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Commentary: Aer Lingus: A Risky Holding Pattern


On Nov. 16 the top three managers of Ireland's state-owned airline, Aer Lingus Group PLC, announced their resignations effective in May. The news shocked the country and sent the government into a frenzy. After all, this was the trio that presided over Aer Lingus' dramatic three-year transformation from a money-losing carrier into one of the most profitable in all Europe. Its operating margins, estimated at 11% for 2004, are second only to Irish rival Ryanair in Europe. Willie Walsh, the onetime Aer Lingus pilot who worked his way up to CEO, isn't saying why he and his top lieutenants are stepping down, but industry observers say the government's failure to clarify the airline's future ownership and funding are to blame. "Given the brutally competitive nature of the industry, we need to move faster, not slower," Walsh said in an interview with the Irish press shortly after his resignation. "It was clear the government did not share our sense of urgency."

If it didn't then, it certainly does now. Irish Prime Minister Bertie Ahern has appointed a Cabinet subcommittee to assess Aer Lingus' options as outlined in a report commissioned from Goldman, Sachs & Co. Although the government has promised a decision by yearend, Ahern says he will not be rushed into a hasty sell-off. "I will not just click my fingers because some right-wing economists believe we should privatize it," he told Parliament in the wake of the resignations.

Fair enough. Yet, considering the challenges facing the aviation industry, the government's options are likely to become more limited the longer it waits. Industry insiders say that without an infusion of fresh capital, Aer Lingus will face debt problems by 2007. Already there are signs that the coalition government led by Ahern's Fianna Fail party, whose core supporters are trade unions, and Mary Harney's pro-business Progressive Democrats, is split on a solution. Ahern is determined to keep Aer Lingus, which is 85% owned by the state and 15% by its employees, in government hands, while Harney favors taking the carrier public or selling it outright.

Ahern has already nixed one potential deal. In July, Walsh proposed a management buyout (MBO), only to withdraw the offer three months later when it became clear the government was unwilling to support the plan. Ahern said he didn't think Aer Lingus' senior management should be allowed "to become wealthy overnight from a state company." But at least an MBO would have kept Aer Lingus in the hands of top-flight managers. Since taking over the carrier in 2001, Walsh & Co. have slashed excess capacity, lowered fares, and shrunk the workforce by a third. Goodbody Stockbrokers in Dublin forecasts Aer Lingus will log a profit of $130 million in 2004.

Ahern's judgment may be clouded by politics. Fianna Fail lost 20% of its seats in local balloting in June, and Ahern is desperate to fortify his party's popularity in the runup to national elections in 2006. The centrist Prime Minister recently rebranded himself as a socialist, telling Irish voters his is "the most left-wing government this country has ever seen." Such grandstanding may score points with Aer Lingus' unions, who fear massive layoffs in the event of privatization. But it may complicate the task of finding private investors, especially now that the airline's best asset -- experienced management -- is no longer part of the deal. Moreover, the government is unlikely to sanction a sale to a rival European carrier.

One possible way to preserve Aer Lingus as an Irish company is to solicit long-term Irish investors such as pension funds, with the state retaining a stake as high as 40%. That's a compromise that both the government and the unions could probably live with. But if Aer Lingus is to capitalize on the achievements made by its current bosses, Ahern will need to put politics aside and reach a decision -- fast. "The issues that we were addressing and problems we were tackling haven't gone away," Walsh told reporters. The longer the government delays making the difficult decisions on funding needed to keep Aer Lingus aloft, the bigger those problems will become. And it will be Ahern's government that ultimately pays the price.

By Kerry Capell


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