GOI APPROVES STOCK FLOAT FOR AER LINGUS, BUT DOES

UNCLAS SECTION 01 OF 03 DUBLIN 000361 SIPDIS SENSITIVE SIPDIS COMMERCE FOR ITA/MAC/ROBERT MCLAUGHLIN COMMERCE FOR ITA/MAC/ADVOCACY CENTER OR PAT NUGENT E.O. 12958: N/A TAGS: EAIR ECON PREL EI SUBJECT: GOI APPROVES STOCK FLOAT FOR AER LINGUS, BUT DOES NOT SAY WHEN REF: A. 05 DUBLIN 606 ¶B. 05 DUBLIN 1488 DUBLIN 00000361 001.2 OF 003 ¶1. (SBU) Summary: On April 5, the Irish Government Cabinet followed through on an earlier decision to privatize Aer Lingus, the national airline, by approving a stock flotation, but left key questions unanswered, such as when the transaction would take place. The level of union support for the sale is also unclear, and Irish Prime Minister Bertie Ahern and Transport Minister Martin Cullen pledged that Aer Lingus management would work with labor to resolve concerns on job security and a large pension deficit. The Department of Transport and financial analysts separately told Post that the sale, expected in late autumn, would raise equity for a significant increase in the carrier's short-haul and long-haul aircraft, enabling the carrier to expand service. In terms of U.S. routes, Aer Lingus aims to add San Francisco service in 2007 after the expected start to the phase-out of the Shannon stop requirement this autumn. Autumn is also likely the last chance for the Government to float Aer Lingus stock before the spring 2007 general elections, since privatization during the election campaign would risk union votes. Delaying the stock flotation even till this autumn, however, will harm Aer Lingus, service expansion plans, as the queue for new long-haul aircraft, such as the Boeing 787 model advocated by Post, is already several years long. End summary. A Clear Decision, but Questions Remain -------------- ¶2. (U) On April 5, the Irish Government Cabinet decided to privatize Aer Lingus, the national carrier, through a stock market flotation (versus an institutional placement). In May 2005, the Government had announced that a majority share in the carrier would be sold (ref A),and the April 5 Cabinet decision followed several months of consultations between the Department of Transport and its appointed team of private sector financial advisors on the form of the sale. Transport Minister Martin Cullen told reporters after the Cabinet meeting that the Government would retain at least a 25.1 percent share in Aer Lingus. (The carrier's 3,600 employees currently own a 14.9 percent share. Under Irish company law, 
moreover, an investor with at least a 20 percent share in a firm can block takeover bids for the firm.) Cullen also noted that Aer Lingus management would continue to consult with unions on concerns relating to job security, pay, profit-sharing opportunities, and an estimated euro 340 million pension deficit. ¶3. (U) The Cabinet decision, however, left several questions unanswered, including, most importantly, when the stock flotation would occur. Cullen said that the Government aimed to complete the sale "as soon as possible," but added that the Department of Transport would defer to input on timing from its team of financial advisors. Irish press commentary on April 6 speculated that the transaction would likely take place in late autumn, since June, the supposed original target date for the stock float, would not allow enough time for further union consultations. ¶4. (U) Another unresolved issue was the position of labor. Impact, the union representing 40 percent of Aer Lingus employees, including pilots and cabin crew, privately supports the carrier's sale, particularly CEO Dermot Mannion's proposal to commit euro 200 million from the stock float to the pension shortfall. On the other hand, the Services Industrial Professional and Technical Union (SIPTU), which represents the other 60 percent of workers, most of whom are low-skilled and vulnerable to job cuts, publicly opposes privatization. On April 4, SIPTU leaders reportedly expressed their willingness to continue consultations, but warned Minister Cullen of possible strikes if workers, concerns were not resolved before the carrier's sale. The Prime Minister Defends Privatization -------------- ¶5. (U) On April 4 and 5, Prime Minister (Taoiseach) Bertie Ahern used Parliamentary question time to defend the decision to privatize Aer Lingus. Responding to opposition parliamentarians, complaints about "losing" a state asset, Ahern said that privatization would enable Aer Lingus to secure funding through financial markets, to acquire additional aircraft, and to expand service. He elaborated DUBLIN 00000361 002.2 OF 003 that the carrier's fleet size made it difficult to serve the 5 U.S. destinations allowable under U.S.-Irish aviation arrangements, let alone the additional 22 U.S. cities that wanted Aer Lingus service under Open Skies. Ahern also highlighted the Department of Transport's intent to resolve unions, concerns about job security and pensions prior to the stock flotation. When parliamentarians raised the possibility of airline job cuts, he pointed out that Aer Lingus had shed nearly 3,000 jobs this decade while under state ownership. Increasing Equity for Fleet/Business Expansion -------------- - ¶6. (SBU) The Cabinet decision lends greater certainty to Aer Lingus, ability to raise equity for business expansion, emboff was told on April 5 by Fintan Towey, Department of Transport Principal Officer for Aer Lingus Corporate Affairs. Between 2006 and 2012, he noted, the carrier intended to increase its long-haul aircraft from 7 to 14 and its short-haul aircraft from 27 to 42. Towey, however, would not speculate on whether carrier management could place orders for long-haul aircraft before the stock flotation. (Per ref B, Post has strongly advocated Boeing aircraft for Aer Lingus, long/short-haul needs in discussions with several Government ministers and CEO Dermot Mannion.) Towey also said that the Government planned to ensure that future investors would not sell any of the carrier's 23 weekly slot pairs at Heathrow Airport (jointly valued at over euro 100 million) to raise additional capital. Currently, the carrier requires a 75 percent majority of shareholders to pass a shareholder resolution, so the Government, with a 25.1 percent "blocking" share, could simply require a shareholder resolution for any proposal to sell slots. ¶7. (SBU) Aer Lingus, value at the time of the stock flotation, barring any aviation industry downturn, could be euro 900 million to 1.1 billion, according to Joseph Gell, aviation analyst for Goodbody Stockbrokers, one of Ireland's prominent financial houses. Citing estimates from Allied Irish Banks (AIB),a member of the Transport Department's financial advisors team, Gell told emboff on April 5 that airline management would use euro 400 million from the flotation proceeds to raise bank debt needed for fleet expansion. The total "sticker" price for new aircraft was roughly euro 2 billion, but Gell believed that Aer Lingus could receive up to a 30 percent discount. He also speculated that Emirates airlines might take a position in Aer Lingus with the stock float, since Emirates was looking for ways to expand service between the Gulf region through Europe to the United States. Gell added that Aer Lingus could increase the value of its shares by preparing for new U.S. routes in the context of the possible autumn start to the phase-out of the Shannon stop under the pending U.S.-EU aviation agreement. (On April 6, Dick Butler, Aer Lingus Head of Operations, told emboff that new U.S. routes this year would be premature, but that the carrier definitely planned to use one of two newly acquired Airbus 330s to begin San Francisco service in 2007.) Comment: Do or Die in Autumn -------------- ¶8. (SBU) Autumn is likely the last chance the Government will have to float Aer Lingus, stock before Ireland's next general elections, which are expected in May 2007. If the transaction were not completed by November, the slow Christmas holiday period would push the opportunity for a sale into early 2007. By that time, however, the election campaign would be well underway, and the governing Fianna Fail party would probably be reluctant to risk union votes by proceeding with privatization. Most of Aer Lingus, workers, in fact, reside in the North Dublin parliamentary constituency of Prime Minister Ahern himself, and they would recognize their strengthened hand on the privatization issue as the elections approached. ¶9. (SBU) Comment continued: One downside to delay is that orders for both Boeing and Airbus new long-haul aircraft are even now backed up several years. Due to purchase orders made by other airlines, for example, Boeing reportedly would be unable to fill Aer Lingus, possible orders for the 787 model until roughly 2011. CEO Dermot Mannion is aware of this queue and its ramifications for business expansion. He previously told Post, however, that a purchase order now DUBLIN 00000361 003.2 OF 003 would weaken his hand in union consultations, particularly the credibility of his promises to use stock proceeds to address priority union concerns like the pension deficit. KENNY