Aer Lingus: the effect of government indecision and procrastination December 2004

The sudden resignation of the highly regarded and successful top management team at Aer Lingus, the Irish state–owned airline, raises a number of questions about the role of the Irish government with regard to the most financially successful of the AEA airlines.

The decision of Chief Executive Willie Walsh, Financial Director Brian Dunne and Chief Operating Officer Seamus Kearney to jump ship is a clear indication of frustration at the Irish government’s continuing delay in implementing its commitment to privatisation made as far back as December 1999.

It also reflects management’s perception of less than full–hearted shareholder support for its latest cost reduction plan which calls for a further loss of 1,325 jobs (on top of 2,000–plus jobs shed over the last two years thus reducing employment by over 50% since 2001).

This would involve an increased level of outsourcing, which is anathema to the unions, which are regarded as social partners by the government.

Over the last decade the government’s position on state ownership of Aer Lingus has waxed and waned, influenced by political expedience rather than the needs of the airline or the management’s views. Here is a potted history.

• Since the mid 1960s, when a minority shareholding held by BEA was acquired, the Irish state has been the 100% shareholder in Aer Lingus.
• Following the worldwide recession in the early 1990s the airline undertook a major restructuring programme involving considerable staff and other cost reductions, a disposal plan for non–airline subsidiaries and a state aid last time equity injection of IR£175m ($120m). In return for cooperation on the restructuring plan staff were granted access to a 5% shareholding in 1995.
• In autumn 1997 the government directed management to begin a competitive process to find a strategic alliance partner with or without an equity element. This was clearly interpreted as an initial key step towards privatisation although the government was not prepared to acknowledge this publicly for political reasons.
• Political indecision, the requirement to convince the unions of the benefits of a strategic alliance together with top management changes at the airline led to a long drawn–out process which was not completed until mid 1999. Bilateral alliances were signed with both American Airlines and British Airways (leading to membership of the one world alliance in 2000). An equity element was proposed but this was not acceptable to the government or unions.
• In December 1999 the government eventually made a commitment to privatise Aer Lingus. This was to be in the form of an Initial Public Offering (IPO) and good progress was made in the preparations necessary for a public flotation of shares in the airline.

The legislation passed all stages in the Seanad (senate or lower house) and discussions began with staff representatives on the structure of Employee Share Option Scheme (ESOP) which would be part of the IPO.

• Discussions between the government and staff representatives proved to be long and difficult and little progress was made over a number of months. Management was effectively sidelined during this process, which led to a fair measure of frustration.
• By mid–2000, market conditions for IPOs had deteriorated and the government now asked its advisers to look at alternative sale options for the airline, thus adding further delay to the sale process. Not surprisingly, the advisers found a considerable degree of interest from potential institutional and private investors but this only led to further procrastination by the government.
• By summer 2001 management had lost faith in the government’s privatisation intentions, and several senior executives decided to move on or retire. Then came the September 11 catastrophe, the Aer Lingus survival plan and the appointment of Willie Walsh as chief executive.
• The successful implementation of the survival plan by Walsh, Dunne and Kearney and further radical restructuring over the last two years was detailed in the July/August edition of Aviation Strategy. Aer Lingus is forecast to record profits in excess of €100m this year and a profit margin over 10%, the highest of all of the AEA airlines.
• Management and shareholder are agreed that the airline needs access to equity funding to strengthen the balance sheet and to expand and replace the long haul fleet.

Government policy is not to invest further in the airline yet, despite a renewed undertaking to the airline Board and management in September 2003 by the Minister of Transport that the ownership issue would immediately be addressed, no decision has been taken to date.

• Increasing frustration at government’s inaction prompted the management trio in June to formally request permission to develop an investment proposal for the airline.

This was interpreted by many as a potential MBO request. Whatever, it was clearly designed to force a decision from government on the ownership/ funding issues.

• The government responded by setting up a Cabinet sub–committee to consider the future of Aer Lingus. It then appointed Goldman Sachs to report on the strategic issues and options to be considered in the context of ownership change. Although that report has been with government for some months, it has not been published nor been addressed to date by the Cabinet sub–committee.
• The government, however, did set up an ESOP this summer. Staff now have a 14.9% shareholding in the airline.
• Negative feedback on government’s attitude to management and its further restructuring plans (particularly relating to outsourcing) led to management withdrawing its request for permission to develop an investment proposal at the end of October and this was followed some two weeks later by the resignation announcement by Walsh, Dunne and Kearney.

The loss of the three executives, widely acknowledged as responsible for one of the most successful turnarounds in airline history, leaves the future of Aer Lingus in some disarray. Although the trio have offered to stay on board until the and of May next year their potential effectiveness in managing the airline, not to mention delivering further transformation, must be in serious doubt particularly in the light of the Taoiseach’s (Prime Minister) recent comments to the Dail (Parliament) where he clearly sided with union resistance and criticised the management for their personal ambitions of wealth from the sale of a state asset. Although Walsh has robustly rejected this criticism, the damage has been done. Rumours are that Walsh will resurface next year as the chief executive of a leading LCC.

• Another issue is that the Aer Lingus chairman Tom Mulcahy resigned this summer.

John Sharman was appointed acting chairman initially for a three–week period but later extended until the end of 2004, after a number of prominent Irish businessmen turned down the chairmanship. Thus Aer Lingus today has a lame–duck management and a temporary chairman.

• Latest reports from reliable sources in Dublin suggest that a decision will be made before Christmas to float 51% of Aer Lingus shares. That decision however will not be acted on until a new chief executive is in place and market conditions are favourable — so yet more delays.