Bargaining Aer Lingus's status

The Government's intended sale of Aer Lingus is likely to be a subject for the new partnership talks with the social partners that started on 25 Janaury. One of the five conditions set down by the trade unions is the role of the State in economic affairs and it is known that Siptu in particular is determined that Aer Lingus remains in State ownership.

While the Government has given a commitment to the sale of the airline later this year, appointed a chief executive (Dermot Mannion) last year on that basis, and has selected advisors, there is still time for the unions to scupper any deal. Given the previous reluctance of Taoiseach Bertie Ahern to sanction the sale of the state carrier, Siptu may be confident of “success”.

That said, time is running out because Aer Lingus is starting to commit to spending cash as if it is confident it will have new shareholders with deep pockets to provide the cash. Aer Lingus plans to spend about €330 million on four new Airbus A330 aircraft to serve new long-haul routes. The first aircraft is apparently due for delivery at the end of the year, the remainder in 2007.

One question is: which long-haul routes will these aircraft fly and will they be profitable? Dubai (where Mannion worked for many years) is one destination, South Africa probably another. There is significant risk involved in establishing such routes and big costs too, compared to the Ryanair quick-turnaround, frequent-flight model, which contributes to its low cost base. As it is, Aer Lingus has only seven long-haul aircraft to serve the North Atlantic. These routes justify the “flagcarrier” moniker, but could others be justified as essential to the Irish economy?

Another question is how Aer Lingus will pay for new aircraft. On their own these particular aircraft probably are affordable, but it appears Aer Lingus has plans to spend as much as €2 billion on expansion in the coming years. In the absence of new capital – which is most certainly not going to come from the State – the airline could always borrow, although not that much. But would its shareholder, the State, having overseen a dramatic restructuring of the airline four years ago, want it to commit to large loans again? It would be a highly significant commitment to make if the company is to remain in State ownership.

If the company is sold via a stock market flotation, the company would not just sell existing shares, but would create new ones that would be sold to provide funds for Aer Lingus rather than the selling shareholders. This is clearly what the company wants to do.

The Government is facing conflicting pressures. On the “don't sell” side is the union pressure and the fear that there could be political repercussions in Dublin northside constituencies, if remaining employees of Aer Lingus feel something they don't want is being forced upon them. On the “sell side” is the need for cash and the commitment – clearly given to the board and Mannion when he joined the company as Willie Walsh's replacement – that the company's expansion will be funded by the private sector
 
And there is one other factor, but one that Ahern will not want to act upon. That is what Ryanair is up to: its announcement late last year that it would establish 18 new routes out of Dublin Airport, allied to its consistent profitability, has catapulted it to the unofficial status of Ireland's most important airline. Aer Lingus has to do something to counteract that quickly, otherwise it will become much less relevant and that – rather than ideological concerns about whether or not it should be in State ownership – is likely to inform future decisions.