Control of Aer Lingus may be lost

The Government will have to sell over 50 per cent of Aer Lingus if it wants to fully fund the purchase of new long-haul aircraft, the Cabinet heard on Tuesday.

It is understood that during discussions it was pointed out that to attract enough institutional investors, the Government would have to concede majority control of the airline.

This would involve selling a stake of at least 51 per cent. However, the subject was only raised during discussions and no decision has been taken.

A report by Goldman Sachs, published last year, made the point that institutional interest could be minimal if the Government only offered a small shareholding to the private sector.

This report also said that once the Government retains over 20 per cent of the shares, it would be able to block a complete takeover.

Normally a minimum of 80 per cent of shares must be in favour of a takeover bid.

The airline is currently in discussions with manufacturers Airbus and Boeing about acquiring between 10 and 11 new long-haul aircraft.

The airline will need at least €300 million to complete a long-haul deal with either manufacturer.

Based on a valuation of just under €600 million, the Government would have to sell over 50 per cent to draw down enough funds for Aer Lingus to do a deal with Boeing or Airbus.

However, if the airline is sold at a time when airline stocks are out of favour and valuations fall, the Government could be left with no option but to sell up to 60 per cent.

The Government's position is also weakened because it only owns 85 per cent of the existing stock, with 14.9 per cent held by the staff.

Sources yesterday said the valuations on Aer Lingus were highly subjective at this point. "You only know what a company is worth when it comes to market."

The climate at present for airline stocks is mixed.

While low-cost carriers are performing strongly, several major US carriers are either in Chapter 11 or have serious liquidity problems.

In the European market declining yields, high jet fuel prices and additional capacity have taken a toll on some carriers.

This week Lufthansa bought out ailing carrier Swiss.

Aer Lingus is currently highly profitable, but because of its history banks would be reluctant to allow the airline to leverage its balance sheet too radically.

That is why the airline cannot take on substantial debts itself to pay for the aircraft.

The airline is due to complete its existing short-haul fleet renewal programme this year, when its gearing is likely to stand at about 40 per cent.

But if the airline had to complete the long-haul deal without any fresh funds, its gearing could rise to dangerous levels.