If Aer Lingus is sold... watch the ESB, Coillte, Bord Gáis et al go the same way
And once that’s done watch for the Government to start a process that may lead to the disposal of many other commercial assets, such as the ESB, Coillte, Bord na Móna, Bord Gais and the Dublin Airport Authority.
The Government might prefer, for all sorts of reasons, that someone other than Ryanair would come along with an offer to buy Aer Lingus. However, the chance would be a fine thing. While the airline industry is “consolidating” all over the world, the attractions of Aer Lingus are relatively limited, no matter how wonderful an airline we Irish like to think it is.
The company is small and heavily dependent on traffic to and from a country whose best economic days — when viewed from outside it — are probably behind it. Unlike Ryanair, it has not diversified to service many routes that do not include an Irish destination.
It is instructive too that the value attributed to the former state-owned airline by the stock market is far less than the cash the company holds, the value of its aircraft and the worth of its landing slots at Heathrow. This implies the market regards Aer Lingus as a potential long-term loss maker, even if the disaster suggested earlier this year by soaring oil costs has been deferred.
Instead, a different problem has emerged. Investors believe the global recession is going to depress demand for seats at all but the very lowest prices, and that Aer Lingus will make consistent losses that will erode its cash reserves, or such low profits as to make the return on any investment almost meaningless.
Aer Lingus has other problems. It has shown itself to be a company where the unionised workforce is prepared to be militant when faced with the prospect of change — not that you can blame any worker for fighting to hold what he or she has — and that does not attract partners. Aircraft can be purchased cheaply at present, reducing the attractiveness of the company’s fine modern fleet. Its Heathrow slots would be far more profitable if used for routes other than to Ireland.
That last reason alone is a good one for not allowing an outside company to take control of Aer Lingus. Ryanair would curry some favour if it provides assurances that it will maintain all of the Heathrow slots exclusively for Irish use. It could even pull a useful stunt by offering to restore the Shannon-Heathrow routes axed controversially by Aer Lingus last year in favour of an ill-fated experiment of offering a Belfast-Heathrow service instead. (If Aer Lingus would like to provide audited accounts showing the new route to be more profitable than the Shannon route it deserted, then I’ll withdraw my assessment that the Belfast route hasn’t worked sufficiently well to justify the damage done to the Shannon region.)
That Shannon decision alone emphasised there is no point in the Government keeping its share in Aer Lingus. While the Government as 25% shareholder, and with a so-called golden share, is in a position to veto the sale or lease of the strategically important Heathrow slots to other companies, it could make such a provision a condition of any sale.
Clearly, the Government involvement on the board has not stopped the airline from attempting huge cost reductions that included the attempted dispatch of 1,500 workers to so-called outsourcing.
In such circumstances it is hard to see why the Government won’t take the money, even if it should try to get some more, either from Ryanair or elsewhere.
There are strong arguments that anyone is better than Ryanair. The self-described low-fares airline has done wonders in providing much needed competition in traffic from Ireland — and that more than anything else forced Aer Lingus to reduce its prices — but it is that spectacular success that causes its weakness.
Ryanair is good at jacking up prices when it suits itself — according to the laws of supply and demand, of course — and the temptation to profiteer if in control of Aer Lingus too would be immense.
But there are ways of putting conditions on a sale of the state’s shareholding that can protect the consumer, especially if both airlines fly to different airports out of Ireland.
There are other reasons why a sale would be unpopular. Ryanair has adapted a ruthless approach to customer and industrial relations. But if people acted according to what they say, then Aer Lingus and not Ryanair would be the main operator out of Ireland. Contrary to common belief, it is not. Significant numbers of Irish people travel with Ryanair each year despite affecting to hating it and to preferring the culture of Aer Lingus. They would soon get over any sale.
Ryanair’s latest offer has not met with the same degree of immediate hostility as its effort two years ago did. It is helped too by the fact that Brian Cowen, and not Bertie Ahern, is in charge. O’Leary and Ahern were at such loggerheads it is hard to imagine how O’Leary believed debatable commercial logic would be enough to win the argument two years ago when personal issues were added to the mix. Now though Cowen is more likely to be pragmatic. He may prefer another bidder but in the absence of one I suspect this Government might just be persuaded to do a deal with Ryanair. Needs must.
That’s why I suspect the sale of the remaining Aer Lingus shares could start a process of a large sale of other state-owned assets. While they could have generated a lot more money two or three years ago, there is no point in pining for what might have been. Whatever price is achievable now is likely to be as good as available for some years to come.
WHILE buyers with cash or access to bank funding may be hard to find, I suspect that utilities such as the airports and ESB would be highly attractive assets to outsiders. The state could raise billions in this way.
A potential repeat of the Eircom experience — where the company was repeatedly traded by greedy investors to the detriment of necessary investment in the upgrade of services — would be the great fear. Again, conditions of sale can be laid down to provide protections, based on the experience of the failings of the Eircom sale.
Most of the big investment at the airports has taken place or is under way, for example.
The ESB may be another iconic company, but it is being forced by legislation to reduce its generation of power to 40% of the total being sold to the public as an aid to competition. The majority of its expansion is taking place outside of the country: what is the point in our Government being its guarantor of debts if something should go wrong?
These are actions that would not have been considered politically palatable even a year ago and most certainly not under a Bertie Ahern-led administration.
But we live in very different times now and if the state has a strategic interest in owning part or all of any commercial entities these days, it is in investing in the banks. The world truly has been turned on its head.
The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.
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