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Ryanair‘s future growth also materially depends on its ability to access suitable airports located in its targeted geographic markets at costs that are consistent with Ryanair‘s strategy. Any condition that denies, limits, or delays Ryanair‘s access to airports it serves or seeks to serve in the future would constrain Ryanair‘s ability to grow. A change in the terms of Ryanair‘s access to these facilities or any increase in the relevant charges paid by Ryanair as a result of the expiration or termination of such arrangements and Ryanair‘s failure to renegotiate comparable terms or rates could have a material adverse effect on the Company‘s financial condition and results of operations. For example in Spain, the Spanish government increased airport taxes at the two largest airports, Barcelona and Madrid, by over 100%, while smaller increases were implemented at other Spanish airports effective from July 1, 2012. As a result, Ryanair cancelled routes and reduced capacity on remaining routes from Madrid and Barcelona in response to the Spanish government‘s decision to double airport taxes at the two airports. For additional information, see ―Item 4.
Following the acquisition of its initial stake and upon the approval of the Company‘s shareholders, management proposed to effect a tender offer to acquire the entire share capital of Aer Lingus. This 2006 offer was, however, prohibited by the European Commission on competition grounds.
In October 2007, the European Commission reached a formal decision that it would not force Ryanair to sell its shares in Aer Lingus. This decision has been affirmed on appeal. However, EU legislation may change in the future to require such a forced disposition. If eventually forced to dispose of its stake in Aer Lingus, Ryanair could suffer significant losses due to the negative impact on market prices of the forced sale of such a significant portion of Aer Lingus‘ shares.
The United Kingdom‘s Office of Fair Trading (―OFT‖) wrote to Ryanair in September 2010, advising that it intended to investigate Ryanair‘s minority stake in Aer Lingus. Ryanair objected on the basis that the OFT‘s investigation was time-barred. On June 15, 2012, the OFT referred the investigation of Ryanair‘s minority stake in Aer Lingus to the U.K. Competition Commission (the ―Competition Commission‖).
On June 19, 2012, Ryanair announced its third all cash offer to acquire all of the ordinary shares of Aer Lingus it did not own at a price of €1.30 per ordinary share and immediately commenced pre-notification discussions with the European Commission for the purpose of preparing a merger filing. Ryanair contended that, pending the outcome of the European Commission‘s review of Ryanair‘s bid, on the basis of the duty of ―sincere cooperation‖ between the EU and the Member States, and under the EU Merger Regulation, the UK Competition Commission‘s investigation of Ryanair‘s minority stake in Aer Lingus should not have properly proceeded. Nevertheless, Aer Lingus argued that the investigation should proceed and that Ryanair‘s offer was in breach of certain provisions of the UK Enterprise Act 2002.
On July 10, 2012, the Competition Commission ruled that Ryanair‘s bid was not in breach of the UK Enterprise Act, but nevertheless decided that its investigation of the minority stake could proceed in parallel with the European Commission‘s investigation of Ryanair‘s offer for Aer Lingus.
In July 2012, Ryanair appealed the latter part of the Competition Commission‘s ruling to the UK Competition Appeal Tribunal, and the Competition Commission‘s investigation became suspended pending the appeal process. On August 8, 2012, the Competition Appeal Tribunal (―CAT‖) rejected Ryanair‘s appeal and found that the Competition Commission‘s investigation could proceed in parallel with the European Commission‘s investigation, but that the Competition Commission must avoid taking any final decision which could conflict with the European Commission‘s ultimate conclusion on Ryanair‘s bid. In August 2012, Ryanair appealed the Competition Appeal Tribunal judgment to the UK Court of Appeal. In December 2012, the Court of Appeal rejected Ryanair‘s appeal and subsequently the Competition Commission‘s investigation restarted. On December 13, 2012, Ryanair applied to the UK Supreme Court for permission to appeal the judgment of the UK Court of Appeal.
The UK Supreme Court refused permission to appeal on April 25, 2013.
On February 27, 2013, the European Commission prohibited Ryanair‘s bid to acquire the entire share capital of Aer Lingus on the claimed basis that it would be incompatible with the EU internal market. Ryanair appealed this decision to the EU General Court on May 8, 2013. The judgment of the EU General Court is expected in 2015 and may affirm or annul the decision of the European Commission.
Following the European Commission‘s decision to prohibit its offer for Aer Lingus, Ryanair actively engaged with the UK Competition Commission‘s investigation of the minority stake. On August 28, 2013, the UK Competition Commission (the ―UKCC‖) issued its final decision in which it found that Ryanair‘s shareholding ―gave it the ability to exercise material influence over Aer Lingus‖ and ―had led or may be expected to lead to a substantial lessening of competition in the markets for air passenger services between Great Britain and Ireland.‖ As a result of its findings, the UKCC ordered Ryanair to reduce its shareholding in Aer Lingus to below 5 percent of Aer Lingus‘ issued ordinary shares. Ryanair appealed the UKCC‘s final decision to the CAT on September 23, 2013. The CAT rejected Ryanair‘s appeal on March 7, 2014. On April 23, 2014, the CAT granted Ryanair permission to appeal the CAT‘s judgment to the UK Court of Appeal. Should this appeal or any subsequent appeal to the UK Supreme Court be unsuccessful, Ryanair could suffer losses due to the negative impact on market prices of the forced sale of such a significant portion of Aer Lingus‘ shares. Ryanair believes that the enforcement of any such decision should be delayed until the outcome of Ryanair‘s appeal against the European Commission‘s February 2013 prohibition decision of Ryanair‘s 2012 offer for Aer Lingus, and the conclusion of any appeals against the UKCC‘s decision in the UK courts.
However, it is possible that the UKCC will seek to enforce any such sell-down remedy at an earlier date. For more information, see ―Item 8. Financial Information—Other Financial Information—Legal Proceedings—Matters Related to Investment in Aer Lingus.‖ Labor Relations Could Expose the Company to Risk. A variety of factors, including, but not limited to, Ryanair‘s profitability and its seasonal grounding policy, may make it difficult for Ryanair to avoid increases to salary levels and productivity payments. Consequently, there can be no assurance that Ryanair‘s existing employee compensation arrangements may not be subject to change or modification at any time. These steps may lead to deterioration in labor relations in Ryanair and could impact Ryanair‘s business or results. Ryanair also operates in certain jurisdictions with above average payroll taxes and employee-related social insurance costs, which could have an impact on the availability and cost of employees in these jurisdictions. Ryanair‘s crew in continental Europe generally operate on Irish contracts of employment on the basis that those crew work on Irish Territory, (i.e., on board Irish Registered Aircraft). A number of challenges have been initiated by government agencies in a number of countries to the applicability of Irish labor law to these contracts, and if Ryanair were forced to concede that Irish jurisdiction did not apply to those crew who operate from continental Europe then it could lead to increased salary, social insurance and pension costs and a potential loss of flexibility. In relation to social insurance costs, the European Parliament implemented amendments to Regulation (EC) 883/2004 which, in the majority of jurisdictions, imposes substantial social insurance contribution increases for either or both Ryanair and the individual employees. While this change to social insurance contributions relates primarily to new employees, its effect in the long term may materially increase Company or employee social insurance contributions and could affect Ryanair‘s decision to operate from those high cost locations, resulting in redundancies and a consequent deterioration in labor relations. For additional details see — ―Change in EU Regulations in Relation to Employers and Employee Social Insurance could Increase Costs‖ below.
Ryanair currently conducts collective bargaining negotiations with groups of employees, including its pilots and cabin crew, regarding pay, work practices, and conditions of employment, through collective-bargaining units called ―Employee Representative Committees‖. On June 19, 2009, BALPA (the U.K. pilots union) made a request for voluntary recognition under applicable U.K.
legislation, which Ryanair rejected. BALPA had the option of applying to the U.K.‘s Central Arbitration Committee (CAC) to organize a vote on union recognition by Ryanair‘s pilots in relevant bargaining units, as determined by the CAC, but BALPA decided not to proceed with an application at that time. The option to apply for a ballot remains open to BALPA and if it were to seek and be successful in such a ballot, it would be able to represent the U.K. pilots in negotiations over salaries and working conditions. Limitations on Ryanair‘s flexibility in dealing with its employees or the altering of the public‘s perception of Ryanair generally could have a material adverse effect on Ryanair‘s business, operating results, and financial condition. For additional details, see ―Item 6.
Directors, Senior Management and Employees—Staff and Labor Relations.‖ Limitations on Ryanair‘s flexibility in dealing with its staff or the altering of the public‘s perception of Ryanair generally could have a material adverse effect on the Company‘s business, operating results, and financial condition.
The Company is Dependent on External Service Providers. Ryanair currently assigns its engine overhauls and ―rotable‖ repairs to outside contractors approved under the terms of Part 145, the European regulatory standard for aircraft maintenance established by the European Aviation Safety Agency (―Part 145‖). The Company also assigns its passenger, aircraft and ground handling services at airports other than Dublin and certain airports in Spain and the Canary Islands to established external service providers. See ―Item 4. Information on the Company—Maintenance and Repairs—Heavy Maintenance‖ and ―Item 4. Information on the Company—Airport OperationsAirport Handling Services.‖ The termination or expiration of any of Ryanair‘s service contracts or any inability to renew them or negotiate replacement contracts with other service providers at comparable rates could have a material adverse effect on the Company‘s results of operations. Ryanair will need to enter into airport service agreements in any new markets it enters, and there can be no assurance that it will be able to obtain the necessary facilities and services at competitive rates. In addition, although Ryanair seeks to monitor the performance of external parties that provide passenger and aircraft handling services, the efficiency, timeliness, and quality of contract performance by external providers are largely beyond Ryanair‘s direct control. Ryanair expects to be dependent on such outsourcing arrangements for the foreseeable future.
The Company is Dependent on Key Personnel. Ryanair‘s success depends to a significant extent upon the efforts and abilities of its senior management team, including Michael O‘Leary, the Chief Executive Officer, and key financial, commercial, operating and maintenance personnel.
Mr. O‘Leary‘s current contract may be terminated by either party upon 12 months‘ notice. See ―Item
6. Directors, Senior Management and Employees—Compensation of Directors and Senior Management—Employment and Bonus Agreement with Mr. O‘Leary.‖ Ryanair‘s success also depends on the ability of its executive officers and other members of senior management to operate and manage effectively, both independently and as a group. Although Ryanair‘s employment agreements with Mr. O‘Leary and some of its other senior executives contain non-competition and non-disclosure provisions, there can be no assurance that these provisions will be enforceable in whole or in part.
Competition for highly qualified personnel is intense, and either the loss of any executive officer, senior manager, or other key employee without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect upon Ryanair‘s business, operating results, and financial condition.
The Company Faces Risks Related to its Internet Reservations Operations and its Announced Elimination of Airport Check-in Facilities. Over 99% of Ryanair‘s flight reservations are made through its website. Although Ryanair has established a contingency program whereby the website is hosted in three separate locations, each of these locations accesses the same booking engine, located at a single center, in order to make reservations.
A back-up booking engine is available to Ryanair to support its existing platform in the event of a breakdown in this facility. Nonetheless, the process of switching over to the back-up engine could take some time and there can be no assurance that Ryanair would not suffer a significant loss of reservations in the event of a major breakdown of its booking engine or other related systems, which, in turn, could have a material adverse effect on Ryanair‘s operating results or financial condition.