Short-haul flights key to growth of Aer Lingus

Aer Lingus will tell investors on its upcoming investment roadshow that its growth will come from short-haul flights of more than two hours' duration.

The airline believes it has an advantage over Ryanair on such routes, which would see it add services to Greece, Turkey and Scandinavia.

It will also tell investors not to expect dividend payments during a roadshow expected to take in Dublin, London, New York and possibly Tokyo.

The airline's analysis indicates that passengers are less likely to chose low-cost carriers like Ryanair on routes of more than two hours because of concerns over service levels and other factors.

The airline will cite Berlin, Faro, Malaga, Rome and Tenerife as examples of these kind of routes where it holds its own against Ryanair and other low-cost carriers with its "low fare, way better" proposition.

However, Deutsche Bank appears to cast doubt on this claim in an unpublished research note circulated to clients. It says regional airlines such as Aer Lingus are in danger of being squeezed between low-cost carriers and global long-haul players like British Airways, Air France and Lufthansa.

Although Aer Lingus has decided to go to market on the back of expanding its short-haul route network, it will not make any commitment to operating a new hub outside Ireland. It is understood that 40 per cent of the short-haul expansion will involve new services to destinations it already serves.

However, the airline will also highlight the potential upside of an Open Skies agreement between the EU and the US giving it access to more US destinations. But the flotation prospectus will not specify a precise date when it expects such an agreement will be reached.

Investors will be told that capital investment will take a priority and it would be unusual for a strongly growing airline to pay dividends. The airline expects to get €400-€500 million from the sale, which includes money for the supplementary pension fund.

Aer Lingus will also emphasis that the current management team have been in place for almost 22 months, since the departure of Willie Walsh and two senior management. They will also point out to investors that they current management implemented the successful strategies of Mr Walsh and his team.

The research from Deutsche notes the strong margins Aer Lingus has and its reasonable level of profits, which are expected to fall this year from last years €72.4 million. The prospectus will contain the accounts for the first half of the year, which are broadly in line with 2005 at the operating profit level. Deutsche also notes its past performance in fending off competition from Ryanair. However, the bank's London-based analysts caution that Aer Lingus is a "regional" carrier and as a result may find it hard to find a niche in future.