Aer Lingus punt not for the faint-hearted

While some analysts expect there will be good value in the airline share to be floated later this month, others point to risks inherent in the aviation industry, writes Laura Slattery

More seats squeezed on planes? No free bar service? A "talk to the hand" approach to compensation claims?

Air passengers may feel indignant at all of these things, but airline shareholders will be ecstatic - less legroom equals more profits, thus giving their share price a healthy impetus.

With Aer Lingus set to float on the stock market at the end of the month, people in Ireland and the UK will have the opportunity to move from luxury-expecting customer to efficiency-demanding shareholder in the shamrock-themed airline for a minimum investment of €10,000.

Although some analysts expect there will be good value in the share, others point to an aviation industry that is plagued by risks.

Ahead of the initial public offer on the Dublin and London stock exchanges, a prospectus on the company will be published at www.aerlingus.com/ipo in the second week of this month.

The prospectus will include the price range of the offer. The final pricing will take place later this month. Before then, anyone in Ireland who wants to know more about applying for shares can contact an information line on 1890-252402.

Investors can purchase shares through any of the following stockbrokers: Davy, Goodbody, NCB, Merrion, Bloxham, Dolmen, Fexco and Campbell O'Connor & Co.

The Government plans to retain a 25.1 per cent stake in the national carrier, but over 50 per cent of the issued share capital will be held by Irish shareholders, including Aer Lingus employees and members of the Employee Share Ownership Trust. There are also plans for a private placement of shares in the US.

Unlike the sell-off of Eircom, when 500,000 small investors piled in, Minister for Transport Martin Cullen has said the Aer Lingus flotation won't involve "an all-singing, all-dancing approach".

The Eircom flotation in 1999 attracted what stockbrokers regard as a special breed of investor: people who had never even considered buying a share before and, a few painful losses later, never did again.

The €10,000 minimum investment will deter many amateur investors: pouring roughly half of the proceeds of a Special Savings Incentive Account (SSIA) into just one share would be an incredibly high-risk strategy no matter how confident the investor was that Aer Lingus's share price would soar on take-off.

But the limit won't be a problem to most private clients of stockbroking firms, some of whom will have been eyeing the potential flotation for some time.

While some will use the flotation as an opportunity to make a quick killing - perhaps even exiting during the unofficial "grey market" trading phase - most will regard it as a medium-term bet, according to brokers spoken to by The Irish Times.

Investors will also be encouraged to hang on to their shares by a bonus share scheme, under which they will receive one additional share for every 20 shares they acquire in the IPO and hold continuously for one year.

So is it a good time to buy Aer Lingus?

The airline industry is "extremely volatile, extremely risky, very cyclical and very prone to unforeseen shocks", including the rising fuel prices and security alerts of recent months, notes Jim Power, chief economist at Friends First.

And the stock itself is nothing to shout home about, he says.

"I just believe you would be buying into an airline with a very strong semi-State legacy, which inhibits its flexibility."

Ryanair, free of trade unions, is an "infinitely preferable" investment, adds Power, and yet its share price has fallen this year.

Unless the Ipo prices are very cheap, there is little that is attractive about Aer Lingus, he says. "There are much better investments out there."

The Irish stockbrokers involved in the flotation are restricted from making public comment. But reports suggest that brokers are valuing the company at anywhere between €750 million and €950 million.

Merrion Stockbrokers expects the valuation to be in the upper half of this range, while Goodbody Stockbrokers compares Aer Lingus to British Airways, noting both airlines' Heathrow presence, unionised workforce, pension deficits and short-haul challenges from low-cost operators.

The airline's financial results for the first half of 2006, due to be published shortly, will show that its operating profits are in line with last year's figures. In 2005, the company recorded operating profits of €72.4 million, with earnings per share of €25.3.

While fare reductions have hit revenues, traffic has increased. The airline is planning to expand its short-haul and long-haul fleets and its network of routes, claiming it is in a good position to take advantage of the liberalisation of transatlantic air routes under the Open Skies agreement.

The airline points to higher disposable incomes in Ireland and immigration traffic from EU accession countries as key drivers for air travel. Unlike Ryanair, Aer Lingus is poised to benefit if the phenomenon of the long-haul mini-break becomes a permanent fixture on Irish people's holiday calendars: long weekends in Dubai will boost its coffers.

It believes that while people are happy to put up with the vagaries of no-frills airlines for short hops, they are not quite as interested in pinching pennies for journeys of more than a couple of hours' flight time.

Manus Cranny, senior equity dealer at London-based spread betting firm Cantor Index, says Aer Lingus is being sold as a long-haul growth story.

"We've come a long, long way with Aer Lingus. [Former chief executive] Willie Walsh left a slick, lean organisation that competes aggressively with Ryanair, although of course Michael O'Leary may not see it that way."

But more information is needed on its load factors - the average number of seats filled per flight - before it can fully assess just how well it is competing with its European rivals, Cranny adds.

Aer Lingus uses the catchline "low fares, way better" to differentiate itself from the merely low-fares Ryanair.

Centrally located city airports, allocated seating and customer care are among the ways in which the airline distances itself from its no-frills competitors. It argues that while Ryanair is akin to Aldi and Lidl and British Airways is Harrods, it is more like Tesco.

Investors tempted by that analogy to stake €10,000 or more on Aer Lingus shares may consider heeding the words of Labour Party transport spokeswoman Róisín Shortall, who is against the privatisation of the airline, and has warned that now is possibly the least positive time since 2001 to be putting an airline on the market.

With oil prices recently exceeding $70 (€54) a barrel, all airlines are under pressure.

Fuel price increases have hit Aer Lingus, adding a surcharge of €40-€45 to the price of its long-haul flights. Merrion Stockbrokers estimates that the cost of fuel for the airline has risen by 47 per cent this year, adding roughly €66 million to its fuel bill.

The flotation is "pretty unfortunate timing", says Cranny.

"This is a pretty difficult time to sell an airline to institutions, to pension funds and to the retail investor. It is pretty brave of them to come to market so close to the August security alerts."

But every cloud has an Airbus 330 just waiting to emerge, all engines blazing. According to Cranny, the industry's recent troubles mean there may be good value in buying Aer Lingus.