Losses continue, cash is burning, – will Aer Lingus even have a pot to piss in?

There are 3,117 shareholder accounts in Aer Lingus, each of which account for 10,000 shares, or fewer. These comprise 88.35% of the total number of accounts but they only represent 1.86% of the total equity. The Irish public have a particular curiosity about the progress of former state companies and to understand who among, stakeholder really reap the benefit of privatisation. The Aer Lingus experience would suggest that the executive and non-executive directors, as well as professional advisors, achieved first-mover advantage but that the pickings for all other stakeholders have been sparse and will remain so.

The first Irish state enterprise to be privatised was the monopoly telecommunications company, An Bord Telecom Éireann. The Irish public believed that their time to become a prosperous, share-owning democracy had arrived when it was privatised in July 1999. The EU had ruled in 1995 that the European telecom sector was to be opened to full competition. The former state company had a turnover in 1999 of €1.82 billion (+16%), achieved following the introduction of ‘the biggest ever price reduction package of €165 million’. It returned a profit of €84 million that year after interest, tax and €127 million of exceptional costs. There was an air of unrestrained exuberance as 500,000 Irish bounty hunters, trusting their Government, purchased equity in the newly privatised enterprise (Eircom Plc) at £3.90 per share on 8 July 1999. The shares peaked briefly, at £4.80 before the bubble burst. Eircell, the mobile phone business of Eircom was acquired by Vodafone in 27 May 2001. Eircom shares were valued at £2.62, a drop of 32% since the IPO. Its fixed line element of the business for which demand was diminishing, Golden Pages and directory enquiries remained with Eircom. The 1999 dreams of equity holders evaporated along with a large chunk of their wealth as the shares traded for £1.16 in June 2001 – following the demerger. Eircom is now about to be sold for the 5^th time since 1999.

The annual general meeting of Aer Lingus Plc is to take place on 5 June 2009. It is over 2½ years since the airlines IPO in late September 2006. It was the Irish second commercial state enterprise to be privatised and the time is opportune to ask is Aer Lingus rapidly reaching a stage where it may not even have a pot to piss in because it is burning cash, incurring losses, business activity trends are contracting, its share price has collapsed, its historically high level of finance income is reducing, credit availability for everybody is tightening and there is no prospect of dividends. At the end of its first quarter 2009 Aer Lingus announced it iis anticipating a materially larger operating loss in 2009 than in 2008.

Aer Lingus was founded in 1936 and was operating 35 aircraft in 2006. The Government owned 85% of the equity and the balance was owned in trust by Aer Lingus employees prior to the IPO.

The Irish Government received €240,914,000 and retained 28.3% of its shareholding. The proceeds of the share issue amounted to €534 million. A sum of €104 million of this was paid into two supplemental employee pension funds. The balance was to be used to expand and replace the Aer Lingus fleet. The fees associated with the IPO amounted to €29.74 million.

Those who received the fees presented the IPO proposition was presented on the basis of the strengths of Aer Lingus and these ‘strengths’, described in a series of cliches can now be viewed in the context of hindsight:

Strengths 2006 per IPO Prospectus	Comment, May 2009
Returns-focused business model for a competitive market	Net Profit (Loss) 2006 -€69,926,000 2007 €105,265,000 2008 - €107,815,000 Share price + Market cap Float price €2.20, 2 Oct 2006; €1.3 billion 2006, 31 Dec: €2.74, €1.449 billion 2007, 31 Dec: €2.09, €1.11 billion 2008, 31 Dec: €1.53, €816.9 million 2009, 13 May: €0.59, €315 million
Proven track record of financial performance	Net overall (decrease) / increase in cash, at Dec 31 2001: €45,059,000 2002: -€30,078,000 2003 €4,082,000 2004: €289,000 2005: -€1,801,000 2006: -€660,000 2007: -€13,472,000 2008: €8,733,000 Fuel costs increased by 58.4% in 2008 and represented 29.2% of operating costs, compared to 21.2% in 2007. Cumulative cash flow from operations has declined by €118.1 million since 2006. An increase in cash flow from operations of €65 million in 2006 was augmented by €132 million in exception items: provision of €16.2 million towards the defence of the Ryanair 2006 'unsolicited' bid, €121 million relating to the contribution to the Supplemental Pension Fund following the IPO and €17 million being the capitalisation of pay increase foregone.
Strong presence in growing Irish Market	Expanded service base to Belfast in 2008 and located 3 aircraft there. Service from Belfast will be reduced for the 4 winter months of 2009 / 2010. Fleet to be reduced to 2 aircraft. Service to Faro, Barcelona, Milan, Rome and Paris to be stopped in Sep 2009 Service between Shannon and LHR has been resumed recently.
Enhanced service offering
Positive brand recognition	Agreed!
Leading position between Ireland and US	Competitors include Delta, US Airways, Continental, American Airlines. Aer Lingus and United Airlines embarked on a partnership in January 2009 whereby a new service is launched between Washington DC (Dulles Airport) and Virginia with daily service from March 2010 and both carriers will equally share the risk, commercial and operating benefits. A code share arrangement has been in place since October 2008.
Key competitive positions at DUB and LHR	Aer Lingus operate at principal metropolitan airports whereas Ryanair uses secondary airports and has more bargaining power. Airport charges account for 17% of operating costs at Aer Lingus.
Strong capital structure
Experienced management team	The experienced management team presented in 2006 included: Dermot Mannion, Chief Executive Greg O’Sullivan, Finance Director Niall Walsh, Deputy Chief Executive Dick Butler, Ground Operations Director Enda Corneille, Commercial Director Stephen Kavanagh, Planning Director Liz White, PhD Human Resources Director Mannion departed Aer Lingus on 6 April 2009. His remuneration at Aer Lingus doubled in the course of his tenure was €530k (2005) - €982k (2006) - €1.11 million (2008). It reduced to €652k in 2008. O’Sullivan Aer Lingus on 6 June 2008. His remuneration was €154k (2006) - €515k (2007) - €138k (2008) and he received a payment of €443k on retirement plus a special pension contribution of €415k Other changes announced in April 2009 include: Niall Walsh became Chief Operating Officer with responsibility for ground and flight operations, procurement and airport bases. He joined Aer Lingus in 1994. Kavanagh is now Head of Long-Haul Operations which generated revenue of €402 million from 11 routes and flew 1.26 million passengers in 2008 in 9 aircraft. Seán Coyle, Chief Financial Officer, is also Head of the Group’s Short-Haul Operations – 95 routes, 32.6 aircraft and 8.37 million passengers in 2008. He is also in charge of ancillary revenues (€149 million in 2008, up from €108 million), information systems and e-commerce business. Coyle joined Aer Lingus from Ryanair, where he had been employed since 1998, latterly as Director of Scheduled Revenues and formerly Head of Investor Relations and Commercial Director. He was paid €187k between 22 Aug and 31 Dec 2008. Dr White (human resources) and Corneille (media) continue in situ. Fees paid to non-executive directors increased from €18k to €45k per annum following the IPO. One of these, Seán FitzPatrick, resigned as senior independent director, from the board of Aer Lingus on 19 December 2008 when he disclosed that he concealed cumulative loans of €122 million to himself by the bank he founded and of which he was chairman, Anglo Irish Bank, from the shareholders of that bank through makinh short-term deposits at Irish Nationwide Building Society. The building society was established and dominated by Michael Fingleton for almost 40 years until his retirement on 30 April 2009. Investigations by the Garda Fraud Squad and the Office of Director of Corporate Enforcement are ongoing. FitzPatrick has been appointed by the Irish Government to the board of Aer Lingus on 22 March 2004.

Ryanair and Aer Lingus

Ryanair currently own 29.82% of Aer Lingus equity.

October 2006

Ryanair purchased a 16% stake in Aer Lingus on 2 October 2006 and increased its stake to 19.2% on 5 October as a prelude to launching a bid based on a cash offer of €2.80 per share. This valued the business at €1.48 billion, a 27% premium over the float price for the remainder of Aer Lingus. This offer was to have been financed from Ryanair’s cash resources of €2 billion.

Are Lingus spent €24 million defending this ‘unsolicited offer’ – in circumstances where the government, employees, and the two leading Irish banks controlled 47% of the equity

The bid was blocked by the EU on the grounds that it would create a ‘near monopoly’. The Government rejected the bid on grounds of it being anti-competitive, ill-conceived and contradictory.

December 2008
The 2008 bid was a €1.40 cash offer per share valuing Aer Lingus at €748 million. The Irish Government rejected this bid in January 2009 on grounds that it was anti-competitive.

Aer Lingus spent €5.84 million on defence costs and in a letter to shareholders dated 22 December 2009, the Chairman, Colm Barrington, stated:

“Aer Lingus is and will be a profitable company with a clear strategy for growth and with unmatched financial strength – net cash of €803 million”

The Aer Lingus financial year ended 9 days later on 31 December and losses for the year amounted to €107,815,000. Capacity increased by 13.9% in 2008 but the passenger load factor declined from 75.4% to 72.8%. The airline has 7 more aircraft than in 2006. Aer Lingus only had net cash of €653.9 million – 13.6% lower than the previous year and €149.1 million less than was stated in Barrington’s letter. Return on capital in 2008 was 9.5% compared to 19.6% the previous year.

The foregoing was clearly inconsistent with the results reflected in the 2008 Annual Report.

Q1 Jan-Mar 2009

In March 2009, the number of trips abroad by Irish residents declined by 15.4% compared to March 2008. Overseas visits to Ireland declined by 16% compared to March 2008.

	IRISH TRIPS OVERSEAS	TRIPS TO IRELAND	Great Britain	Other Europe	North America	Other
Jan – Mar 2007	1,575,200	1,478,300	771,500	496,400	156,200	54,300
Jan – Mar 2008	1,762,500	1,542,200	849,500	480,200	155,900	56,700
Jan – Mar 2009	1,539,800	1,402,200	772,400	488,700	142,200	48,800
					Source	CSO

The first quarter 2009 commentary on Aer Lingus results disclosed:

	2008	Q1 2009 (v Q1 2008)
Revenue	5.6%	-16.0%
Cash	€653.9 million (€757 m on 31 Dec 2007)	€593.6 million
Passenger Numbers Long-haul Short-haul	7.5% 2.3% 8.3%	-6.5% -5.57% 12.5%
Passenger Load Factor Long-haul Short-haul	-2.6% 5.0% -0.7%	2.4% 1.4% 3.2%
Revenue per passenger	€115.13
Capacity (available seat kilometres) Long-haul Short-haul	14.7% 13.0%	-19.5% -4.5%
Average Fare Long-haul Short-haul	2.6% -6.4%	-1.6% (Jan, Feb); -23.6% (Mar) -14% (Jan, Feb); -25.7% (Mar)

The principal operating costs at Aer Lingus are fuel (29.2%), staff (24.3%), airport charges (17.7%) and maintenance.

It is noteworthy to reflect on who has gained and who has not as a consequence of this IPO.

Chairman

The emoluments of John Sharman, former Chairman of Aer Lingus increased from €57,000 to €86,000 in 2006 to €175,000 in 2007 and €175,000 or the Jan-Oct period 2008 when he resigned. He also received €272,000 in executive compensation in 2005.

Chief Executive

The cumulative net profit at Aer Lingus for the years 2004, 2005 and 2006 was €158.55 million and the former chief executive, Willie Walsh, received cumulative emoluments during these years of €1,572,000.

The cumulative loss at Aer Lingus for the years 2007, 2008 and 2009 was €72,17 million and the now former chief executive, Dermot Mannion received cumulative emoluments of €2.995 million from 8 August 2006 to 31 December 2008. Mannion resigned on 6 April 2009.

Professional Advisors

Fees connected with the IPO were €29.74 million. Fees to defend the first Ryanair bid in 2006 were €24.07 million and fees charged to date in connection with the 2008 Ryanair bid were €5.84 million. The total spent, €59.65 million, would have reduced post-IPO losses to €12 million had this expenditure not been incurred.

Long-haul Customers

1,118,000 customers paid an average fare of €280.90 in 2006. 1,264,000 customers paid an average fare of €304.49 in 2008 but by March 2009 the average fare on long-haul declined by 25.7%

Short-haul Customers

7,513,000 customers paid an average of €90.99 in 2006. 8,737,000 customers paid an average fare of €87.75 in 2008 and by March 2008 average fares on short-haul declined by 23.6%

Employees

Are Lingus employed 6,833 in 2001. The number employed in 2008 was 4,035, having recovered from a low of 3,475 in 2005. The number of aircraft increased from 35 to 42 since the IPO. €117.5 million was spent on early retirement, voluntary severance and migration schemes in 2008. The number employed actually increased by 130 between 21 December 2007 and 31 December 2008. Savings of €52 million are anticipated in return.

Shareholders

Float price €2.20; current price €0.59 (May 2009).