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.


Patrick Kinsella said...

Well said Paul.

Furthermore, it is strategically wrong to dispose of state investments at a time when we need to build up assets for currently unfunded state pension liabilities (defusing the 'pensions time bomb').

Donal Palcic said...

Great article Paul. I wrote a blog post (along with my colleague Eoin Reeves) back in 2011 when there was a lot of talk about the government selling off its remaining stake in Aer Lingus. At the time we presented statistics on passenger numbers between Ireland and London that showed the importance of the Heathrow routes to Ireland.

I just had a look at the statistics for 2013 and they show that little has changed since we wrote that post. In 2013, the Heathrow routes accounted for over 52% of the flights between Cork and London, over 47% of flights between Shannon and London, and over 43% of flights between Dublin and London (in total, the Heathrow routes accounted for over 2.3 million of the approximately 5.6 million passengers that travelled between Ireland and London in 2013). I didn't have the time to dig further into the stats but you can be sure that a significant proportion of the passengers on the Heathrow routes were connecting to/from another airport.