Rising fuel prices will affect Aer Lingus sale

The point is fast approaching where the sale of Aer Lingus should not take place, for commercial rather than ideological reasons.


If it goes ahead, the airline may be sold for a pittance compared to the price that could have been achieved as recently as six months ago. If the company raises money it may be spent on poor investments in new aircraft and routes.

A combination of rising oil prices and Bertie Ahern's dithering has banjaxed the chances of a successful sale, even if the company management is maintaining a confident face about continuing with a stock market debut.

It can point to continued stock market highs as a good reason for proceeding with the sale of shares. That way the company can raise as much as €200 million to shore up a pension fund deficit and another €400 million, which could be used as a base for another €1 billion in borrowings, that could be spent on new planes.

But who would pay top euro for shares in Aer Lingus now at a time of rising fuel costs that potentially could eliminate the airline's profitability? And why would the company open new routes, with expensive new aircraft, when ticket prices are rising fast?

Aviation fuel rivals staff renumeration as the major cost for any airline. Any fall from present oil prices is likely to be temporary; instead a price of $100 per barrel, and even higher, seems to be the future.

Aer Lingus has announced that from May 15 it is to put a whopping €35 each way tariff or fuel surcharge on its prices of flights to the United States and Dubai, even though the latter route was introduced less than a month ago. It is not introducing it on its British and European routes but the principle has been established, especially if fuel costs go so high that profits would be wiped out without such a surcharge.

Such tariffs may be common throughout the industry – although Ryanair has ensured, loudly, that it cannot be called an industry norm because it does not levy such additional charges.

But this highlights how the aviation sector is heading into yet another period of severe turbulence, the boom and bust cycle that has dogged Aer Lingus over the last 15 years. And yet all of the Aer Lingus plans seem to be based on purchasing aircraft for new long distance routes.

That strategy must be questioned in light of a long-term likelihood of more expensive fuel.

Investors are not likely to be impressed with the degree of freedom the company has to deal with such problems either. The government has said the State will retain 25 per cent of the shares and the workers will own 15 per cent of the company. That 60 per cent available to investors will not supply control. A substantial minority is in place to restrain the company from taking any tough decisions about cutting costs – such as staff numbers. Anybody buying shares in those circumstances will want them to be priced cheaply.

All of this is Bertie Ahern's fault, assuming of course that a sale is something he really wants. He could have sold the company two years ago when Willie Walsh and the old management wanted, or soon after Dermot Mannion was appointed as a replacement. Instead, he delayed, delayed and then delayed again. That may be his way in politics, but in business it means trouble.