Saturday, March 25, 2006

Why the Aer Lingus share offering must go forward

In the Blog O'Sphere, blankpaige and Omaniblog have posted on the plan to sell part of the Government stake in Aer Lingus. The Irish Independent (rego req.) also published a recent sceptical article (a letter to the editor identifies it as by Martina Devlin). Damien Kiberd takes a different view in the Sunday Times which I share.

To wrap Aer Lingus in the national flag and pretend the aviation market will be thwarted is to guarantee its end. The example of bankrupted airlines like Sabena and Swissair, the continuing basket-case status of Olympic and Alitalia and the dubious policies at South African should be loud warnings to those like me who actually wish to see Aer Lingus succeed while remaining an Irish airline. What are the factors which have hindered Aer Lingus to date?

1. Government regulation means that investment in Aer Lingus will only occur when the national finances permit it. Private airlines like Ryanair can raise finance whenever they have a commercial need to do so. Investment in State airlines is highly political and circumscribed by regulation. Investment in Ryanair is limited by Michael O'Leary's ability to persuade fund managers of his business case. This is why Ryanair now operates 101 737-800 aircraft with orders and options for 317 more (although some of the older aircraft will be sold as new ones arrive). Aer Lingus operates 27 aircraft in the shorthaul market (with 12 orders and options) and 7 long haul aircraft with 2 on order.

2. The Irish market - Ryanair's expansion to Europe following deregulation means they are less exposed to economic shocks in individual market and can redeploy aircraft to rapidly growing markets. Aer Lingus is focused on the US and the UK and events such as foot and mouth in Ireland can cause a massive drop in all markets. Aer Lingus did consider setting up European and British bases but it would never, er, "fly" politically.

3. The unions. While Michael O'Leary's jackboot tactics get what he wants whatever the cost, leading to a climate of fear in Ryanair, Aer Lingus goes too far in the opposite direction. SIPTU in particular refuses to understand that the market has changed. A successful Aer Lingus will be bigger and fly to more destinations - just now employing the same number of employees per passenger and thus the total workforce, a legacy of when Aer Lingus was operating seven aircraft types as opposed to the A320, A321 and A330 that Willie Walsh retrenched to, must reflect the simplification of operations.

4. Aviation policy. The deregulation of European flying did not happen on the transatlantic market. Shannon airport actually saw an increase in traffic once airlines were not forced to stop both east and westbound en route to Dublin. However, much service to Ireland is seasonal because of the additional costs involved in serving two airports - there is zero service between Ireland and Canada between October and March. The existing bilateral constrains Aer Lingus to certain airports and the US airlines regularly object to any expansion which does not give them the right to choose the airports they fly to in Ireland. The shuttling back and forth of long range planes between Dublin and Shannon decreases the life of Aer Lingus' fleet (which is measured in both flying hours and takeoffs/landings).

5. Dublin Airport. Aer Lingus is in a good position to be a hub for transatlantic traffic en route to Europe and western UK cities like Cardiff. The provision of US immigration preclearance in Dublin helps with this, but only recently has Dublin built a facility to allow transferring passengers to be able to go directly to their flight rather than going out into the public zone and back through security. The airport is badly laid out and has poor public transport. The main runway is comparatively short to get the maximum range out of long range planes and there is no sign of a go-ahead for the new, longer runway which would alleviate Dublin Airport's peak time congestion. In addition to the poor direction, funding and management at Dublin, the workers oppose efforts to introduce internet check-in to reduce queues.

6. Ireland can still be emotionally invested in a private Aer Lingus. The example used of British privatisation, British Airways, is a good example here. When BA created the ethnic tailfins, it suffered a drop in custom from both home and abroad because their British logo was part of what people felt about the airline, and the antipathy was crystallised by Thatcher's draping of a handkerchief over a model's fin, saying "We fly the British flag, not these awful things." The critics would say "well they sold it so that's it" and yet soon after BA started repainting their fins in Chatham (Union Flag), not least when Richard Branson painted Union Jacks on his Virgin aircraft. While in State ownership, it was Willie Walsh who moved Aer Lingus away from the shamrock to the livery, which evoked a similar annoyance in passengers.

7. Heathrow. The Heathrow slots are valuable but arguably not critically so. There are five "London" airports. Aer Lingus has operated to four that I know of at one time or another (I don't recall Luton) and only serves Heathrow. Much of this traffic feeds British Airways and Qantas' long-haul operation to places like Canada in winter when that traffic should be in Aer Lingus aircraft out of Dublin. Therefore, if Aer Lingus stopped serving Heathrow, sold its slots and started serving Stansted or Luton or City, BA would be in like a shot to protect its feed like it did when Aer Lingus stopped serving Gatwick.

To allow Aer Lingus to raise money is not to say the Irish Government should sell completely. However, the Government stake should be transferred to the NTMA as an investment arm (like Caisse de dépôt et placement du Québec) with a mandate to manage Irish assets to remove them from the dead hand of the Departments. It looks like the unions are protesting and waving the flag but now the chequebook is out and the SIPTUites will gobble it up as they did with the maintenance arm.

UPDATE: changed the first para to reflect the original posts more accurately and correct a silly editing error :)
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