LONDON/DUBLIN British airline Flybe (FLYB.L) has agreed to create a new carrier as part of a deal with Ryanair (RYA.I) to satisfy regulatory concerns over the Irish carrier's last-ditch bid to take over peer Aer Lingus (AERL.I).
The new carrier, Flybe Ireland, would receive 100 million euros ($135 million) and nine aircraft from Ryanair and commit to operating 43 routes for at least three years if Ryanair's Aer Lingus bid succeeds, Flybe said.
Ryanair, Europe's leading low-cost carrier, is making its third attempt to take over smaller Irish rival Aer Lingus and has been told by the European Commission it has one last chance to submit measures to prove the merger will not curb competition.
Ryanair will also provide Flybe Ireland with forward sales cash and liabilities worth around 50 million euros.
In return Flybe will pay Ryanair 1 million euros for the newly created airline.
In addition to the Flybe deal, Ryanair will pass Aer Lingus's routes from London's Gatwick Airport to British Airways (ICAG.L), a source close to the talks said.
Flybe said on Wednesday the deal had received "irrevocable acceptances" from 64 percent of shareholders, allowing Ryanair to present it to the European Commission as a binding deal.
"We are not setting up an airline in Dublin as a short-term project. This is a long-term project," Flybe Chief Executive Jim French told a conference call. "Flybe Ireland, if it goes ahead, will be a new, well-capitalized business."
A decision from the European Commission, Europe's anti-monopoly watchdog, is due by March 6.
"This deal is a step in the right direction but considerable issues remain," said Merrion Capital analyst David Holohan, who said the chances of EU approval of the Aer Lingus-Ryanair merger had increased significantly in recent weeks but were no higher than 40-50 percent.
Ryanair's takeover target Aer Lingus, meanwhile, said it did not expect the Flybe deal to convince the European Commission that the new airline would be capable of offering serious competition to an enlarged Ryanair.
"This shady deal, where you create an artificial competitor, funded up front... is simply a joke," Aer Lingus Chief Executive Christoph Mueller told Irish state broadcaster RTE after announcing a 40 percent hike in its 2012 operating profit.
"That a weak almost bankrupt carrier is supported to take out a very strong carrier like Aer Lingus... I believe is not going to fly," he said.
Flybe said its main competitive advantage was the ability to introduce high-frequency routes with small planes carrying less than half the 190 carried on Ryanair's Boeing 737s.
Ryanair agreed to give Flybe the right to use the Aer Lingus brand for three years to allay European Commission concerns of Flybe's poor brand recognition in Ireland, he said. If the merger went ahead, Ryanair could also use the Aer Lingus brand for some routes, French said.
Aer Lingus shares have climbed from 1.10 euros at the start of January to 1.30 euros, the level of the Ryanair bid.
Shares in Flybe, which have shed about a third of their value in the last year amid profit warnings and lay-offs, were 20 percent up at 53.7 pence by 1110 GMT.
(Writing by Conor Humphries and Rhys Jones; editing by James Davey and Mike Nesbit)