Aer Lingus, ESB, to face challenging new year

Next year Aer Lingus, the State airline, is due to be floated. The ESB, meanwhile, will face increasing competition as the market for electricity opens up.

The Government sought advisers on the Aer Lingus flotation just before Christmas, the first step in the flotation process. They will advise on the price at which the shares should be pitched and when the company should be floated.

Although it is still unclear how much of Aer Lingus will be offered for sale, it is likely that the whole company will be sold. Staff, who currently hold 5 per cent, will be able to buy a further 10 per cent, through a combination of cash and concessions for work practice changes. This process is likely to occupy much of the State airline's time in the coming months. A leaner, fitter organisation which is braced for the inevitable downturn in the aviation sector will have a better chance of successfully floating.

The company spent much of 1999 positioning itself to become part of the OneWorld global alliance, a move which was completed last month. The alliance includes American Airlines and British Airways and for Aer Lingus it means it can offer more services as part of that umbrella group and link into their timetables in a far more meaningful way. Aer Lingus also made clear that it was concentrating on the wealthier leisure traveller and on being a business travel airline, dropping its routes from Dublin to Stansted. Whether this is the best policy remains to be seen and will be severely tested when the downturn comes, as business travel is the first to be cut back in such circumstances.

The flotation process will be watched keenly by institutions and retail (small investors) many of whom have been less than impressed by Eircom's share performance. Although it is not really fair to compare the companies, wary investors will want to be satisfied that the price at which the Aer Lingus shares are floated, is not high, compared to its aviation sector counterparts - as happened in the Eircom case.

The future of another company with which Aer Lingus is very familiar - Aer Rianta - will also be clarified this year. Consultants on behalf of Minister for Public Enterprise, Ms O'Rourke, and the State airports' operator have assessed the options. Aer Rianta favours floating 25 per cent to 49 per cent with the State retaining a controlling 51 per cent interest.

Aer Rianta wants access to funds to expand overseas and to develop the domestic airports. The loss of duty free has affected the company and it needs new revenue sources. An airports' regulator, to adjudicate on issues including airport charges, has been appointed and this is seen as a precursor to some form of IPO.

From mid-February, up to 28 per cent of the market for electricity will be opened to competition. This means the top 350 firms, or the biggest users of electricity, can now choose to buy supplies from the ESB or other suppliers. This should mean cheaper prices, initially for large users. The ESB has said in the past that the larger users are paying more than they should be for electricity. The ESB has said that tariffs need to be rebalanced, meaning that domestic users could face increases. As in the telecoms' sector, it will be several years before domestic users will benefit from competition in the electricity market.

At present, nine consortiums have signalled that they want to enter the market through building gas powered plants, providing a total of 3,000 MW of electricity. Ironically, it is the ESB/Statoil consortium which is leading the race - it was the first to receive planning permission for a project at Ringsend in Dublin.

However, Ms O'Rourke has moved to ensure that the ESB will divest its stake in the new power plant if it is seen to be abusing a dominant position. Relations between the ESB and the Minister, are to put it politely, somewhat strained. She is said to feel the ESB is not embracing competition, but has to be dragged into it.

For its part the ESB would argue that the industry requires a huge level of investment and there are historical and political reasons why certain power plants were kept open, particular where fuels such as peat were used, rather than closing uneconomic power plants and building more efficient gas powered facilities. ESB sources say that many of the projects mooted will go ahead and that several new plants will be built. It will take at least 2-3 years for new plants to be up and running. In the meantime, companies will try to become resellers of electricity, which means will they will either buy from the ESB or from Viridian (Northern Ireland Electricity) or from further afield, when the electricity interconnector between Northern Ireland and Scotland is completed. They will be trying to buy electricity at wholesale prices and sell it at a profit.

The latest entrant to the gas plant building race is Bord Gais, in partnership with Rolls-Royce Power Ventures a subsidiary of Rolls-Royce, the civil aerospace, defence and energy group which wants build a £60 million station in Co Waterford. For its part, Bord Gais will be busy trying to find new sources of gas. The company has said it will spend £500 million in the next five years, including building a second interconnector to Scotland to tap into North Sea gas. Bord Gais also intends to spend £200 million building a pipeline from Ballough in north Dublin to Galway and Ennis. It will connect with the existing grid at Limerick and open up the midlands and the west to piped gas supplies. This project and the new gas fired electricity stations will ensure the company's services remain in demand.

Overseeing all this will be the electricity regulator, Mr Tom Reeves. The ESB has been criticised by companies such as Viridian for allegedly withholding information about the market. EPower, a venture which includes Esat chairman Mr Denis O'Brien, who took on the Eircom monopoly, has also been critical of the ESB. Expect to see a lot more criticism.

The ESB will also become a plc next year, which will put some value on the 5 per cent shareholding which the company's 8,500 employees hold. An employee share option scheme in return for work practice changes is also likely.

An ESOP is also expected in An Post which is facing increasing competition in the parcels market. Last month it got the go-ahead to seek a strategic alliance partner. Like many of the changes which have been taking place in semi-states in recent years, changes at An Post are being driven by liberalisation of the market at EU level.

The postal market internationally is going through a period of consolidation, technological changes are also driving the market. Early in 1999 the letter market was liberalised exposing £20 million of previously reserved annual revenues to competition.

Among those tipped as possible strategic alliance partners are Dutch Post, Deutsche Post and Royal Mail. Whether an alliance partner takes an equity stake is another matter. An Post's financial performance has been poor of late. This year pre-tax profits plunged to £8.3 million, down 40 per cent on last year. The company attributed it to rising costs and increased competition.

However, An Post sold PostGem/Ireland Online for £115 million in November. The strong price achieved for the subsidiary amazed the market. It was also a canny deal for An Post, because as part of the deal it received 3.5 per cent of its purchaser Esat's shares.

Although An Post undoubtedly needs something to replace it, sources said, they can always buy another company. "The Esat offer was just too good to refuse," said one source.

For the 8,500 workers at An Post, next year will bring redundancies as well as changes in work practices. Negotiations on these issues are ongoing.

In 2000, the Government is expected to begin implementing its £2.2 billion investment programme in transport, mainly in rail and DART services as part of the £40.6 billion National Development Plan. To oversee this, the Government has established a subcommittee which will also consult on implementing the rail investment programme.

Work on the long-awaited LUAS light rail system is expected to begin early next year. CIE may undergo some restructuring at board level in its three subsidiaries - Dublin Bus, Bus Eireann and Iarnrod Eireann.

Talks on implementing in excess of £40 million in cost savings and work practices changes at the three companies have proved long and difficult, although talks at Dublin Bus are said to be almost concluded.

The Government is due to introduce public service contracts to replace the £100 million-plus annual subvention next year. This means the three companies will be paid specifically for what are deemed social services - such as the operation of non-profitable services. A change in legislation is necessary before they can be implemented and their aim is to bring more transparency to the subvention process as well as focusing on value for money. RTE is also facing its own restructuring process. It plans to save £15 million over the next three years, and reduce its 2,165 workforce. The company expects a group deficit of £5 million this year, compared to a profit of almost £6 million last year. Staff costs absorb £115 million of RTE's annual £192 million spend..

However, RTE got £130 million for its 25 per cent stake in Cablelink which was sold to NTL last May for £535 million. It will use £43 million of this to fund severance packages.

The company will also have to fund its share of Digico, the designated digital broadcast company for all transmission operators. Among those tipped to be interested in taking a stake in this new company is Telenor, the Norwegian telecoms group which owns 49.5 per cent of Esat Digifone.