Flight path for Aer Lingus is very much uncharted

The airline's future requires action on its pressing need for funds, writes Emmet Oliver

When reviewing the Government's performance in any sphere, one should always try to provide a rounded picture.

But presenting a rounded picture of Government policy in relation to Aer Lingus poses significant challenges.

At time of writing, the airline has no permanent chairman, its top management team are getting ready to depart, the future ownership structure of the company remains unknown, a pressing need for funds has not been addressed and its future profitability could be under threat.

On the positive side? Well there are probably only two things to write about: the airline's relatively healthy balance sheet and the apparent success of the recent voluntary severance scheme.

Put simply, the Government's performance in handling the complex strategic issues at Aer Lingus has been lamentable. One could forgive the Government if the issues involved crept up unannounced. But that is hardly the case. The future ownership of Aer Lingus has been on the political agenda for several years now.

In 2001, the airline was being readied for an IPO. Most of the senior ministers of the current Cabinet should be familiar with the issues from that time. During the summer, the airline's three managers, chief executive Mr Willie Walsh, chief financial officer Mr Brian Dunne and chief operations officer Mr Seamus Kearney, sought permission to develop an "investment proposal". While they never used the word, most commentators started throwing around the phrase "MBO".

Surely at that time the Government should have considered the Walsh and Co request or advanced their own proposals, or even have taken the far easier option of simply saying we want to keep the airline in State hands? Instead, paralysis and more committees were the order of the day.

Earlier this month, the Cabinet sub-committee, set up specifically to bring clarity to the debate, met twice and still failed to reach a decision. A Government statement recently set a fresh deadline of late January for some kind of decision.

Guessing the official Government position has become the new parlour game in Leinster House. The Taoiseach is believed to be nervous about inviting private sector funding into the airline, possibly eyeing the political consequences in north Dublin if it all goes wrong.

At times, the Taoiseach has appeared peeved at being depicted as a ditherer on the issue. In mid-November, he angrily denounced his critics, when he said he would "not just click my fingers because some right-wing economists believe we should privatise it".

The Tánaiste, Ms Harney, has struck a very different tone, playing up the achievements of the departing management team and pointing to the airline's need for fresh funding to conclude a deal for new long-haul aircraft.

The key question in 2005 is whether these stark differences of emphasis can be overcome and some kind of middle ground agreed upon. Unfortunately, middle ground positions tend to mean fudges in Irish politics.

If something finally emerges in January or February, most observers believe it will be nothing stronger than a vague decision "in principle" to back private sector funding.

How could it be anything else? The cyclical airline sector is already unpopular with many fund managers and no sane investor is going to plough millions into an airline run by an untested management team.

Such a warning was delivered in a Goldman Sachs report which said if Walsh and Co departed, it would seriously delay the timing of any investment. The other difficulty for the Government is that its ability to control events could be limited once even a small stake is handed to private investors.

In an institutional placement scenario, the Government would probably have to give some kind of assurance that a wider sale process (an IPO presumably) would be on the cards.

Again, Goldman Sachs warned about this in its report. It said if Aer Lingus shares were placed with institutional investors, "such an investment will almost certainly be the first step to an IPO as this will be the most likely preferred exit of such a group".

But say the Government goes down the route of private sector investment. Goldman Sachs again warns this carries major risk, particularly the IPO option: "A successful airline IPO does require the confluence of both a window of opportunity in the airline sector and equity markets as a whole."

Of course the Government can insert specific conditions into any sale agreement or retain a golden share in the company, but this reduces the price it gets for the airline.

All these issues are likely to preoccupy the top political minds in the new year, but the departure of Walsh and Co ironically probably leaves even more room for a Government fudge. Without Walsh and Co, a new management team will have to be recruited, and that team will have to settle in and preside over at least one year's financial results, potentially two.

That means no moves on any sale can be made in that time, not unless the Government is prepared to accept a massive discount on the airline's true value.

In the meantime, the airline is starting to come under competitive pressure and, unless further cost-cutting takes place, things could change very quickly.

Mr Walsh indicated in October that, while the airline remained on target for operating profits of over €105 million for 2004, it could be difficult to maintain this performance in 2005.

Either way, Mr Walsh and his colleagues will not be in place to deal with these challenges. Despite their remarkable performance in turning around the airline, its future direction is no more certain now than it was when they came in to manage it three years ago.