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Focus turns to Ryanair as IAG looks to seal Aer Lingus deal

* IAG CEO says hopeful of gaining Ryanair's backing

* Irish government gave deal go-ahead on Tuesday

* Aer Lingus (Other OTC: AELGF - news) shares up 1.7 pct, IAG up 0.5 pct (Adds more IAG CEO comments, updates shares)

By Sarah Young

LONDON, May 27 (Reuters) - After securing approval of the Irish government for its takeover offer for Aer Lingus, British Airways-owner IAG must now seek the backing of the Irish airline's other major shareholder, Ryanair, to seal the deal.

The Irish government on Tuesday agreed to sell its 25 percent stake in Aer Lingus, removing an obstacle that had stalled the 1.36 billion euro ($1.48 billion) deal for months, after IAG gave reassurances on jobs and routes.

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IAG has now formally launched its bid, which has already been recommended by the Aer Lingus board, but the deal remains conditional upon winning support from budget airline Ryanair, which owns 30 percent of its Irish rival.

Ryanair has fully written down the value of the stake, which it built up during several failed takeover attempts of its own, dating back to 2006. That means any proceeds from a sale would be a boost to its finances.

"We're hopeful that Ryanair will see this as an attractive offer for their stake in Aer Lingus," IAG Chief Executive Willie Walsh told investors on a call on Wednesday.

Ryanair said it would consider the bid once it had received the formal offer document.

Cantor analyst Robin Byde said he expected Ryanair to agree to sell, as the likely 405 million euro windfall would be handy.

"The additional cash would no doubt be welcome and may also accelerate planned (share) buy-backs or further special dividends," he said.

But Jefferies analysts expected Ryanair to "play hard ball".

"Presumably if Ryanair rejected the offer as too low, the onus would be on IAG to return with a higher bid for all shareholders," they said.

IAG's Walsh said on Wednesday he would not increase the bid.

He added IAG was due to issue the offer document within 28 days and had no plans for direct talks with Ryanair.

Aer Lingus shares were up 1.7 percent at 2.43 euros by 1304 GMT, below IAG's offer of 2.55 euros. IAG shares were up 0.5 percent at 547.3 pence.

Buying Aer Lingus would allow IAG to expand capacity on lucrative transatlantic routes by using Dublin airport to add flights. Its biggest unit British Airways (BA) cannot do that at its main hub, London's Heathrow, because the airport is full.

Walsh said that if his plan to add Aer Lingus to IAG, which already comprises BA, Spain-based Iberia and Spain-based low cost carrier Vueling, succeeded, he could follow it up with further acquisitions in Europe, which he favours over Asia.

"We're clear that the opportunities for consolidation are stronger within Europe," he said, adding expansion in Asia would be by growing existing businesses.

GOVERNMENT BACKING

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

Before backing the deal, it also sought reassurances on jobs, transatlantic services and connections to London.

It said on Tuesday IAG's offer was the best way of securing Aer Lingus' future in a competitive market while also enhancing connectivity to Ireland (Other OTC: IRLD - news) , key for its rejuvenated tourism market.

Walsh said the Dublin hub would be used to improve connections for airports in the UK regions that don't have flights to Heathrow.

IAG also said it would increase the number of aircraft deployed to the Irish market by eight and add four additional transatlantic services.

Ireland's parliament will begin to debate the deal later on Wednesday before a vote on Thursday set to be easily won with most coalition lawmakers, including a significant number from the junior Labour party, satisfied with IAG's commitments.

Asked whether more concessions would be needed to gain approval from competition regulators, Walsh said the overlap between IAG airlines' current routes and those of Aer Lingus was "not on a significant scale." (Additional reporting by Padraic Halpin and Conor Humphries; Editing by Victoria Byran and Mark Potter)