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«Chief Executive‟s Report 9 Summary Operating and Financial Overview Directors‟ Report 15 Corporate Governance Report Report of the Remuneration ...»

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On December 1, 2008, Ryanair made a second offer to acquire all of the ordinary shares of Aer Lingus it did not own at a price of €1.40 per ordinary share. Ryanair offered to keep Aer Lingus as a separate company, maintain the Aer Lingus brand, and retain its Heathrow slots and connectivity. Ryanair also proposed to double Aer Lingus‘ short-haul fleet from 33 to 66 aircraft and to create 1,000 associated new jobs over a five-year period. If the offer had been accepted, the Irish government would have received over €180 million in cash. The employee share ownership trust and employees who owned 18% of Aer Lingus would have received over €137 million in cash. The Company met Aer Lingus management, representatives of the employee share ownership trust and other parties. The offer of €1.40 per Aer Lingus share represented a premium of approximately 25% over the closing price of €1.12 on November 28, 2008. Ryanair also advised the market that it would not proceed to seek EU approval for the new bid unless the shareholders agreed to sell their stakes in Aer Lingus to Ryanair. However, as the Company was unable to secure the shareholders‘ support it decided, on January 28, 2009, to withdraw its second offer for Aer Lingus.

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. Ryanair contended that the OFT had and missed the opportunity to investigate Ryanair‘s minority stake within four months from the European Commission‘s June 2007 decision to prohibit Ryanair‘s takeover of Aer Lingus. The OFT agreed in October 2010 to suspend its investigation pending the outcome of Ryanair‘s appeal against the OFT‘s decision that its investigation is not time barred. On July 28, 2011, the Competition Appeal Tribunal ruled that the OFT was not time barred when it attempted in September 2010 to open an investigation into Ryanair‘s 2006 acquisition of a minority non-controlling stake in Aer Lingus. Ryanair subsequently appealed the Competition Appeal Tribunal‘s decision. On November 24, 2011, the UK Court of Appeal ordered a stay of the OFT‘s investigation into Ryanair‘s minority stake in Aer Lingus pending the outcome of the appeal. On May 22, 2012, the UK Court of Appeal found that the OFT was not time barred to investigate Ryanair‘s minority stake in Aer Lingus in September 2010. Ryanair subsequently sought permission to appeal this ruling to the UK Supreme Court but permission was refused. On June 15, 2012, the OFT referred the investigation of Ryanair‘s minority stake in Aer Lingus to the UK 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. 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 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 has restarted. On December 13, 2012, Ryanair applied to the UK Supreme Court for permission to appeal the judgment of the Court of Appeal. The 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.

The timing of Ryanair‘s 2012 offer for Aer Lingus was influenced by; (i) the continued consolidation of European airlines, and more recently the International Airlines Group (the parent company of British Airways) takeover of British Midland International, where the No.1 airline at Heathrow was allowed to acquire the No. 2; (ii) the additional capacity available at Dublin airport following the opening of Terminal 2 and the decline in traffic from 23.3 million passengers per annum in 2007 to 18.7 million in 2011, resulting in Dublin airport operating at approximately 50% capacity; (iii) the change in the Irish government policy since 2006 in that the Irish government indicated that it had decided to sell its stake in Aer Lingus; (iv) the fact that under the terms of the bailout agreement provided by the European Commission, European Central bank and International Monetary Fund to Ireland, the Irish government committed to sell its stake in Aer Lingus; (v) the fact that the ESOT (Employee Share Ownership Trust), which at the time of the unsuccessful 2006 offer controlled 15% of Aer Lingus, had been disbanded since December 2010 and the shares distributed to the individual members, with the result that Ryanair‘s new offer was, in Ryanair‘s view, capable of reaching over 50% acceptance either with or without government acceptance; and (vi) the fact that Etihad, an Abu Dhabi based airline, had acquired a 3% stake in Aer Lingus and had expressed an interest in buying the Irish government‘s 25% stake in Aer Lingus (the offer now provides Etihad or any other potential bidder the opportunity to purchase the government‘s stake).

Ryanair offered to keep Aer Lingus as a separate company, maintain the Aer Lingus brand, and to grow its traffic from 9.5 million to over 14.5 million passengers over a five year period post acquisition, by growing Aer Lingus‘ short haul traffic at some of Europe‘s major airports where Aer Lingus currently operates and Ryanair does not. Ryanair also intended to increase Aer Lingus‘ transatlantic traffic from Ireland, which has fallen in recent years, by investing in operations. If the offer had been accepted, the Irish government would have received €173 million in cash. The offer of €1.30 per share represented a premium of approximately 38% over the closing price of €0.94 for Aer Lingus shares as of June 19, 2012. The offer was conditional on competition approval by the European Commission.

Following the European Commission‘s decision to prohibit its offer for Aer Lingus, Ryanair actively engaged with the Competition Commission‘s investigation of the minority stake. On August 28, 2013, the UK Competition Commission (UKCC) issued its final decision in which it stated 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 per cent 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 Court of Appeal. Should this appeal, or any subsequent appeal to the 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.

Legal Actions Against Monopoly Airports. Ryanair has been involved in a number of legal and regulatory actions against the Dublin and London (Stansted) airports in relation to what Ryanair considers to be ongoing abuses of their dominant positions in the Dublin and London (Stansted) markets. Management believes that both of these airports have been engaging in ―regulatory gaming‖ in order to achieve inflated airport charges under the regulatory processes in the U.K. and Ireland. By inflating its so-called ―regulated asset base‖ (essentially the value of its airport facilities), a regulated airport can achieve higher returns on its assets through inflated airport charges. With respect to London (Stansted), the OFT, following complaints from Ryanair and other airlines, has recognized that the regulatory process is flawed and provides perverse incentives to regulated airports to spend excessively on infrastructure in order to inflate their airport charges. The OFT referred the case to the Competition Commission which released its preliminary findings in April 2008. It found that the common ownership by BAA of the three main airports in London affects competition and that the ―light touch‖ regulation by the Civil Aviation Authority was having an adverse impact on competition. In March 2009, the Competition Commission published its final report on the BAA and ordered the breakup of the BAA, (which involved the sale of London (Gatwick) and London (Stansted) and either Glasgow or Edinburgh Airport in Scotland). In October 2009, London (Gatwick) was sold to Global Infrastructure Partners for £1.5 billion. In May 2009, BAA appealed the Competition Commission‘s decision on the bases of apparent bias and lack of proportionality. Ryanair secured the right to intervene in this appeal in support of the Competition Commission.

The case was heard in October 2009 and in February 2010 the Competition Appeal Tribunal quashed the Competition Commission‘s ruling on the basis of the ―apparent bias‖ claim. This decision was successfully appealed by both the Competition Commission and Ryanair before the Court of Appeal. The appeal was heard in June 2010 and the judgment was issued in October 2010, quashing the Competition Appeal Tribunal ruling and reinstating the Competition Commission March 2009 decision. In February 2011, the Supreme Court refused to grant the BAA permission to appeal the Court of Appeal ruling. The Competition Commission has subsequently reconsidered the appropriateness of the remedies imposed on the BAA in March 2009 in light of the passage of time, and confirmed in its preliminary report in April 2011 that the remedies are still appropriate and the sale of Stansted and one of either Glasgow or Edinburgh airports should proceed. In July 2011, the Competition Commission confirmed its March 2011 provisional decision on ―possible material changes of circumstances.‖ It found that no material changes of circumstances (that would necessitate a change in the remedies package) had occurred since the March 2009 decision requiring the BAA to sell London (Gatwick), London (Stansted) and one of either Glasgow or Edinburgh airports, and that consequently the BAA should proceed to dispose of London (Stansted) and one of the Scottish airports. The BAA appealed this decision to the Competition Appeal Tribunal, and lost on February 1, 2012. The BAA then brought a further appeal to the Court of Appeal, which they also lost on July 26, 2012. While these appeals were ongoing, the BAA proceeded to sell Edinburgh airport in April 2012. BAA did not appeal the Court of Appeal judgment to the UK Supreme Court, and proceeded to complete the sale of London (Stansted) airport to Manchester Airports Group plc in March 2013.

With respect to Dublin airport, Ryanair appealed the December 2009 decision of the CAR, which set maximum charges at the airport for 2010 through 2014, to the Appeals Panel set up by the Minister for Transport. In June 2010, the Appeals Panel found in favor of Ryanair on the matter of differential pricing between Terminal 1 and Terminal 2, recommending that such differential pricing be imposed by the CAR. The CAR subsequently overruled the decision of the Appeals Panel and allowed the charges increase at Dublin Airport, with no differential pricing between Terminals 1 and 2.

Ryanair has also been trying to prevent both the BAA in London and the DAA in Dublin from engaging in wasteful capital expenditure. In the case of London (Stansted) Airport, the BAA was planning to spend £4 billion on a second runway and terminal, which Ryanair believes should only cost approximately £1 billion. Following the final decision of the Competition Commission forcing BAA to sell London (Stansted) airport, Ryanair believed that it was highly unlikely that BAA‘s planned £4 billion plans would proceed. The Liberal/Conservative government in the U.K. had also outlined that it would not approve the building of any more runways in the Southeast of England. Consequently, in May 2010, the BAA announced that it would not pursue its plans to develop a second runway at London (Stansted).

In the case of Dublin, the DAA has built a second terminal, costing over four times its initial estimate.

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