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.

No comments: