Committee Reports > List of Committees > Joint > 2005 > Committee on Tourism, Sport and Recreation > Annual Report of the Joint Committee on Tourism, Sport and Recreation, 2004 and Work Programme 2005

Tithe an Oireachtais

An Comhchoiste um Iompar

An Tríú Tuarascáil

Tuarascáil ar Dhíol Beartaithe Aer Lingus

Meán Fómhair 2006

Houses of the Oireachtas

Joint Committee on Transport

Third Report

Report on the Proposed Sale of Aer Lingus

September 2006

Foreword by the Chairman of the Joint Committee on Transport Mr. John Ellis T.D.

The Joint Oireachtas Committee on Transport agreed, in response to the Government proposal to proceed with the sale of Aer Lingus, to invite submissions from interested parties and members of the public on the impact of the proposed sale.

The following Motion was agreed to by the Joint Oireachtas Committee on Transport on March 22^nd 2006,

“That the Joint Oireachtas Committee on Transport agree to carry out an examination of all aspects of the proposed sale of Aer Lingus and to hear the views of interested parties on the best way forward in respect of the national economy, the travelling public, the company, the taxpayer and the workforce.”

Following on from this the Joint Committee began its consideration of the proposed sale of Aer Lingus by inviting the key stakeholders to address it. On the 6^th April, 2006, the Joint Committee received delegations from SIPTU and IMPACT, the principal trade unions and from Aer Lingus management.

The Joint Committee also placed a public notice in the national press, and received 17 written submissions on the proposed sale of Aer Lingus. The Joint Committee invited 8 parties to make further oral presentations to add to their written submissions.

The Joint Committee also invited the Minister for Transport, Martin Cullen, T.D. to address it on the proposed sale of Aer Lingus. The Minister came before the Committee on the 31^st May and responded to questions from members of the Joint Committee.

Following on with a series of Joint Committee meetings the stakeholders, interested parties and members of the public outlined to Members their views on the proposed sale and this led to Members being better informed on all aspects of the proposed sale.

The Joint Committee would like to express its gratitude to all those who came before the Joint Committee to give evidence and to those who took the time to make written submissions.

The Joint Committee would also like to thank Deputy Roisin Shortall and Mr Kevin Baneham for their assistance in the preparation of this Report.

John Ellis T.D.,

Chairman,

Joint Committee on Transport.

September 2006

Report by the Joint Oireachtas Committee on Transport

On the proposed sale of Aer Lingus and its implications for the national economy, the travelling public, the company, the tax-payer and the workforce

The following Members also attended the deliberations of the Joint Committee on the proposed sale of Aer Lingus: Deputies Seán Crowe, Joe Higgins, Seán Ryan and Trevor Sargent; Senators Don Lydon, Shane Ross and Mary White.

July 2006

Table of Contents

Introduction

In response to the Government proposal to proceed with the sale of Aer Lingus, the Joint Oireachtas Committee on Transport agreed to invite submissions from interested parties and members of the public on the impact of the proposed sale.

On March 22^nd 2006, the Joint Oireachtas Committee on Transport agreed to the following Motion: “That the Joint Oireachtas Committee on Transport agree to carry out an examination of all aspects of the proposed sale of Aer Lingus and to hear the views of interested parties on the best way forward in respect of the national economy, the travelling public, the company, the taxpayer and the workforce.”

The Joint Committee invited 3 stakeholders — Aer Lingus management and the SIPTU and IMPACT trade unions - to address it on the proposed sale of the airline.

Following a public notice in the national press, the Joint Committee received 17 written submissions on the proposed sale of Aer Lingus. The Joint Committee invited 8 parties to make further oral presentations to add to their written submissions.

The submissions are reviewed and summarised in subsequent chapters of this report. The details of those parties who made submissions are attached at Appendix A.

The Joint Committee invited the Minister for Transport, Martin Cullen, T.D. to address it on the proposed sale of Aer Lingus. The Minister came before the Committee on the 31^st May and responded to questions from members of the Joint Committee.

Subsequently, the Joint Committee agreed that this report should be prepared on its behalf, to review and summarise all submissions made to it on the proposed sale of Aer Lingus and to identify the implications of such a sale for the national economy, the travelling public, the company, the tax-payer and the workforce.

This report is intended to inform Government of the issues that have arisen in the Joint Committee’s deliberations on the implications of the proposed sale of Aer Lingus with interested parties and members of the public.

The report also pinpoints those outstanding issues that the Joint Committee should continue to monitor once the privatisation of Aer Lingus proceeds. These issues are of national importance and require the ongoing attention of the Houses of the Oireachtas. It is suggested that the outstanding issues are:

•Ownership of the company;

•Retention of the State shareholding;

•Unresolved pensions issue;

•Success of the expansion programme;

•Retention of the Heathrow slots;

•Dublin remains the airline’s operating base.

Chapter 1

Review of submissions received from the stakeholders

The Joint Committee began its consideration of the proposed sale of Aer Lingus by inviting the key stakeholders to address it. On the 6^th April, 2006, the Joint Committee received delegations from SIPTU and IMPACT, the principal trade unions and from Aer Lingus management.

The presentations and points raised in response to questions from Members are summarised below. The SIPTU delegation was first to meet the Joint Committee, followed by the IMPACT delegation and Aer Lingus management.

I. Submission by SIPTU

Mr. Michael Halpenny, national industry secretary and Mr. Christy McQuillan, branch organiser, attended the Joint Committee on behalf of the Services Industrial Professional Technical Union. They outlined that the trade union has 1,800 members at Aer Lingus.

On behalf of SIPTU, Mr. Halpenny re-stated the trade union’s opposition to the proposed sale of Aer Lingus. He outlined the following reasons for SIPTU’s opposition to the proposed privatisation:

-proposed sale was unnecessary;

-threat posed to job security of SIPTU members, in particular by outsourcing;

-pension shortfall;

-dilution of shareholding held by employees and the ESOT;

-inability of the ‘Golden Share’ to protect the national interest.

In its submission, SIPTU also outlined its alternative to the proposed sale, in particular the possibility that the Government could provide the capital to Aer Lingus under the Market Investor Principle. The SIPTU representatives outlined the State Holding Company model of public ownership.

Privatisation unnecessary

In opposing the proposed sale of Aer Lingus, the SIPTU representatives held that it was unnecessary. They pointed to the emergence of the airline as a profitable, commercial and competitive company. This followed a process of change, including the addition of new routes and the loss of jobs, which occurred under public ownership.

Threat to job security

Mr. Halpenny informed the Joint Committee that the main issue raised by staff is job security. He outlined that while under public ownership, staff of Aer Lingus have experienced the “rocky road” of attempts to outsource parts of the company. Given that outsourcing has followed other airline privatisations, it will also happen at Aer Lingus. Mr. Halpenny stated that when Aer Lingus management met staff representatives, they gave no assurances regarding job security.

SIPTU stated that they are looking for commitments from management on job security, in particular that there will be no compulsory redundancies. The representatives stated that they are looking for agreement on core numbers, ratios and a commitment not to outsource.

Pension shortfall

The SIPTU delegation outlined there are three issues arising in relation to the issues of pensions at Aer Lingus. First, the scheme does not provide for indexation or increases in payment on retirement. Second, the shareholder, the Minister for Transport, made certain promises and undertakings to improve the scheme. They are subject to an export report, due shortly. Third, the pension scheme is certified with the Pensions Board as a defined benefits scheme, while Aer Lingus have treated the scheme, for accounting purposes, as a contributions scheme. The SIPTU delegation stated that, while there is not currently a shortfall, it would be for the company to meet any shortfall, should one arise.

During the deliberations of the Joint Committee, discussion arose regarding the potential difficulties of disentangling the Aer Lingus pension scheme from the combined pension scheme with employees of the Dublin Airport Authority and SR Technics.

Employee Share Ownership Programme (ESOP)

Employees of Aer Lingus currently own 14.9% of the airline, either by way of the Trust or individually. At the Joint Committee, SIPTU reiterated its concern that the offering of shares in a privatisation will dilute the share held by employees in the company.

The SIPTU delegation stated that the Minister had acknowledged the need to find a means of protecting the employee shareholding.

The ‘Golden Share’ retained by the State

The SIPTU delegation highlighted the role Aer Lingus plays as part of the nation’s economic infrastructure and its position as a strategic economic asset. Furthermore, the delegation emphasised Ireland’s position on the periphery of Europe and the importance of the country’s links with the United States. In that context, the Joint Committee’s attention was drawn to the importance of the slots at Heathrow airport.

SIPTU commented on the legal complications that would arise if the State sought to use its shareholding in a privatised Aer Lingus to prevent the disposal of the Heathrow slots. SIPTU drew the Joint Committee’s attention to jurisprudence of the European Court of Justice which prevented the use of a ‘Golden Share’ in a similar manner.

Government investment under the Market Investor Principle

The delegation outlined to the Joint Committee that SIPTU is ambitious for Aer Lingus. They commented that the sale as proposed by Government is estimated to yield €400 million. Management has indicated that this would be used as leverage to borrow a further €1.6 billion to fund a €2 billion investment programme in the airline.

SIPTU proposed to the Joint Committee that the Government invests €400 million into the airline. This would ensure that the airline remains in public ownership, thereby removing the risk to the workforce. The airline would also gain the leverage to fund the €2 billion investment programme.

On behalf of the trade union, Mr. Halpenny stated that such an investment is permissible under EU rules under the Market Investor Principle.

The ‘State Holding’ company — an alternative form of public ownership

SIPTU outlined its preference for an alternative form of public ownership, that of the State Holding company. Under this proposal, the shareholding of each of the commercial state companies would be transferred from the Department of Finance to a new holding company. Thus, the shareholding of Aer Lingus would be transferred to the new State Holding company. This would allow it access to capital from private sources, including in times of difficulty.

What happens if a state-owned Aer Lingus faces difficult financial circumstances in the future?

During the discussions of the Joint Committee, an issue arose over what recourse a state-owned Aer Lingus would have, if it faced a precarious financial position in the future. The Joint Committee noted that state aid is not permissible in that situation.

The SIPTU delegation pointed to the fact that if the airline was under a State Holding company, management could seek assistance from the State Holding company.

Furthermore, the attention of the Joint Committee was drawn to the Alitalia case where state aid was permitted to rescue that airline in a time of crisis.

II. Submission by the IMPACT trade union

Mr. Shay Cody, deputy general secretary; Ms. Christina Carney, assistant general secretary, and Mr. Paul Blake, chairperson of the cabin crew committee attended the Joint Committee on behalf of the IMPACT trade union. They gave a presentation to Members and subsequently, responded to questions. They also outlined that IMPACT represents 1,725 staff in Aer Lingus, comprising of cabin crew, pilots and management grades.

Performance of Aer Lingus

On behalf of the IMPACT delegation, Mr. Cody gave a positive appraisal of the performance of Aer Lingus. He stated that the airline is a highly profitable company that has not been a burden on the State. He further outlined that the State was a poor shareholder in the company as it was unable to invest in the company when it was doing badly and unwilling to do so when it was doing well.

Mr. Cody outlined to the Joint Committee that IMPACT’s preferred solution was for the State to invest in the company. He stated that such an investment is permissible under EU rules. He further outlined IMPACT’s support for the State Holding Company proposed by the Irish Congress of Trade Unions.

State shareholding

IMPACT outlined to the Joint Committee that the State should retain a shareholding in the order of 35% of the company. This shareholding was necessary to protect the State’s strategic interests, such as the slots at Heathrow airport or transatlantic services.

Mr. Cody outlined that the advice IMPACT had obtained was that a shareholding of at least 25% was necessary for the State to exercise significant blocking rights. This would be subject to the terms of the company’s new articles of association, which would lay out thresholds for major decisions.

Mr. Cody outlined his fear to the Joint Committee that the State shareholding would be diluted following successive share issues by the company. A 25% shareholding was minimum the State could hold. He called for cross-party agreement that the State would invest in any successive share issue to protect the State’s interest in the company. In the absence of such a commitment, Mr. Cody suggested that the State hold 35% to ensure that its interest would not be diluted in the future.

Mr. Cody drew the Joint Committee’s attention to the privatisation of eircom, in which the State did not retain a strategic shareholding. As it did not retain a shareholding, the State lost all interest in the company. eircom was subjected to asset stripping and a venture capital takeover.

Slots at Heathrow airport

Mr. Cody highlighted the slots at Heathrow airport and the airline’s transatlantic services as strategic interests that the Government should protect. He outlined that the Heathrow slots were important as they provide Irish travellers with connectivity to destinations not served directly from Ireland.

Mr. Cody outlined that even if they were profitable to the airline, Aer Lingus management might be tempted to sell these assets for a quick profit. He drew the Joint Committee’s attention to the current business practice in Ireland of selling profitable petrol stations and hotels to cash in on the property value of the sites.

Issues arising for staff from the proposed privatisation

Mr. Cody outlined to the Joint Committee that this was a period of considerable uncertainty and anxiety for Aer Lingus staff. He outlined that his members were concerned regarding their job security, pay, profit share and the role of the employee share ownership plan (ESOP) and both the general pension scheme and the pilots’ pension plan.

In response to questions, Mr. Cody called on Aer Lingus management to enter a collective agreement with the workforce to ensure that any redundancies in the future are sought on a voluntary headcount basis.

Mr. Cody also informed the Joint Committee that employees faced the similar prospect to the State of a dilution of their shareholding following a subsequent share issue by the company. He outlined that this was an issue the trade union was pursuing in negotiations with management.

III. Presentation by Aer Lingus management

Mr. John Sharman, Chairman; Mr. Dermot Mannion, Chief Executive and Mr. Greg O’Sullivan, finance director and company secretary appeared before the Joint Committee on behalf of the management of Aer Lingus.

In responding to questions and comments from members of the Joint Committee, Aer Lingus management outlined their position on capital and labour issues arising from the proposed privatisation. They also discussed issues relating to the airline’s assets, namely the slots at Heathrow airport and the value proposition offered by Aer Lingus.

In considering issues relating to capital, Aer Lingus management outlined their plans to access capital for the airline and made reference to the company’s debt/capital ratio. They also responded to questions on their view on any impact the remaining State shareholding would have on the attractiveness of the company on the Stock Market. They also made general comments on the blocking share to be retained by the State.

Aer Lingus management responded to questioning from Members in relation to labour issues arising from the privatisation of the airline, including details of the pensions issue and job security.

The Chief Executive and Chairman also discussed the airline’s future interest in the slots held by the airline at Heathrow Airport. They also gave details of the value proposition offered by Aer Lingus.

Capital issues

(i) Access to capital

Aer Lingus management outlined that in the course of the privatisation, the airline would raise €400 million in capital. Mr. Mannion stated that this cash equity would support the airline’s capital investment programme. He outlined that on the day of the Initial Public Offering (IPO), there would be a fresh issue of shares, bringing in €400 million to the airline, followed by the sale by Government of its shares.

(ii) The company’s debt/capital ratio

The Chief Executive outlined that the company would not be able to fund the €2 billion capital investment programme by way of borrowing alone. He stated that to borrow the totality of the fund required would push the company’s debt-equity ratio to a level that would put the company at risk in the event of a serious downturn in the industry.

(iii) Effect of the remaining State shareholding on the company

Mr. Mannion informed the Joint Committee that he was comfortable with the scenario in which the Government retains 25.1% ownership of the airline, in addition to the 14.9% share of the employees. He stated that this scenario would receive a favourable reception in the market.

Responding to questioning, Mr. Sharman rejected the suggestion that the levels of continued State and employee shareholding would lead to a discount on the value of shares on the Stock Market.

(iv) The status of the blocking share

Members of the Joint Committee queried how much control the State would be able to exercise over its strategic interests through the 25.1% shareholding it retained. In response, Aer Lingus management stated that, in the first instance, a minority shareholder had recourse to the Companies Acts, 1963 — 2005. Furthermore, a shareholder could obtain a blocking share by way of agreement among shareholders, in the form of the company’s articles of association. On behalf of management, Mr. Sharman stated that they were in active discussion with Government as to how the new articles of association could protect the rights of the 25.1% shareholder.

Labour issues

(i) Pension matters arising

In response to questions raised by members of the Joint Committee in relation to the pensions of Aer Lingus employees, airline management stated that the total deficit attributable to Aer Lingus as part of the multi-employer scheme was in the order of €171 million. This figure is based on an actuarial report prepared on behalf of the airline. The other parties to the multi-employer scheme, the Dublin Airport Authority and SR Technique have not agreed to this calculation and nor have the trade unions. Mr. Mannion stated that this was a matter to be resolved during the negotiations underway in preparation for privatisation.

Mr. Mannion informed that Joint Committee that he saw that this deficit could be met by a lump sum payment accompanied by increased contributions from the company and employees or by lump sum alone. He further stated that the pensions issue can only be resolved if a portion of the Government’s proceeds are allocated to meet the deficit.

On behalf of Aer Lingus management, Mr. Mannion ruled out the indexation of pensions to wage inflation, preferring indexation with the Consumer Price Index (CPI). He stated that the current deficit was related to CPI indexation and if the deficit were determined in terms of wage inflation, it would be a much higher figure.

(ii) Job security

The Chief Executive, Mr. Mannion informed the Joint Committee of the meetings held by management with trade union representatives and staff directly regarding job security. He informed the Members that, in his view, the best way to ensure job security for everyone was to ensure that the airline builds on its recent successful track record.

Assets

(i) The slots at Heathrow airport

In response to questions from Members, Mr. Mannion stated that the slots at Heathrow Airport were a valuable asset and a fundamental part of the airline’s business, now and in the future. He stated that he expected Aer Lingus to have a significant continuing presence at Heathrow.

Mr. Sharman acknowledged that the retention by Aer Lingus of slots at Heathrow was an important commercial and philosophical issue in terms of Ireland’s connectivity with the world. He stated that it would be unwise for management to give an absolute and cast-iron assurance regarding the future of the Heathrow slots. He pointed to the developments of an alternative hub at Dubai and the increasing level of connectivity directly from Ireland.

(ii) Aer Lingus value proposition

Aer Lingus management stated to the Joint Committee that the key to the success of the airline was its success on both short and long haul services. Mr. Mannion informed the Members that the airline was the only full service carrier to have a profitable short haul network. He also reiterated the airline’s commitment to retain the shamrock as its key brand image.

Fees incurred by Aer Lingus

In response to questioning on the matter, Mr. Mannion informed the Joint Committee that phase 1 of the privatisation process had incurred €100,000 in fees for advisors and consultants. Now that the Government had indicated it would move ahead with privatisation, the airline would seek agreement for a fee structure for phase 2.

Chapter 2

Presentation by the Minister for Transport, Martin Cullen, T.D. on behalf of the Government, followed by discussion with Members of the Joint Committee.

The Minister was accompanied by Mr. John Murphy, assistant secretary; Ms Eithne Brogan, assistant principal officer; and Mr. Fintan Towey.

The Minister was received by the Joint Committee on Wednesday, 31^st May 2006.

The Minister for Transport, Mr. Martin Cullen, T.D. agreed to the invitation of the Joint Committee to appear before the Committee. The Minister gave the Members a presentation on the proposed sale of the airline and responded to questions and comments.

During the course of the session, there was discussion on the rationale behind the privatisation of the airline and the value it offered to the taxpayer. The Minister was asked about the market conditions at the time of the IPO and would the Government withdraw Aer Lingus from sale if the conditions were unfavourable. Furthermore, there was discussion on the shareholding to be retained by the State, the issues raised by staff and the Heathrow slots. The Minister also responded to questions on how the proceeds of the sale would be allocated.

The rationale behind privatisation

The Minister opened his presentation with a positive appraisal of Aer Lingus’ performance, but outlined that the company now needed access to international capital markets on the same basis as its competitors. He stated that the Government had mandated the airline to prepare an expansion plan on short and long haul services, which would benefit the airline, the economy and the travelling public. The sale of the airline would fund this investment programme.

The Minister stated that it was the Government’s strategy for Aer Lingus to have sufficient resources in the long term to enable it to compete successfully and to ensure its balance sheet is strong enough to withstand industry downturns or external shocks, features of the airline industry. The Minister stated that to achieve this, the airline must have access to capital on the same basis as its competitors.

The Minister outlined to the Joint Committee his view that the status quo was not an option for Aer Lingus. If it were not given access to capital on the same footing as other airlines, it would be in a vulnerable position at the next downturn or external shock.

A number of Members outlined an opposing view to that put forward by the Minister. They stated that the State was able to invest in Aer Lingus and provide it with the necessary capital for expansion. They also pointed out that the plans put forward by Aer Lingus management are predicated on a successful outcome to the Open Skies negotiations between the United States and the European Union. This outcome is far from certain. Furthermore, the €2 billion expansion plan is an 8-10 year plan and therefore, the airline does not require this funding immediately. This lack of urgency reduces the value-added an IPO offers of an immediate injection of capital.

It was also put to the Minister that there was no guarantee that Aer Lingus will still be based in Ireland in 5 years time. It was stated that the airline could become a back office to British Airways. The Minister did not accept this argument, stating the airline was commercially viable and would not be uprooted from its market.

In response to questions, the Minister held that while it could be possible, in principle for the State to invest in Aer Lingus, in practice, this might not be the case. He outlined to the Joint Committee that such an investment, even on a Market Investor basis, would be in an uncertain position as to its legality. He outlined that it could be subject to scrutiny from the EU Commission. The Minister drew the attention of the Joint Committee to the scrutiny the EU Commission has applied to the funding available under Transport 21 to the regional airports of Knock, Donegal, Galway, Kerry and Waterford.

The Minister was asked why the airline could not raise the required funding from sources other then the Stock Market, thereby removing the need to sell Aer Lingus. A Member outlined that if the airline’s plans were so good, it could seek financial directly from financial institutions, without having to go through investors on the Stock Market. In response, the Minister outlined that the airline has sought financing directly from financial institutions, but there is a point at which a company needs internal equity to lever more substantial investment from the markets. The Minister also stated that Aer Lingus needs a strong balance sheet and a mixture of resources in approaching the market.

Value for the taxpayer

The Minister outlined his view that privatisation was the best way to ensure value for the taxpayer. Privatisation and access to capital would allow the airline develop, adding to its long and short haul services. He outlined that if the airline did not have access to capital on an equal footing to other carriers, it would fail.

A number of members of the Joint Committee outlined the opposing view that the taxpayer is going from owning 85% of the company to owning 25% with nothing to show for it.

Members also drew parallels with the privatisation and subsequent return to State ownership of Air New Zealand. Members outlined the difficult financial position an airline can face following a downturn or external shock. The Minister did not accept the parallel with Air New Zealand. He outlined that the airline was still in financial difficulty, even back in State ownership. He also stated that the New Zealand carrier operated in a different regulatory environment and was not subject to European Union rules.

Market conditions at time of proposed IPO

Members of the Joint Committee raised the previous occasion when Aer Lingus was withdrawn from sale due to changing market and world conditions. They also raised the case of the IPO of Aer Berlin. Members asked was there a price under which the Government would not proceed with the sale.

The Minister stated that he could not speculate on the price of Aer Lingus as to do so would breach Stock Exchange rules. He, however, informed the Joint Committee that the Government would not sell at a price lower then that required to fund the investment needed by the airline.

The Minister also rejected the comparison between the IPO of Aer Berlin and that proposed for Aer Lingus. He stated that the circumstances of both transactions were immeasurably different. The Minister outlined that Aer Lingus was a successful and growing company, in excellent health.

The Minister also outlined that the Government would know the market response to the proposed sale of Aer Lingus well before the privatisation.

Retention of State shareholding

The Minister stated to the Joint Committee that the State would retain an interest of 25.1% in the airline to protect and enhance the strategic interests of the taxpayer. He further stated that this shareholding does not represent a golden share and is no different from any other company in which a group holds 25%.

In response to questions from the Joint Committee, the Minister stated that the State shareholding would not below 25.1% and could be higher.

Addressing staff concerns

The Minister informed the Joint Committee that he mandated the airline to engage intensively with the trade unions with a view to addressing the job security and pension issues arising from the proposed privatisation.

In response to questions, the Minister stated that the Aer Lingus pension fund is not a State pension and neither his Office nor the Government are trustees of the pension fund.

Slots at Heathrow airport

Members raised the possible stripping of the airline’s valuable slots at Heathrow airport. The Minister outlined that these assets made a commercial return for Aer Lingus and on that basis, would be maintained. He also outlined that other hub airports were gaining prominence, for example in the Middle East and Frankfurt. He also stated that Ireland would benefit from a greater level of direct connectivity.

Proceeds of the sale

In response to questioning, the Minister outlined to the Joint Committee that the proceeds of the sale of Aer Lingus would be invested in Aer Lingus. He would not give further details of how additional proceeds would be allocated. The Minister stated that he would be able to give further details before the sale takes place.

Chapter 3

Review of oral and written submissions received from interested parties

The Joint Committee agreed to seek submissions from interested parties and members of the public on the proposed sale by Government of its shares in Aer Lingus. A notice was published in three national newspapers on March 29^th and subsequently in Foinse, requesting submissions

17 parties made written submissions on the proposed sale of Aer Lingus and are listed at appendix A.

The Joint Committee heard 8 oral submissions of interested parties:

•Aer Lingus Craft Group of Trade Unions;

•SRS Aviation Ireland Limited Pensioners Group;

•Dublin Chamber of Commerce;

•Irish Tourist Industry Confederation;

•Chambers Ireland — Air Transport Users Council;

•Dr. Aishling Reynolds-Feighan;

•Rehab Group; and

•Irish Congress of Trade Unions.

This session took place on Thursday, 18th May 2006.

The submission made to the Joint Committee orally and in writing are reviewed and summarised below.

Prior to each submission, the Chairman or Vice Chairman drew the witnesses’ attention to the fact that members of this committee have absolute privilege but that this same privilege does not apply to witnesses appearing before it. He further stated that the Committee could not guarantee any level of privilege to witnesses appearing before it. He outlined that Members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.

I. The Aer Lingus Craft Group of Trade Unions

Mr. Brian Gormley, chairman, Mr. Niall O’Hara, senior shop steward, Amicus trade union, and Mr. Robbie Patton, TEEU, appeared before the Joint Committee on behalf of the Aer Lingus Craft Group of Trade Unions.

Case against privatisation

The delegation outlined their opposition to the proposed privatisation of the airline. They outlined the strategic importance of Aer Lingus to Ireland’s economic prosperity. They drew a parallel between the sale of eircom and Ireland’s failure to develop a highspeed communications infrastructure with the threat posed by the Aer Lingus privatisation to Ireland’s air connectivity with the rest of the world. They concluded that the country’s economic welfare should not be placed in the hands of venture capitalists.

Mr. Gormley drew the Joint Committee’s attention to the viable alternative of State investment in the company under the State Holding model proposed by ICTU.

The experience of workers in TEAM Aer Lingus

On behalf of the delegation, Mr. Patton outlined to the Joint Committee the negative experience of the former employees of Aer Lingus who were persuaded to transfer their employment to TEAM Aer Lingus. Mr. Patton outlined that Aer Lingus had reneged on commitments it gave to employees and, despite successful challenges in the High and Supreme Courts, the company was still reluctant to recognise the legitimacy of the employees’ claims. He informed the Members that the staff in the successor company to TEAM Aer Lingus were now under protective notice. Mr. Patton drew a parallel with the worsening pay and job security now experienced by TEAM Aer Lingus workers with the situation Aer Lingus workers will face, should privatisation go ahead. He also stated that the ongoing litigation between employees and Aer Lingus on guarantees made by the company at the time TEAM Aer Lingus was established coloured their view on the current privatisation negotiations.

Issues arising from the proposed privatisation

The delegation outlined that they and other trade union representatives were in negotiations with management regarding issues arising in relation to the privatisation. They informed the Joint Committee of their concerns in relation to job security, future pay and conditions, pension deficiencies, deteriorating benefits for new employees and the maintenance of the ESOP at 14.9%. They outlined that the company had not made satisfactory guarantees on these matters.

The Craft Union representatives also raised the issue of the slots at Heathrow airport. They stated that it was in the national interest to have guaranteed access to an international hub of the standing of Heathrow. Dubai or the Middle East generally did not offer viable alternatives.

In concluding the delegation’s submission, Mr. Gormley stated that craft workers had previously faced the prospect of privatisation of their service when TEAM Aer Lingus was created. They were also made promises of a brighter future. He stated that their members reflect on that experience in assessing the current proposal to privatise the airline. He affirmed that they were unable to support privatisation until the Government had given the assurances sought.

II. SRS (Aviation) Irl. Ltd/Aer Lingus Teo. Pensioners Group

Mr. Derek Neville, former general manager of ground handling and marketing and Mr. P. J. O’Sullivan, former general manager of the company came before the Joint Committee to outline the basis of their claim against Aer Lingus.

This group represents current pensioners of Shannon Repairs Services Ltd who were employees of that company prior to 1982. The company was a groundhandling agent at Shannon airport and was acquired by Aer Lingus in 1966 as a wholly owned subsidiary. The SRS staff were given the same terms and conditions of employment with colleagues in Aer Lingus. This was enshrined in the 1982/83 SRS Aviation/Aer Lingus/ Trade Union Relativity Agreement.

The delegation outlined that their claim was for equal treatment in the calculation of their pensions. They wish to have an Annual Cost of Living Increase, calculated on the same basis as other Aer Lingus and SRS Aviation pensioners. They wish that these increases be paid retrospectively from their date of retirement.

III. Dublin Chamber of Commerce

Mr. Eugene McCague, President of the Dublin Chamber of Commerce, made a written submission on behalf of the Chamber. Mr. Ronan King, vice president, Ms. Margaret Sweeney, chairperson of the infrastructure committee and Ms. Gina Quinn, chief executive addressed the Joint Committee on the Chamber’s behalf.

Mr. King outlined the Chamber’s endorsement of the proposed privatisation of Aer Lingus and its plans to expand its short and long haul services. He stated that Dublin businessmen and businesswomen were important corporate and personal users of Aer Lingus and they favoured the privatisation.

The delegation outlined that the success of the airline would be determined by two market-driven factors: first, an airline’s ability to compete when times are lean and, second, its readiness to avail of opportunities to grow. They stated that the airline must have access to capital and its management the freedom to make and carry through rapid decisions. A successful IPO will not only facilitate its survival but also ensure its future prosperity.

The Chamber contends that air travel and Ireland’s connectivity are key factors to the city’s economic success. In its document “Imagine Dublin 2020”, the Chamber outlines that success is dependent upon the continued growth of air access services to Ireland and an international airport with at least two terminals and 21st century runways to facilitate the growth of annual passenger traffic of more than 30 million passengers. Specifically, Mr. King informed the Joint Committee that connectivity was an important factor in decisions by multi-national companies to locate in Ireland. He also pointed to the popularity of Dublin for short-term breaks and outlined that business tourism was now worth €500 million to the capital city.

The Dublin Chamber of Commerce stated that Exchequer capital resources would be better applied to tackle the appalling infrastructural deficit in terms of roads, rail, waste, energy, educational, health and broadband facilities, rather than invested in Aer Lingus.

Mr. King concluded by saying that the airline needed the commercial flexibility to respond to the changing global market and could not be undermined by Government procrastination.

IV. Irish Tourist Industry Confederation

Ms Catherine O’Reilly, chairwoman; Mr. Richard Bourke, deputy chairperson, and Mr. Eamon McKeon, chief executive appeared before the Joint Committee on behalf of the Irish Tourist Industry Confederation.

They outlined their support for the privatisation of Aer Lingus as the Government had indicated its decision not to fund the expansion of the airline. The delegation outlined their view that the expansion of the airline was vital to the development of tourism throughout Ireland.

The delegation opened their presentation by highlighting the importance of tourism to the economy. They stated that almost 17,000 businesses, most of which are small, are involved in the industry which employs 150,000 directly and supports the employment of a further 80,000. The number of tourists coming to the country from overseas has increased from 1.9 million in 1985 to almost 7 million last year. The delegation hoped that the number of visitors from overseas will increase to 10 million by 2012, thereby generating €6 billion in foreign exchange earnings.

On behalf of the delegation, Mr. McKeon outlined the importance of developing Aer Lingus’ long haul services. He stated that a fleet expansion from seven to at least 14 long-haul aircraft is needed. He also pointed to the long lead-in time with the delivery of the additional aircraft. Mr. McKeon also drew the attention of the Joint Committee to the opportunities that will become available following the advent of the Open Skies agreement between the United States and the European Union.

The delegation concluded by saying that the expansion of Aer Lingus was essential to the development of tourism in Ireland. The airline could not survive without availing of the opportunities to expand its services.

V. Chambers Ireland — Air Transport Users Council

Mr. Dan Loughrey, chairman of Chambers Ireland’s air transport users council (ATUC), and Mr. Seán Murphy, the director of policy of Chambers Ireland addressed the Joint Committee on behalf of Chambers Ireland and the Air Transport Users Council.

Mr. Loughrey opened by saying that the ATUC represents the interests of the business community as users of air transport services. He outlined that ATUC was a strong supporter of the privatisation of Aer Lingus, which was in the interests of customers, staff and shareholders, and urged that this be completed as soon as possible.

Mr. Loughrey outlined that air access is vital for the economic wellbeing of the country. He also stated that there needed to be competition in air travel to ensure that the user got a good price and service.

The ATUC delegation informed the Joint Committee that they considered that air transport was no longer a public utility. While they recognised its strategic importance, air travel was an intensively competitive industry where all players needed to participate on a level playing field. They submitted that Aer Lingus needed access to capital and flexible decision-making in order to expand.

Mr. Loughrey suggested that current decision-making structures in the airline and between the airline and its shareholder were inflexible. He gave an example of Aer Lingus’ failure to acquire aircraft in 2002-03 when the market for aircraft purchases was soft. If Aer Lingus had received a capital injection at that stage, it could have obtained a significant discount on orders.

Mr. Loughrey continued that the air travel industry does not stand still and Aer Lingus faces continued pressure from Ryanair. If Aer Lingus does not have the same access to capital and flexible decision-making, he fears that the airline will lose significant market share. This would be to the detriment of customers in terms of a lack of competitiveness, employees in terms of fewer job opportunities and shareholders in terms of lower profits. The submission also drew attention to the opportunities offered by the EU —US Open Skies agreement.

While the ATUC delegation recognised the importance of preserving the airline’s slots at Heathrow airport, they urged that the proposed ownership structure of the privatised airline would hamper its commercial prospects.

VI. Dr. Aisling Reynolds-Feighan, School of Economics, University College Dublin

Dr. Reynolds-Feighan outlined to the Joint Committee the need for the State to retain a controlling shareholding in a privatised Aer Lingus, to protect Ireland’s strategic interests. Dr. Reynolds-Feighan based her submission on the vulnerability of Aer Lingus to a takeover and the mobility of the company’s assets. Furthermore, the submission drew the Joint Committee’s attention to a divergence between Ireland’s interests from policies promoted by the European Union as well as to US experience of when a city loses its status as the operating base of a significant airline.

Dr. Reynolds-Feighan opened her submission by pointing to the success of Aer Lingus, but highlighted its vulnerability, as a small carrier, to a takeover by a larger airline. She also distinguished the airline industry from the electricity, telecommunications and airport sectors in that the assets of the former are extremely mobile. It was Dr. Reynolds-Feighan’s contention that if a privatised Aer Lingus is taken over, the parent company may seek to re-locate Aer Lingus’ operating base away from Dublin airport.

Dr. Reynolds-Feighan gave a detailed outline of the experience of airports in the United States who lost their status as the operating base or hub of major US airlines. The airports are attached to cities of the same approximate size as Dublin. In her oral submission, Dr. Reynolds-Feighan focused on the experience of St. Louis, Missouri and Raleigh-Durham, North Carolina. She highlighted the important community and employment benefits allied with being an operating base. Both airports suffered a significant decline in passenger numbers once they lost their status as an operating base, following the takeover or bankruptcy of the airline.

Dr. Reynolds-Feighan also drew the attention of the Joint Committee to the overriding policy preference of the European Union to favour rail transport over road and air. She outlined that, given Ireland’s geography and demographics, this shift might not be appropriate for Ireland. Dr. Reynolds-Feighan outlined this EU policy objective may reduce the availability across Europe of short haul slots, thereby reducing Ireland’s connectivity.

Dr. Reynolds-Feighan concluded by highlighting the importance of the national airline to Ireland’s well being. She outlined the detrimental consequences of Aer Lingus moving its base outside Ireland. She highlighted the need for the State to retain a controlling shareholding over strategic decisions, including the need to maintain this level of shareholding with periodic investments.

VII. The Rehab Group

Ms. Cliodhna O’Neill, head of public affairs, and Ms. Sonya Felton, senior public affairs executive addressed the Joint Committee on behalf of the Rehab Group. Ms. Angela Kerins, Director of Public Affairs and Group Development made the written submission on behalf of the organisation.

The delegation outlined that the Rehab Group is one of the largest non-profit organisations in Ireland and the largest voluntary provider of services for people with disabilities, older people and others who are marginalised in the community. It provides a range of health, social care, training and employment services for 60,000 people in 200 locations in Ireland and Britain.

They outlined their wish that the sectoral plan required of the Department of Transport under the Disability Act 2005 include access to people with disabilities to air transport services. This is an opportunity to implement statutory codes of practice that would be binding on airlines on matters related to access.

Ms. O’Neill informed the Joint Committee that Aer Lingus is a signatory to the European voluntary airline passenger service commitment. She asked that this commitment be implemented fully before privatisation.

Ms. O’ Neill stated that in many instances Aer Lingus has a good track record and reputation in the provision of accessible services which meet the needs of its customers with disabilities, at no extra cost to them. However, Ms. O’Neill said that there were gaps in terms of ensuring access. She called on Aer Lingus to remove its requirement for people with reduced mobility, which includes persons with learning disabilities and psychiatric illnesses, to make medical declarations about their disability as a condition of travel. Aer Lingus must also publish a written policy about its services for people with disabilities and make it available in accessible formats. Aer Lingus should establish and maintain a system of ongoing consultation with customers with disabilities and impaired mobility.

VIII. Irish Congress of Trade Unions

Mr. Liam Berney, industrial officer, and Mr. Paul Sweeney, economic adviser appeared before the Joint Committee on behalf of the Irish Congress of Trade Unions, ICTU.

The Congress delegation briefed the Joint Committee on ICTU’s proposed for a new model of ownership of semi-State companies. They outlined to Members that this followed consideration by the OECD on the future of public ownership, in particular where they are natural monopolies or strategic interests to protect.

Mr. Sweeney outlined the ICTU proposal for a State Holding company to hold the shares of all semi-State companies, thereby removing their ownership from the Department of Finance. The proposal casts the State Holding company as a supportive shareholder, willing to seek finance for the appropriate investment proposal.

Where a semi-State company seeks access to capital, it would submit a proposal to a small panel of experts in the State Holding company who would assess the proposal. They would be assessed and decided upon promptly.

Mr. Sweeney pointed to the involvement of private pension fund to invest in proposals put forward by semi-State companies.

With reference to Aer Lingus, the delegation held that, given the strategic importance of retaining a national airline, this was an appropriate body to hold under a State Holding company.

Chapter 4

Written submissions received by the Joint Committee on Transport

The Joint Committee on Transport received and considered submissions from members of the public and interested parties followed the publication of a notice requesting submissions. The written submissions were considered as part of the Committee’s deliberations on the proposed sale of Aer Lingus and are reviewed below.

The Joint Committee received the following written submissions from interested parties and members of the public:

I. Mr. William J. Murphy, 120 Gaybrook Lawns, Malahide, Co. Dublin

Mr. Murphy is a graduate of the Institute of Transport (United Kingdom) and worked for Aer Lingus in Dublin and London from 1951 until his retirement in 1992.

In his submission, Mr. Murphy outlines the need for a full-service carrier, operating from Ireland. He outlined the possible markets that such a carrier could explore, for example long haul services or guaranteed connections for connecting passengers who cannot avail of point-to-point services.

Mr. Murphy acknowledges the need for substantial capital investment in the airline, but questions the need for the €2 billion plan put forward by Government. Mr. Murphy outlines three possible avenues to obtain the funding needed by Aer Lingus. The first option is reliance on State funding, which, Mr. Murphy states, the Government has ruled out. The second is a sale to the highest bidder. He rejects this proposal, as it would allow the company to fall into the hands of venture capitalists. The third option is an IPO. Mr. Murphy looked at the precedent offered by the eircom IPO and concluded that there must be a mechanism to protect the Irish interest in the company. He outlines that the Aer Lingus IPO should give priority to individual smallholders to invest in the company. He also suggested that the Government retains an interest in the airline.

II. Grounded Ireland, Spokesman Mr. John Fitzpatrick, 3 Military House, Rue des Landes, St. Peter, Jersey JE3 7BG

On behalf of the organisation “Grounded Ireland”, Mr. Fitzpatrick outlined its support for the privatisation of Aer Lingus. He outlined that the airline should be able to respond quickly to the changing air transport market and to raise funds on the same basis as its competitors. He further outlined that there is no benefit gained by the airline or its employees by public ownership. He suggested that the airline was not immune to competitive pressures and its employees did not have job security.

Mr. Fitzpatrick pointed to the positive outcome Open Skies within the European Union had had on Ireland. He outlined that similar benefits will be available under the forthcoming Open Skies agreement between the European Union and the United States. Mr. Fitzpatrick also drew the attention of the Joint Committee to the collapse of the Belgian national airline, Sabena. Despite being at the heart of Europe, Brussels has lost most of its long haul services following the collapse of Sabena.

Mr. Fitzpatrick outlined that the State should not invest in Aer Lingus. First, State resources are better allocated to other priorities. Second, the State could not provide the level of resources needed by the airline. He also stated that the competitive pressures faced by Aer Lingus represent the greatest threat to the job security of its employees, a threat that remains even if the airline stays in public ownership.

Mr. Fitzpatrick suggests that Aer Lingus should develop its long haul service and incorporate the low-cost model into this service. He further outlined that Ireland should pursue a separate Open Skies agreement with the US, should the EU-US negotiations stall.

Mr. Fitzpatrick outlined that the importance of the Heathrow slots will diminish as more point-to-point flights become available from Ireland. Furthermore, he believes that Aer Lingus will retain its presence at Heathrow.

Mr. Fitzpatrick concluded by pointing to the detrimental impact delay in privatisation will have on Aer Lingus, holding back the airline’s development and leaving it more vulnerable to competition.

III. Mr. John Doherty, a retired Aer Lingus employee

Mr. Doherty outlined his preference that Aer Lingus not be privatised. He informed the Joint Committee that he retired 4 years ago from the airline.

IV. Mr. Seán Crowe, T.D., on behalf of Sinn Féin

Deputy Crowe outlined Sinn Féin’s opposition to the Government’s proposed sale of Aer Lingus. The party supports the retention of the airline in State ownership.

Deputy Crowe outlined his party’s opposition to the privatisation of state companies and outlined its commitment to the principles of democratic ownership. Deputy Crowe highlighted the privatisation of eircom and outlined that this sell-off contributed to the failure to develop a broadband network in Ireland.

Sinn Féin outlines that the Government could and should invest in Aer Lingus. It can do so under the Market Investor principle and should do so because of the airline’s good performance. The party also drew a parallel between the proposed Aer Lingus sale and the outcome of the Air New Zealand privatisation.

In considering the blocking share, Sinn Féin highlighted the decisions of the European Court of Justice in Case C-98/01: Commission of the European Communities v. United Kingdom and In Case C-463/00, Commission of the European Communities v. Kingdom of Spain, supported by the United Kingdom. This jurisprudence restricts the way a Government can seek to use shareholdings to protect strategic interests.

Deputy Crowe also outlined that privatisation inevitably leads to worsening terms of employment and the ongoing pensions issue. He also stated that it was in the country’s strategic interest to have a passenger and cargo carrier, operating from Ireland.

Sinn Féin called on the Government to concentrate on devising an all-Ireland transport strategy, instead of selling off its assets.

V. Laird Aviation and Transport Consulting Ltd; Mr. Robert Laird of 20 Greenlawns, Skerries, Co. Dublin.

Mr. Laird opened his submission by outlining his expertise in the aviation industry and his previous professional experience with Aer Lingus and Aer Arann.

Mr. Laird contends that Aer Lingus management should not be restricted in its dealings with regard to the slots at Heathrow airport. He submits that they do not have a strategic value to Ireland and should be retained by the airline for only as long as they are profitable for the company.

Mr. Laird outlined to the Joint Committee that the Irish consumer has options in deciding which London airport to fly to. This consumer is price sensitive and the share of the Ireland — London market held by Heathrow has declined.

He further pointed to developments in air transport that have diminished the importance of Heathrow as a hub. He suggests that the increasing number of direct services from Dublin to new destinations, the development of other hubs in Europe and the Middle East and the decision of British Airways to move services from Heathrow to Gatwick all mean that Heathrow is less important to the Irish consumer.

VI. Mr. Brian Flanagan of 27 Ardmeen Park, Blackrock, Co. Dublin.

Mr. Flanagan opened his submission by stating that he is a management consultant and his business, Planware, develops software for planning and financial consulting.

Mr. Flanagan applied the Planware software to projected business figures for Aer Lingus, obtained from the company’s 2004 Annual Report and 2005 results statement. Following his analysis, Mr. Flanagan concludes that the company is in a good position to finance growth without having to resort to privatisation. He further commented on the costs associated with privatisation and the on-going expense of listing and compliance fees.

Mr. Flanagan asks the Joint Committee to obtain further details from Aer Lingus management regarding the proposed expansion to the Americas, the Middle and Far East and Africa. He points out that the airline is not in a position of strength to develop these routes.

Mr. Flanagan also outlined that the State will have to purchase shares in any subsequent share issue to preserve its position in the airline. He further suggested that the Government obtain a definitive position from the EU Commission on whether it can invest in the company.

In concluding, Mr. Flanagan called on the Joint Committee to recommend against the privatisation of Aer Lingus.

VII. Retired Aviation Staff Association, ALSAA complex, Dublin Airport.

The RASA submission outlined that this association represented the retired members of the Irish Airlines (General Employees) Superannuation Scheme (IAGESS). This is a defined benefit scheme, comprising of two sponsoring employers, Aer Lingus and Aer Rianta and three participating companies.

The submission welcomes the commitment given by the Aer Lingus Chief Executive to link pensions to the Consumer Price Index. It also highlighted the ongoing deficient in the pension fund and called for this to be resolved for all pensioners.

The RASA submission bemoans that they have been excluded from consultations regarding the airline’s privatisation. It outlined that some of its members view privatisation as removing their access to Government to intervene on its behalf, while other members view privatisation as the means to resolve this issue.

VIII. Ms. Eilish Pearce of 4 Trafalgar Lane, Monkstown, Co. Dublin

Ms. Pearce outlined her opposition to the proposed sale of Aer Lingus. She outlined that the airline has not explained why it wishes to expand its long haul services. Ms. Pearce also pointed to the risk associated with expansion as well as the environmental effect of increased air travel. She also pointed to congestion in the skies caused by higher levels of air travel. Ms. Pearce also outlined that, as an island nation, Ireland needed to maintain control of its inwards and outwards transport capability. She concluded by calling on the Government to explain its refusal to invest in the airline.

IX. Ms. Kathryn Sinnott, M.E.P., St Joseph’s, Ballinabearna, Ballinhassig, Co. Cork

Ms. Sinnott is a Member of the European Parliament for the Ireland - South Constituency. In her submission, Ms. Sinnott outlined the detrimental impact privatisation would have on regional development and the regional airports. She outlines that the current E.U. Open Skies policy will relegate Irish airports to a subordinate position to airports such as Heathrow. Ms. Sinnott also held that the privatisation of Aer Lingus would render the policy of sustaining regional development unworkable. She concluded by stating that the airline’s privatisation would have a negative effect on the viability of regional airports.

X. Aer Lingus workers at Shannon airport; Mr. Padraig Geraghty and Mr. Michael Mulvihill.

Mr. Geraghty and Mr. Mulvihill reported on a recent meeting of Aer Lingus workers at Shannon to discuss the future of the airline. They concluded that, as an island nation, it was essential that Ireland retain a national carrier. They raised the fear that a privatised airline would be moved from Ireland. They expressed concern at the impact of privatisation on regional airports, in particular flights to Heathrow and Kennedy. They also expressed concern at the impact of the E.U. Open Skies policy.

Chapter 5

Issues raised in submissions to the Joint Oireachtas Committee on Transport

This Report seeks to highlight the issues raised in submissions made to the Joint Committee and to identify those issues requiring the on-going attention of Members.

Aer Lingus is currently a publicly owned airline. The Minister for Finance owns 85.1% of its shares and employees or the ESOT hold the remaining 14.9%. It is proposed that the company issue further shares in an IPO and that the Government sell a significant portion of its shareholding. Proceeds of the sale would be allocated to an investment programme for the airline with an additional portion being assigned to cover a deficit in the airline’s pension scheme.

During the course of receiving submission from interested parties and members of the public, the following issues were brought to the attention of the Joint Oireachtas Committee on Transport:

•Need for Aer Lingus to expand;

•Access to capital;

•Can the State invest in Aer Lingus?

•Need for Aer Lingus management to have commercial flexibility;

•Shareholding the State retains in Aer Lingus;

•Vulnerability of Aer Lingus to takeover;

•Retention of Dublin as Aer Lingus’ operating base;

•Heathrow slots;

•Unsuccessful privatisations;

•Outstanding employee issues;

•Value to the taxpayer.

Need for Aer Lingus to expand

It was a common theme across submissions that Aer Lingus has been very successful in the difficult period since 2001 and now has the opportunity to expand. Many submissions supported the airline’s dual approach of developing short and long haul services and the current need to further develop long haul routes. Submissions generally agreed that the airline needed an injection of capital.

While there was agreement on the need of Aer Lingus to expand and to locate capital to fund this, there was no consensus on how this can be achieved. Some submissions suggested that the Government should fund this expansion programme and that this was permissible under EU rules. Other submissions stated that an IPO was the optimal way for the airline to acquire the necessary funds.

A number of submissions questioned the scale of the €2 billion expansion plan proposed by Aer Lingus management, in particular given the uncertain outcome of the current talks between the U.S. and E.U. for an Open Skies agreement.

Access to capital

The Minister for Transport, the airline and other delegations outlined that the best way of obtaining access to capital was by way of selling shares in Aer Lingus on the Stock Market. Others suggested that Aer Lingus could obtain funding by other means, either through borrowings or from the State.

The submissions that supported the sale of Aer Lingus outlined that the airline needed to have access to capital on the same basis as its competitors. They also pointed out that an IPO would give the airline equity to finance its expansion plan. They stated that the airline could not rely entirely on borrowings alone, as to do so would give the airline an unhealthy debt/equity ratio.

Many submissions, including from SIPTU and IMPACT, call for State investment in Aer Lingus as an alternative to privatisation. This would give the equity to borrow the additional monies required by the expansion plan and would retain the company in public ownership. If the proposals of Aer Lingus management were accepted by Government, this would necessitate a State investment of €400 million as well as the allocation to resolve the pension deficit.

Can the State invest in Aer Lingus?

Those advocating State investment in Aer Lingus held that such an investment was permissible under E.U. rules under the market investor principle. This holds that state investment in a company is permissible so long as it is undertaken on sound business principles and is not part of a rescue package.

Those advocating privatisation argued that such an investment would be uncertain or unwise. It was stated that the relevant E.U. rules were complex and any such State subject would be subject to challenge from the airline’s competitors. This uncertainty would hamper the development of Aer Lingus. Other submissions also stated that it would be preferable for the State to spend this money in other ways.

Need for Aer Lingus to have commercial flexibility

A number of submissions outlined that Aer Lingus management needed the commercial flexibility to respond to changing market conditions on the same basis as the airline’s competitors. One submission pointed to a missed opportunity to purchase new aircraft in 2002-03.

There was support for a new form of public ownership under the State Holding company. Shares in Aer Lingus, and other semi-State companies would be held by the State Holding company, which would have ready access to capital. The submissions which supported this form of public ownership highlighted the flexibility and access to capital it would give company management. No longer would semi-State companies have a shareholder who was unable or unwilling to invest in them.

State shareholding to be retained in Aer Lingus

The Government proposal outlines that the State will retain a 25.1% share in the privatised airline. Submissions queried how much control this would give the State in the event of a threat to one of its strategic interests. It was submitted that this shareholding would only prevent a 100% takeover of the company.

Reference was made to jurisprudence of the European Court of Justice, restricting the application of so-called ‘Golden Shares’.

Furthermore, whatever the protection a 25.1% shareholding offers the State, submissions also highlighted that the State would have to purchase shares in the company following subsequent share offers. It was drawn to the Joint Committee that this would amount to State investment in the airline.

Submissions also highlighted that in framing its articles of association, the shareholders could assign certain voting thresholds to significant decisions of the company. They outlined that this would offer the State as 25.1% shareholder a say in protecting key strategic interests.

A number of submissions questioned the need of the State to retain a shareholding in the company. They argued that this would undermine the flexibility of the company in a competitive environment.

Vulnerability of Aer Lingus to takeover

Submissions raised the prospect that Aer Lingus would be subject to a takeover bid from a larger airline. The attention of the Joint Committee was drawn to other examples of European airlines have been taken over by larger carriers. This would have long-term consequences for Ireland in securing its strategic interests.

Retention of Dublin as Aer Lingus’ operating base

Submissions outlined the importance of retaining Dublin as the airline’s operating base. This was in the interest of Ireland’s strategic economic interests, in particular to ensure Ireland’s connectivity to the world. It also provided employment and community benefits to Dublin. A parallel was drawn to US case studies of how cities lost their status as operating centres for airlines following changes in the airline’s ownership and the negative consequences this had on the city.

Slots at Heathrow airport

Many submissions highlighted the strategic importance of Aer Lingus’ slots at Heathrow airport. They provide Irish travellers with access to connecting flights across the world. Submissions highlighted that a privatised airline would be tempted to cash in on this asset, to the detriment of the Irish passenger and economy.

The airline stated that these slots were profitable and they intended to continue with the relationship with Heathrow airport. One submission highlighted that, even if profitable, airline management might wish, at a future date, to realise the value of the asset.

Other submissions outlined that Heathrow was of declining importance to Ireland. They drew the Joint Committee’s attention to the development of other hubs in Europe and the Middle East and the increased provision of point-to-point services from Ireland.

Unsuccessful privatisations

Submissions raised previous unsuccessful privatisations of companies, either in the airline industry or other sectors, for example eircom, Air New Zealand and Air Berlin. Some submissions highlighted asset stripping that followed the eircom privatisation and its fall into the hands of venture capitalists. They also pointed to the failure of the State to secure its strategic interest in developing the country’s broadband infrastructure.

Submissions outlined that New Zealand had to return its airline into public ownership following an unsuccessful privatisation of that airline. They also pointed to the unhappy experience of Air Berlin, which was withdrawn from sale due to a disappointing response from investors. It was eventually sold at a price below that sought by management.

In response to these submissions, opposing submissions highlighted that the State was retaining a shareholding in Aer Lingus. They also pointed to fundamental differences in the business of eircom, which had fixed assets and that of Aer Lingus, with mobile assets.

They also distinguished the Air New Zealand and Air Berlin privatisations on the basis that Aer Lingus’ healthy performance. They also pointed to the different regulatory position of Air New Zealand.

Issues arising for employees

The trade unions highlighted their concerns regarding job security, the deficit in the pension scheme and the value of shares held by employees and the ESOT. They expressed concern that a privatised airline would outsource jobs and demand compulsory redundancies. Furthermore, they pointed to a deficit in the pension scheme and the difficulty in disentangling the Aer Lingus portion from those of other employers. The trade unions demanded their shareholding be protecting in the event of further share issues. They outlined that they were not satisfied with the progress of negotiations with the company. Submissions also raised the litigation undertaken by former Aer Lingus employees regarding guarantees made by the company at the time TEAM Aer Lingus was established.

The airline outlined that they hoped that all issues would be resolved in negotiations. They held that job security was best secured by the expansion and competitive strength of the airline. The deficit in the pension fund would be resolved by an allocation from Government of a portion of its proceeds from the sale of Aer Lingus shares.

The plight of certain groups of pensioners of Aer Lingus and its subsidiaries was brought to the attention of the Joint Committee.

Value to the taxpayer

During deliberations, the Joint Committee discussed the return to the taxpayer from the sale of Aer Lingus. It was submitted that there was no return to the taxpayer, the current majority owner of the airline. There were no details of the proceeds the Exchequer would receive from the sale. The opposing view was made that the taxpayer would benefit from a growing and more competitive company.

Chapter 6

Observations and outstanding issues

In April and May of 2006, the Joint Oireachtas Committee on Transport took the initiative by inviting stakeholders, interest groups and members of the public to address it on the impact of the proposed sale of Aer Lingus. Since then, the Government has proceeded with steps to sell the substantial part of its shareholding in the airline.

This report seeks to achieve two important objectives. First, it compiles in one volume the many submissions made on the proposed privatisation of the airline. Second, it identifies those issues of public interest that will continue to concern the Oireachtas and Government following the privatisation of Aer Lingus.

If and when the Government proceeds with the sale of Aer Lingus, the Government will retain an interest in the airline on two levels. First, the Government will be a significant shareholder in the privatised Aer Lingus. As a shareholder, it will have an ongoing interest in the running of the company, its ownership and staff relations.

Second, as well as being a shareholder, the Government retains its responsibility to look after the broad public interest. It has an obligation to enhance Ireland’s connectivity to the outside world. Submissions identified connectivity as key to job creation, tourism and wealth generation. This involves ensuring that Dublin remains the airline’s operating base and that there is no sale of the Heathrow slots.

Submissions received by the Joint Committee highlighted some negative experiences with privatisation. They pointed to the asset stripping and failure to guard the public interest that followed the privatisation of eircom. These failures, for example to provide Ireland with adequate broadband infrastructure, are important matters of public interest but the State left itself with no way of intervening to protect them.

The Joint Committee recognises that by retaining a significant shareholding in Aer Lingus, the Government has preserved an important lever to protect the public interest.

Given the matters of public interest arising from the sale of the Aer Lingus, the Joint Committee will continue to monitor the outstanding issues post-privatisation. This means ensuring that the public interest is met in the running of the airline and Ireland’s connectivity generally.

It is submitted that the following issues will be outstanding following the privatisation of Aer Lingus:

•Ownership of the company;

•Retention of the State shareholding;

•Unresolved pensions issue;

•Success of the expansion programme;

•Retention of the Heathrow slots;

•Dublin remains the airline’s operating base.

These outstanding issues, discussed further below, require the active consideration by Government and the Oireachtas, in particular by the Joint Oireachtas Committee on Transport. It should be noted that none of these considerations involve interference with the day-to-day running of the airline.

Ownership of the airline

The Government has chosen to proceed by way of IPO where it would retain a 25.1% share of the company. In submissions, it was argued that this would only enable the Government to resist a 100% takeover of the company. It would not prevent any single party taking a majority holding in the company. If a single party acquired such a shareholding, the State would retain little effective leverage within the company. It would not, therefore, be in a position to protect the public interest.

Submissions further highlighted the experience across Europe of privatised small and medium size airlines being subject to takeovers by larger airlines or had significant shareholdings being taken in them.

There is an outstanding public interest in the future ownership of the airline and the shareholding retained by the State offers only limited protection of that public interest.

Retention of the State shareholding

Submissions raised the prospect that a privatised Aer Lingus could issue further shares in the future. As a result, the State’s shareholding would be diluted below the 25.1% level. There is no mechanism provided by which the Government can retain its level of shareholding and nor is there a commitment from Government to purchase additional shares following a subsequent share issue.

There is an outstanding public interest that the State retains its level of shareholding at 25.1% as it has less scope for leverage if this shareholding is diluted by future share issues.

Unresolved pensions issue

The deliberations before the Joint Committee highlighted the ongoing differences between Aer Lingus management and the unions on the pensions issue. This affects the State directly as Aer Lingus management expects Government to foot some of the bill for resolving the pension shortfall. This problem also has an impact on the public interest as the Aer Lingus pensions are entangled with the pension scheme of other semi-State companies who are remaining public.

There is a public interest in ensuring that the pension dispute is resolved to the satisfaction of all parties, in particular staff and pensioners.

Success of the expansion programme

Government has argued that privatisation is the most effective way of providing for the expansion of the airline’s short and long-haul services. There is an outstanding public interest in monitoring the success of this expansion programme. First, the State is a significant shareholder in this airline and therefore retains an obvious interest. Second, the expansion programme is closely allied to ensuring Ireland’s connectivity to the rest of the world. As repeated in submissions, this connectivity is essential to Ireland’s job and wealth creation.

Retention of the Heathrow slots

The draft Articles of Association for the privatised airline include a provision restricting the sale of the slots held by Aer Lingus at Heathrow airport. This recognises the importance of the Heathrow slots to Ireland’s connectivity abroad. There is an outstanding public interest to ensure that this provision is legal and operable so that the Heathrow slots are not sold off in the future.

Dublin remains the airline’s operating base

There is the prospect that a privatised Aer Lingus would relocate its operating base away from Dublin airport. While Aer Lingus management ruled out a move from Dublin, it remains a possibility if there was a significant change in ownership of the airline.

One submission drew the attention of the Joint Committee to the detrimental impact suffered by a city if it lost its status as the operating base of a significant airline. This submission highlighted the loss of jobs and connectivity arising from the loss of the airline operating base. It is, therefore, essential to Ireland’s public interest that Dublin continues as Aer Lingus’ operating base.

Conclusion

Following the announcement by Government to proceed with the privatisation of Aer Lingus by way of an IPO, the Joint Oireachtas Committee on Transport sought to hold public hearings on the proposed sale.

This allowed the stakeholders, interested parties and members of the public to outline to Members their views on the proposed sale. This provided an important ventilation of diverse views on the proposal as well as better informing Members of all aspects of the proposed privatisation.

This Report has been compiled to bring together in one volume all the submissions received in writing or orally, or in both forms. It also highlights the issues raised during submissions and summarises the views expressed for or against aspects of the proposal.

Significantly, it identifies those outstanding issues that will remain part of the public interest and therefore, within the purview of Government and the Houses of the Oireachtas. These are matters that arise following both from the Government’s retention of a significant shareholding in Aer Lingus and the broad public interest in ensuring Ireland’s connectivity to the outside world.