UP AND AWAY WITH AER LINGUS FLOTATION

UNCLAS SECTION 01 OF 02 DUBLIN 001122 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAIR EI SUBJECT: UP AND AWAY WITH AER LINGUS FLOTATION REF: DUBLIN 493 AND PREVIOUS DUBLIN 00001122 001.4 OF 002 ¶1. (SBU) Summary: The privatization of Aer Lingus, Ireland's national airline, is all but complete, with the Government expected to reduce its share in the carrier from 85 percent to 25 percent following the October 2 stock market flotation. Informal trading has already pushed Aer Lingus shares above their fixed price of euro 2.20, placing the carrier,s value at euro 1.2 billion. The key to finalizing the flotation had been a recent labor-management agreement that increased employees' pay and committed a portion of the flotation proceeds to the carrier's pension fund. The Irish Transport Department and the financial firm that advised the Government on the flotation have told Post that they are pleased with buoyant informal trading of Aer Lingus stock. Although the absence of U.S.-Irish Open Skies apparently did not spook initial investors, Post expects that the Irish Government will step up tentative entreaties on a bilateral Open Skies arrangement if U.S.-EU aviation negotiations falter into ¶2007. We will also continue strong advocacy of Boeing as Aer Lingus, now flush with flotation earnings, turns to the expansion of its long-haul fleet. End summary. Lift-off for Stock Flotation -------------- ¶2. (U) On September 27, the Irish Government took the final steps toward privatizing the national air carrier, Aer Lingus, by setting the stock price for the airline at euro 2.20 and allocating shares to retail and institutional investors based on subscriptions finalized the previous day. Athough the carrier will not list officially on the Dublin and London stock exchanges until October 2, informal trading based on the allocations pushed the share price to euro 2.40 on September 28. At the close of trading, the airline's value stood at euro 1.2 billion, with earnings of euro 140 million for the Irish Exchequer and euro 530 million for the carrier. The breakdown of shares in Aer Lingus is now as follows: the Irish Government (34 percent); carrier employees (12.4 percent); former staff (2 percent); institutional investors (40 percent); and, retail investors (11.6 percent). The Government is expected to reduce its share to 25 percent in the coming months by selling 3 percent to employees and another 6 percent to the market to ensure against volatile trading. Key Steps toward Privatization -------------- ¶3. (U) The central piece in the flotation process had fallen into place on September 20 when unions representing the carrier's 3,400 workers approved the move to market. Under the terms of the management-labor agreement, workers will receive an across-the-board 4 percent pay increase following privatization. Moreover, Aer Lingus CEO Dermot Mannion disavowed stock options for management arising from the flotation and committed to set aside euro 1.4 million of the carrier's flotation proceeds for the employee pension fund. Mannion informed the unions that management would use earnings from the flotation to leverage the euro 2 billion required for fleet expansion. (As Mannion had previously told Post, Aer Lingus intends to increase long-haul aircraft from 7 to 14 and short-haul aircraft from 28-42. In public remarks on September 27, he noted that Aer Lingus was considering offers from both Airbus and Boeing for the expansion program.) ¶4. (SBU) Besides negotiations with airline labor, Aer Lingus management had taken other measures in recent weeks to prepare for the flotation, including: A) CEO Mannion led a team on an investment roadshow through Dublin, Edinburgh, London, Frankfurt, Paris, Rome, New York, and Boston, focusing on institutional investors and the eight brokerages through which retail investors lodged subscriptions. (Retail investors were required to purchase a minimum of euro 10,000 in shares as a guard against amateur investment.) The Irish investment firm, Goodbody Stockbrokers, a subsidiary of Allied Irish Banks (AIB), participated in the road show as the Government's main financial advisor on the flotation. B) Management published the Aer Lingus prospectus on September 12. The prospectus noted that operating profits were likely to slip from euro 90 million in 2005 to euro 67 million this year, due largely to fuel price rises. The prospectus not only noted that the stalled U.S.-EU aviation negotiations lent uncertainty to Aer Lingus' bid for greater U.S. market access, but also speculated that the Irish Government might seek a bilateral arrangement with the USG in DUBLIN 00001122 002.2 OF 002 the absence of a U.S.-EU deal. C) On August 28, Transport Minister Martin Cullen appointed four new non-executive directors to the Aer Lingus board. One appointee was U.S. citizen Thomas Moran, President and Chief Executive of the insurance group, Mutual of America. Another appointee was David Begg, Secretary General of the Irish Congress of Trade Unions (ICTU),Ireland's largest union umbrella organization. Begg's appointment was seen as a Government measure to ensure labor buy-in to the flotation. The Government and Goodbody: Very Pleased ¶5. (SBU) The Government was "exceedingly pleased" with the flotation's early outcome, Pol/Econ Chief was told on September 28 by Fintan Towey, Department of Transport Principal Officer for Aer Lingus Corporate Affairs. Towey said that the rise in the carrier,s share price in informal trading had been a relief for Transport officials, who had been concerned by the initial slump in Air Berlin,s stock price after its IPO in the summer. He agreed with media analysis that the drop in oil prices over the past two weeks had been propitious, raising investor confidence in the final days before Aer Lingus' share allocation. The carrier's official listing on October 2, observed Towey, would consummate a drive toward privatization that had begun in the 1990s. He recalled that the last attempted flotation in 2001 had been aborted due to adverse market conditions and poor labor relations, a situation that was exacerbated by 9/11. ¶6. (SBU) Goodbody Stockbrokers, the Government's financial advisor on the float, was similarly gratified by buoyant informal trading of Aer Lingus stock. Goodbody aviation analyst Fionbhar Griffin told Pol/Econ Chief on September 28 that a number of institutional investors had expressed disappointment that they had not been allocated as many shares as they had hoped. He noted that Goodbody colleagues were now in New York to oversee a private placement with U.S. institutional investors, though he did not know the percentage of shares that these investors had been apportioned. The Government, he added, was sensitive to the need to ensure that 50 percent of shares would remain in Irish hands to preserve Aer Lingus' rights under the U.S.-Irish bilateral aviation agreement. Griffin explained that the Government had amended the company's articles of establishment and had been careful in selecting institutional investors to preclude the possibility of Irish ownership dipping below 50 percent. Comment: Open Skies and the Market ¶7. (SBU) Bullish informal trading indicates that the absence of bilateral Open Skies with Ireland was not as harmful to Aer Lingus' flotation as Irish Transport officials had previously feared. In recent weeks, the Irish media had highlighted uncertainty in Aer Lingus' long-haul prospects due to the lack of Open Skies, but apparently this has not spooked investors. To sustain Aer Lingus' market performance over the longer term, the carrier's management and the Government would obviously prefer to secure an Open Skies relationship that would open up additional U.S. destinations beyond the several cities now permitted under the bilateral agreement. If U.S.-EU negotiations continue to falter into 2007, Irish Transport officials will likely step up now tentative entreaties to the USG and EU Commission on a bilateral Open Skies arrangement. ¶8. (SBU) Post intends to continue strong advocacy on behalf of Boeing as Aer Lingus now turns to the expansion of its long-haul fleet. CEO Dermot Mannion had been reluctant to move on aircraft purchases earlier because he was concerned about being seen to prejudge the outcome of management-labor negotiations. With a labor agreement in hand, and with euro 530 million in flotation earnings, Aer Lingus should have no further obstructions to a decision on aircraft purchases. KENNY