Irish government backs sale of Aer Lingus to IAG

* IAG makes formal bid for Aer Lingus (Other OTC: AELGF - news) , needs Ryanair support

* Some lawmakers previously opposed to sale now back deal

* Unions say deal is bad for workers (Adds share prices, analyst comment)

By Padraic Halpin

DUBLIN, May 27 (Reuters) - The Irish government agreed to sell its 25 percent stake in Aer Lingus to IAG , paving the way for the owner of British Airways and Iberia to formally launch its 1.36 billion euro ($1.48 billion) bid for the Irish carrier.

International Airlines Group's (IAG) proposed offer for Aer Lingus was recommended by the Irish airline's board in January, but was held up while the Irish government sought reassurances on jobs, transatlantic services and connections to London.

The deal is still conditional on the backing of Aer Lingus' other main shareholder, budget airline Ryanair, though some analysts expected this would now be forthcoming.

Buying Aer Lingus will enable IAG to expand lucrative transatlantic services from Dublin airport where there is capacity for it to do so, in contrast to the home of its biggest unit British Airways at London's Heathrow, which is full.

Formally presenting its 2.55 euros per share offer, IAG committed to Aer Lingus operating routes from Heathrow to Irish airports for at least seven years, winning over the government.

"There's a number of extremely important changes that have led to this decision by government," Irish transport minister Paschal Donohoe told a news conference on Tuesday, after a cabinet meeting.

In February the government presented IAG with a list of new demands it said had to be met before it would consider the sale, in areas including possible job cuts, transatlantic services and a longer guarantee on maintaining connections between Irish airports and London's Heathrow airport, BA's hub where Aer Lingus holds valuable runway slots.

"Acquiring Aer Lingus would add a fourth competitive, cost-effective airline to IAG, enabling us to develop our network using Dublin," said IAG Chief Executive Willie Walsh.

Shares (Berlin: DI6.BE - news) in both companies, which were closed when the deal was announced on Tuesday evening, traded higher early on Wednesday, with Aer Lingus up 1.6 percent to 2.43 euros and IAG up 0.6 percent to 547.8 pence.

AWAITING RYANAIR

Ryanair still has to declare its hand. It declined to comment again on Tuesday on whether it would accept an offer by IAG for its 30 percent stake.

Ryanair has now fully written down the value of the stake it owns since a failed takeover attempt, with Cantor analyst Robin Byde saying a windfall from a sale could come in handy for Ryanair.

"The additional cash would no doubt be welcome and may also accelerate planned buy-backs or further special dividends," he said, expecting Ryanair would accept IAG's offer.

The government, which had been urged by opposition parties and trade unions to reject the IAG offer and also faced objections to it from some ruling coalition lawmakers, had said Ryanair's attitude was key to its decision.

Aer Lingus' main trade union, IMPACT, repeated after the announcement that the deal was bad for workers. A second major union, SIPTU, said it wanted commitments on compulsory redundancies and outsourcing.

Ireland (Other OTC: IRLD - news) 's ruling coalition will put the decision to a vote in parliament as early as Wednesday. While it has a large majority capable of easily approving the deal, it risks some unhappy backbench lawmakers voting against the government.

In a joint statement, a group of lawmakers from the Labour Party previously opposed to the sale -- known as the "Gang of 8" as they represent almost a quarter of the junior government party's lower house of representatives -- said the deal was a positive outcome.

Two lawmakers from Donohoe's Fine Gael Party, who had previously expressed reservations about the deal, told Reuters they would likely vote through the sale.

($1 = 0.9204 euros) (Additional reporting by Conor Humphries and Sarah Young; Editing by Janet Lawrence, Leslie Adler and Mark Potter)