Airline can handle €191m payment

Stock market analysts believe Aer Lingus’s balance sheet is "more than strong enough" to accommodate the €191m once-off payment to its pension scheme, recommended by an expert group appointed to analyse how to address the €700m deficit in the scheme.

The analysts warned that a successful resolution to the long-running pensions dispute could still face stumbling blocks with union approval needed, as well as potential for a legal challenge to the proposal from existing pensioners.

The membership of the Irish Airlines Superannuation Scheme is made up of current and retired workers in Aer Lingus and the Dublin Airport Authority as well as workers who have left the companies but not yet retired.

The airline this week made a presentation to a number of financial institutions at a dinner in London. Afterwards, a number of the firms issued an analysis of the airline’s financial position, with a lot of focus on the pension issue.

The presentation outlined how management has a memorandum of understanding with the trade unions on implementation of the pension deal. It said there was now a target implementation date of the end of 2014, with unions likely to ballot at the end of next month and a submission to the Pension Authority by mid-November.

In its analysis, Investec said clear progress had been made on the pensions issue but it said an “implementation risk” remained.

“Trade unions connected to the Dublin Airport Authority have yet to agree a similar memorandum of understanding which could, for example, delay the process,” it said.

“Likewise, Aer Lingus could still face a legal challenge to the proposal from some parties including pensioners.”

Goodbody said it had been acknowledged that the union vote still needs to be carried out and that “the deal requires two small but equally relevant third party union members to agree (particularly workers for the Dublin Airport Authority) and that individual action could jeopardise the timetable with the risk of injunctions”.

“However, all sides are clearly closer to a deal on this issue than at anytime to date,” it said.

“Obviously a resolution will result in a one-off payment of €191m but the airline’s balance sheet is more than strong enough to carry that.”

In addition, frozen salaries will generate a significant saving against projected cost inflation, as well as freeing up those who want to take a renewed voluntary redundancy programme once there is clarity on their pensions.

“Management believes that some 200 employees might take this option at the off,” Goodbody said.

“Finally, a resolution will allow management to restructure an inefficient balance sheet beyond the contribution to the pension pool, with positive implications for company return ratios and peer group comparisons.”

Away from the pensions issue, Goldman Sachs pointed out long-haul growth was a source of opportunity for the airline.

“Aer Lingus is confident that despite increased consolidation over the North Atlantic, there is potential for growth as an independent value carrier, given Aer Lingus’s efficient cost base and attractive price proposition.

“On average Aer Lingus’s North Atlantic fares are 40% cheaper than its direct competitors which, coupled with an advantageous geographic location, gives management the confidence to pursue market share gains over the medium term.”