Airline faces key strategic choices

Analysis: Despite teh Taoiseach's comments, the Aer Lingus ownership issue is not dead, writes Emmet Oliver.

The Taoiseach is legendary in political circles for speaking cautiously and, most importantly, ambiguously when dealing with controversial issues.

But yesterday in the Dáil he was uncharacteristically blunt in his opposition to a management buyout at Aer Lingus.

"I do not believe it is compatible with the mandate of Aer Lingus to have a management buyout." He also said: "I do not think that is a solution."

The extremely candid nature of his comments essentially kills off the idea of an MBO. While a Cabinet sub-committee will examine future ownership options, without the Taoiseach's imprimatur the MBO is going nowhere.

Political sources suggest there is little political appetite generally for changing the airline's ownership structure. A recent Goldman Sachs report said airline stocks are generally out of favour now because of rising oil prices. While Aer Lingus has a good story to tell on profitability and cost control, getting a strong valuation early next year would be challenging.

Until now, the balance of political forces on the sub-committee was delicately poised. The Minister for Tourism and Trade, Mr O'Donoghue, was against any sale, the Taoiseach was also said to be sceptical, but on the other side the former Minister for Transport, Mr Brennan, and the Tánaiste, Ms Harney, were said to be at least open to the idea of selling a stake in the airline.

But with Mr Brennan now in the Department of Social, Community and Family Affairs, a potential supporter for any sale plan has moved on. This has led observers to conclude that continued State ownership will be the option to emerge from the Government's deliberations.

But that does not mean the ownership question will disappear from public view.

Aer Lingus chief executive Mr Willie Walsh and his chief financial officer, Mr Brian Dunne, spoke passionately yesterday about giving the airline access to badly needed capital.

The airline used its own resources to fund last year's short-haul deal with Airbus. Consequently its cash reserves are becoming depleted as the Airbus deals head towards completion.

The next big strategic decision is renewing the long-haul fleet. Mr Dunne said about 10 planes were likely to be ordered in the period ahead and Airbus and Boeing have already made pitches to Mr Walsh and his colleagues.

Each aircraft has a list price of about $100 million, although in the current environment Aer Lingus would hope to shave something off this price. But all things considered about $1 billion in funds may be needed.

Where is that money going to come from? Bringing new investors into Aer Lingus would be one way to do it. In that case the Government would dilute its holding and the new investors would provide the capital to the airline in exchange for an equity stake.

If Government ministers are squeamish about this, the other option is to take out the cheque book themselves, but EU state aid rules make this unlikely.

So while the Taoiseach has delivered an unvarnished message to the management at the airline, the big strategic decisions facing the airline still remain.