Thursday, 29 January 2015

Aer Lingus Watch: The Slots are the real Target for IAG

Paul Sweeney: The real value in Aer Lingus - for IAG - is in the slots. The investor column Lex in the Financial Times, the paper of record of business people, tells it straight, that IAG are after the slots and should be careful in order to get control of them:

“For IAG, buying Aer Lingus remains sensible at the higher price, which comes to 17 times estimated 2015 earnings (IAG’s own multiple is 12). Slots at Heathrow do not come up often and pricing them accurately is tricky. But IAG would gain the flexibility to use the 23 slots for routes other than London-Dublin (such a shift would be unpopular with the Irish government, so it would have to be done carefully and gradually). IAG would also get a business rapidly expanding its north Atlantic operations, adding capacity of 25 per cent on this key route this year.”

Thus IAG will promise lots and re-allocate them as soon as they can after the takeover.

It will be ably assisted by all kinds of “professional” compradors who will work against any local opposition. There is a fortune to be made for some - whether the takeover bid is successful or not. Look at who is advising the 25.1% shareholder the government – Credit Suisse, IBI Corporate Finance and McCann Fitzgerald. Aer Lingus has its expensive advisors too, as will poor Ryanair. And IAG has professional advisors.

Those who are advocating the takeover of Aer Lingus by IAG, like David McWilliams (Irish Independent on Wednesday), argue that the Heathrow slots are not important as he and many others tend to avoid that airport. Sure, some people from here go long-haul via Amsterdam, Frankfurt and the Middle East, yet Dublin-London is one of the busiest routes in Europe, perhaps the second biggest after London-Paris.

Dublin passengers will be shunted to Gatwick or Stansted, as will passengers from Cork and Shannon, if the takeover takes place. I showed in my last blog post that both of the Irish regional cities’ airport links to Heathrow are protected in the company’s Articles of Association - at present (provided another 5% shareholding comes on board against the takeover).

Dirty Governance at Work in the Takeover
Willie Walsh must resign from the board of the NTMA immediately. He is proceeding with the takeover of Aer Lingus. He is also Chairman of NTMA and one of its main areas of operation is NewERA, which is the holding company for most state assets.

NewERA’s role is stated to include “advising on the governance of the State companies and their respective financial and commercial operation, including the expected rate of return on capital and appropriate dividend policy. In addition, NewERA may, in consultation with the relevant Minister, develop proposals for investment in the energy, water, telecommunications and forestry sectors to support economic activity and employment”.

It is incredible that Mr Walsh is Chairman of NTMA and is also head of the takeover company IAG which is trying to buy Aer Lingus when the state has this controlling 25.1% share. Only the elite in the Big Four accounting firms, in the Big Six law firms and regrettably some at top of the state believe that he can walk out of a meeting of NTMA and that “this absence” creates an impermeable Chinese wall which magically allows him play on both sides.

Are we a Banana Republic?
Furthermore, overpaid (€1,500,000) CEO, Aer Lingus chief executive Christoph Mueller may get almost €3 million worth of share options if the airline is sold ahead of his departure next year. The Aer Lingus annual report said that the company may award share options if there is a change of ownership. There is a clear incentive to sell out here.

Expand State Investment in Indigenous Firms of Size
Instead of selling its shares and losing any influence over the company, the government through NewERA should gradually buy up more shares in the company to build a stronger deterrent of over 40 per cent.

Regrettably, NewERA became the state privatisation agency, overseeing the billions of state assets sold cheaply under the Troika demands. NewERA should cease to be a privatisation board. It should be the development board of the state sector, expanding out of this little republic into other countries, like the French, Chinese, the Middle Eastern states, Norway and most other emerging countries' state companies do.

NewERA should be under a driven and entrepreneurial state capitalist development board. But the government should be kept at arm's length by law and its mandate should be as Congress of Trade Unions urged back almost a decade ago in 2005 in “A New Governance Structure for State Companies” which inspired the establishment of NewERA (by Fine Gael!) - to develop state firms of scale internationally.

The one difference in any arm's length operation from the owners (to say quoted private firms) is that the state should have Golden or Poison Pill shares to become active if major strategic issues arise. That is not dissimilar to how Ireland’s many private and unlimited companies are controlled and how the Wallenburgs control most of Swedish industry – but it would be transparent.

Those who argue only the private sector can do still do not realise what happened with our six indigenous private banks and Sean Quinn, and the developers. They all crashed, and with ignominy. So what is special about private ownership anymore in this Republic? The other reason for state ownership is precisely to retain control of strategic companies in Ireland, a small open economy.

Aer Lingus: the (State) Entrepreneurial Company
I said in the last blog post that Aer Lingus has set up many (perhaps 50 to 100) companies over the years, and has been behind the emergence of many major companies including, ironically, Ryanair.

Mr McWilliams said that Ryanair inspired many new airlines and he named Pegasus as one of these. But the Turkish low cost airline – the “most rapidly growing airline in Europe” - was established as a joint venture by none other than Aer Lingus.

Its website says “Pegasus Hava Tasimaciligi A.S, which was founded as a joint venture company on 1990 by Aer Lingus Group, Silkar Yatırım ve Insaat Organizasyonu A.S. and Net Holding A.S., entered into commercial operation with just two airplanes.”

Another point is that as a local company, Aer Lingus has established itself as a major player on the transatlantic route in the past few years. Its transatlantic route is pulling in great numbers from UK because of its service and pre-clearance of US immigration. There was a growth of 25% in the route last year and it plans profitable growth of the long haul business in 2015. It has a new Dublin to Washington service, and services on its existing transatlantic routes will be increased. “This will provide even more connectivity for our passengers and strengthen Aer Lingus’ and Dublin’s position in traffic between Europe and North America” the company said.

This would never have happened under IAG. On the contrary, it will sweep these passengers across the ocean from the rest of UK to Heathrow, probably using Dublin slots.

Tuesday, 27 January 2015

The Takeover of Another Indigenous Company by a Foreign Multinational

Paul Sweeney: “I’m not going to click my fingers because some right-wing economists believe we should privatise [Aer Lingus]. We are an island nation, heavily dependent on trade, overseas investment and tourism. There are very important strategic issues which have to be satisfactorily resolved.” So said then Taoiseach Bertie Ahern, a decade ago on 17th November 2004.

That government went on to sell the majority of our shares in Aer Lingus in 2006 but it did hold on to 25.1%. The value of this minority - golden? - shareholding will be addressed later.

Is this blog post an obituary for Aer Lingus? Today the board recommended selling out to IAG. Indeed is it an obituary for a coherent industrial policy for Ireland? Are we accepting that we bob up and down to the vagaries of market forces and not put out a paddle to steer in the direction of some indigenous prosperity?

There are three issues on the proposed takeover of Aer Lingus by British multinational IAG for Ireland:
- First is connectivity with the rest of world for an island country;
- Second is its impact on industrial policy, i.e. future locally-grown and -owned companies;
- Third is the price of the shares for a country which needs the money.

1. Connectivity and the Slots.
The 23 slots in London Heathrow (LHW) are much more financially valuable to IAG/BA than to Aer Lingus. You can put big long-distance planes on these valuable slots and make much more than on little planes to Dublin, Cork and Shannon. But the slots are important to Ireland’s connectivity. If one believes that markets work well and will always fill any vacuum, you might believe that we can connect with the rest of the world via Amsterdam or Paris, and thus argue the slots are not so important. Indeed the Dublin-LHR route is one of the busiest in Europe, but that does not mean that IAG/BA will not assign them to long haul routes and divert Dublin passengers to Gatwick or Stansted.

Nothing can stop it, once it has control of the slots through ownership of Aer Lingus.

No airline owns the slots but they can trade them on the grey market and this is done regularly. Heathrow is the world’s second busiest airport and so the slots are valuable. But their value to Ireland is more than financial. Again, the new owners can do what they like with the slots once they own Aer Lingus.

Until such a takeover, the Aer Lingus Articles of Association give protection of the slots through the following:
“Where a resolution by shareholders is required, the voting threshold to prevent a disposal of Heathrow slots proposed by the Company is such that the percentage vote against disposal at the extraordinary general meeting must be greater than the percentage of the Company’s shares held by the Minister for Finance plus 5% (or 25% if greater).” Thus the governments stake (25.1%) plus some 5 per cent of say workers’ shares or those of other Irish shareholders, i.e. 30.1% can block the sale/reallocation of the slots.

The Articles of Association also provide for regional development and connectivity: “The Minister for Transport considers that four London Heathrow slot pairs for services to and from Cork and that four (summer season) and three (winter season) for services to and from Shannon would each be critical to ensuring connectivity to these airports because this is the minimum necessary to ensure a spread of flights throughout the day. On this basis, the Minister for Finance as a shareholder in the Company, acting on the advice of the Minister for Transport, is unlikely to support a proposed disposal of any slot pair such that there would be less than the existing London Heathrow slot pairs that relate to services between London” (2006). These rules will also die with a takeover.

The EU will also have to rule on the takeover on competition grounds. This can also delay the takeover of the very popular national emblem and former state enterprise.

2. Industrial policy, i.e. future locally-grown and -owned companies.
Aer Lingus is an exceptional entrepreneurial Irish company. Founded in 1936 it was state-owned until its privatisation in 2006. It has spun-off a great deal of successful companies, directly and indirectly. It has been through some tough times in the very cyclical airline business. It nearly collapsed in 1994 and in 2001, but with union help it progressed and is one of the more efficient airlines today.

It had diversified to even-out revenues during the cycles with subsidiaries in many sectors, including a major hotel chain, Copthorne Group, and companies in healthcare, computers, project management, recruitment and aircraft maintenance, and it was the founder investor in GPA.

It backed the leasing manager it had trained, Tony Ryan, in establishing GPA, lending its name and investing in it, with Guinness Peat bank. In turn, GPA executives set up many successful aviation leasing and finance companies which have in turn made Ireland the hub of the business worldwide today, with one-fifth of all commercial planes leased from here.

Tony Ryan also set up Ryanair, which was given three key Aer Lingus routes one of which was to be its hub, Stansted. Aer Lingus was put off the routes to allow its competitor to grow – without competition – for some years.

Once employing 10,000 worldwide, with 6,000 in Ireland (1989), Aer Lingus now employs almost 4,000. Willie Walsh may be Irish but his only allegiance is to the maximization of IAG shareholder value.

Are we serious about retaining good Irish controlled firms of size? Or is industrial policy a one-trick-pony of low taxes? I have recently argued that Irish industrial policy is confused, over-dependent on foreign direct investment, obsessed with low or no taxes on MNCs but it is also, heavily state interventionist, and costly (Irish Times).

Selling out Aer Lingus was a mistake in 2006, but keeping the state’s 25.1% share was due to lessons learned, partially from the Eircom debacle. The Articles of Association make some action possible, but there should have been a much stronger Golden Share, which is in effect a poison pill share to deter unwelcome predators. Many companies have some such shares, in many countries. Such controlling shares are of course hated by free marketeers, who prefer might or big money in determining control.

To sell the rest of Aer Lingus without a fight will just undermine any coherence in industrial policy, that is, in building indigenous enterprise over which we have some control. Head office jobs will shift to London and, despite any 'promises', over 1,200 jobs will be 'rationalised'.

Some of the best Irish firms were state-owned and still operate, like Irish Ferries, B&I, Greencore (Irish Sugar) Irish Life (collapsed like all privatised banks), TSB, ACC and ICC (ditto), Eircom (Telecom), INPC (Phillips) and BGE.

3. The Price of the Shares
This is what most (not all) financial journalists are talking about. The stockbroker commentators have a vested interest – money on both selling and buying the shares.

Could the government get more? It does not matter. €300 or €400 million is peanuts today when interest rates are on the floor and we have no problem borrowing. Indeed we have lots borrowed already in the bank (earning little) with €7.2 billion still in the Pension Reserve Fund last September and more borrowed since.

Happily the debate on the sale of the rest of Aer Lingus is getting more serious. The key issue is whether it will lead to a real debate on industrial or enterprise policy, which includes the role of Aer Lingus as an Irish-grown and -controlled firm.

A small open economy need lots of good foreign MNCs. We have many but we also need good competitive indigenous firms and that includes a brace of top class state firms too. We now know that ownership does not matter, or rather, if it does, private may not be the best as all six collapsed banks demonstrated with an incomparable vengeance.

The IAG bid is conditional on the two big shareholders, Aer Lingus and Ryanair accepting the bid. There is also the veto on the sale of the slots which the government shareholding has in the company’s rules or Articles of Association.

The Troika demanded the privatisation of up to €2 billion in non-strategic assets. This has been greatly exceeded, with €2,995 million privatised to date by my count, which may not comprehensive. And the Troika is gone.

Fianna Fáil is against the sale of the remaining shares, as are the rest of the Opposition. Labour is totally against such a sale. Even Michael Noonan from near Shannon airport may baulk at the consequences of such free-market economics in this instance. The EU Commission will take at least two months to review the sale.

The important strategic issues which Bertie referred to a decade ago have been forgotten. This has been costly. The state has had to invest a fortune in broadband subsidies since the Eircom privatisation. And four state financial institutions (ICC, ACC, Irish Life and TSB) were since privatised, collapsed and had to be rescued by the state, along with the private banks, AIB, BOI and Anglo. And more…

Willie Walsh will promise not to paint over the shamrock on the Aer Lingus tailfin with the Union Jack. He will promise jobs optimization. He will promise connectivity. He will promise slot protection. He may even promise 'the sun, moon and stars' will be painted on the Aer Lingus tailfins!

This is not just about Aer Lingus, the former dynamic state company and still Irish firm. It is about industrial or enterprise policy. It is about some modicum of control over our own economic progress. It is time to fight back. And it is winnable.

Paul Sweeney has worked on most Aer Lingus issues: crises, ESOT shares, pay freezes and pay rises, recoveries, on competition and more from 1990 to 2005.

Monday, 26 January 2015

Why Half of Irish People are Willing to Pay More Taxes

Nat O'Connor: Most people want Ireland to be more equal, and they want this to be achieved through boosting the minimum wage, capping high pay, raising taxes and providing a wider range of quality public services. Will 2015 be the year when Irish public policy rediscovers inequality?

According to a recent survey – commissioned by TASC and carried out by research company Behaviour & Attitudes – the vast majority of people (83%) feel that income in Ireland is unfairly distributed, with close to half of them (46%) believing it is ‘very unfairly distributed’. This is when asked the question out of context. When informed that the incomes of the top 10% are seven and a half times greater than the lowest incomes, 88% felt income was unfairly distributed.

This sentiment is close to the pulse, as Ireland is the most unequal among all members of the Organisation for Economic Cooperation and Development (OECD) when it comes to incomes from work and investments. However, taxes and social transfers reduce income inequality in Ireland to lower than EU average levels, and public services like health and education reduce other aspects of economic inequality, which shows the importance of maintaining both tax levels and public services.

Economics has always been about who gets what, when and how, and there is now persuasive evidence that our well-being as a society is determined by the extent of inequality. More equal countries do better on a whole range of social issues, with lower crime rates, better health outcomes and more cohesive societies.

Now, in the aftermath of the global economic crisis, inequality has become an important focus for understanding how economies can do better. The World Bank, the IMF, the OECD, and major financial institutions are becoming increasingly concerned that the concentration of income and wealth is damaging countries’ economic potential.

Yet measures to reduce inequality – such as progressive taxation, minimum wages and strong public services – have been under attack across the developed world for many years. As a result, the share of income and wealth held by the top 10%, and particularly the top 1%, has been rising in most developed countries, including Ireland. This is not only damaging to our economy and our society but goes against the tide of public sentiment as revealed in this survey.

People in Ireland strongly believe that the Government should take active steps to address economic inequality. More than 90% are in favour of either increasing the statutory minimum wage, establishing a ‘maximum wage’ or both, with only seven per cent opting for neither of these measures. Compared to 2010, when the same question was asked, there was a rise in support for increasing the minimum wage from 65% to 84% in favour.

This may reflect the fact that the €8.65 minimum wage is no longer linked to average wages, and remains at the same level as 2006. It might also indicate a growing awareness that the minimum wage is not the same as a living wage. In Ireland a Living Wage, to allow a single person to live a minimum but decent standard of living based on full-time work, has been calculated as €11.45 an hour for a 39-hour week. The problems faced by many workers on the current minimum wage are made worse by the reality that many of them are not given full-time hours on a regular basis yet are not always eligible for State income supports.

Another key finding in our recent survey is that the majority of people (55%) support the establishment of a maximum wage to cap the amount of money earned by high earners. The idea of a maximum wage is gaining serious attention elsewhere. For example, Switzerland passed a referendum last year – with 68% of voters in favour – that imposes some of the world’s strictest rules on executive pay, such as giving shareholders a veto over salaries and forbidding ‘golden handshake’ payments to departing managers. Shareholders in Switzerland and elsewhere have been frustrated by extremely high pay, especially to those who played a lead role in the global financial crash of 2008.

In relation to tax, nearly two-thirds of Irish people (63%) are in favour of a top tax rate of 60% (combining income tax, USC and social insurance) on that part of income in excess of €100,000 per year. This finding reflects similar sentiments elsewhere.

Sceptics will point out that of course people want the government to intervene to reduce inequality, and provide better services, as long as it doesn’t affect them. The focus on tax cuts in the recent Budget and the vocal opposition to water charges are presented as evidence of this.

But, the survey finds that people are willing to contribute to making Ireland a more equal country. Half of respondents indicated that they would be in favour of ‘paying more taxes’ themselves, if guaranteed high quality public services or new or additional services such as pre-school education or social housing. This is a significant increase on the 35% who were willing to pay more taxes in 2010.

What all of this demonstrates is that there is a strong constituency in favour of a more balanced economic model for Ireland, not just one based on tax cuts and reduced solidarity, but one based on the provision of quality public services for all.

A version of this opinion piece was published in The Irish Times on Monday 15th December 2014.

The full survey data is available here.

TASC's first report on economic inequality in Ireland will be released in early February.

Thursday, 15 January 2015

Think again about the 'squeezed middle'

Nat O'Connor: Ireland's 'squeezed middle' has been defined by the Minister for Finance, Michael Noonan, as those earning between €32,800 and €70,000 (e.g. the figures were repeated again in the Irish Times).

That basically means any single person once he or she begins to pay income tax at the higher rate of 40%.

What isn't clear from Minister Noonan's definition of 'the middle' is whether he is focusing on individual incomes or household incomes. Obviously, there is a big difference between one person earning €40,000 and two people each earning €20,000.

But unless we are talking about individual incomes, married couples on up to €140,000 would still fit in Minister Noonan's definition of the squeezed middle (and be potentially in line for further tax cuts) despite being in the Top 2% of the income spectrum.

The following chart shows Revenue data for tax cases (either singles or couples) by their gross income before tax. There are 2.05 million cases, representing 2.85 million adults; i.e. there are c. 800,000 married couples in the data, slight over half of which are dual-earner couples.

(Click to enlarge)

Three things to note when reading the chart:

  1. Revenue has no data for over 750,000 adults (15+), who have no taxable income - presumably for many of the approximately 350,000 secondary and third level students aged 15+, as well as for some people entirely reliant on social protection incomes.
  2. We don't know how many single tax payers are cohabiting with another earner, therefore benefiting from a higher household income.
  3. Where social protection incomes are a taxable part of a larger individual or household income, they should be included in the Revenue data - e.g. someone with both a State Contributory Pension and an occupational pension might have a tax liability.

If we begin counting the so-called 'squeezed middle' from those on incomes of €30,000+, they are actually the top 25% of all adults in Ireland by income share. If we exclude the adults not in Revenue's data, they are in the top 32%. In neither case are they the real middle.

It is also possible to estimate the distribution of taxable income by dividing married incomes 50:50 between couples, as shown in the next chart. This is not the best method of indicating market income distribution, which is often skewed towards one earner in a couple (the other of whom does more unpaid work), but it is one way to illustrate the average income per adult.

(Click to enlarge)

In this data, which removes the distortion of single versus dual income tax cases, those on incomes over €30,000 are in the top 15% of all adults in Ireland, or the top 20% of all adults in Revenue's data.

The middle adult taxpayer in Revenue's data is an adult in the €20,000 to €30,000 income group, below the 'squeezed middle's' LOWEST point of €32,800.

All of this is yet another way to show that the 'squeezed middle' is just a rhetorical device to make it sound OK to cut the higher rate of income tax for the minority of people who already enjoy a greater share of market incomes. Those earning from €32,800 to €70,000 are neither the 'middle' nor the most 'squeezed'.

This is not to say that some people on those incomes may not be under serious pressure due to mortgage debt or other issues. But that would call for targeted measures like mortgage relief for the over-indebted, not blanket tax cuts for an income category that includes many people without major mortgage debt or other such pressures.