I move:
That the Bill be now read a Second Time.
The main purpose of this Bill is to give effect to the employee share ownership plan, ESOP, agreed by the Government and Aer Lingus unions and to provide for a legal framework to facilitate a process of external investment in the airline in the event that the Government embarks on such a process. The Bill also includes an enabling provision for the establishment of new pension schemes by Aer Lingus for general employees and pensioners and for amendments regarding the appointment of directors, including worker directors.
While this is a short Bill, before I outline the purpose of each section, I want to make some general remarks. The original employee share participation scheme, ESPS, for Aer Lingus staff was agreed under the Cahill plan in 1993. This scheme provided that employees satisfying certain service criteria were entitled to receive the equivalent of 10% of the issued share capital of Aer Lingus as at 31 December 1995, valued at approximately €30.98 million, earned out of profits of which 5% is by way of shares and 5% by way of cash.
Since the scheme was established in 1996, a total of €15.5 million has been paid to staff in cash and a total of 12.2 million shares in Aer Lingus Group pIc have been allocated to staff. No further shares or cash are due to be allocated or paid under the existing scheme.
Following the Government decision in December 1999 sanctioning an initial public offering, IPO, of Aer Lingus shares, negotiations commenced on an Aer Lingus ESOP to bring the employees share to 14.9% in line with Government policy. The Government's policy for the establishment of ESOPs in semi-State companies is that the total amount of equity which an ESOT can hold is 14.9%, of which up to 5% of equity may be given for organisational transformation and the balance of up to 9.9% must be paid for in cash to the Exchequer. The Government policy envisaged that the full 14.9% is only relevant in certain circumstances such as when the State is exiting from the company.
While progress was made on some of the ESOP issues, negotiations did not conclude due to a number of external and internal difficulties including industrial relations problems in 2000 and 2001, the deepening economic downturn and the impact of the foot and mouth disease, all of which led to the eventual cancellation of the IPO process. These events were quickly followed by the terrorist attacks of 11 September 2001 and the consequent devastating global impact. As we all recall, the aviation sector was badly affected. Some airlines did not survive while others are still struggling to recover from the impact.
The events of 11 September 2001 greatly exacerbated an already difficult trading position in Aer Lingus with the result that the company was on the brink of bankruptcy in late 2001. Faced with this crisis, the Government decided on 23 October 2001 to facilitate private sector and further staff investment in the company. This was contingent on support by Aer Lingus staff for implementing the survival plan in full. The survival plan agreed at that time included the reduction of over 2,000 in staff numbers, a pay freeze, substantial work practice changes and the sale of non-core assets. This plan was the subject of intense negotiations with unions with the assistance of the Labour Court and the Labour Relations Commission.
I want to acknowledge that it was the quick action to cut costs and stem losses, with the co-operation of staff, which resulted in the survival of the airline. The survival plan involved significant pain and sacrifice and the ESOP is the tangible recognition of that contribution. Agreement on a framework for the ESOP was reached in December 2001 following detailed and intensive discussions involving Ministers, unions, company management and senior officials from the Departments of the Taoiseach, Finance and Transport.
I again refer to Government policy on staff shareholdings in State companies. Due to the unique circumstances of Aer Lingus in late 2001 when it was on the verge of bankruptcy, it was decided regarding the 9.9% element, the con sideration would be the pay foregone elements of the survival plan. A judgment was made at the time by Ministers that this was the only course of action to ensure the survival of the company.
During 2002, departmental officials, company management and unions took the basic framework already agreed and together with their advisers negotiated and finalised the necessary legal documentation culminating in the signing of documents such as the ESOP deed of covenant and the trust deed in March 2003.
Existing legislation only allows for the distribution of up to 5% of the share capital of Aer Lingus for the benefit of staff. Full implementation of the ESOP, including the issuing of the additional 9.9% shareholding to staff and the appointment of an ESOP director, can only be completed with the enactment of this legislation.
I will now outline the key elements of the agreement on the Aer Lingus ESOP. An employee share ownership trust to hold shares on behalf of the participants will be established with an equity base of up to 14.9%, including the shares currently held by staff. The existing staff shareholding is open to purchase by the ESOT. Payment for the additional 9.9% will be by way of the pay foregone elements of the survival plan. The implementation of the ESOP is subject to verification by the chief executive of Aer Lingus that the relevant elements of the survival plan have been implemented. The ESOT will be entitled to appoint one director to the board of Aer Lingus with a further director to be appointed by the Minister from nominations submitted by the unions. For as long as the worker participation Acts apply to the company, the aggregate number of worker directors and ESOT directors cannot exceed four. In line with Government policy, for as long as the State holds any shares in the company, the maximum shareholding, which the ESOT and staff can hold, is 14.9%.
As I said earlier, this is a unique ESOP arrangement made in unique circumstances. At the time the ESOP framework was agreed, the company was arguably of very little value. Now, however, that stake is worth a very considerable figure by reference to analysts' valuations which appeared in media reports in recent times. Whatever the ultimate value, it should be acknowledged that staff now have a valuable stake in a valuable company and that all efforts should be focused on strengthening the company financially and operationally so as to increase its value in the interests of all stakeholders. Whatever the future circumstances and policy decisions of Government, the 14.9% will remain the limit of staff shareholding while the State holds any shares in the company.
As already mentioned, Aer Lingus has made a remarkable recovery and return to profitability since the aftermath of 11 September 2001. The board, management and staff have transformed the airline into a lower cost, flexible, efficient business model offering low fares with a quality service. The airline is better placed now to withstand competitive pressures and economic and other external shocks which may particularly impact on the volatile, cyclical aviation sector.
In 2002, Aer Lingus achieved an operating profit of €63.8 million compared to a loss of €52.1 million in 2001. The first half results for 2003 demonstrate that the new focus continues to yield results with an operating profit of €14.3 million against an operating loss of €12.6 million for the same period last year and an operating loss of €38.1 million for the first half of 2001. This significant turnaround was achieved against a tough background including the war in Iraq and the SARS scare. Aer Lingus is on track to exceed its full-year operating profit forecast of €75 million for 2003.
On the operational side and despite the difficulties of the past two years, Aer Lingus has introduced services on 16 new routes, all from greater efficiencies in the utilisation of existing aircraft and staff resources. This brings the current number of destinations served by Aer Lingus to 29. Last week the company announced services on nine new European routes which will commence in 2004. This ability to respond flexibly and rapidly to new opportunities is a reflection of the developing new culture in the organisation since the introduction of the survival plan.
Taking account of the improved performance and the continuing expansion of European services, I am examining a proposal for the upgrading of the European fleet. This will see the airline obtain a single short-haul fleet aircraft type for its European operation with the acquisition of 17 new Airbus A320 aircraft. These aircraft will replace existing but smaller capacity Boeing and Bae146 aircraft. The new aircraft will be on-stream by 2005, maintaining the total short-haul fleet at 27 but with increased capacity from the larger aircraft and lower unit costs. The company proposes to fund this investment from internal resources.
Aer Lingus has also advised that it sees significant growth opportunities on the important transatlantic market if the current bilateral restrictions are eased. I am looking at this matter in the context of the EU-US "open skies" talks and the opportunities for growth in the tourism and aviation market.
The airline has made, and continues to make, a significant and valuable contribution to the economic and tourism development of the country by providing a range of quality services to destinations in Ireland's main markets in the UK, Europe and United States of America. It is the Government's wish that it continue to play this key role for the future. To ensure that role continues, we must be open at all times to examining options crucial to the ongoing and future success of the company, taking account of the global aviation environment.
For this reason, an enabling provision has been included in this Bill which allows both the sale of some or all of the State's shareholdings and for the company to issue new shares. It is now over six years since the Government first decided to explore the ownership issue which led to the decision in 1999 to embark on an IPO of the airline. Since the cancellation of that planned IPO, the board and staff of Aer Lingus have focused on the implementation of the survival plan and more recently, on building on the progress made. I have taken the view since coming into office that the company needed to continue that focus on positioning the airline so that it could compete successfully and grow profitably. This it has done and is continuing to do.
In that context, and taking account of progress in repositioning the airline, I asked the chairman last July to examine and report back to me on future options for the company. The chairman supplied me with that report recently. The company's view is that a private sector investment process should be initiated without delay. I am considering that report carefully and I will bring the Aer Lingus views, together with my own position, to Cabinet in the coming weeks.
I want to refer to the current industrial relations difficulties in the cabin crew area of Aer Lingus. While I accept that change is difficult for all, I hope this matter can be resolved on the basis of the recent Labour Court recommendations, without further impact on customers and without jeopardising the company's progress to date.
I now turn to the main provisions of the Bill. Section 1, the definitions section, is self-explanatory. Section 2 and the Schedule provide for the repeal of provisions, in whole or in part and on different days, of the existing legislation governing Aer Lingus. Section 3 provides for the sale of all of the State's shares in the airline. Provision is also made that any funds received in respect of the sale or disposal of the State's shareholding in the company will be paid into, and disposed of for the benefit of, the Exchequer.
Section 4 makes provision for Aer Lingus to issue and sell new shares. Section 5 makes provision to enable the Minister for Finance to enter into one or more agreements in connection with the sale of shares in the airline, including customary provisions contained in a shareholders' or underwriting agreement as the Minister may wish.
Section 6, in order to facilitate ESOT board representation and, where and when necessary, third party board representation, provides for the full or partial disapplication from the company of the Worker Participation Acts, for the retirement of directors upon such disapplication and for the Minister to appoint new directors to fill vacancies so created. The overall number of directors does not change. Section 7 provides for employee shareholding schemes and their acquisition of shares in the company. Section 8 provides for an exemption from section 60 of the Companies Acts. Section 9 is an enabling provision to provide that Aer Lingus may establish a superannu ation scheme for Aer Lingus employees and former employees of Aer Lingus.
Section 10 is a standard provision in relation to the expenses of the Minister for Finance and the Minister for Transport. Section 11 provides for the repayment to the Exchequer of a loan and outstanding interest by Aer Linte. Section 12 provides for the disapplication of certain acts to Aer Lingus. Section 13 gives the Short Title and commencement provisions.
Before I commend this Bill to the House I want to pay tribute to everybody at Aer Lingus for what they have done. They have turned around an airline which a few years ago was on the verge of bankruptcy, through the sacrifices of the staff in particular, led by the board, the chairman and by strong management. The current chief executive especially has shown great courage and skill in leading that organisation for many years. This House and I understand the sacrifices made by all the staff, the cost-cutting they had to bear and their absolute determination to turn the airline around. What they have achieved is unique because airlines around the world are in difficulty in the aftermath of the attacks on the World Trade Centre on 11 September 2001. When the aviation history books are written it will be a source of some satisfaction and admiration that in the face of the troubles after 11 September and the hopes and aspirations of so many people in Aer Lingus the company was able to reach a point where it is looking at a possible €75 million profit.
The 14.9% is being transferred to staff. That is not just a token, it is a real decision. I am not today going to put a valuation on Aer Lingus but in the financial pages of the press one can read different estimates from €300 million to €700 million or €800 million. Whether it is the former or the latter one does not need to be good at sums to know that 14.9% of that is very valuable, it could be anything from €40 million or €50 million up to €100 million. Through this Bill this House gives effect to that percentage and that is the range of the current valuations of the shares which the staff hold. They deserve that. They worked hard for it and put up with considerable sacrifice to make it happen. They gave up increases in their incomes to pay for these shares and I do not believe this House begrudges the benefit to them. However, it is worth noting, from the taxpayers' point of view, that these are very valuable shares which are being entrusted to the staff at Aer Lingus, who will now own 14.9% of a very valuable company.
Having outlined the main elements of this legislation, I also wish to make it clear the position regarding the enabling provision on possible future disposal of the rest of the shares in Aer Lingus – I should say, rather, the company itself. No Government decision has been taken to dispose of Aer Lingus – let me make that very clear. I have a recommendation from the company, giving me its opinion. As expressed to me by the chairman and chief executive, the opinion of the company is that its future would be best secured by taking on board private sector investment so that it could expand its fleet into the future and secure funds for the airline in that way.
There are arguments on both sides of this question and, no doubt, those will be expressed in the House. There are arguments to the effect that Aer Lingus is a strategic company—