Thursday, 19 February 2015

Aer Lingus Watch #4: Did Privatisation Make Aer Lingus Profitable?

Paul Sweeney: A number of commentators have claimed that privatisation was the best way for Aer Lingus and that it was the making of the company because it became more profitable. The facts demonstrate that this is patently not true.

Timmy Dooley of Fianna Fail defended that party’s un-strategic decision to privatise Ireland’s strategic aviation bridge to the rest of the world, claiming that the company had performed poorly before it was sold off and he claimed that it has done better since their mistake of privatisation.

In a book, “The Politics of Public Enterprise and Privatisation” written back in 1989, I analysed the accounts of all commercial state firms and argued that as they had been made profitable in the 1980s, they would be more attractive to privatise. I demonstrated in “Selling Out: Privatisation in Ireland” published in 2004 by examining the accounts of all the state companies which by then had been privatised - that they had been profitable and performing well under state ownership prior to sell off. This is usual.

There is no great performance improvement after privatisation. On the contrary, in some cases, the performance after can be far worse than in public ownership. For example, it was the lack of investment (due to asset-stripping by new owners) which led to Eircom’s collapse just ten years after privatisation. The company is struggling to find it feet and the taxpayer had poured vast subsidies into the sector since. We privatised four financial companies, Irish Life, ACC, ICC and the mutual TSB. All collapsed since.

In the years before Aer Lingus’ privatisation in 2006 – which were just after 9/11 which really hit aviation, Aer Lingus still made profits before taxation as the chart shows.

Aer Lingus’ Profits before Tax
(Source: Annual Reports. Privatisation was in 2006)

In the four years before the privatisation these totaled €203m. Total losses in the four years from 2006 - the year of privatisation - amounted to €283m. It can be seen that in particular in 2008 and 2009, Aer Lingus made huge losses. While this is selective, it does illustrate that the supporters of privatisation have either ignored the facts or got it wrong and/or did not bother to check them.

Not long after 9/11 which devastated aviation, profits before tax in Aer Lingus were back at €37 in 2002, and €79m in 2003. The low profit in 2004 of 5m when the operating profit of €107 was almost wiped out by restructuring (redundancy etc. costs of €102m) when a big hit was taken. Profits in 2005 then rose to €79m and but plummeted to a loss of -€79m in 2006, the year of privatisation.

In the 2007 report, profits before tax were €127m but the two next years saw major losses of €161m in 2008, and losses rose even further to a very high €170m in the newly privatised company in 2009. These were due to exceptional costs. There has been the issue of an under-funded pension scheme too (at least the workers have a pension scheme in Aer Lingus). The company got a Corporation Tax rebate of €25m to soften the blow of its losses in that year. Since 2009, its 75th year, the accounts have become much less clear, much more opaque. There was a return to profit in 2010 of €27m before tax and the company has been profitable since.

It would be more honest if Mr. Dooley admitted that Fianna Fail made a major mistake from a national perspective in privatising Aer Lingus. Why cannot politicians admit to mistakes? Bertie Ahern said - quoted at the front of Aer Lingus blog No 1, that he would not be pushed into the privatisation of the company by some right wing economists. He of course, did not take long to change his mind, regrettably.

Colm McCarthy economist and opinion writer in the Sunday Independent also claimed “Had Aer Lingus not been privatised when it was, it is fair to speculate that it too would have been prevented, by politicians, from responding to the new commercial realities.”

The facts demonstrate otherwise, but Colm did appear to make assertions that suit his line. It was McCarthy who was put in charge of deciding what state assets to sell by the last government and his report was largely superficial, perhaps reflecting the very tight times after the Crash of 2008. My main disagreement with Mr McCarthy is his lack of strategic thought… he takes the simplistic view that the market will always provide. This is the standard conservative view but it is inadequate for a globalised trading island economy where aviation is the key to connectivity in this instance.

Ownership does matter for key strategic companies and Ireland can well afford to hold a majority share in Aer Lingus (the government should increase its shareholding to 50.1% by buying most of the Ryanair holding when the share price collapses after the IAG bid fails).

However, the owners must also ensure that it is well run and it needs to be run at arms length. But on strategic issues, it is normal for a shareholder like the government to ensue it serves the national interest. The fact that it flies into Cork and Shannon from Heathrow is important to these regions and should these should be protected. Profits will continue to be made, but they may not be maximized, within the arms length operation of the company.

In short it was seen that Aer Lingus was in profit and re-structured before it was privatised in 2006, as is always the way with commercial state enterprises in Ireland. They are profitable and performing before privatisation – not as a result of privatisation.

In the next Aer Lingus Watch #5, I will examine the line that “consolidation is inevitable” -  the old TINA line of Thatcher - There is no alternative.

Paul Sweeney is Chair of TASC's Economists' Network 

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