to make a formal offer.

Employment Aer Lingus has, as a standalone airline, implemented significant reductions in employment levels

over recent years20 (and is currently implementing a further restructuring programme entailing voluntary redundancies21) and future employment levels in Aer Lingus as a standalone airline are by no means guaranteed (or subject to control by the State as a minority shareholder).

In this context, while employment levels will be a matter for Aer Lingus and IAG, IAG has provided positive indications on its plans to grow employment at Aer Lingus, primarily as a result of investment in Aer Lingus’ fleet and route expansion.

- IAG has indicated that by end 2016, there could be c.200 new direct Aer Lingus jobs created in Ireland, with net employment growth of c.150 jobs after taking account of c.50 job losses as a result of the Transaction primarily in back office functions.

- IAG has indicated that by 2020 up to 635 jobs could be created, comprised of up to 470 pilots and cabin crew and up to 165 engineers and other ground staff.

20 Aer Lingus employee numbers decreased from 6,108 in 2001 to 3,766 in 2014 (source: Aer Lingus 2014 Annual Report and IPO Prospectus). 21 Source: Aer Lingus Annual Report 2014.

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Aer Lingus Brand IAG’s proposed offer includes a legal commitment in relation to the maintenance of Aer Lingus’

brand, company name and head office location and place of incorporation in Ireland for an unlimited time period (see Section 8 below). This is a protection that the State currently does not have22.

7. Heathrow Slots and Existing Protections

An airport slot is a permission to operate at a ‘coordinated’ airport on a specific date and at a specific time as allocated by an airport slot coordinator. ‘Coordinated’ airports are airports where the operational demand by airlines exceeds the capacity of the airport infrastructure, making it necessary to apply procedures that determine the priority of each requested flight to be granted a slot. At coordinated airports, the slot allocation process is driven by the dynamics of a constantly changing capacity/demand picture, coordination parameters, International Air Transport Association (“IATA”) guidelines, regulations (national or EU), local rules and the availability of technology, time and resources etc. EU Regulations on the allocation of slots at Community airports23 stipulate that where an air carrier has utilised at least 80% of its allocated slots during the summer/winter scheduling period then it is entitled to operate the same slots in the equivalent scheduling period of the following year (so-called “grandfather rights”). Consequently, slots which are not sufficiently used by air carriers are reallocated (the so-called "use it or lose it" rule). Heathrow airport is a coordinated airport as it is one of the busiest and most capacity constrained airports in the world. British Airways operates c.51% of the c.700 slot-pairs currently available at Heathrow, followed by Lufthansa with c.6%, Virgin Atlantic / Delta Airlines with c.5% and Aer Lingus with c.3%24. In light of capacity constraints at Heathrow, there is significant demand for Heathrow slots which appears to be underpinning the high value of some recent slot transactions. Prior to Aer Lingus’s IPO in 2006, the Government took advice in relation to the potential impacts on strategic issues such as continued access to Heathrow slots, direct transatlantic services to and from Ireland and the protection of the Aer Lingus brand and the need for any specific protection mechanisms to be implemented in the context of an IPO. At the time, it was decided that the only issue which required a specific protection mechanism was in relation to Heathrow slots. Accordingly, a mechanism was included in the Company’s articles of association whereby shareholders holding 20% or more of the Company’s shares may require that a general meeting of shareholders be convened to consider any proposed disposal by Aer Lingus of those Heathrow slots that were owned by Aer Lingus at the time of its IPO in 2006. Such disposal may not proceed if opposed by a percentage vote of shareholders equal to the State’s then shareholding (in percentage terms) plus in excess of 5%, provided that, if the State’s holding in Aer Lingus were to fall below 20%, the approval threshold would be 75%. Based on the State’s current 25.1% shareholding, the approval threshold for a disposal of Heathrow slots would be 69.9% of all votes cast at the meeting of shareholders convened to consider the proposed slot disposal. It is important to note the following:

Currently, the State does not have a unilateral ability to block a disposal by Aer Lingus of any of its Heathrow slots. In order to block such a proposal the support of more than 5% of other shareholders would be required.

22 The State, by virtue of its 25.1% shareholding, could at present block a change in Aer Lingus’ company name or place of incorporation as such a change would require the approval of shareholders by special resolution (i.e. 75% of votes cast) under Irish company law. However, the State could not block a change in Aer Lingus’ brand or head office location as these are not matters that require shareholder approval under company law. 23

Council Regulation (EEC) NO 95/93 of 18 January 1993 on common rules for the allocation of slots at Community airports, as amended

or replaced from time to time (including by Regulation (EC) No 793/2004 of the European Parliament and of the Council of 21 April 2004). 24 Air Coordination Limited, “Start of Season Report”, Winter 2014

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Under the existing mechanism, the State cannot prevent a re-allocation, re-assignment or cessation of use of the Heathrow slots by Aer Lingus.

The Steering Group understands that Aer Lingus currently holds up to 23 Heathrow slots in the IATA summer season and up to 21 Heathrow slots in the IATA winter season25, one of which is leased from another airline (i.e. up to 22/20 owned slots in IATA summer/winter season), and that the slots are currently allocated as follows:

In the 2015 IATA summer season, Aer Lingus operates 11-13 daily services (depending on the day of the week) using these slots on the Dublin-Heathrow route, 4 daily services on the Cork-Heathrow route, 2-3 daily services (depending on the day of the week) on the Shannon-Heathrow route and 3 daily services on the Belfast-Heathrow route.

In the 2014/15 IATA winter season, Aer Lingus operated 8-12 daily services (depending on the day of the week) using these slots on the Dublin-Heathrow route, 3-4 daily services (depending on the day of the week) on the Cork-Heathrow route, 2-3 daily services (depending on the day of the week) on the Shannon-Heathrow route and 1-3 daily services (depending on the day of the week) on the Belfast-Heathrow route.

8. IAG Connectivity Commitments

IAG’s proposed offer includes legal commitments in respect of Aer Lingus’s Heathrow slots and related matters. 8.1 Summary of Commitments The terms of the commitments offered by IAG have been the subject of significant negotiation between IAG and the Steering Group (in consultation with the Minister) assisted by its financial and legal advisers. The key terms of the commitments are summarised below:

Location and Brand:

The State will be entitled to object to a proposal by Aer Lingus to change its company name, brand, head office location from Ireland and place of incorporation from Ireland, in which case Aer Lingus may not proceed with the proposal.

There is no time limit on this commitment.

Disposal of Heathrow slots:

Aer Lingus’ existing slots at Heathrow will continue to be held by Aer Lingus within the IAG Group. The State will, having given consideration to certain agreed connectivity considerations, be entitled to object to a proposed disposal by Aer Lingus of any of its Heathrow slots, in which case Aer Lingus may not proceed with the proposed disposal.

There is no time limit on this commitment.

There are a number of exclusions to what would constitute a disposal for the purpose of this commitment, such as a short term lease (no longer than 36 months) and securing of finance over a substantial part of the assets of Aer Lingus, which are in all material respects consistent with the exclusions which apply to the current slot disposal provisions in the Aer Lingus articles of association (“Aer Lingus Articles”).

Commitment to operate Heathrow slots:

For a period of 5 years from Completion, Aer Lingus will operate its Heathrow slots to replicate in all material respects the level of daily services operated by Aer Lingus on each of the Dublin, Cork and Shannon routes to Heathrow in the 2014/15 IATA winter season and 2015 IATA summer

25 The IATA northern summer season commences on the last Sunday in March and the IATA northern winter season commences on the last Sunday in October (www.iata.org). The precise number of Aer Lingus slots varies by season (winter and summer) and day of the week depending on daily frequencies. The level of daily services are sometimes reduced during a season (particularly in winter).

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season and the remainder of the slots on routes between these or other airports in the island of Ireland and Heathrow.

The State will be entitled, having given consideration to certain agreed connectivity considerations, to object to a proposed cessation or reduction of operation by Aer Lingus of any of these slots within this period, in which case Aer Lingus will continue to operate the slot.

This commitment will not apply in the case of an event outside Aer Lingus’ reasonable control (force majeure events) or ordinary course scheduling modifications, cancellations or curtailments (this also applies to the extended commitment period below).

Extended commitment to operate Heathrow slots:

For an additional 2 years (i.e. for the period after 5 years from Completion until 7 years from Completion), Aer Lingus will operate its Heathrow slots to replicate in all material respects the level of daily services operated by Aer Lingus on each of the Dublin, Cork and Shannon routes to Heathrow in the 2014/15 IATA winter season and 2015 IATA summer season.

This commitment is subject to the condition that airport charges at these airports remain at or below 2014 levels (adjusted for inflation) (without any material erosion of service standards/scope). If this condition is not met at one of these airports then the commitment in respect of slots allocated to that airport would no longer apply.

However, if the commitment no longer applies due to an increase in airport charges (or material erosion of service standards/scope) and Aer Lingus proposes to cease operating a slot, then it will be required to make the slot available to other air carriers to operate the same route (provided the air carrier can demonstrate that it has exhausted all reasonable efforts to obtain an equivalent slot through the normal workings of IATA slot allocation guidelines).

8.2 Structure of Commitments and Oversight Arrangements These commitments would be secured by providing certain rights to the Minister for Finance who is the current State shareholder in Aer Lingus. The positions taken by the Minister for Finance will be subject to prior consultation with the Minister. The Minister for Finance would retain one share in Aer Lingus following Completion which would be re-designated as a B share (“‘B’ Share”). The benefit of these commitments would be conferred on the Minister for Finance as holder of the ‘B’ Share through the Aer Lingus Articles, which would also set out the rights attaching to the ‘B’ Share. The rights attaching to this ‘B’ Share, as would be enshrined in the Aer Lingus Articles, would allow the holder of the ‘B’ Share (i.e. the Minister for Finance) to object (on the basis described above) to any proposed disposal of Aer Lingus’ Heathrow Slots, any proposed cessation of operation of Aer Lingus’ Heathrow Slots on certain Irish routes for a specified future period and certain other business related matters (i.e. any proposed change of Aer Lingus company name, brand, head office location or place of incorporation outside Ireland). Apart from these rights to object to certain matters which are the subject of the proposed commitments, the ‘B’ Share would have limited other rights (e.g. no rights to dividends or to vote at general meetings). In exercising the ‘B’ Share rights, the Minister for Finance must give consideration to certain connectivity considerations, which largely mirror the decision making criteria for any proposed slot disposals published by the Minister at the time of the IPO in 2006, as follows: Other services between the relevant region in Ireland and Heathrow operated by Aer Lingus, the

wider IAG group and other relevant carriers at the relevant time;

Any evolution of services provided from Dublin, Cork or Shannon (as the case may be) to connecting airports other than Heathrow and/or of any relevant direct long haul flights from Dublin, Cork or Shannon (as the case may be); and

Services provided via other connecting airports where there is relevant available capacity both from Dublin, Cork or Shannon (as the case may be) to the other airport and from that airport to

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key long haul destinations, and any relevant direct long haul flights from Dublin, Cork or Shannon (as the case may be).

8.3 Steering Group Views on Commitments The terms agreed with IAG in relation to the commitments to be provided have been the subject

of substantial negotiation between IAG and the Steering Group (in consultation with the Minister) assisted by its financial and legal advisers. On this basis, the Steering Group considers the agreed terms are likely to be the best achievable outcome with IAG.

The mechanism underpinning the commitment in relation to a disposal of Heathrow slots is designed to replicate the current provisions in the Aer Lingus Articles, save that the commitments would provide the State with a unilateral ability to block a slot disposal (whereas in the current Aer Lingus Articles the State requires the support of more than 5% of other Aer Lingus shareholders to block a proposed disposal of Heathrow slots).

The commitment in relation to maintaining Aer Lingus’ brand and head office location in Ireland is not a protection that the State has today.

The commitment in relation to the future operation of Aer Lingus’ Heathrow slots to maintain the most recent Aer Lingus winter and summer frequencies between Heathrow and each of Dublin, Cork and Shannon for the period of 7 years from Completion (with the final 2 years of this period being subject to a condition in relation to airport charges) is not a protection that the State has today.

The original proposal from IAG in relation to the future operation of Aer Lingus’ Heathrow slots for Irish routes was that this commitment would apply for a period of 5 years. The Steering Group (in consultation with the Minister) has agreed with IAG an extension to this commitment to 7 years subject to a condition that there is no increase in airport charges (adjusted for inflation) during the extended period (final 2 years).

The mechanism for delivery of the commitments was developed with legal advice from McCann FitzGerald and following consultation between DTTAS and the European Commission.

The legal commitment to be provided in relation to Aer Lingus’ Heathrow slots will apply to the Heathrow slots within Aer Lingus’ portfolio at the time of Completion, and therefore would be subject to adjustment to reflect any slot divestments which may be required by the European Commission as a condition of any merger clearance26 or termination of any slot leases in accordance with their terms, including in the context of the Transaction. In ensuring that the connectivity commitments can be implemented as proposed, it would be important that Government’s acceptance of an offer from IAG for its shareholding would be conditional on, or following, European Commission merger clearance for the Transaction having been obtained and Government being satisfied with the terms of such clearance. Therefore, in the event that a disposal of Aer Lingus’ Heathrow slots was offered by IAG to secure European Commission merger clearance, the State could decide not to accept the IAG offer.

Prior to Completion, a number of steps will be required to implement the commitments, including a number of Aer Lingus shareholder resolutions (the passing of which will be a condition of IAG’s offer) to approve the provision of the commitments, the making of amendments to the Aer Lingus Articles and the re-designation of one Aer Lingus share held by the Minister for Finance as a ‘B’ Share having become effective. It would be important in ensuring that the connectivity commitments can be implemented as proposed that Government’s acceptance of an offer from IAG for its shareholding would be conditional on, or following, these shareholder resolutions having been passed on terms satisfactory to Government.

26 As part of IAG’s acquisition of BMI in 2011/12, IAG was required to commit to release some of BMI’s Heathrow slots to new entrants on specific routes in order to secure European Commission merger clearance.

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9. Proposed Offer Price

IAG’s proposed offer to Aer Lingus shareholders27 is a cash payment of €2.50 per share payable upon Completion (the “Offer Price”). The proposed offer would also refer to the payment of a cash dividend of €0.05 per share28. It is noted that:

The Offer Price of €2.50 per share would generate proceeds for the State of c.€335 million.

The Offer Price would represent a premium of c.37% to Aer Lingus’ share price on 17 December 2014 of €1.8229 (the day prior to the announcement of IAG’s initial approach).

The Offer Price would represent a premium of c.14% to Aer Lingus’ IPO price of €2.20 in 2006.

Prior to the IAG approach, Aer Lingus’ share price had not traded at this level (c.€2.50) since late 200730.

The Board of Aer Lingus has publicly stated that the financial terms of the proposal are at a level which it would be willing to recommend to Aer Lingus shareholders31. The Steering Group has received detailed valuation advice from its financial advisers. The financial advisers have considered a range of different valuation methodologies which they consider to be relevant. Based on and consistent with that advice, the Steering Group has received a formal fair value opinion from its financial advisers. Noting that there has been a significant level of public commentary regarding the potential value of Aer Lingus’ Heathrow slots, the Steering Group notes that one of the methodologies considered by its financial advisers is an asset valuation of Aer Lingus (including the potential value of its Heathrow slots). The Steering Group places less reliance on an asset or break-up valuation of Aer Lingus as an indication of Aer Lingus’ going concern value given an important objective of the Steering Group in evaluating the proposed IAG offer is the protection of the connectivity provided by Aer Lingus. The following points are relevant in this regard:

The financial advisers’ asset valuation takes account of the potential value of Aer Lingus’ Heathrow slots, aircraft fleet, net cash and pension liabilities and also the potential costs of liquidating Aer Lingus’ operations (e.g. terminating employment and aircraft leases) as the Company would no longer be able to operate without its fleet.

Therefore, this valuation approach is effectively an analysis of the potential break-up value of Aer Lingus rather than its future value as an operational airline. Any such break-up would not be desirable from a national aviation policy perspective.

In terms of the potential value of Aer Lingus’ Heathrow slots, the financial advisers have reviewed previous Heathrow slot transactions in the period since 1998. During this period, slots have traded for a very large range of values (reported values of between €4 million and €53 million for a slot), with considerable variability between the value of slots at different times of the day32. Therefore, values for individual slot transactions cannot necessarily be applied to valuations of larger slot portfolios such as Aer Lingus’. Subject to these comments, applying a range based on the median to average prices achieved for Heathrow Slots sold over the past 5 years would imply that Aer Lingus’ portfolio of Heathrow Slots may be worth somewhere in the range of €425 million to €559 million.

27 It is anticipated that IAG would also make proposals to the holders of Aer Lingus share options and long term incentive plan (LTIP) share awards which includes Aer Lingus directors and management. 28 The €0.05 per share dividend was approved at Aer Lingus’ AGM on 1 May 2015 and will be paid on 29 May 2015 to Aer Lingus shareholders who are on Aer Lingus’ share register on 1 May 2015 irrespective of whether the proposed IAG offer proceeds or not. 29 Source: Irish Stock Exchange. 30 Source: Bloomberg data. 31 Source: Aer Lingus announcements. 32 For example, SAS has separately disposed of two Heathrow slots in 2015 for values of $60 million (morning slot) and $22 million (afternoon slot) respectively (source: SAS announcements on 4 February 2015 and 27 February 2015).

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A valuation of Aer Lingus’ Heathrow slots is only relevant to the extent that such value could be realised by a bidder through a disposal of slots (rather than the future operational value of routes using these slots which is considered separately). This would not be consistent with maintaining the use of the slots for Irish connectivity to Heathrow.

This would also not be consistent with the commitments included in IAG’s proposed offer. IAG will provide a legal commitment in relation to the future disposal of Aer Lingus’ Heathrow slots for an unlimited time period and in relation to the future use of Aer Lingus’ Heathrow slots to maintain the most recent Aer Lingus winter and summer frequencies between Heathrow and each of Dublin, Cork and Shannon for a period of 7 years from Completion (each described in more detail in section 8).

10. Summary of Options

There are three possible scenarios that may arise from the immediate decision for Government as to whether the State should sell its shareholding or not: i. Sale of shareholding to IAG

The Government decides that it is willing to sell the State’s shareholding to IAG. Subject to and following Dáil approval and a number of other conditions, the Minister for Finance accepts an offer from IAG for the State’s shareholding in Aer Lingus with certain legal commitments in relation to connectivity and other matters to be provided by IAG. The completion of the Transaction by IAG would be subject to a number of other conditions as outlined in Section 11 below. ii. No sale of Aer Lingus

The Government decides not to sell the State’s shareholding to IAG and IAG decides not to make a formal offer and Aer Lingus continues as a standalone airline for the foreseeable future. Based on IAG’s public statements to date, this would appear to be the most likely scenario in the event that the Government decides not to sell its shareholding (as opposed to scenario iii below). Given that it has been approximately five months since IAG’s initial approach to Aer Lingus was announced and no other bidders have emerged, it is considered unlikely that other bidders for Aer Lingus will emerge at this time. There is no guarantee that IAG or any other bidder would decide to revert with a further offer for Aer Lingus in the future or if they did decide to revert with a further offer, that it would be at the price and include the commitments comprised in the current proposed IAG offer.

iii. Sale of Aer Lingus with Government retaining a minority shareholding

The Government decides not to sell its shareholding and IAG proceeds to make a formal offer for Aer Lingus with a view to acquiring a controlling interest of greater than 50%. Based on IAG’s public statements to date, this would appear to be a less likely scenario than ii above but cannot be ruled out. While this may allow for the commercial and strategic benefits for Aer Lingus of an IAG takeover to be realised, it is unlikely that IAG would be willing to offer any commitments to the State in such a scenario. The Government would remain a minority shareholder of Aer Lingus and would not have received any proceeds of a disposal. The State may not be able to maintain the status quo in such circumstances. As a minority shareholder it would not be able to prevent certain strategic/day-to-day decisions by an IAG controlled Aer Lingus. Further, the State may be left in a significantly weaker position as regards its ability to block a disposal of the Heathrow slots as such ability depends on the support of more than 5% of other shareholders which may no longer be possible (depending on how much of a shareholding above 50% IAG would be able to acquire). Also, the State’s ability to realise value from its shareholding should it decide to sell in the future is likely to be negatively impacted.

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11. IAG Offer Conditions

In the event that Government were to approve a proposal to sell the State’s shares in Aer Lingus to IAG (subject to the approval of Dáil Éireann), it would be anticipated that the Boards of IAG and Aer Lingus would announce the details of a recommended cash offer for Aer Lingus by IAG (referred to under the Irish Takeover Rules as a Rule 2.5 announcement of a firm intention to make an offer (“2.5 Announcement”)). Following the 2.5 Announcement, IAG would be obliged under the Irish Takeover Rules to proceed to make a formal offer to Aer Lingus shareholders through the issue of an “Offer Document” to Aer Lingus shareholders within 28 days of the 2.5 Announcement (the “Offer”). IAG has indicated that there would be a number of conditions to the Offer, which will be set out in the 2.5 Announcement and Offer Document, including: The receipt of merger clearance of the Transaction from the European Commission on terms

satisfactory to IAG.

The passing of a number of Aer Lingus shareholder resolutions (the “Connectivity Resolutions”) to approve the provision of the connectivity commitments to the State, the making of amendments to the Aer Lingus Articles and the re-designation of one Aer Lingus share held by the Minister for Finance as a ‘B’ Share (all of which are necessary to implement the connectivity commitments proposed by IAG).

The receipt of valid acceptances for the offer from not less than 90% of Aer Lingus shareholders, which minimum acceptance level IAG may decrease to not less than 50% (subject to the below conditions in relation to the Minister for Finance and Ryanair accepting the offer).

The approval by Dáil Éireann of the general principles of the disposal on or before the 50th day after the Offer Document has been issued.

The Minister for Finance accepting the offer (which condition IAG may not waive).

Ryanair accepting the offer (which condition IAG may not waive unless Ryanair’s shareholding is 5% or less).

The satisfaction of the above conditions in respect of EU merger clearance and the passing of the Connectivity Resolutions would be important to Government, in particular for the implementation of the connectivity commitments proposed by IAG33. Therefore, in the event that Government were to approve a proposal to sell the State’s shareholding in Aer Lingus to IAG (subject to the approval of Dáil Éireann), the Steering Group recommends that this would be on the basis that Government would only proceed to formally accept the Offer when those conditions have been satisfied on a basis satisfactory to Government. 12. Ryanair Position

Consistent with Government’s policy based on competition between at least two airlines with significant home bases in the Irish market and the position taken by Government in the UK Competition and Markets Authority’s inquiry into Ryanair’s 29.8% shareholding in Aer Lingus, the Steering Group recommends that it be clarified that Ryanair will accept the Offer prior to Government formally accepting the Offer. Further in this regard, it has been agreed with IAG that its Offer would be conditional on Ryanair accepting the Offer and that IAG would not have an ability to waive this condition (unless Ryanair’s shareholding is 5% or less).

33 The terms of EU merger clearance principally being of relevance to the connectivity commitments in the event that Heathrow slot divestments were required by the European Commission as a condition of any merger clearance.

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13. Recommendation

Having engaged with IAG and carefully considered its proposal, and informed by the analysis and advice received from the Steering Group’s external financial and legal advisers, the Steering Group concludes that in its view:

There is a strong commercial and strategic rationale for an IAG takeover of Aer Lingus from a national aviation policy perspective;

The proposed IAG offer price is acceptable;

IAG is a logical partner for Aer Lingus;

There is less apparent strategic rationale at this time for other market participants to make a bid for Aer Lingus; and

The proposed legal commitments negotiated and agreed with IAG provide:

- Stronger protection to the State in relation to the ownership of Aer Lingus’ current Heathrow slots than the protection that exists today whereby the State needs the support of greater than 5% of other Aer Lingus shareholders in order to block a disposal of Aer Lingus’ Heathrow slots;

- New protection to the State in relation to the future operation of Aer Lingus’ Heathrow slots that does not exist today; and

- New protection to the State in relation to the retention of the Aer Lingus brand and head office location in Ireland that does not exist today.

Accordingly, the Steering Group recommends that Government should, subject to and following the satisfaction of the conditions set out below, accept an offer from IAG for the State’s shareholding in Aer Lingus. The conditions to be satisfied before Government accepts the IAG Offer are:

The approval by Dáil Éireann of the general principles of the disposal34;

The IAG Offer being made on the terms and conditions discussed and agreed between IAG and the Steering Group, including conditions relating to European Commission merger clearance of the Transaction and the passing of Aer Lingus shareholder resolutions required to implement the connectivity commitments, and those conditions being satisfied on terms satisfactory to Government before Government would accept the Offer; and

The position regarding Ryanair’s acceptance of the Offer being clear.

34

Under Section 3 of the Aer Lingus Act 2004, the Minister for Finance may not dispose of any shares in the Company without the general

principles of the disposal being laid before and approved by Dáil Éireann

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Appendix – Steering Group

Members of the Steering Group

Department of Transport, Tourism and Sport John Fearon (Chair)

Ethna Brogan

Niall Curran

Theresa Kenny

Department of Finance Declan Reid

Department of Public Expenditure and Reform Brendan Ellison

NewERA Eileen Fitzpatrick

John Dillon

David Stokes

Advisers to the Steering Group

Credit Suisse and IBI Corporate Finance (financial)

McCann FitzGerald (legal)