No easy way to plug gap in Aer Lingus pension deficit

AN INTERESTING note came yesterday from Merrion stockbrokers on Aer Lingus and the pesky pension deficit issue.

The joint pension operated by Aer Lingus, the Dublin Airport Authority and SR Technics is in deficit to the tune of about €500 million.

Merrion analyst Gerard Moore believes resolving this issue could lead to a re-rating of Aer Lingus stock by as much as 33 per cent and has put a target price of €1.10 on the stock.

But only if the pension problem is resolved.

Legally, Aer Lingus believes it has no obligation to help plug the pension gap, as it is a defined- contribution scheme.

But the airline has accepted that the possibility of industrial action exists.

Moore’s analysis suggests that a month-long strike would cost Aer Lingus about €30 million.

It must be said, however, that such a lengthy dispute in the current economic environment seems unlikely.

If members don’t compromise, the scheme could be wound up. “Pensioners would then be prioritised and active employees could see their benefits halved,” Moore said.

The Merrion analyst did some interesting calculations on how the deficit might be closed.

Factoring in a lower level of pensionable salary – as happened at Eircom and Bank of Ireland – would reduce the deficit by €140 million, Moore said.

Other measures, such as linking to State pensions, benefit cuts and cross-funding from the Supplemental Funds could reduce it by another €194 million. The three companies could then close out the gap by contributing €166 million, with Aer Lingus chipping in €100 million.

Merrion was an adviser to Aer Lingus for its IPO and has worked with the employee Esot at Eircom. It has experience of such issues.

It is in this context that Moore’s analysis is interesting.