Is there less turbulence ahead for Aer Lingus?
Ryanair is clinging onto its 29.8 per cent and strikes loom at Aer Arann, but the pensions row is in hand, and passenger numbers are up
Staff at Aer Lingus and the Dublin Airport Authority are members of the Irish Aviation Superannuation Scheme, whose €780 million shortfall has several times brought both companies’ workers close to striking.
In May, following six months of talks, the Labour Court recommended that the airline provide €110 million to a new fund, pay a number of salary increases due to staff this year and then freeze wages for a period. It is also being asked for €30 million for deferred beneficiaries.
The company has about €500 million in net cash, allowing it to easily cover the lump sum. While it does not have to seek shareholder approval for the move, it has already pledged to do so. Mueller is optimistic that the vote can go ahead in October and that the issue can be squared away by the end of the year. O’Leary says that the plan is a waste of shareholders’ money as the company has no legal liability for the deficit.
Ryanair will vote against the proposal but will be unable to block it on its own, as only a simple majority is needed to carry the day. The Government is likely to back the plan, meaning that Aer Lingus is half way home at least. Analysts suggest other shareholders will be swayed by a likely boost to the stock price if the deal gets across the line.
O’Neill agrees there is some merit in arguing that there are other uses to which shareholders’ cash could be put, but this is outweighed by the fact that a failure to draw a line under the pension row leaves the airline facing an ongoing threat of industrial unrest and uncertainty, with the consequence that the money could remain sitting on the balance sheet.
He points out that a deal means the company “starts at zero”, with no further pension liabilities, allowing it to look at reinvesting the cash and consider paying dividends to shareholders. As a result, he suggests, the stock’s performance should begin to improve to reflect these factors once that deal looks more like becoming a reality.
Holohan also believes a resolution will result in a positive re-rating for Aer Lingus shares. Both he and O’Neill point out that they are trading at a discount to those of many of its peers. The Merrion analyst calculates this at about 40 per cent, while his opposite number at Goodbody says the airline’s stock sells for about four times earnings, compared to an industry norm of five to six times.
Even if shareholders vote in favour of the pension proposal in the hope of unlocking some of this implied value, it should not be assumed that it is a done deal. The unions have to ballot their members and both the trustees and the regulator have yet to give it their blessing.
Shortly after the Labour Court produced the proposals, the trustees, chaired by Brian Duncan, expressed concerns about the provisions made for deferred beneficiaries. Then last month it emerged that the Pensions Board – the regulator – had written to the trustees saying it feared some elements did not comply with new rules governing retirement plans.