Ingredients at Aer Lingus unpromising

Put the following ingredients together. Two changes at the top in fewer than two years. A bleakish outlook for an industry hit by rising oil prices, falling fares and more intense competition. A militant workforce looking for hefty payoffs for agreement to an initial public offering.

Are they the correct ingredients for a successful privatisation of Aer Lingus, the State-controlled airline? Aer Lingus seems to think so. Its chairman, Mr Bernie Cahill, has said the flotation should take place "sooner rather than later" and could happen as early as summer. He has also insisted that the sudden resignation of the chief executive, Mr Garry Cullen, will not affect the proposed flotation.

But that event is yet another image blinker to the State's privatisation effort. Just look at the litany of disappointments: the will-they-won't-they TSB/ACC proposals ending in failure, the sheer lack of interest in ICC, and the yet to be proved Eircom. Against that background, the next flotation effort will, and should, be scrutinised even more clinically.

The resignation of Mr Cullen was said to be for personal reasons. Mr Cullen said he had "given full consideration to the position of chief executive during the initial public offering process and its aftermath and decided that, for personal reasons, this is a role that I'd not wish for myself". But this followed the abrupt resignation in May 1998 of the then group chief executive, Mr Gary McGann, to join the Jefferson Smurfit Group, before the long-drawn out negotiations with TEAM Aer Lingus over its sale to FLS Industries were completed.

Mr Cullen played a key role in the development and implementation of the Cahill Plan, which restructured the airline and steered it back to profitability. It is hard to square that fact with some analysts' suggestions that he may not have been aggressive enough for the demanding flotation process. So why did the board appoint him - and why did he take the job - when he was not going to see the process through? Also, why did Mr McGann stay for only four years?

They had two things in common. First, both were chief executives. Second, neither was on the board. For a company aspiring to take its place among publicly quoted companies, that is a ludicrous situation. But Aer Lingus's position is even worse. Four of the 12 directors are worker-directors. A structure that has the potential to have senior executive decisions turned down/modified/changed by worker-directors is potentially dangerous, though there is no evidence that anything untoward happened.

Mr Cahill acted as executive chairman for two years - he was also acting chairman in the interim period between Mr McGann and Mr Cullen.

But as he is a non-executive chairman, surely the chief executive should be on the board. Indeed, a normal board would also have the finance director and at least one other senior executive on the board. The airline's archaic board structure urgently needs to be changed.

Mr Cahill's prediction that a flotation may take place as early as summer must be a pious hope, but it could be ready by the end of the year or early next year. What, then, are its prospects as a flotation candidate?

The Aer Lingus employees already have a profit-sharing agreement and they will end up with a 5 per cent stake. Some workers are pressing for an additional 14.9 per cent in ESOP but that is likely to be a maximum of 9.9 per cent, the same as Eircom. But is that not too generous?

Aer Lingus is certainly operating in a competitive environment. British Airways, for example, reported a third-quarter operating loss of £2 million sterling compared with £92 million profit, and the shares halved in the past 12 months.

That, however, would be taking too gloomy a view about the industry. Iberia, Spain's flagship airline, for example, expects its net income to rise by 20 per cent in 2000. And Aer Lingus, which returned to profitability in 1998, is also understood to be performing better. Its historic earnings are over £50 million, which puts a base value of £500 million to £600 million on the group based on a p/e of some 10 - Ryanair's is around 30.

That confirms a value of £530 million placed on the company under the last tender - last December - under the share options scheme. But the real value of the company will be higher as it intends to raise £150 million to £200 million in new shares to renew its fleet.

The final p/e and value will, of course, depend the company's results for 1999, its prospects, the credibility of the new CEO, and the timing of the flotation. Clearly, it will have a value substantially ahead of the suggested u £300 million last week. But it will be a pale shadow of Ryanair.