Wednesday, 25 February 2015

Aer Lingus Watch #5

Paul Sweeney: I began Aer Lingus Watch 3 by saying that the government will not sell its stake in Aer Lingus. The Taoiseach had said that he wanted “a cast-iron guarantee” on the slots from IAG. That will not be forthcoming, I said. Cast-iron means no, if it is plain English because such a guarantee can't be given and enforced. And I thought the case was closed. For a time it appeared as if it might be opened again when a few key players in positions wavered. But the government has now sensibly rejected this bid.

That is not to say another won't materialize.

More importantly Aer Lingus is important as an indigenous Irish firm in industrial policy, for those of us who care about such matters.

What the Labour/Fine Gael government must do now, through NewERA is to buy Ryanair’s shares to bring the state’s shareholding up to 50.1%. This would give the state control again, although it must run the company at arms-length.

The time to move is soon, as the share price will fall when the bid fails. Government should fund the purchase of the additional tranche of shares through NewERA, which was set up to be a developmental board for state enterprise. If Aer Lingus is so important as the Transport Minster said on rejecting this bid, why not take control?

Talk that we don’t have the money - for what is capital investment - is not the case when it came to bailing out the banks or when Exchequer receipts exceeded projections, as recently, or when other sums are found in the coffers, as they are.

Is such decisiveness so alien to politicians that they cannot take such a logical and indeed popular step? But then they must then step back and leave the running of the company to its board, and leave any future investment decisions to NewERA.

The government said “The information and commitments that have been set out to date do not at present provide a basis on which the Government could give an irrevocable commitment to accept an offer to dispose of its shares, should one be made by IAG.” Regrettably it did not close the door, with Transport Minister Mr Donohoe saying “the Government remains open to considering any improved proposal which IAG may bring to the steering group.”

He said the government wanted extended guarantees beyond five years in relation to the use of Heathrow slots for services to Ireland. Indeed, if in say 2 years IAG was to give the slots to BA, who would enforce these “guarantees” in law? The then government would say it is not a shareholder and is not directly involved and cannot spend taxpayers’ money fighting a big Multinational. That is why such cast-iron guarantees would be seen to be actually made of plastic.

Mr Donohoe said that the Government wants “firm commitments and details” on IAG’s plans to grow transatlantic traffic out of Ireland. This is what excited one union official for a while and indeed if the opportunity is so good, why can't Aer Lingus seize it? What is the obstacle to such expansion?

The government was skeptical of the promise by IAG that it would “look at” other opportunities to grow at Cork and Shannon and that, through the re­lationship with British Airways at Gatwick, it might enhance the Knock-Gatwick service.

Was the IAG price a good offer? Aer Lingus just announced that it had €545m in net cash at end-2014 (its gross cash was €936m). This means that the net price is substantially reduced. Further, the slots are worth a lot. One report put them at up to €925m.

Some will tell us Aer Lingus does not own the slots and so they should be discounted. But there is a grey market in Heathrow slots and they are selling for real cash. Stephen Kavanagh, the new boss of Aer Lingus, who favoured the bid along with the rest of the board, (though he wont get a bonus but his shares are worth a lot) claimed the slots are worth less than €500m, perhaps as little as €300m. Still a lot of money. And on the basis that AA paid £20m pounds sterling for a pair last year, Aer Lingus’ 23 pairs are worth £460m sterling or €626m.

So taking the net cash and say €500m for the slots, then the offer price of €1.3bn becomes a net offer price of €255m.

IAG are not generous. They want the slots as well as the company.

But the slots are more valuable and important to Ireland’s connectivity and they are tied in to three airports in the company’s rules as AL Watch No 1 pointed out.

I will return to the promised blog on airline consolidation in the next watch. There is a lot of worry by many people over the need – the imperative – for airlines to consolidate. This is a view which should be considered.

But I have heard this siren call of consolidation over and over in the 15 years I spent advising the unions at Aer Lingus on financial and aviation matters. And while it is a powerful argument in a capital-intensive industry, I will argue that there is room for well-run regional airlines - particularly like Aer Lingus - which has so much going for it.

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