Friday, 10 April 2015

Keep Aer Lingus Local

Paul Sweeney has added a new TASC think piece arguing against the sale of Aer Lingus. You can read the full text here  

A short summary blog appears here:

Paul Sweeney: It is argued by those who want to sell-off Aer Lingus that:

  • “Sure its a big boys game now and we cant compete.” 
  • “What will Aer Lingus do if it needs more money to buy new planes?” 
  • “If there is a cyclical downturn, the airline could go bust, 
  • "It’s the best offer we will get” 
  • "The market will provide."

IAG group, a UK multinational, is bidding to take-over Aer Lingus. Aer Lingus was privatised in 2006 but the state still holds 25.1% of the shares. With another 5% it can control the slots in Heathrow. Aer Lingus is quoted on the stock exchange, with Ryanair holding 29%, the state with a quarter and Emirates with a small shareholding.

I have argued in previous blogs on Progressive Economy and in the Irish Times that the Government through New Era, the State Holding company, should take 50.1% of Aer Lingus by buying up Ryanair’s and other’s shares.

This would retain Aer Lingus as an Irish controlled airline, serving this island.  It would be very productive investment by the state rather than dis-investment (for a mere  €320m) at a time when investment in the Irish economy is historically low. Aer Lingus will become a small cog in a big shareholder (ie short-term profits) dominated multinational based in London.

Retention would be very popular with the Irish people. It would not be with those who believe “the market always provides.”

The key issue missing from the debate, particularly in the financial pages, is the lack of a strategic approach. The only hint of such a strategic approach is from Paschal Donohue, happily the Minister in charge of Aer Lingus. The worry is that he has to win over his skeptical cabinet colleagues, some of whom are very taken by expediency.

Strategy is seen simply in the short-term protection of the Heathrow slots. It is much more than that. It is about industrial or enterprise policy over the long term; about the role of indigenous firms; and about the very large subsidies and supports which the government and its many agencies give to enterprise here. Enterprise policy is not just about what makes commercial sense with one company.

It is argued in this think-piece that small airlines can have a great future in aviation. Consolidation in the industry has also been simultaneously accompanied by a growth in the number of airlines. It is the flexible, innovative airlines which survive and grow. Aer Lingus is both flexible and expanding. It has been very active in reducing its costs to near those of the greenfield low-cost carriers while maintaining a superior service.

On its own, it has been very innovative and has hoovered up a great deal of transatlantic passengers from the UK and other countries, something it could not have done if it had been in the icy grip of IAG. It has learned to use its expensive capital – the aircraft - to the maximum. It has hedged its fuel better than much bigger Ryanair.

It has been argued that while size gives an airline bulk purchases discounts, timing in investment in expensive investment is more important. Good timing can provide better discounts. Another option is leasing, but it has to undertaken cleverly and Ireland is the world capital of aircraft leasing.

Air New Zealand had to be re-nationalised in 2001. This won't be possible with Aer Lingus as it will be part of IAG group if the bid succeeds and it will not be quoted on the stock market and thus not biddable. Thus to replicate the company, it would have to be built-up from scratch, find staff, expertise, capital, aircraft etc. and simultaneously compete against Ryanair, IAG and the other airlines and what is left of Aer Lingus.

Some of the fastest growing airlines are state-owned. The ideological hostility to state ownership is not just misplaced, but dated. EU rules have preclude favouritism and subsidies to state (or private) firms for decades and some of the best firms in Ireland are state-owned. State-ownership should not just be for rescue but for long-term growth too, especially for an open island economy.

The best course is for the government to be bold and strategic and instruct New Era, the state holding company, to buy up to 50.1% of the shares in Aer Lingus as Ryanair divests. Ireland would retain a major indigenous company and have its own strategic airbridge with the rest of the world, which can continue to expand.

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