Opening speech by Minister for Transport Tourism and Sport, Paschal Donohoe TD, to Dáil Éireann on the Principles of a Sale of Aer Lingus shares

Wednesday 27 May 2015

I move:

That Dáil Éireann, pursuant to section 3(5) of the Aer Lingus Act 2004, approves the general principles of the disposal of shares in Aer Lingus Group plc by the Minister for Finance in accordance with section 3(2) of the Aer Lingus Act 2004, which were laid before Dáil Éireann on 27 May 2015.

The motion seeks the approval of the House for the general principles of the disposal of shares in Aer Lingus. The Aer Lingus Act 2004 contains a provision stipulating that the Minister for Finance may not dispose of any shares in the company without the general principles of the disposal being laid before and approved by Dáil Éireann.

A document setting out the general principles was laid before the House earlier this week.

At the outset of this debate I want to pay tribute to Aer Lingus and to its management and staff. I want to recognise the contribution Aer Lingus has made to Ireland and emphasise that I see the IAG proposal as an opportunity to ensure this company has the opportunity to continue to grow, to develop, and to become stronger.

As a country we are proud of the fact that Aer Lingus is one of the oldest airlines in the world still operating today. It was one of the first State companies established by the newly independent State in 1936. It pre-dates the likes of CIE, and Bord na Mona. The decision to establish Aer Lingus was more than just the setting up of an airline - it was an expression to the rest of the world of the optimism and openness of a fledgling country finding its wings. More than 75 years later, that recognition of its heritage, its importance, its contribution and its potential holds true for this century and this generation.

Since its establishment Aer Lingus has served and continues to serve the country well. It and its employees have played a huge part in the development of the Irish aviation sector into the vibrant industry that it is today. The Irish aviation sector is rightly recognised and respected around the world.

One of the great successes of Irish aviation policy over the past 30 years is that the two largest Irish airlines now have roughly 80% of the market in and out of the country. In most countries the market is split more equally between domestic and foreign airlines. But the success of the Irish airlines means that the majority of people flying in and out of our country do so on an Irish aircraft.

EVALUATING THE IAG OFFER

Alongside this recognition, I must emphasise three factors that have been decisive in my evaluation of the IAG proposal.

Firstly, the airline industry is inherently cyclical and has been severely impacted in the past by a number of global shocks such as 9/11 and the 2008 financial crisis. The industry is currently in its  fifth consecutive year of positive global airline profitability. However, as a relatively small, albeit currently well capitalised, airline  Aer Lingus is dependent on the capacity decisions of its larger competitors and may be more vulnerable to future industry shocks or aggressive direct competition than the larger airlines.

Secondly, the European airline industry remains relatively fragmented compared to the US. Many of the European legacy carriers have been forced to implement significant restructuring plans in recent years. This has also driven consolidation amongst European airlines with many formerly State owned airlines either becoming part of larger groups or having  failed. I do not want to leave it to chance that it will be a forced decision in difficult times.

And thirdly, Aer Lingus is no longer our national flag carrier. That decision was taken nine years ago when 75% of the shareholding was sold. Nor is the State the majority shareholder in the company.

We own a minority 25.1% shareholding and I want to use the opportunity now to maximise the benefit of that residual shareholding to put the company on a firm footing for the future while protecting key general national interests.

Today, in reality, the State has little or no influence in relation to the company although it can, with the support of others, prevent the disposal if not the transfer of Heathrow slots.

I want to protect and indeed strengthen that position. I want to ensure that, in the national general interest, we have guarantees over the use of the Heathrow slots in a time of transition.  I want to ensure the best opportunity for increased employment and growth in the company.  I want to ensure that Ireland’s essential links to the global economy are enhanced.

BACKGROUND TO THE OFFER

In 2012 the Government decided, in the context of the State Asset Disposal under the EU/IMF Programme, that the State’s 25.1% shareholding in Aer Lingus could be sold when market conditions were favourable and on terms and at a price that were satisfactory. Subsequently, on 19 June 2012 Ryanair indicated its intention to make an all cash offer of €1.30 per share but for a number of reasons this would have been unacceptable to the Government.

No other bidder has emerged to date. Indeed, circumstances where an actual sale could be considered did not arise before an announcement of an initial approach by IAG to Aer Lingus in December 2014.

While initial proposals were rejected, the Board of Aer Lingus in January 2015 indicated to IAG that it would be willing to recommend the financial terms of a proposal based around a share price of €2.50.

An Inter-Departmental Steering Group which was established when the Aer Lingus shareholding was included in the State Asset Disposal Programme was asked to review the potential sale. The Group was chaired by the Department of Transport Tourism and Sport and included representatives from the Department of Finance, the Department of Public Enterprise and Reform and NewEra. 

NewERA engaged expert external financial advisers - Credit Suisse and IBI Corporate Finance - and legal advisers - McCann FitzGerald - to assist the Steering Group in its work. 

That Group has engaged in intensive work over the last few months and has recommended that the Government should accept the IAG offer. I have been briefed by the Group over the intervening period, I have also had discussions with IAG directly, and all the key stakeholders have been before the Oireachtas Committee on Transport and Communications.

I have also kept Government briefed on key developments and yesterday, 26 May,  the Government decided to proceed with a sale subject to Dail approval of the general principles of such sale.

IAG PROPOSAL

The IAG Board and the Independent Aer Lingus Directors have  announced that they have reached agreement on the terms of a recommended cash offer to be made for Aer Lingus. This involves a cash payment of €2.50 per Aer Lingus Share and the payment of a cash dividend of €0.05 per Aer Lingus Share.

This latter element is payable in any event this coming Friday 29 May 2015. The offer will be subject to a number of conditions including the receipt of EU merger clearance of the transaction on terms satisfactory to IAG.

It also requires the passing of a number of Aer Lingus shareholder resolutions to approve the provision of the connectivity commitments to the State, the making of amendments to the Aer Lingus Articles and the re-designation of one Aer Lingus share held by the Minister for Finance as a ‘B’ Share. All of these are necessary to implement the connectivity commitments offered  by IAG.

It is also subject to the Minister for Finance accepting the offer, which condition IAG may not waive and to Ryanair accepting the offer, which condition IAG may not waive unless Ryanair’s shareholding is 5% or less. I will come back to this point later.

AER LINGUS

This process to date has taken some time- as it should. We are dealing with a very significant issue which has implications for this country, for this company, for employment and employees, and for customers. The Government, in considering a sale of the State’s remaining minority shareholding have taken account of those interests.

Aer Lingus and its operations represent a significant and legitimate national interest. Aer Lingus plays a key role with almost 45% of the airline seats at Dublin, Cork and Shannon airports on Aer Lingus flights. It also supports significant numbers of jobs and is in the top 50 of Irish employers.

I recognise the intrinsic value that Aer Lingus brings to the Irish economy. I recognise the importance of ensuring it has a viable future. I recognise the benefit, and indeed the need, to set it on a route to continued growth. I believe that the proposed merger with IAG provides the best opportunity to meet these objectives. That is a credit to the company’s management and staff.

However, I must emphasise that across Europe many formerly State owned airlines including Cyprus Airways, Malev, and Hungarian Airlines have failed.

A number of European airlines remain under State control but some are undergoing significant restructuring or are open to potential disposal.  

In fact, Finnair and the Portuguese airline TAP are really the only other examples of national, small independent carriers competing against what are generally significantly larger carriers.

The Aer Lingus Board and Chief Executive have clearly recognised and stated publicly that the IAG proposal presents the company’s best opportunity to do so and to reduce risk. 

I have to balance that against the limited role the State has now where, acting with others, it can prevent Heathrow slot disposal but not use of these slots. I want to take the opportunity to strengthen this role while placing the company in a better position to compete commercially.

BASIS FOR CONSIDERING SALE

The factors that the Government would take into account in considering any sale of its shareholding to IAG or any other potential offeror were clearly outlined at the outset. 

In addition to price, the other issues that were identified were the potential impact of a sale of the State’s minority shareholding on connectivity to and from Ireland including direct transatlantic services and connectivity via Heathrow.

We also had regard to competition in the air transport market. Employment issues generally and jobs in Irish aviation were an important factor as was the Aer Lingus brand. In considering the principles for the disposal of the State shareholding I will have regard to each of these aspects in order to give the House a wider context within which the principles can be considered.

There is one other aspect that I want to mention. Government aviation policy is based on competition between at least two airlines with significant home bases in the Irish market.

We are fortunate to have both Aer Lingus and Ryanair, two very successful companies based in Ireland. We recognise the outstanding achievement of Ryanair since its foundation and are proud to acknowledge its contribution not just in Ireland but also to the aviation sector and its customers across Europe. 

However, given our island status and the importance of competition, it has consistently been the Government’s position that Ryanair should dispose of its shareholding in Aer Lingus.  Government would not wish to see Ryanair remaining as a significant minority shareholder in Aer Lingus following a takeover by IAG. 

For this reason Government welcomes the fact that the IAG offer will, inter alia, be conditional on Ryanair accepting the offer and that IAG would not have an ability to waive this condition unless Ryanair’s shareholding is less than 5%.

MAINTAINING OUR CONNECTIVITY AND SECURING SLOTS TO HEATHROW

I want to turn now to the issue of connectivity and the impact that the sale of the State’s shareholding in Aer Lingus will have in this regard.

I am convinced that a merger with IAG provides an excellent opportunity to strengthen Aer Lingus, to protect its brand and to enable it to grow and succeed as a commercial entity.

However, in selling the residual State shareholding in this airline there are other, national, interests that have had to be taken into account in reaching a decision.

Primary among these national interests is the question of connectivity and particularly connectivity through Heathrow.  Sometimes I think the depth of concern here is not fully understood. It does not arise because of a fundamental disbelief in the commercial viability of these routes. It does not arise from a fear that our airports cannot develop services.

It arises because right now connection through Heathrow is a significant strategic national interest.

Heathrow is the most significant destination airport from Dublin, accounting for approximately 8% of the air transport seats by destination.

In comparison, the next largest hub airports serviced by Dublin are Paris and Amsterdam which account for about 3% and  2% of air transport seats respectively. The Heathrow route accounts for just under 20% of passengers at Cork Airport, and nearly 25% at Shannon. 

Heathrow is the UK’s only airport with the requisite size and scale to deliver a comprehensive service to long‐haul destinations across the globe. In 2013, it provided access to 180 destinations in 85 countries whilst being serviced by 82 airlines. The high level of frequencies of connecting flights from Dublin, Cork and Shannon helps passengers achieve attractive, time‐minimising connection options which are essential to Ireland’s economic interests and business development.

SLOT DISPOSAL

The commitments secured in our negotiation with IAG retain the protection that has been available for the last nine years and in addition provides a time limited assurance for the coming seven years.

On slot disposal, where the Government can at present with its existing shareholding plus 5% from others prevent the disposal of slots, under the new arrangements the Minister for Finance in consultation with the Minister for Transport Tourism and Sport would have that ability.  

SLOT USAGE

Furthermore, in the new proposal commitments are being given that for  at least 7 years post –acquisition, all Aer Lingus’ current winter and summer daily scheduled frequencies on routes between London Heathrow and each of Dublin, Cork and Shannon will be maintained.

In addition, all of Aer Lingus’ other LHR Slots will be operated on routes to/from airports in the island of Ireland in the first five years. These are guarantees we do not have a present.

I should also mention that under the proposal Aer Lingus Group will not change its name and Aer Lingus will operate all its scheduled international air transport services under the Aer Lingus name.  Aer Lingus will also maintain its head office in Ireland. Again these improve the protections currently in place.

BENEFITS TO DUBLIN AIRPORT

I would also like to draw to the attention of the Dail that, in addition to the legally binding commitments, IAG has also confirmed, as outlined in their formal announcement, that for the 2016 summer season two new transatlantic destinations can be added and that by 2020, four new transatlantic routes will be in place, delivering up to 2.4 million more passengers.

IAG’s proposal will enable Ireland to become an important hub for European traffic across the Atlantic. As part of the North Atlantic Joint Business with American Airlines, Iberia, British Airways and Finnair, Aer Lingus will benefit directly from sales and marketing of the bigger Group, in particular in the USA.

In addition, Aer Lingus’ planned long haul growth would benefit from being part of IAG’s global cargo network and customer loyalty unit, Avios.

BENEFITS FOR REGIONAL AIRPORTS AND REGIONAL DEVELOPMENT

Turning to the benefits of the deal for our other airports, IAG plans to sustain and grow business at Cork, Shannon and Ireland West Airport Knock and have in particular referenced the Cork-Amsterdam and Cork-Paris routes, the transatlantic routes from Shannon and the Knock-London route.  

For example, IAG has a strong presence in Paris with 56 daily flights, 45,000 active frequent flyer members and a strong sales force.   I am assured that growth opportunities with tourism and business interests in the Munster region will be pursued to exploit the potential that exists in all the short haul routes currently operated by Aer Lingus from Cork.

Aer Lingus has indicated that a combination with IAG would also underpin a planned Cork-Germany service, which I understand will be announced shortly.

In Shannon, in the context of sustaining and growing its business, IAG will consider options, including Aer Lingus codeshare and accepting customers originating from Shannon that could enhance the existing all-business British Airways two daily service from Heathrow to JFK via Shannon.

The Aer Lingus Shannon flights to Boston and New York are expected to be strengthened as a result of the company becoming part of the North Atlantic Joint Business.  Aer Lingus support for existing American Airlines flights to Philadelphia will provide opportunities for additional capacity and increased connectivity to the US.

In addition to the Gatwick route being more sustainable, Aer Lingus will also actively work with Knock airport to explore new growth opportunities that will be available as part of the IAG Group.

EMPLOYMENT

I want to assure the House that IAG has confirmed that the existing employment rights of the employees of Aer Lingus will be fully safeguarded upon completion of the offer.

IAG have also confirmed that that it endorses Aer Lingus’ statements that it will honour its collective agreements and is prepared to confirm that it will re-register the existing Registered Employment Agreements under the new legislative framework that is being introduced.

The Chief Executive of Aer Lingus confirmed Aer Lingus’ position on Registered Employment Agreements in a letter  to me yesterday indicating that Aer Lingus considers that having clear registered employment agreements that safeguard the respective interests of employees and the company is mutually beneficial.  In addition, Aer Lingus has committed to expanding the scope of registered employment agreements where appropriate to include staff groups not covered by the current agreements.  The letter also indicates that Aer Lingus will engage in a process of consultation governed by agreed structures with staff and their representatives when any restructuring is required and that it does not foresee a likelihood of either compulsory redundancy or non-direct employment.

This, together with the expected increase in direct employment in Aer Lingus as a result of this deal is a very compelling proposition and it is a significant improvement on the status quo. the .

IAG has stated that it anticipates that under its ownership, there will be a significant job creation opportunity in Aer Lingus business.

In the coming year alone the assessment is that there will be net employment growth of about 150 jobs at Aer Lingus.  By 2020, growth at Aer Lingus could lead to the creation of up to 635 new highly skilled jobs including over 400 pilots and also engineers and ground staff.

PRINCIPLES

Having set the overall context I want to address each of the principles contained in the Dail resolution.

  1. SALE OF SHARES AND RETENTION OF ONE SHARE

The first principle provides that the Minister for Finance may dispose of all but one of the remaining minority shareholding in Aer Lingus under the offer or any renewed or revised offer made by IAG on the same or improved terms.

This is to facilitate the retention of one share which will be redesignated as a ‘B’ share in Aer Lingus, as detailed in the announcement.

The rights attaching to this ‘B’ Share, which would be enshrined in the Aer Lingus Articles, would allow the Minister for Finance, in consultation with the Minister for Transport Tourism and Sport,  to object to any proposed disposal of Aer Lingus’ Heathrow Slots, any proposed cessation of operation of Aer Lingus’ Heathrow Slots on certain Irish routes for a specified future period and any proposed change of Aer Lingus company name, brand, head office location or place of incorporation outside Ireland. 

As the ‘B’ Shareholder, the Minister for Finance would have no rights to dividends or to vote at general meetings.

  1. PRICE

The Steering Group has received detailed valuation advice from its financial advisers. The financial advisers have considered a range of different valuation methodologies which they consider to be relevant.  The Steering Group has concluded that a price of €2.50 is acceptable. 

The Dáil is being asked to approve in principle the disposal of the shares for a cash payment of at least €2.50 per share payable upon completion of the transaction.

The proposed offer also refers to the payment by Aer Lingus of a cash dividend of 5 cent per share.  This dividend will be paid on 29 May 2015 to Aer Lingus shareholders who are on Aer Lingus’ share register on 1 May 2015 and is payable irrespective of whether the proposed IAG offer proceeds or not.

Price has been an important but not exclusive consideration in the State’s evaluation of this proposal.  A price of €2.50 per share would generate proceeds for the State of about €335 million.

It also represents a premium both to Aer Lingus’ share price of €1.82 on the day prior to the announcement of IAG’s initial approach last December and to Aer Lingus’ IPO price of €2.20 in 2006. Prior to the IAG approach, Aer Lingus’ share price had not traded at this level since late 2007.

The Board of Aer Lingus has publicly stated that the financial terms of the proposal are at a level which it would be willing to recommend to Aer Lingus shareholders. 

  1. IAG’s CONNECTIVITY COMMITMENTS

It is a principle of this proposed sale that the Minister for Finance’s acceptance of the offer will be on the basis that the legally binding commitments, agreed by IAG and detailed in the announcement, are conferred on the State as holder of a ‘B’ share in Aer Lingus.

As I said earlier, negotiating commitments relating to connectivity via Heathrow Airport was a significant focus of much of the work undertaken over the last few months.

The commitment, in essence, is that the existing Aer Lingus winter and summer daily scheduled frequencies to Heathrow from each of Dublin, Cork and Shannon would be maintained for a period of seven years from completion of the transaction.

The final two years of this period being subject to a condition that airport charges at these airports remain at or below 2014 levels, adjusted for inflation. Furthermore, for the first five years, Aer Lingus will operate the remainder of its Heathrow slots on routes between these or other airports in the island of Ireland. 

Furthermore IAG’s proposed offer also includes a legally binding commitment that the Minister for Finance would be entitled to block a proposal by Aer Lingus to change its company name, brand and head office location and place of incorporation from Ireland.  This commitment is unlimited in time and provides a protection that does not currently exist.

  1. COMPETITION REVIEW

If IAG proceeds to make a formal offer, the impact on competition will be subject to review by the European Commission under the EU Merger Regulation. While we believe that no significant adverse impact on existing competition is likely to arise given the relatively limited overlap of the existing Aer Lingus and IAG route networks we cannot prejudge the Commission review. 

If, as part of that review IAG is required to offer remedies that are unacceptable to the Minister for Finance, the principles of the disposal recognise the Minister’s right not to proceed with a sale in those circumstances.

Another issue that the Government considered this morning was the potential use of the proceeds of any sale of the State’s shareholding. The Government has agreed that any proceeds should be used to establish a new ‘Connectivity fund’ as a sub-portfolio of the Ireland Strategic Investment Fund (ISIF). The Minister for Finance will seek the approval of the Oireachtas in due course for the payment of the proceeds of any sale of the State’s shareholding into this fund in accordance with Section 46(2) of the National Treasury Management Agency (Amendment) Act, 2014, should such a sale proceed.

  1. EMPLOYMENT

The Chief Executive of Aer Lingus has confirmed to me that Aer Lingus’ strong expressed preference is to utilise direct labour wherever efficient and effective.  In addition, their clearly demonstrated preference and practice over many years is to restructure only in manner as required and so as to avoid compulsory redundancies is noted.

Further, it is noted that Aer Lingus’ current collective agreements provide flexibility and mobility across its workforce without unduly restricting other possible approaches.

Aer Lingus’ stated position that having clear Registered Employment Agreements (REAs) that safeguard the respective interest of employees and the company is mutually beneficial is noted, as is their commitment to expand the scope of their REAs where appropriate to include staff groups not covered by the current agreements.

The commitment of Aer Lingus to engage in a process of consultation governed by agreed structures with its staff and its representatives should any restriction be required is noted, as is its current position that it does not foresee a likelihood of compulsory redundancy or non-direct employment.

SUMMARY AND CONCLUSION

The sale of the State’s residual shareholding in Aer Lingus is a landmark decision. Aer Lingus is a great company. It has been Ireland’s Flag Carrier State airline and has served the country well.  As a private company over the last nine years it has flourished and grown in the face of stiff competition.

However as a small carrier competing against larger companies in a changing European environment it faces difficult challenges and risks. Its Board and senior management recognise this and see the IAG proposal as a means to address these and enhance the company’s opportunities to grow and develop. 

I believe it can continue to do so and as part of the IAG Group. This Government believes that a sale of the States shareholding on the basis of the IAG proposal is the right decision in the interests of the country and of the company.

Let me outline again five key reasons why we should do so:

Firstly, it strengthens the competitive position of Aer Lingus, reduces risk to the company and provides it with an opportunity within a larger group to grow and face the challenges in a changing aviation environment.

Secondly, it gives greater certainty around our connectivity to Heathrow. It strengthens the guarantees we have around disposal of Heathrow slots and further more provides new guarantees around slot utilisation for at least seven years that we do not have today.

Thirdly, it promotes Ireland’s wider connectivity and can bring growth to our airports. It is anticipated this move will bring benefits to both Aer Lingus’s long haul and short haul networks within the IAG group. There will be a focus on sustaining and growing routes from Dublin, Cork, Shannon and Knock.

Another fourth reason is that it will create employment. It is envisaged that by the end of 2016, a new net 150 jobs will have been created in Aer Lingus, rising to a new net total of 635 jobs by 2020.

A fifth reason is that it protects the Aer Lingus brand and keeps its head office in Ireland.

Under the terms of the deal, “Aer Lingus Group plc will not change its name” and “Aer Lingus will operate all its scheduled international air transport services under the Aer Lingus name.  Aer Lingus will also maintain its head office in Ireland.

We are seeking the approval of this House to proceed to do so on the basis of the principles that have been laid before you and which have been presented to you today.  

In the interests of the company and the country I encourage you to do so.

Ends
Press Office, Department of Transport, Tourism and Sport, 01 604 1090 / 01 604 1093 www.dttas.ie pressoffice@dttas.ie

Date of Speech: 
Wednesday, 27 May 2015