Aer Lingus seeks willing and able bedfellow

In a famous comment last year, former Aer Lingus chief executive Mr Gary McGann said that it was in the airline's interest to be "promiscuous" in any alliance arrangements, linking up with a range of airlines to allow it to build its business heading both east and west.

Even since then the game has changed, with a range of new alliances forming which, Aer Lingus believes, are set to dominate the airline industry. Getting into bed with one of these alliances is now the Aer Lingus goal.

The airline argues that this is the only way its business will develop and grow. In a document given by chairman Mr Bernie Cahill to the Minister for Public Enterprise, Ms O'Rourke this week, it says the alternative of trying to grow in isolation is not credible in an industry where promiscuous behaviour is being replaced by longer-term relationships.

The guessing game on likely partners for Aer Lingus is already well advanced. This week, however, the airline indicated for the first time that its priority lay in developing transatlantic business and it is now likely to try to interest one of the big US airlines in entering an alliance and taking an equity stake. However, British Airways should not be written off as a potential partner, particularly if Aer Lingus finds a US partner hard to interest. The three major US carriers are American Airlines, United Airlines and Delta and Aer Lingus has no doubt already sounded out all three. Each one is in good financial health, according to leading US analyst, Mr Jim Higgins of Donaldson, Lufkin & Jennrett investment bank. However, he believes that, while they may investigate some kind of link with Aer Lingus, the big airlines now rarely enter equity arrangements with other airlines. Perhaps the most obvious partner would be the giant American Airlines, which operates hubs from John F Kennedy airport in New York and O'Hare in Chicago - into which Aer Lingus flies - although neither is its major hub.

With flights to over 150 US cities, American Airlines would be able to feed passengers onwards from Aer Lingus flights and provide the Irish airline with extra custom from its passengers. The latter is a crucial consideration for Aer Lingus, as it calculates that around half the US tourists to Ireland do not fly directly into Ireland, with many arriving via London. A link with a major US carrier would make the direct route to Ireland more attractive. However, what is in it for the US partner remains very much open to question, according to industry sources.

American Airlines is currently tied up in getting regulatory clearance for a major linkup with British Airways which, if it gets the expected go-ahead, will be a major force on the transatlantic traffic.

The imminent link up of these two giants is one reason why Aer Lingus is seeking a partner, as it fears the impact on its own transatlantic business. A link-up for the Irish airline with an alliance which included British Airways would carry benefits in terms of feeding traffic through Heathrow on to BA routes; already 25 per cent of Aer Lingus traffic to this airport goes on to other destinations. A key question is whether, with such a major commitment to the BA alliance, American Airlines would now be interested in looking elsewhere in western Europe. Some sources still believe that a straight link with British Airways is the most likely outcome of Aer Lingus's search.

The BA/AA alliance will not involve crossequity holdings. AA does have long-standing stakes in a couple of overseas airlines, now worth very little. In Mr Higgins's opinion, it would be slow to take such a stake in Aer Lingus, unless the trade-off was very attractive and included, for example, the Irish airline investing in some of the information technology systems marketed by an affiliate of AA.

The BA/AA alliance also includes codesharing agreements with a range of other airlines, including Canadian, Qantas, Iberia and Japan Air Lines, offering a global reach to challenge the other major alliance - the socalled STAR grouping.

If Aer Lingus wants to enter this grouping, then the major US partner would be United, the second largest player worldwide with annual revenues of £10 billion.

Not quite as healthy financially as American, it is still performing quite strongly. STAR is the largest of the existing alliances, offering 600 destinations in 108 countries and also including international giants Air Canada and Lufthansa. United also operates from JFK as one of its hub airports. Again, Aer Lingus would have to persuade it that a link-up would bring tangible gains to the US airline.

The final potential partner among the major US carriers is Delta, which already has a codesharing (passenger booking) link-up with Aer Lingus and flies from Ireland to its main hub in Atlanta. Delta serves 149 US cities, also has a hub at John F Kennedy in New York and has put a lot of effort into developing its transatlantic business. Having overcome financial troubles and a management change, it is now in a strong financial position and is one of the most prominent carriers at JFK.

Delta is itself a member of the smaller Atlantic alliance, which also includes Swissair and Austrian airlines, with a number of others lined up to join. However, this alliance is on a relatively small scale in comparison to Star or the BA/AA alliance. Delta also has a codesharing agreement with Air France. Like United and AA, Delta would be slow to take a shareholding in Aer Lingus, Mr Higgins believes. It lost out a now-dissolved equity stake with Singapore Airlines, although it has a small cross-shareholding with Swissair. And the fact that it already flies to Ireland may lessen its interest in a link with the Irish airline.

Aer Lingus will thus have a lot of persuading to do to fulfil its wish of attracting a major US airline as an equity shareholder. The willingness of the big US airlines to enter such an arrangement remains to be seen - particularly as many have opened new direct routes to Europe over the past couple of years. Although as Aer Lingus has already sounded out some partners informally, it must be aware of some level of interest.

And whatever about an alliance partnership, there is no guarantee that an agreement can be reached for a partner to take an equity stake in Aer Lingus. Of the 360-plus airline alliances, just 54 have equity shares, according to Airline Business, a trade magazine.

While Aer Lingus argues that an equity stake would cement an alliance, the Irish Airline Pilots Association (IALPA) argues that this would unnecessarily tie Aer Lingus down and restrict its future options. IALPA points to the falling out between alliance partners KLM and North-West airlines, which eventually led to cross-shareholdings being dissolved, although the partnership subsequently prospered.

The issue of Shannon also remains to be thrashed out. Aer Lingus argues that to take full advantage of an alliance, it needs to be able to grow its transatlantic business faster out of Dublin than out of Shannon, which is precluded by its current rules. Also, the US authorities are likely to require a so-called "open-skies" agreement with no restrictions in the Irish market in return for approving the deal, which would mean the Shannon restriction would have to go. Aer Lingus argues that even if the rule were lifted Shannon could still grow, albeit not as fast as Dublin. However, the view from Co Clare will be different, presenting a tricky political issue for the Government.

So Aer Lingus faces many fences ahead. Success in reaching its goal of a major US partner buying an equity stake followed by a float of the group's shares cannot be guaranteed. Much will now depend on the attitude in the boardrooms of the major US carriers and their interest in what a small Irish airline has to offer.