Aer Lingus' initial public offering has been a long time coming, eight years to be precise. And while interest has been surprisingly strong—the Irish Times reports an average investment of €25,000 from thousands of retail investors—the question is whether this promising performance will hold up much past Oct. 2, when shares start trading on exchanges in Dublin and London.
The Irish state-owned carrier plans to sell about 208 million new shares. The government will also chip in 73 million shares as it cuts its holding from 85% to about 25%. At a price of €2.20 a share, the airline expects to raise €618 million. The cash will be used to shore up the airline's pension scheme and to help finance a €2 billion expansion that will include the purchase of seven long-haul and 14 short-haul aircraft, and the introduction of new routes. Though the price is at the low end of the expected range, "we are very pleased with the response to the IPO," says Dermot Mannion, chief executive of Aer Lingus.
The airline's decision to finally go public comes at a turbulent time. High fuel prices, the threat of terrorism, and doubts about the timely completion of a new terminal at Aer Lingus' Dublin Airport hub have raised questions about the offering.
RIDING A WAVE. "They might have gotten a better price before Sept. 11 and before the current oil prices, when they were making big profits," says Olivia Mitchell, a member of the lower house of Parliament and transportation spokeswoman for Ireland's largest opposition party, Fine Gael. "But given that it was postponed and postponed and postponed, this is probably as good a time as any."
The recent performance of airline stocks bodes well for Aer Lingus. The share price for short-haul Irish carrier Ryanair rose 10.25% to €7.85 in the three months to Sept. 18, while British Airways saw its price jump more than 18% to £426.75 (€631.80). German carrier Air Berlin has shot up by a third to €12.35 over the same period, though the increase comes after an IPO in which it had to cut both the price and the number of shares on offer due to lackluster demand.
A trouble spot for Aer Lingus is operating expenses, which were up 27.3% this year. The airline's unionized workforce contributes to its high costs, a factor not affecting rival Ryanair. Fuel expenses, which more than tripled to €106 million in the first half of this year, also played a big part.
CUT AND GROW. Though oil prices dropped to a six-month low soon after the prospectus was published in mid-September, likely boosting interest in the shares, the dip could be temporary. Despite the interest in the offering, "we wouldn't be too bullish long-term," says Ross McEvoy, analyst at Bloxham Stockbrokers.
CEO Mannion counters that the airline is on track to cut costs, despite the planned expansion. "We can grow passenger volumes by 50% without having to spend anything on our booking engine or reservation system because we developed it in-house, so we pay no third-party fees," he says. "So we can grow the business while continuing to drive down costs."
Another concern is Washington's delay in finalizing a so-called Open Skies agreement with the EU. The deal would allow Aer Lingus—and any other European airline—to fly to any U.S. airport, while granting U.S. carriers the same right in Europe. The pact was to be inked in October, and has now been postponed to December. That's a problem since Aer Lingus had hoped to beef up its transatlantic service.
LONGER RUNWAY. The airline has said it may expand into China and South Africa instead, though those plans could be hindered by the length of Dublin Airport's runway, which is too short to handle the heaviest jets.
Aer Lingus is counting on a new terminal and a new, longer, runway at the airport to solve that problem, and to help deal with ever-increasing passenger numbers. The work on the terminal is scheduled to be completed by 2009, and the runway by 2011, though Ireland's Commissioner of Aviation Regulation, Cathal Guiomard, calls the terminal's completion date "very ambitious." If it takes longer, that could hinder Aer Lingus' growth.
These challenges bolster the arguments of those opposed to the flotation. Although employees will continue to own 14.9% of the airline, the Services, Industrial, Professional and Technical Union (SIPTU), representing Aer Lingus workers, remains the most vocal challenger. The union says the government's decision to divest over half of its holdings will leave the airline vulnerable to foreign takeovers.
DUBAI INTEREST? A better plan might be for the government to pony up the money for the airline's expansion, says Mike Halpenny, national industrial secretary for SIPTU. "Our argument is that state ownership has delivered a profitable Aer Lingus," Halpenny says. "We've no difficulty with expansion. What we're talking about is the risk of giving up to privatization without knowing where it will go."
Rumors are already circulating that Dubai-based Emirates Group, where Mannion used to work, might be interested. An Emirates spokesperson, however, denied the rumors, saying the airline has no intention of acquiring Aer Lingus. And regulations stipulating that Irish nationals must hold more than half of Aer Lingus make any such takeover improbable. "The likelihood of the Irish government giving up Aer Lingus to a foreign airline," says Chris Avery, aviation analyst for JP Morgan, "is pretty much non-existent."