Doubt over Aer Lingus float date

Senior figures in the Department of Public Enterprise have expressed misgivings that Aer Lingus can be floated this autumn, The Irish Times has learned.

Civil servants advising the Minister, Ms O'Rourke, are in no doubt that there is a compelling case to float the airline, it is understood. But there is concern that the negotiation of an employee share option plan (ESOP) with Aer Lingus's trade unions may not be concluded in time for an initial public offering (IPO) this year.

People at the highest level in Aer Lingus are understood to be pressing for a flotation in October while the Government still regards an IPO in 2001 as a possibility.

The airline is expected to report an improved performance for 1999, with its forward-looking position buoyed by the strength of the Irish and US economies, which are crucial to its business.

While Aer Lingus and a specialist team in the Department and corporate advisers on both sides are working full-time gearing up to the flotation, the ESOP is seen as the major issue. Should an IPO take place in the autumn, an agreement would have to be concluded this summer.

The airline and people close to the IPO process are believed to be confident that a deal can be done in this timeframe. But, while preliminary discussions between the trade unions and advisers to the Government and the airline have taken place, a trade union spokesman said this week that negotiation had not yet begun in earnest.

The major issue is the size of the stake available to Aer Lingus workers.

The staff already hold 5 per cent of the company under arrangements agreed in return for work practice changes implemented in the Cahill rescue plan in the early 1990s.

Ms O'Rourke's stated position is that no more than an additional 9.9 per cent will be available to workers in the ESOP, bringing their shareholding to 14.9 per cent, equal to that of Eircom's workers. One well-placed person said the Government had no room to change this policy, even if it meant delaying the flotation indefinitely.

This conflicts with the position of the pilots' trade union, IMPACT, whose members will seek an additional 14.9 per cent in the ESOP.

A trade union spokesman said this week that SIPTU, which represents most Aer Lingus workers, had yet to finalise its position. Only then would the Central Representative Council, the co-ordinating body for the airline's trade unions, reach a joint position on the ESOP.

The spokesman added that the Aer Lingus unions would not proceed with the ESOP negotiation until changes to the company's joint pension fund with Aer Rianta were agreed. Workers thought the pension fund was undervalued and should be topped up and this matter was being discussed, he said. The airline's management is thought to regard pensions as separate to the question of the IPO.

For all that, there appears to be no doubt that other unresolved matters, such as the appointment of a new chief executive to replace Mr Garry Cullen and the passage of legislation, can be concluded in time to float in October.

The heads of the Bill to privatise the airline were passed by the Cabinet 10 days ago. This means the legislation could pass the Oireachtas in time for the summer recess.

A sub-committee of Aer Lingus's board advertised the chief executive's position last week and interviews should take place this month. The appointee is likely to be in place by June.

Mr Cullen's departure caused genuine surprise among many people connected to the process. But the dominant view appears to be that Mr Cullen felt he did not want to go through with the IPO and resigned accordingly. Senior figures within Aer Lingus are said to be very determined that Mr Cullen's resignation would not delay the process of change for flotation. Crucial to this has been the performance of the airline's interim chief executive, Mr Larry Stanley - formerly Mr Cullen's deputy - and its finance director, Mr John O'Donovan, who are regarded as steady figures with a solid knowledge of the business.

It is unclear whether Mr Stanley has applied for the post. He did not apply when it last became vacant in 1998.

Several people connected to the process have said they would be "comfortable" if Mr Stanley was appointed, although the airline is expected to recruit from outside the company.

The new chief executive will be paid a salary exceeding £200,000, about twice that of Mr Cullen. It is understood, however, that the Government has ruled out granting the appointee share options before the flotation.

Further questions surround the general weakness of airline stocks worldwide. Observers who question the logic of floating Aer Lingus at this time cite the well-documented difficulties of Aer Lingus's OneWorld alliance partner, British Airways, and those of other airlines such as the Dutch operator, KLM, which is cutting some 2,700 jobs.

For their part, Aer Lingus managers are understood to argue that this view does not account for its return to profitability in the late 1990s and the continued restructuring of its internal systems since the time of the Cahill plan. This argument is supported by Aer Lingus's dependence on the Irish and US economies, which continue to perform strongly.

A further view is that it would be unwise for Aer Lingus to wait for a sectoral upturn as it should capitalise as soon as possible on its positive position. Some say there is evidence of a turnaround in the industry, with airlines redeploying aircraft from the US to routes in Asia as the eastern economies recover.

Aer Lingus is also changing its business model and plans to increase its total of leased aircraft from one-third to half. This - and the increased use of contract staff - would enable it to rapidly unwind the business in the event of a downturn.

While the Government is believed to have been advised that selling Aer Lingus would be more difficult than the flotation of Eircom, there is confidence that the airline has a very good story to tell.

No decision will be taken on how much of the Government stake in Aer Lingus is to be floated until much nearer the IPO. Some observers say the small relative value of the company, estimated at £600 million, mean the Government will be likely to sell its entire stake.

It is also understood that the Government is determined there will be retail offer, albeit a smaller one than in the case of Eircom. New shares worth some £200 million are also likely to be issued as part of the Aer Lingus IPO.

Unlike Eircom, Aer Lingus will not be floated on the New York exchange. The company will be listed on the Dublin and London exchanges, with the British share issue confined to institutional investors.

One crucial consideration is the existence of bilateral agreements with the US authorities, which dictate that Aer Lingus must be Irish-owned. In effect, this means that more than half the airline must be sold to Irish investors.

When the time comes, the success of the flotation will depend on the pricing of the share. Again, this will not be decided until much nearer the flotation. However, the Government will be aware that a clear division arose between the Departments of Finance and Public Enterprise before Eircom was floated, with Finance favouring a higher price. The ultimate offer price of €3.90 (£3.07) was a compromise.

The split between the departments was similar to the division between the Government's advisers, AIB Capital Markets and US firm Merrill Lynch. The Americans wanted a higher price while AIB urged a lower rate.

AIB is advising the Government again in the Aer Lingus IPO; the international side of the flotation is being handled by Salomon Smith Barney. Whatever the timing of the flotation, it is likely that many members of the Aer Lingus board will be asked to stand down to make way for successors with greater expertise in running a publicly quoted company. However, the current board is regarded by as reasonably strong and this is not seen as a major issue.