Getting access to stock market cash key to Aer Rianta chief's strategy

Aer Rianta's chief executive John Burke is not a man who gives short answers to questions, but his message is concise: he needs more than £200 million (€254 million) to develop the State's airports and he aims to secure this money by floating.

The Government's advisers AIB Capital Markets and Warburg Dillon Read, reckon Aer Rianta needs some £250 million between 1999 and 2003.

Mr Burke is not afraid of repeating himself: for almost a year he has repeated the vision for the State-owned airport company contained in its Future Strategic Direction report published last April.

Aer Rianta wants to maintain its three airports at Dublin, Shannon and Cork and exit from the Great Southern Hotels (GSH) business. The company plans to offset the loss of its intra-EU duty-free retail trade - which will cut profits by some £30 million - by unwinding old discount schemes on aircraft landing charges and by increasing traffic.

The key to the strategy, however, is to gain access to stock market capital. "It is clear that we cannot meet even our minimum investment requirements from borrowings alone," Mr Burke said in an address this week to the Leinster Society of Chartered Accountants. "We do not have a strategic partner in that we are the preferred strategic partner for others. A trade sale would be unlikely to deliver the strategy and would not solve the funding issue."

AIB Capital Markets and Warburg Dillon Read have advised that Aer Rianta should float "as soon as practicable". The Minister for Public Enterprise, Ms O'Rourke, is believed to favour an initial public offering of 30 per cent. Aer Rianta would retain control of all three airports under this plan. The challenge for Ms O'Rourke in the next few weeks will be to persuade the Cabinet that this is the correct strategy.

Mr Burke is aware of the broader questions surrounding this decision. "He's realistic enough to know there are political agendas as well as commercial agendas in these things," said one figure.

The Minister for Tourism and Sport, Dr McDaid, has already indicated opposition to the proposal on the basis that increased landing charges will damage tourism.

And the Progressive Democrats' stated policy is to oppose replacing Aer Rianta's "public" monopoly with a "private" one. Given that party's commitment to "balanced regional development", one suggestion is that the Tanaiste, Ms Harney, may propose separate operational autonomy for the airports. In this scenario, the less profitable operations at Shannon and Cork would not be sidelined by investment in Dublin.

Dr McDaid outlined his view to the Dail last month: "The priority requirement, from a tourism perspective, is the provision of the necessary infrastructure and services at our main airports at the lowest possible cost consistent with safe commercial operations.

"The position has always been that low access fares to Ireland are important. This policy has proved successful in the past because airlines have provided low access fares. Anything which disturbs this must be investigated or considered in very great detail."

Mr Burke challenges this, arguing that the new Airports Regulator, Mr Bill Prasifka, appointed last year, will ensure that Aer Rianta's charges are fair. "We think it is right that airport charges should be determined on economic principles and not through the media and political lobbying," he said in his address.

"The issue for us is not just earning more revenue from airport charges but ensuring that we have a charging structure that makes the best use of very scarce and expensive assets."

While a sustained campaign by Ryanair has focused attention on this issue, Aer Rianta sources said Mr Burke's management style is to concentrate on strategic questions.

"He sees his role as structuring the company going forward. He's not a hands on day-to-day operator," said one figure.

Another source cited Mr Burke's commitment to the IPO proposal: "He has a strong sense of determination to get this through. He is a man of total conviction on the IPO. He's really bringing along the board, management and staff on this issue."

Mr Burke stated this week that changes required to prepare for an IPO would fundamentally affect Aer Rianta's culture, structure and work practices. "A key factor is a joint approach and openness in dealing with significant issues affecting the company," he said.

But certain worker-directors at Aer Rianta are understood to be unhappy that the company's workforce were not consulted in the form of a vote when the current strategy was adopted.

Another concern is a perception that workers were under-represented at a Corporate Strategy Significant Issues Group which formulated the strategy. Group members included senior management figures in Aer Rianta and trade union representatives.

A confidential discussion document compiled by this group also suggests that an IPO was not its preferred option.

Dated March 1999, the document said it would make "excellent business sense" for the State to invest further in Aer Rianta. However, it cited an "ideological objection" to continued investment in State-owned companies. "If no further investment from the existing shareholder [i.e. the State] is forthcoming, then the next option should be . . . the IPO."

If the Cabinet sanctions a flotation, Mr Burke argued this week that an IPO could take place in summer 2001. However, the timing of an Aer Rianta flotation will depend on when the Aer Lingus IPO takes place.

While senior figures in the airline are understood to be pushing for a stock market launch this autumn, one political observer pointed out that negotiations on an employee share option scheme (ESOP) are still at an early stage. If this pushes the Aer Lingus IPO into next year, Aer Rianta is unlikely to float before 2002. Of course, an ESOP would be required at the airport company too.

Further debate surrounds the resignation last month of Mr Garry Cullen as chief executive of Aer Lingus. Mr Cullen cited "personal reasons" when he left, although concern had been voiced, notably by trade unions, about his ability to lead the IPO.

As within Aer Lingus, Mr Cullen's departure was noted with surprise at Aer Rianta.

While sources say Mr Burke is unlikely to let the Aer Lingus situation deflect his attention from the task in hand, there appears to be an acceptance that he will have to decide whether he wants to see the IPO through when the time comes.

"It has to have crossed his mind," said one figure. "But his total and utter belief is in the strategy he is the author of with the board. And whether he's there to see it through is of secondary importance, probably."

Another aviation source who has faced Mr Burke in negotiations expressed confidence that he could float the company. "He's quiet and steely, but he knows his stuff and knows where to draw the line. You could misjudge the guy," he said. "The management team around him are extremely loyal. He's built a strong team."

A separate well-placed source said the crucial issue will be the perception of Mr Burke in the market. "The big issue doesn't come down to the ability of the guy but to what the market thinks . . . It's very difficult to manage in the public sector, but it's not what I think, it's what the market thinks."

The source noted that neither Mr Burke nor Aer Rianta's chairman Mr Noel Hanlon have IPO experience. "If you've two that haven't been down that same route, presumably these questions will arise," he said.

Other observers pointed out that the Government's advisers said Aer Rianta's performance "measures favourably" against its international counterparts.

For all that, the ultimate success of the Aer Rianta flotation will ultimately rest on the attractiveness of its stock and its ability to retain and grow its value.

Pricing will be crucial, according to Mr Shane Matthews of NCB Stockbrokers. "At the right price you'll always get demand for something. Ideally people would like it out of government control," he said. "On the surface Aer Rianta would seem to have less labour relations issues than Aer Lingus."