Asia turbulence rocks alliance for Aer Lingus

Turmoil in the Asian markets has made the task of finding a suitable strategic partner for Aer Lingus more difficult, the airline's chairman, Mr Bernie Cahill, has admitted. However, he remains adamant that no alliance will be entered into unless it is right for the airline.

Mr Cahill admitted that Aer Lingus was very late into the process of searching for an alliance partner. He said finding a partner "will not be as easy as it would have been six months ago". He said nobody was sure what was happening in the Far East and this had slowed the process up.

Aer Lingus was asked more than 18 months ago to examine the issue of an alliance partner. Much of the process was put on hold while the airline sold TEAM, a process which took almost a year. Mr Cahill said the airline had had preliminary discussions with several airlines - many of whom had made the first approach - and were now revisiting them. He said no deal could be done until TEAM was sold and other airlines had understood this.

Mr Cahill would not disclose the purchase price for TEAM, its aircraft maintenance subsidiary. "We got a fair price for it," he said. It cost the airline in excess of £54 million to persuade employees to transfer to Danish purchaser FLS Industries. He conceded that solving the TEAM issue "was a costly exercise, but it had to be done".

Mr Cahill and the recently appointed chief executive, Mr Garry Cullen, will be two of the key executives working on the alliance. "There will be either a strategic alliance within six months, or there won't," he said, adding that the company would not enter an alliance which would see its brand swallowed up by another airline group.

Major airlines increasingly see their future bound up in alliances. There is the proposed British Airways-American Airlines alliance; the Star alliance which includes Lufthansa and Air Canada; the Atlantic alliance, which includes Delta, Swissair and Austrian Airlines; and the KLM-Northwest alliance.

"We would survive without an alliance, but we would not grow as much as we could," he says. "If we are not in an alliance we could lose a lot of traffic."

Nor does Aer Lingus want to depend on local traffic in its own hubs or departure points. An alliance would mean that customers of the alliance partners would look more readily at using Ireland as a gateway to other destinations or as a final destination.

Mr Cahill smiles when it is suggested that the obvious candidate is British Airways/American Airlines. Aer Lingus must find a strong North American partner to help it develop its North American routes which are more profitable than the European routes.

Mr Cahill says British Airways "is mad keen to talk to us" but he admits that its current negotiations with American Airlines, makes the process more difficult for Aer Lingus to have "any meaningful discussions".

This is because BA's time is being consumed with the other merger. "It's no different from when we were selling TEAM - our time was being taken up with that."

Mr Cahill says an equity stake need not go hand in glove with a strategic alliance deal. Although he stresses that it is the decision of the shareholder (the Government), he is in favour of a flotation. He points to Telecom Eireann as a possible model. In Telecom employees got a 14.9 per cent stake, 9.9 per cent of which they paid for themselves.

Next year, Aer Lingus employees will own 5 per cent of the airline. This is because under a previous agreement they could take 10 per cent of the annual profits in cash or shares and a shareholding of up 5 per cent of the company.

Mr Cahill says each year staff take "the maximum of shares - very few take cash".

When an employee leaves Aer Lingus his or her shares are auctioned. Last year, 40,000 shares were available and bids were received from staff for 220,000 shares. Each share was sold for £1.21 and the offering was scaled back.

He concedes that £1.21 is pretty cheap for shares in a company, but he says "two years ago you couldn't sell them [to staff]".

He says it is a "tremendous indication of how staff now feel about the airline and about privatisation".

The notion of shares and offering staff options to buy shares in return for concessions in semi-state companies has come in for criticism from many who believe that valuable taxpayers' assets are being given away cheaply.

Mr Cahill rejects this notion. He says in Telecom, for example, the shares were valued independently. He also believes people are now recognising the role of the employee, the importance of employees and what they have done to build companies. This, he says, applies not just in the private sector, but also in State companies.

He would like to see Aer Lingus employees get more than their allotted 5 per cent shareholding because they deserve it, he says.

Mr Cahill is credited with turning around Aer Lingus through overseeing the implementation of the so-called Cahill Plan. He says this was the handy name which the media used, the full title was A Strategy for the Future.

"The plan allowed us to catch up, not get ahead of the industry," he says. When it was drawn up, the airline industry was going through "a horrendous time" he says.

He stresses that it was a plan drawn up and executed by all staff. "Nobody does anything on their own," he says.

The airline's operations were divided into selected small groups who knew the sections they were working in. The staff were then asked to devise ways to improve the airline and bring it back to profitability. They were also given access to financial, legal marketing and technical advice.

"It was amazing what came out of that process," he says.

Mr Cahill says staff will be kept informed of the strategic alliance process. He acknowledges that relations between TEAM employees and Aer Lingus executives were not always good. He says in 1993-94, relations between the two sides were very poor, but maintains they had improved a lot by the time it came to selling TEAM.

He says there was a lot of work involved in selling the company. "The hardest job we had to do was to explain to them that by joining FLS they would become a world player with a world player - something which we couldn't guarantee [if TEAM remained part of Aer Lingus]."

He now concedes that communication between the two sides may not have always been what it should have been. He says processes were in place to keep staff informed of the sale of TEAM, "but obviously they weren't good enough".

Mr Cahill has spent periods as both an executive and non-executive chairman at the airline. He now spends about two days a week at its Dublin headquarters. He has been appointed by Fianna Fail and reappointed by Fine Gael governments and has worked under six Ministers.

Although often described as a political animal, he says he is not political and says he rarely sees the Ministers who have Aer Lingus in their portfolio. He says, Ministers do not interfere with the work of the company.

Now 68, he will retire from the board next July, having been reappointed for three years by former Transport Minister, Mr Michael Lowry. He is on the boards of Greencore (where he is chairman), Larry Goodman's Irish Food Processors and Murphy Brewery in Cork.

In 1991, he was chairman of Greencore when its chief executive, Mr Chris Comerford, claimed a private profit from one of the former State company's deals. Mr Comerford left after the deal was exposed and the spotlight turned on Mr Cahill. There were calls for him to resign but he weathered the storm.

Mr Cahill says he regrets the Greencore affair but believes he was vindicated. He said at the time that he was "not a man for resigning".

He has no intention of taking any more directorships but admits he has always enjoyed his life in business. "I enjoy meeting people and I enjoy the cut and thrust of competition," he says.

He says if there is one thing he has learned in a life in business it is this: "Never try to outsmart the other guy - if you do, it won't work."

Aer Lingus's potential alliance partners, would do well to heed this advice.

Name: Bernie Cahill.

Title: Aer Lingus chairman.

Born: 1930, Bere Island, Cork.

Education: Rockwell College, Blackrock College, University College Cork (where he studied Dairy Science.

Background: During his career in the dairy industry he worked for Express Dairies in Britain before returning to Ireland in the 1960s to build a business for Express. It was sold five years ago by its British parent, Grand Metropolitan, for £100 million.

Family: married to Kathleen they have three children.

Why he is in the news: The quest to find a strategic alliance partner has begun in earnest and the process will be spearheaded by Mr Cahill and the new chief executive, Garry Cullen.