We will commence with the presentation by SIPTU. The committee is joined by Mr. Michael Halpenny, national industry secretary, and Mr. Christy McQuillan, branch organiser. We have agreed to give 30 minute slots to each group. We have already lost ten minutes and will lose another couple of minutes at the end because we must vacate the room. We would like a ten minute presentation followed by a 20 minute question and answer session.
Privatisation of Aer Lingus: Presentation.
Mr. Michael Halpenny
We are dealing with a company that is an essential part of the nation's economic infrastructure and a strategic economic asset. We are on the periphery of Europe with no direct land access to the continent, rendering us totally dependent on air and sea links for the transportation of goods and passengers.
The United States is of particular importance to our economic development which underscores the necessity for economic security on the transatlantic routes and elsewhere. There has been global growth in air traffic. The importance of this to our high value exports also underlines the necessity for such economic security.
Aer Lingus is a profitable, commercial and competitive company. Over the past four years it has accumulated profit in the region of €340 million, or an average of approximately €80 million per annum. The only year in the past decade when it did not make a profit was 2001. Since then, over 50 new routes have been added and the workforce has been halved from 7,000 to 3,500. If a crude measure of productivity is the number of people involved versus the work to be done the company is in a more productive position than it was five years ago.
This was not achieved through privatisation or any private sector influence, rather it was achieved on the platform of public ownership and control, together with social partnership on the ground and by the workforce putting its shoulder to the wheel. In light of the progress made by Aer Lingus in the past five years, one question must be asked, namely, what more can privatisation bring to the table that has not been demonstrably achieved by the current combination of public ownership and control and the involvement of the workers through a system of partnership? We accept that there is a need for the company to develop its operations, services and routes. No one knows this better than our members, who are working in a continually changing environment.
The company possesses substantial resources. In 2004, the then chief financial officer, Mr. Brian Dunne, confirmed that the short-haul replacement programme was sourced from the company's resources. The current chief executive officer has confirmed that the company is able to arrange for the purchase of two additional long-haul craft. The company has a strong balance sheet and liquid assets have increased over the past several years. The shareholders' funds increased significantly over the past four years and now stand at in excess of €440 million.
This is not, as has been suggested by some, an airline in crisis. Our difficulty is the rationale behind the €2 billion programme, which, we are told, is necessary. I accept the bona fides of the case but it has not been demonstrated to us. The difficulty is that the constraints imposed by confidentiality have rendered it difficult for front-line negotiators and representatives to attain a clear understanding. That is also the situation with the bilateral process and its impact on the overall mix of affairs. We are not clear on other issues, such as the legal obligations the company has towards people employed in SRT.
In so far as the Government's flotation proposal is concerned, we understand that the yield to the company will be approximately €400 million. The effect of privatisation on Aer Lingus will make available an extra €400 million to the company, the price of four wide-bodied jets. Far from securing the financial needs of the company, it will still have to source €1.6 billion for the remainder of the financial package. The effective public ownership and control will be handed over for the less than a quarter of the company's capital needs and the price of four aeroplanes.
The effect of the issuing of new shares will be to dilute the current employee shareholding of 14.9% to 9.7%, a major issue for all employees. Given the scenario, there is no reason the State cannot invest in the company even to the level of €400 million. It would give the company leverage for the outstanding €1.6 billion. The Government has hidden behind the claim that the EU would prevent it from doing so. The Minister belatedly confirmed on Monday, to us and on "Prime Time", that EU rules do not preclude the Government from providing funding. It is a pity that canard was floated around for the past three years, with the Government and other politicians hiding behind it.
The State-holding company idea was offered as an alternative but was rejected by the Department of Finance, with no engagement. The failure to engage was in breach of understandings in the national agreement. Much has been made by the Government of the protection that a golden share would give in respect of the Heathrow Airport landing slots. The consultants, Goldman Sachs, originally retained by the Government warned that there were legal complications surrounding this issue. Documentation we have seen from the EU Commission points out that strict criteria were laid down by the European Court of Justice in a succession of cases in recent years on the legality and appropriateness of such shares. The Heathrow Airport landing slots have been referred to many times in the debate. Aer Lingus has a large number of these slots, which, in an increasingly competitive aviation sector, are becoming ever more valuable.
In light of the increasing pressure on aviation companies to compete, the phenomenon of "slot-busting" has emerged. This reached its most extreme level in Germany, where airports were obliged to place tenders on the tarmac to stop an airline from slot-busting. There are also problems in Dublin Airport with the allocation of slots. If we cannot retain the ground at Dublin Airport, how can a minority share in a privatised company allow the Government have any influence in another jurisdiction?
Significant employee issues are emerging on foot of the proposed privatisation. There are questions over job security and the need for agreements that there will be no compulsory redundancies. Agreements are also needed on core numbers, ratios and no outsourcing. Three issues surround the pensions question. There is also the dilution of the employee shareholding, which must be resolved in advance of the company proceeding to implement the privatisation programme. We have given the notice to that effect.
I thank the committee for allowing us to make a presentation. I do not need to remind it of the Eircom privatisation experience. Two leading economists, who are no cheerleaders of the trade union movement, have called for the renationalisation of Eircom. We are very mindful of the Irish Ferries experience. Air New Zealand went through the same process and had to be renationalised. Why do we have to reinvent the wheel?
This is not a minority view because there are many who agree with us. The evidence lies in the many resolutions passed by local authorities. We hope that the deliberations of the committee will be brought to bear, in a positive way, on the debate. On Monday, the Minister confirmed to us that he would await with interest the outcome of the committee's deliberations and stated that if it is positive, he will factor it into the Government's deliberations.
The presentation was more concerned with opposition to the privatisation of Aer Lingus than with employee issues. I agree with the point on the lack of clarty on certain employee issues. However, the unions appear to be dead set against the privatisation of Aer Lingus. Is there any deal that would entice them to support it? How much is it appropriate for the taxpayer to invest in the Aer Lingus pension fund? How much are members of the union willing to invest to top up that fund?
The level of employee ownership is promised at 14.9%. Is there a level of employee ownership that would entice SIPTU members to support the partial privatisation of Aer Lingus?
Mr. Halpenny
We are trade unionists and we live in the real world. We have fought the broad policy question as much as we can in a high profile and unambiguous way. We have always stated that if the Government, which is democratically elected, made a decision, as it has done, to proceed with a part-privatisation — we believe this is the wrong option — we will be obliged to deal with the company. We informed the latter that there are issues which must be dealt with, in co-operation with the workforce, before privatisation proceeds.
The paramount issue for our members is not pension provision or the employee shareholding but job security. This is not to say that the others are less important. If the committee were to ask Mr. Mannion about his meetings with staff, he could confirm that this was the main issue identified. We represent people on the ground who have been the subject of moves by the company under public ownership to outsource large swathes of the organisation. Some of the people concerned have experienced the rocky road and have been around for a number of years. They have witnessed as many as three change programmes and are quite concerned, given what has happened elsewhere. That is why the issue of job security and the need for the agreements I have enumerated in the submission are so important.
On the specific issue of pensions, Deputy Olivia Mitchell will understand that there are three separate aspects. One has been well aired in the media, namely, the whole deficiency in the fund relative to indexation or increases in payments in retirement. A second aspect relates to unfinished business and goes back to the time of the former Minister for Transport, now Senator O'Rourke, who made certain promises and undertakings about improvements in the pension scheme. We had to go to the Labour Court last year to get the company to restart those negotiations. A report on that by a jointly appointed expert, Mr. Kevin Finucane, is due at the end of this month and there is a whole raft of issues which point to the necessity for improvements there. The third pension aspect relates to the position adopted by the company. It appears to have taken the position that while the pension has been certified by the Pensions Board as a defined benefits scheme it is treated for accounting purposes as a defined contributions scheme. Thankfully there is no shortfall currently in the base scheme. There is, of course, if indexation is taken into account. However, in the event of any shortfall in the base scheme, the company is in effect saying: "Don't come knocking on our door." That is not consistent with a defined benefits scheme. Our advisers have told us that is the view of the company.
On the broad issue of pension improvements, we have made it clear to the company that our members will be in the mix, and if there is a question about compensation for improvements, we are willing to negotiate that with the company. However, where there is a question of a shortfall arising, our very clear view is that this is a matter for the employer.
On the question of employee share ownership, the difficulty we have is that there is an ESOP of 14.9%. We have not sought an increase in that so far, but we are open to offers. The major concern — I include all of our colleagues in the organisation in this regard — is the effect of privatisation in diluting that equity holding. There is no doubt that if the company is to issue new shares, this will have a dilution effect not only on the employee shareholding but on the State's equity holding as well. That of course raises questions about just how safe a retained shareholding by the State would be.
My next question relates to job security.
I asked the Deputy for three questions. She put three questions and Mr. Halpenny has answered.
There were three issues on which I sought clarification.
I asked the Deputy to put the questions she wanted.
The Chairman did not say I could not come back.
This is very unfair. If the Deputy had been here at the start of the meeting, she would have known that we agreed a procedure.
I said at the start that I would come back with a third question.
The Deputy can come back after Deputy Shortall has spoken, or after any of the other members of the committee.
I welcome the SIPTU representatives to the meeting. We are all somewhat at a loss given the scant nature of the information provided the other night by the Government in its press release. We do not know anything about the exact nature of the transaction being proposed. Certainly, the key issues as regards staff have been kicked to touch and left to be resolved at a future date. Many of us are in the dark in respect of what precisely is being proposed.
I want to ask about the engagement of management with workers on some of these key issues. I note that following SIPTU's meeting with the Minister a few weeks ago, the management was instructed to engage intensively with staff to address the issues of concern. Can Mr. Halpenny tell the committee something about the nature of that type of engagement? Is the union satisfied that adequate consultation is now under way in respect of the strategic plan.
I also want to ask about the whole pensions issue. How does Mr. Halpenny see this being resolved, given that it is a combined pension scheme? Members of the Oireachtas have recently received representations from workers in the Dublin Airport Authority, DAA, in respect of their pension concerns. Does he believe it will be possible to disentangle the pension scheme as it currently exists, given that it includes employees of Aer Lingus, Aer Rianta and SR Technics, SRT? From a company law viewpoint, will it be possible to break up the scheme? What are the options, from the viewpoint of putting more equity into that scheme? Finally, I want to ask about the ESOP to which Mr. Halpenny has referred already. Has he been given any indication of what mechanism might be available in terms of protecting the 14.9% shareholding workers have at the moment? In the context of any new share issue by the company, which seems inevitable, it is difficult to see how the employees' current shareholding level can be protected. Has the union engaged with the company on this or been given any information either by the Minister or management as regards the mechanism to be used in order to safeguard that position?
Mr. Halpenny
I will take the last question first. We have not been given any indication. We raised the matter in passing with the Minister a month ago. We raised it specifically with him at the meeting on Monday. He acknowledged that such a mechanism would have to be found. There has been no engagement with us on that. I understand there has been some media speculation, but there has been no engagement on that. A mechanism will have to be found. As far as we are concerned, the State cannot walk away from that one. On page 6 of the Goldman Sachs report, the Government's consultant noted in one of its major observations that in the long-term the State is likely to walk out of the situation at Aer Lingus. We will not wait around, however, and we want that situation sorted now. I am not sure how the company, as such, is affected. As far as we are concerned it was a decision made by the State which has promoted this particular debate. It is for the Government to devise a mechanism that is satisfactory to our members, to ensure that this level of equity holding is retained.
On the pension question, it is quite clearly a multi-employer scheme. SIPTU has members in both DAA and SRT and from a company law viewpoint we have been advised there are all types of difficulties as regards the break-up of the scheme. There are legal difficulties from a company law viewpoint and other problems as well in terms of the division of assets. There are competing views as regards how the pensions future at the airport should be dealt with. Our members in DAA believe a separate scheme would be better and quite clearly the focus in Aer Lingus is about protecting the future. The issue is far more complicated than has been portrayed, much more complex than some people like to believe.
There really has been no effective engagement. We had three meetings with the company on 8, 20 and 24 March, and that was it. The meeting on 8 March was solely about pensions. It comprised a pensions sub-group of SIPTU along with colleagues from IMPACT and the group of craft unions. As regards a specific meeting to deal with SIPTU concerns, we had to write to the company and the Minister to arrange that, even though an instruction had been given.
I have been asked whether we are confident there will be proper engagement and the answer is that we are not. That will not prevent me seeking proper engagement, however. I have arranged a meeting with the company for Friday and we shall see how matters develop. Up to now the company has been of the view that what was needed was a clear decision by the Government. It had a clear decision by the Minister, which was to engage, but decided it was better to get clarity on the political issue before moving further. That seems to be why it was treading water. It has no excuse now, as far as we are concerned. However, if it underestimates the difficulties, then it will be a very rocky road.
Has there been any consultation on outsourcing?
Mr. Halpenny
None. In his meetings with staff, Mr. Mannion has made comforting noises, but much more will be required. I have clear memories of the battles we have gone through with management under public ownership. We pulled the company away from outsourcing and we have a very clear memory of the Irish Ferries situation. It will require a great deal more than good wishes to satisfy our members.
I propose, on foot of the serious time constraints under which we are operating, to take questions from Deputies Peter Power and Glennon and Senator Dooley together.
I thank Mr. Halpenny for his submission, which we appreciate. There has been much debate regarding the legality or otherwise of the State investing in the company at this stage, which is SIPTU's general position. Mr. Halpenny is, I believe, familiar with the market economy investor principle. He may be familiar with the EU bulletin No. 8 of 1984 in regard to EU investment in public companies. If privatisation does not occur, what would be SIPTU's preferred option? The EU bulletin states that where fresh capital is injected into a public enterprise, where this capital corresponds to new investment needs and costs directly linked to them, where the industry in which the enterprise operates does not suffer from structure over-capacity in the Common Market and where the enterprise's financial position is sound, state aid is legal. However, if the financial circumstances of Aer Lingus were not sound and if it was in a precarious financial position, given that the Government, as sole shareholder, would not be entitled to invest in it under EU rules, what would be the company's position?
If privatisation takes place, it will be open to the members of the ESOT, with the sponsorship of the union, to invest individually, which, I presume, is taken as given, or for the ESOT to invest as an entity. Given the flexibility that is needed in modern aviation, a fact recognised by all aviation companies, does Mr. Halpenny believe that a state-owned company has the flexibility to make the quick, sharp decisions needed to compensate in a business that is changing rapidly, on a weekly and sometimes daily basis? We know how long it took the Government to reach a decision in this regard. What of the rapidly changing nature of the environment? Does Mr. Halpenny believe government-sponsored aviation companies will be able to operate in that environment?
I welcome Mr. Halpenny and Mr. McQuillan. Mr. Halpenny referred to the possibility of a straight-up investment of €400 million to cover cashflow capital investment requirements in the coming years. In the event of that investment being made, while it would resolve the question of the dilution of the employee's shareholding, how would it ameliorate the position in regard to job security or pension deficit? Given that 3,500 jobs have been shed under public ownership in recent years, surely investment in new aircraft and the expansion of the route network would be the way to proceed in regard to creating job security.
Will Mr. Halpenny provide details of the number of company employees who are members of SIPTU and whom he represents? What was the turnout at the recent ballot for industrial action and will Mr. Halpenny provide details regarding the outcome of the ballot?
Is there a possibility of reaching some kind of arrangement in respect of the golden share or blocking share to which reference was made? Will that golden share provide job security?
Mr. Halpenny
The golden share has never been posited by anybody as being relevant to job security. Instead, people have pointed in the direction of national interest as far as Heathrow is concerned or offered vague promises to protect broad national interests. We are under no illusion that the golden share is being directed towards job security.
With regard to Deputy Glennon's questions on the development of the business and job security, there is currently job security in the sense that we are crafting agreements within the context of the current set-up. What raises a major question with regard to job security, as the Deputy will know, is that the experience of privatisation. The influence of the private sector in aviation in general has not been entirely happy. In the economy generally, privatisation has set off all sorts of alarm bells, a situation not helped in the least by the fact that when Mr. Mannion chose to meet the employees, as he is quite entitled to do, he could give no assurances about anything when asked specific questions. As we head, therefore, towards privatisation, the issue of job security is paramount from our perspective. We have enumerated the way in which that can be at least clarified for the workforce.
On the question of the ballot, we have 1,800 book members. The number of those entitled to vote by virtue of the fact that they were in the membership for the requisite period, which is eight weeks or over, was 1,676. There was a 69% poll and 93% of those voted in favour. We can provide the ballot certificate to the Chairman, if necessary, but I did not bring it with me.
There is no need to do so.
Mr. Halpenny
I wish to state, as it is a matter of public record, that I was surprised by the question.
We are not suggesting that the Government should invest €400 million and leave it at that. We are suggesting that if the privatisation project is based on the outcome of a flotation that will deliver only €400 million to the company, which it claims it needs as leverage to attain finance of €1.6 billion, it would be quite easy for the Government to inform the company not to worry about the flotation because it will invest, on the market investor principle, the €400 million that would give the company the leverage without the risk of doing away with public ownership and control, and the consequent risk to the workforce. That is the point we are making. We are not suggesting that it should stop at €400 million; we are suggesting that it should be sourced from the State and not the market. One way or another, the company will still have leverage to attain the €1.6 billion.
With regard to Deputy Peter Power's questions on State ownership, this matter has been debated by many, sometimes in a negative and pejorative way. The State and this democracy have done something that five of the six major privately-owned US carriers have failed to do, namely, produce a profitable airline. The US — the home of the free and the land of the brave and also of the market economy — has failed to produce a profitable aviation sector. In a highly competitive European aviation sector, we, as a state, have done what everybody else failed to do. I have absolute confidence that what he have found is the correct model and the correct mix.
In so far as the ESOT is concerned-——
My question concerned the event of the company getting into difficulties in public ownership and-——
Mr. Halpenny
No, I——
I thought Mr. Halpenny was about to deal with the issue of the ESOT.
Mr. Halpenny
No, I will answer on the ESOT and then a final question——
That was my question.
Mr. Halpenny
I apologise. I am dealing with the questions in reverse order. The Deputy asked about the ESOT.
My question was simple.
Mr. Halpenny
I know what the Deputy asked.
I will repeat the question. If the company gets into difficulties, EU rules forbid public sector investment. Where would it stand in that instance?
Mr. Halpenny
If the Deputy prefers, I will take the questions in that order. I was not trying to evade his question, of which I made a note.
The Deputy asked a reasonable question. We offered a broad solution for all State-owned companies in the form of the State holding company concept, which was rejected out of hand by the Department of Finance. This would have provided the broad framework within which companies would have a broad home to go to when they got into trouble. Therefore, if Aer Lingus was captured within the State holding company concept, this type of protection or the possibility of this type of protection would be present.
Notwithstanding those rules enumerated by the EU in a 1984 bulletin which stands today, the Italian Government was permitted to rescue Alitalia. It appears there is possibly one set of rules in Europe for the large players and another for smaller players. I also have considerably more confidence than some people in the ability of Aer Lingus. We should not forget that this company, which is a very small player in Europe, weathered the storm when other airlines went to the wall. Aer Lingus is in a much stronger position now as it is cash rich, has good reserves and, most important, has a workforce which is attuned to change management and committed to carrying out its business. All of these factors in an expanding aviation sector give me far more confidence than some of the doom merchants.
Three other members wish to ask questions. They will be permitted to ask one question each as we are five minutes over our time.
I will be brief.
Due to the brevity of this morning's meeting, if members believe that we should speak with SIPTU, IMPACT or Aer Lingus in the future, I will accede to their request.
Given that we are now certain that EU rules allow Governments to invest in companies like Aer Lingus and in light of the very negative results of previous privatisation in this country and abroad, such as the privatisation of Eircom, Irish Sugar and Irish Ferries, is it not true that there is no need to privatise Aer Lingus? Is it not true that no more benefits would accrue from privatisation than those which would accrue from proper Government investment in Aer Lingus? Is it not true that the desire to privatise Aer Lingus is motivated by the race to the bottom and a desire to drive down wages and conditions and introduce casualisation and part-time working?
Is Mr. Halpenny ambitious for Aer Lingus? He mentioned that he had confidence in Aer Lingus but is he ambitious for the airline? When the former chief executive of Aer Lingus, Mr. Willie Walsh, appeared before this committee, he spoke about a €1 billion investment plan, while the new chief executive of Aer Lingus has spoken about a €2 billion investment. Do comments like these lead Mr. Halpenny to be ambitious for the airline?
In the event that the current discussions are unsuccessful, does Mr. Halpenny believe that a strike will help the future of Aer Lingus? Who is Aer Lingus supposed to serve and where does the consumer come into the equation?
I wish to follow on from Senator Morrissey's question about strike action. I understand SIPTU served notice of such action yesterday. Is strike action motivated by the detailed objections to the privatisation mentioned by Mr. Halpenny today? Is it motivated by the fact that the pensions deficit has not been resolved and concerns over job security and outsourcing? Would SIPTU call off the threat of strike action if these concerns were dealt with? Alternatively, is strike action motivated by an objection to privatisation per se? I note that SIPTU has run some very colourful posters which contain soundbites stating that the union objects to privatisation. Will SIPTU drop its objections to privatisation and its strike notice against Aer Lingus if its detailed concerns are addressed to its satisfaction, for example, if the pensions deficit is plugged?
What is the nature of the relationship between SIPTU and IMPACT? IMPACT does not appear to have the same kind of barmy, suicidal ideas as SIPTU, which involve tackling the Government and Aer Lingus head on. IMPACT appears to be making sensible and reasonable demands and appears to be willing to co-operate with privatisation once its concerns, which are shared by SIPTU, are addressed. It appears that both SIPTU and IMPACT are seeking the same things but SIPTU is threatening to strike and disrupt the airport if it does not defeat the entire process of privatisation. Is this observation correct?
Mr. Halpenny
To avoid confusion, I will return to Deputy Healy's question because I do not want someone to accuse me of trying to evade the question. SIPTU does not believe there is any need for privatisation. We believe the State has a role to play. In respect of leveraging, the €1.6 billion will be equal regardless of whether the €400 million comes from the flotation or the State. We do not believe any benefits will accrue from privatisation because we, the management and the State have achieved things nobody else has done and which have not involved privatisation.
I am not sure whether privatisation involves a race to the bottom. However, our members fear that it will lead to such a scenario. I am sure that this is not the intention of management but the reality is that the exigencies of the marketplace will dictate what happens. This is why it is paramount that agreements are secured on this side of the fence rather than on the other side. This is why we argue that if the Government has made a political decision to privatise, a decision with which we fundamentally disagree regardless of whether it is, as Senator Ross argued, barmy or not, this disagreement stands. We certainly agree that there is no basis or need for privatisation.
In respect of Senator Morrissey's question, SIPTU is ambitious for Aer Lingus. I represent 1,800 people who are ambitious for Aer Lingus and have delivered more than soundbites or political statements. They have delivered the change which has made the airline a highly profitable company. The management of Aer Lingus, Mr. Mannion and Mr. Sharman would be the first to agree with this observation. There is no lack of ambition on the part of ordinary workers on the ground. The lack of confidence in the company appears to emanate from other constituencies, some of which Senator Morrissey might hope to represent.
In respect of whether strike action will be helpful, Senator Ross must understand that SIPTU has issued protective strike notice. This is because we do not believe the industrial relations system can deliver the kind of engagement that will lead to the type of agreements we need that will stand after the Government decision on privatisation is made. Industrial action is obviously a last resort for anyone but it shows the lengths to which our members feel they must go to protect the gains they have made for the company and their interests.
I compliment Senator Morrissey on raising the issue of the consumer. We have a regard for the consumer to the extent that we have made a decision not to implement industrial action over the Easter period in deference to the consumer, on whom we all depend. We have considerable public support, as evidenced by a recent poll conducted by RTE, and always have an eye on the consumer. However, our job as trade unionists is to represent our members, protect their members and protect the interests of consumers, many of whom, thankfully and despite the efforts of some parties, are members of trade unions themselves.
This brings me to Senator Ross's question about whether SIPTU is striking against privatisation. This now appears to be an industrial relations matter. We have publicly and unambiguously fought a political battle, given no corner and make no apologies for our actions. It appears from a report in The Irish Times that Senator Ross has had a Damascene conversion on the issue of privatisation in so far as he is quoted in the article as saying that he now wonders whether we should reconsider the decision to privatise the airline and that he agrees with Senator Ryan. I welcome the Senator’s statement, even if it is late in the day.
Do not blow out the candle. It is only a couple of hundred million euro. I want to make it perfectly clear that the whole lot should be privatised.
Mr. Halpenny
As the Senator has responded, I will finish the quotation. The Senator said that, while he tended to believe in privatisation, he shared the view of Senator Ryan that the Government had not yet made a business case for privatisation.
Correct. I will explain my comment. If the whole lot was privatised——
Mr. Halpenny
If I can finish——
The Senator should allow Mr. Halpenny to continue without interruption in order that we can meet our guests from IMPACT.
Mr. Halpenny
We have a trade union relationship with IMPACT on the grounds that we are part of congress and SIPTU's members work alongside members of IMPACT. I do not know what the Senator is trying to suggest. IMPACT is entitled to express its view on the matter, just like any other trade union, including the craft group and the CRC. We fully support the right of each trade union to bring its influence to bear in respect of the views on which it has been instructed by its members. We have been instructed by our members to pursue a campaign against privatisation. In the event of a Government decision to privatise, an overwhelming majority have instructed us by secret ballot to pursue an agenda which includes job security, pensions and all of the other issues we have enumerated to the company, the State and the committee.
I apologise for going ten minutes over time. We must try to make up lost time in the next hour. I call on the IMPACT delegates to make their presentation. We are joined by Mr. Shay Cody, deputy general secretary; MsChristina Carney, assistant general secretary, and Mr. Paul Blake, chairperson of the cabin crew committee. If Mr. Cody could reduce the length of his presentation, we would appreciate it.
Mr. Shay Cody
I appreciate the time constraints. After his discussion with Senator Ross, I was going to give Michael Halpenny a hug but perhaps I will leave it until later.
It will be some hug.
A bear hug.
Mr. Cody
We have circulated our submission. I will skim through it to allow more time for questions and comments.
It is proper to say Aer Lingus is a highly profitable company and has not been a burden on the State to date. It has funded its capital growth from its own resources and borrowings without the need for State funding. Only once was there a necessity for an injection of State capital, at the time of the Cahill crisis in the early 1990s when £175 million was invested, most of which was used to address the Team Aer Lingus issue. For this minimal investment, the company is worth between €750 million and €1 billion.
IMPACT's preferred solution is for the State to invest in the company. We know such investment would be allowable under EU rules. Congress has made an imaginative proposal on how State investment in this and other companies could be managed. It would be worthwhile to engage seriously on this proposition but this has not happened to date. As congress stated when it published its document, we are in an era of politics when the State is a poor shareholder. It cannot invest when companies are doing badly and is unwilling to invest when they are doing well. In the circumstances and unless there is a change in political direction, we must deal with the world as we find it. In particular, we must respond to the Government's decision in May 2005 and last Tuesday to exit from the company to some extent.
There has been misguided and naive commentary on the size of the remaining Government shareholding, on which I will focus. The matter was considered and discussed in the Goldman Sachs report commissioned by the Government in October 2004. Goldman Sachs considered the issue of the various levels or rungs of the ladder surrounding the residual State shareholding. The State could retain a majority shareholding or various levels of minority shareholdings but the report identified that 25% was a crucial threshold, below which the State would cease to have significant blocking influence, as it were.
I emphasise that IMPACT is not a supporter of day-to-day interference by any shareholder in any company. We believe shareholders should take a strategic view on any company in which they invest. They should employ, hire and, if necessary, fire management to carry out what is necessary. Shareholders have strategic considerations, whether they are driven by narrow financial, broader investment or strategic issues.
Goldman Sachs identified two strategic areas of note. The first concerned Heathrow services, on which Goldman Sachs stated: "The State could enter into specific shareholder arrangements to ensure the provision of a minimum level of Heathrow services". The report went on to state:
In the event of a subsequent IPO exit, it is likely that restrictions will need to fall away. The duration, therefore, of the restriction beyond a minimum period is likely to be uncertain.
We must remember that Goldman Sachs originally assumed there would be a halfway house before an IPO exit, whereby private equity investors would be brought in. Perhaps the people concerned could live with a number of covenants or restrictions for a transitional period but, once there was a full stock market floatation, these issues would fall away.
The report made similar comments about transatlantic services, that an industry player or temporary private equity investor could live with a requirement for a minimum level of transatlantic services but, in the event of an IPO, the restrictions would drain away. The report stated: "It is clear therefore that the complete divestment of the Company does not allow the Department retain any influence it has, or might choose to exercise, as a shareholder in order to achieve its stated objectives" and "control and influence through ownership will pass immediately to the buyer". Covenants would be limited in duration and fall away in the event of an IPO exit.
The issue of the residual State shareholding is crucial. A total of 25% would give significant blocking rights to the State subject to appropriate articles of association being put in place identifying voting thresholds for major decisions. The nub of the issue is that any subsequent rights issue would pose a dilemma for the State. It could participate in any raising of equity. Such an approach, even to maintain a minority stake, would represent a significant change in public policy. Alternatively, in the absence of this, it would be diluted below 25%, thereby losing key influence.
Why is it necessary to retain influence ? Irish people and, in particular, business people need to travel to places not directly served from Ireland. Heathrow Airport, one hour away, serves almost all of those centres. Other London airports do not offer this spectrum of routes. If the Aer Lingus Heathrow slots were sold, it would give a substantial return on capital for its owners. The travelling public would then need to access the airport via other London airports and bus, train or taxi journeys. The CEO has stated this would not arise as the Heathrow routes are profitable. While they are profitable, this view does not stand up to argument or as a defence. Investors seek the maximum return for their capital, as can be seen around Ireland where profitable hotels or petrol stations in certain areas are being closed as it emerges that the land on which they are sited is worth more than their routine profits from ordinary trading. In the context of the State exiting totally or retaining a minimal shareholding, it will lose its influence in this matter, which will affect us, not as shareholders in Aer Lingus, but as individuals doing business around the world.
From the point of view of Aer Lingus and a new owner, switching to other London or continental airports might result in the regular profit stream being maintained. Windfall profits would be returned to the shareholders but Ireland would be less accessible to international business traffic. To continue to influence these decisions, the necessary State shareholding requires an amount above 20% of the current initial public offering, IPO, to allow for subsequent dilution. Our estimate is that an amount up to 35% would be needed. The alternative is a commitment that the State would be minded to invest in the event of a subsequent rights issue. This would require cross-party support for that to be a meaningful commitment as a subsequent rights issue would take place after the next general election. A consensus has been reached on a number of issues and I suggest cross-party debate on this matter.
In the absence of the above, the workforce and the market will assume the State is pursuing the ultimate goal of complete divestment and ending its influence on these strategic issues. We welcome the signals that the State may not reduce its holding to 25% and we believe this is an opportune time to discuss the State holding company, which may be the most appropriate vehicle to be the holder of that residual State shareholding. This would have the flexibility to decide, based on appropriate considerations, if an investment should be made in 2010 or 2012.
This is a time of considerable uncertainty and anxiety for Aer Lingus staff. A number of significant issues must be resolved in advance of any transaction. We have listed them under four headings: 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 scheme. We do not propose to address these matters in detail in our presentation but we will answer questions. These headline issues must be concluded before investors can make a judgment on the value of the company. These are pressing matters that, in the opinion of the workforce IMPACT represents, require immediate attention.
Mr. Cody mentioned the State holding company as a possible way to circumvent EU rules. Does Mr. Cody believe this is feasible? Mr. Cody refers to it as imaginative. Is it not more accurate to describe it as fanciful? Yesterday's news referred to the EU threat to privatise Olympic Airways because of the unacceptable state aid it received when the airline was in trouble.
SIPTU mentioned job security as a major issue to be resolved but Mr. Cody does not seem to identify it as a major issue. When redundancies were offered in Aer Lingus in 2004, prior to the resignation of the management team, the scheme was oversubscribed. Some redundancies took place before restructuring was stopped and new management took over. Is it true that several hundred employees in Aer Lingus would like to accept this redundancy deal now?
Mr. Cody
IMPACT is not proposing a device to circumvent EU rules. State aid is associated with state bail-outs but this is not the case here. The State owns a number of commercial, semi-State organisations. It appears to be the only shareholder in the world with the policy of not investing in its companies. This is a problem for the political system. Whichever political party is in Government always suggests it cannot or will not invest. It has been decided not to invest in the current political climate.
The Government is in a position to invest in the airline at present, regardless of whether it should. What would happen if the airline were to get into trouble in the future?
Mr. Cody
In the event of a downturn we should examine what happened previously. After a severe downturn Aer Lingus was told it was on its own, in contrast to what happened to Olympic Airways and Alitalia. The Aer Lingus workforce accepted pay cuts and pay freezes, a number of surplus aircraft were sold and paintings by Jack B. Yeats were sold. The company tightened its belt and survived without a State bail-out. If a similar event occurred in a few years, it would meet the same response. It is regrettable that Aer Lingus sold the Jack B. Yeats paintings.
I agree.
Mr. Cody
In the event of a downturn, an airline has surplus aircraft. IMPACT would prefer the company to have a strong capital base, allowing it to withstand shocks that nearly toppled it in the past.
The redundancy scheme was oversubscribed and approximately 100 members of cabin crews have applied for but been refused the package. Over the course of negotiations we will monitor the development of this matter.
Are other employees, besides members of IMPACT, in the same situation?
Mr. Cody
I can only speak for members of IMPACT. After 11 September 2001, there was concern at the possibility of insufficient volunteers. Any company in a downsizing situation will be troubled by these issues. The former chief executive officer had the attitude that if an insufficient number volunteered, he would implement compulsory exits. It was stated in the Oireachtas that this was not how affairs should be conducted in State companies. This is a crucial issue for the workforce. Before Eircom went on its cook's tour around the world it entered into a simple agreement with the workforce, stating that the existing policy of headcount reduction by voluntary means would continue in the privatised environment. Through all the transactions in Eircom there has been no agitation or anxiety in the workforce because the collective agreement still holds. This is the manner in which we must address the similar issue in Aer Lingus.
I welcome Mr. Cody to this meeting. This is a worthwhile session because a number of critical issues are being ventilated for the first time in a public arena. I hope the media takes note of this and seeks answers to the important questions posed. It is useful that Mr. Cody refers to the Government's original advice on a proposed change of ownership. This advice, from Goldman Sachs, was very expensive and answers many of the questions that now arise. It was clear in respect of the likely consequences, especially the worthlessness of a golden share. Does Mr. Cody accept that the term is being used loosely by Government representatives? Does Mr. Cody accept that the European Court of Justice has ruled against the idea of a golden share in a post-privatisation situation? It is worthless and ineffectual as well as illegal.
While it is no longer possible to have a golden share to safeguard strategic interest, what power does a blocking share, requiring a minimum of 20%, confer on a minority shareholder? It gives the power to block a 100% takeover but, in terms of safeguarding strategic interests such as the Heathrow slots, does Mr. Cody accept a 20-25% shareholding will not give the State power to block anything other than a 100% takeover bid? Mr. Cody refers to 25% being inadequate. If there is a new share issue, a holding of 25% will be diluted. The only way to safeguard a 25% holding is if the State invests by buying new shares. Mr. Cody referred to a cross-party agreement to the effect that the 25% shareholding would be safeguarded. This would entail a somersault on the present Government's policy, entailing the State investing in Aer Lingus. Members of the current Government have made it clear this will not happen. Does Mr. Cody accept that 25% holding cannot be retained as once new shares are issued it will be diluted?
The Minister stated recently the Government may need to hold on to 30% to give it headroom. That will not give it anything like the headroom required to maintain the 25%. Does Mr. Cody accept it is nonsense to speak in terms of a blocking share or a share that could influence matters such as the Heathrow slots and the services being provided at present?
What is Mr. Cody's view on maintaining the strength of the 14.9% employee share ownership trust? Will this holding be severely diluted in the context of a new share issue? How can it be safeguarded, if at all? What is Mr. Cody's experience to date of engagement of management on these key issues? The Minister issued an instruction that management intensively engage with staff. Has that happened and what is Mr. Cody's view on the current level of engagement by management with staff?
Mr. Cody
The golden share was an invention of Mrs. Thatcher, which has no status in law at this stage. It is a phantom and we should stop discussing it. Depending on the articles of association of a company and the rules, a particular block of shares can stop certain events occurring. I do not believe Sir Anthony O'Reilly owns the majority of shares in Independent Newspapers but I suspect the rules are written in such a way that he could block a number of matters. It depends on how the rules are designed.
I am aware that for major divestments, purchases or issues regarding headquarters, companies often require more than a 50% majority. I often comment that if Manchester city council owned approximately 25% of Manchester United, the Glaziers would not own it because it would not be necessary to own a majority. It is down to the rules of the company and these discussions have not touched on much of the fine print.
On the disposition of the Government and the future, I want to use this as an opportunity to start conversation among representatives of all parties. We have a funny dilemma. I thought it would have been easier to obtain a commitment for future investment by the Government in the event of a dilution. That is so difficult for the Government that it will go the opposite route and will not decrease to 25%. It is almost a theological issue that it will never invest in a company and will remain at a 30-something per cent level. That only defers the evil day.
Two issues are raised regarding the ESOT. At present, the ESOT is limited to 14.9% of the shareholding. In the event of a public floatation, that restriction must fall away. How can a limit be placed on the overall size of anybody's shareholding in a public company? The issue is not increasing the ESOT, but that it will be diluted and we must find a means to bring it back up to 14.9%. Nothing will happen unless this issue is resolved. Many people must bring their ideas to the table. That debate has not begun yet.
We have not had satisfactory engagement with the company to date. I do not know whether it is because of the disposition of the company. I suspect the view was formulated that the Minister sending us to speak with each other prior to a Government decision being made had elements of a hospital pass, so to speak. Meaningful discussions on pensions could only take place in an environment in which we knew a public floatation would occur and would give rise to certain funding avenues to address the problem. I expect and require that from now on we enter serious negotiations. We met company management yesterday and we have another meeting scheduled. So far, it has not happened.
Six members are offering and approximately six minutes remain. I will ask each of those members to ask one question and Mr. Cody will then reply.
Mr. Cody's contribution was very helpful on this issue raised by Deputy Shortall. Has the union received specific advice on whether the retention of a 25% share, a blocking or strategic share but not a golden share, will definitively prevent the sale of the Heathrow slots as a strategic interest? Would it also give the power to prevent a further rights issue in itself if the terms of that rights issue were unsatisfactory? Would the combined shareholding of a strategic share plus the ESOT share be very strategic in terms of workers' interests and the company's interests?
Is the union confident that asset-stripping will not occur? We saw that happen in Eircom. In discussions with management, is there any indication of the cost of advisers and consultants for the floatation?
I would like to ask the same question as I asked at the previous presentation. How many members does Mr. Cody represent? We have been led to believe by various presentations during recent years that cabin crew in particular were considerably concerned about the implementation of previous agreements. That does not tally with the stance Mr. Cody takes on this issue. Will he elaborate on that?
Is it possible to ensure that the planes will come home? We will also ask this question of Mr. Mannion. Are many people lining up to get involved with Aer Lingus? Does Mr. Cody believe the floatation is likely to occur this year?
We are in trouble as there is a vote in the Dáil.
Regarding dilution of the 14.9%, if that figure were increased would it be granted or would it be brought back up through investment?
Is the 35% figure mentioned realistic? I can see why Mr Cody wants it because if 35% is retained by the Government and 14.9% is held by the ESOT, it would mean a 50:50 privatisation situation, which is not privatisation in any meaningful sense.
Mr. Cody
I will go through a number of issues. We have taken professional advice from financial and legal sources, as has everybody in this transaction. God knows what the costs will be but I suspect they will be high as these people know how to charge. The advice we have is that it depends on the rules in the articles of association of the company. Companies have different articles of association with different thresholds for decision making.
I must interrupt. There are enough of us to pair if members want to do so. We can ask the Whips if they would agree so long as members agree they will remain here. Will someone check with the Whips to see if it can be done? We must vacate the room by 11.10 a.m.
Mr. Cody
As of now the State owns 85% of the company. It will prepare a set of rules and articles of association for the floatation. It has the opportunity to design it in such a way that the approval of strategic or major shareholders at certain levels would be required before the company could relocate or sell Heathrow slots. I am involved with other ESOTs which require the agreement of a certain proportion of shareholders before changes are made. The fine print has not yet been discussed but this is a possible option.
Eircom was mentioned with regard to asset stripping and, in effect, a venture capital takeover. The major problem with the Eircom privatisation was that it had been conducted with more enthusiasm than logic. Until the last minute, the State had contemplated the retention of a strategic shareholding but abandoned that idea. Once it had sold its stake, it lost all its influence on decisions on the company's future. It later transpired that the individuals who had invested a few bob in the company also had limited influence. Goldman Sachs has advised that if the State discontinues its involvement with Aer Lingus, it will have no influence on the airline.
IMPACT represents 1,725 staff in Aer Lingus, comprising cabin crew, pilots and management grades. On the dilution of the 14.9% staff shareholding, the shareholding is held by staff who originally had a choice between taking cash or shares. The great majority chose to take shares. The subsequent growth in shares through the ESOT took place on the basis that people had set aside agreed pay increases in order to take shares. There is a long history in Aer Lingus of people being prepared to invest in the company through cash or in kind. However, in the context of a major transaction, we require the ability to remain players in the company because, if it is to prosper, we want the staff to do likewise.
On Senator Ross's comment about a figure of 35% for the State and 14.9% for the ESOT, the 14.9% figure arose from a decision by the Government to hold 35% of Eircom shares. The two holdings come to a figure of 49.9% but the majority shareholding was to be privatised. I do not presume that the views of the ESOT and the State will always be identical because, while I do not contemplate a divergence of views, shareholders do not always remain in the same bed. The State's holding will be between 25% and 35%, although we would like it to be as high as possible. Private shareholders will also have rights, duties and entitlements.
I thank Mr. Cody, Ms Carney and Mr. Blake. We will revert to them if we feel the need to meet them on a future date. I welcome Mr. John Sharman, chairman of Aer Lingus; Mr. Dermot Mannion, chief executive, and Mr. Greg O'Sullivan, finance director and company secretary. It has been proposed by members that we take the delegation's submission as read and, because we have only 16 minutes remaining, we proceed directly to questions and answers. Is that agreed? Agreed.
I know that Mr. Mannion would like access to capital, although I am not sure what his views on the private ownership of Aer Lingus are. The possible retention by the State of a shareholding of between 25.1% and 30% would result in a considerable discount in remaining share prices because the market would view it as a strategy which would restrict flexibility by seeking to ensure control over future policies. Workers are retaining 14.9%, although SIPTU would like them to be given additional shares in order that they could retain their percentage. It has been suggested the pension problem could be solved by the sale of 20% of the company. After everybody has put their snout into the trough, will there be anything left to sell? The public is getting the sense that the company is devouring itself, even before it goes to the market. Will a point be reached where it will not be worth selling the remainder?
Mr. Dermot Mannion
I am comfortable with a scenario in which the Government would retain 25.1% and the employees, subject to anti-dilution provisions, have close to 14.9%. That has been the basis for discussions on the transaction and I believe it would be favoured by the market. When the privatisation proceeds, new shares will be issued in order to ensure a €400 million fresh capital cash injection to support the Aer Lingus capital investment programme. We do not know what the proceeds will be from the remainder, that is, the Government's share but it is clear that the pensions issue can only be resolved if a portion of the Government's proceeds is allocated. From the point of view of Aer Lingus management, it is clear that we will receive fresh equity capital of €400 million as a result of the process.
Therefore, Mr. Mannion thinks it is worth selling the company for €400 million.
Mr. Mannion
We have a capital expenditure programme of €2 billion. We need €400 million in new equity to support the programme before any discussions are held on how much the Government will realise on its own investment. My role, as chief executive, is to secure new cash equity. There is a mechanism by which the €400 million we need can be provided. What the Government may or may not achieve through the disposal of its shares is a matter for it. It is not true to say that, when this process is complete, the proceeds will only be €400 million. That figure does not include the money to be realised by the Government through the sale of its shares.
I understand that point. It has been suggested €200 million will be required to top up the pensions fund. The former Minister of Finance, Mr. McCreevy, has consistently maintained that the State cannot step in with this money. Can the State top up the pension fund of what will, in effect, be a private company? Is it reasonable to ask ordinary taxpayers who own Aer Lingus to top up the fund to the extent of €200 million when many do not have a pension?
Mr. Mannion
The total deficit attributable to Aer Lingus as part of a multi-employer scheme was in the order of €171 million on the date on which the actuarial report was compiled last year. The solution under discussion would involve the payment of a lump sum, as well as increased contributions from the company and its employees. A combination of those measures will deal with the problem. That is not to say that €171 million, or even €200 million, needs to be put into the pension scheme on day one.
Therefore, the figure in the paper is questionable.
Mr. Mannion
The total deficit, actuarially, is €171 million. That can be made up either by a lump sum or a combination of a lump sum and increased contributions from the employer and the employee. The solution I envisage, which I believe will be acceptable to taxpayers, involves each of the constituents doing his or her bit to resolve the problem. There will be a cash injection and an increase in company contributions and, as a quid pro quo, a requirement for an employee contribution. That is fair and reasonable and will sell very well with the Irish taxpayer.
What is the current estimated value of the company? Can Mr. Mannion tell the committee what percentage of the called up share capital is in Government hands? What percentage of its holding does the Government propose to dispose of? On the blocking share, does he accept the points made earlier to the effect that a 25% holding will provide no influence over what happens in the company in the medium term? It will not be possible to block anything other than a 100% takeover.
Whatever the company is valued at we, the Irish taxpayers, own it. Privatisation will be a bad deal for taxpayers because the valuable holding we own will be reduced dramatically, with nothing in return. Does Mr. Mannion accept there is nothing in this deal for the Irish taxpayer?
Mr. Mannion
As of now the employees own 14.9% of the company, the balance being held by the Government. In a recent statement the Minister for Transport committed the Government to retaining 25.1% of the equity in Aer Lingus. That will be after the new issue of shares to which I referred, raising fresh capital of €400 million. The value the market puts on whatever shareholding the Government decides to sell will be a matter for it.
That holding cannot be protected unless there is further State investment.
Mr. Mannion
I do not understand.
The 25% holding cannot be protected in the event of a share issue unless there is further investment by the State in the form of the buying up of shares.
Mr. Mannion
I said that two things will happen on the day the transaction takes place. There will be a fresh issue of shares, bringing €400 million into Aer Lingus, and the Government will sell some of its shares, though we do not yet know how many. The Minister committed the Government to retaining 25.1% of the new Aer Lingus, enlarged by an extra €400 million, at the end of the first day of trading.
I invite Mr. Sharman to comment on the blocking share.
Mr. John Sharman
The rights of a blocking shareholder or, in this case, the 25.1% shareholder derive from two sources. The first are the Companies Acts 1963 to 2005, which confer statutory rights and can be accessed by everybody. The second is the agreement among shareholders, as Mr. Shay Cody mentioned, in the form of the company's articles of association. The Government made its decision last Tuesday and we are now in active discussion as to how the new articles of association will or will not protect the rights of the 25.1% shareholder. A balance needs to be struck between absolute veto rights, which will diminish the value of the company——
Which are illegal.
Mr. Sharman
What are illegal? Margaret Thatcher came up with the concept of the golden share, though it turned out to be less than golden, where a single share outvoted all other shares in a company where strategic interests were involved. It was applied to protect defence companies in the UK such as British Aerospace. In the privatisation of British Airways, which was a 100% privatisation, there was no golden share.
I asked two specific questions. One was the estimated current value of the company and what percentage of called up capital was in Government hands. The other was what percentage of that holding the Government proposed to dispose of
Mr. Mannion
I have answered both questions. The Government owns 85.1% of the shares. The value of those shares is not a matter for me to determine but the market.
Does Mr. Mannion mean 85% of the called up capital?
Mr. Mannion
The Government owns 85% of the company. I cannot be clearer than that.
I asked about the percentage of shares.
Mr. Mannion
The Government owns 85% of the company and the shares.
Does Mr. Mannion mean the called up shares?
Mr. Mannion
Yes.
Six members wish to put questions. After they have done so I will allow Mr. Mannion and Mr. Sharman to reply.
What assurances can Mr. Mannion give the committee on the retention of the Heathrow slots? What assurance can he give on the possibility of the company being asset stripped, as happened elsewhere? Can he also give an indication of the costs of advisers and consultants engaged in the process?
Has the figure for the pension deficit requirement of €171 million been agreed with other parties to the pension fund, namely, the Dublin Airport Authority and SR Technique? Has it been accepted by the trade unions?
I do not need to remind Mr. Mannion that Aer Lingus makes a profit of €100 million. Would it not be easier to borrow the €400 million required?
Mr. Mannion will have heard the reservations expressed by the trade unions about job security. What is his answer to them?
My question is related to Deputy Glennon's. Mr. Mannion is very ambitious for the company and has put in place an investment programme involving €2 billion. It is a profitable company. Many seeking to invest in the IPO will have to borrow money, probably at much higher rates than the company could. If he has confidence in the company and in his plans, is there anything to prevent the company borrowing a significant amount of money to fund them, rather than offering shares? That is the key question and it must be answered.
In the aviation sector at present price is to the fore in people's decision whether to fly with a particular airline. What does Aer Lingus bring to the table as a privatised company? Mr. Mannion says the company's unique selling point, the shamrock, adds considerable value to the business. Is there anything more than the shamrock to attract an investor?
I was struck by the feature on "Prime Time" the other night, which I am sure Mr. Mannion saw. Stockbrokers and others said the shares would carry a big discount because of the Government shareholding. The delegation stated it would be happy with a 25% holding, that this added to the figure of 14.99% would mean the airline would have to be sold cheaply, but that it would not go at the same valuation as overseas airlines. Would the delegation be content with this? Is it worthwhile selling the airline at a knock-down price?
I am still slightly puzzled by the €400 million figure. This is the result of issuing of new shares, not because of any company assets. Is this a fixed figure which cannot be varied no matter what happens with the flotation? Will the price at which the shares will be issued make a difference to the figure?
I have two brief questions. When members of the delegation appeared before the committee in November, I wished management well and continue to do so. It was clearly stated by it that a decision to privatise was not one for it to make, that it was up to the Government to decide. Does Mr. Mannion accept that he may have overstepped his authority in pushing the privatisation line?
In the context of the €400 million figure, will money arising from the sale go to the Government or the company? If it goes to the Government, will the company expect to receive further funding from it?
Mr. Mannion
I will reply to Deputy Healy first. Flights to Heathrow Airport are very profitable for Aer Lingus. I do not expect the Heathrow slots to come under any threat. They are a valuable asset which earns much revenue for Aer Lingus. They make up a fundamental part of our business, now and into the future. I do not see any realistic possibility that they will be sold.
Can Mr. Mannion assure us they will not be sold?
Mr. Mannion
Aer Lingus will continue to follow good commercial principles. Aer Lingus and Heathrow Airport have had a very profitable partnership which I fully expect to continue.
Therefore, Mr Mannion cannot assure us.
Mr. Mannion
There is no guarantee that commercial circumstances will not change. Given a reasonable turn of events, the relationship between Aer Lingus and Heathrow Airport will be a fixture well into the future. The Deputy need have no concerns about this.
With all due respect, the shareholders will decide the matter.
Mr. Mannion cannot assure us.
Mr. Mannion
I have been asked the question as chief executive. The shareholders can speak another time.
Can Mr. Mannion assure us the answer is correct?
Mr. Mannion
There are no guarantees in respect of anything in public ownership. I repeat that the Heathrow slots are profitable for Aer Lingus. I expect Aer Lingus to have a significant continuing presence at Heathrow Airport far into the future. What other assurance could I give as chief executive?
There is no guarantee. It is an important issue. It is clear from the reply that there is no assurance.
(Interruptions).
Mr. Sharman
This is an important issue, commercially as well as philosophically, in terms of Ireland's connectivity to the rest of the world. The Deputy has asked for an absolute and cast-iron assurance about the Heathrow slots. It would be extremely unwise for management in any company to give cast-iron assurances. Last week we inaugurated our service to Dubai. In 15 years' time it is planned that the airport at Dubai will be twice the size of Heathrow Airport as a connecting hub. One will be able to connect to double the number of places at Heathrow Airport. The Deputy would not want any management, board or chairman of Aer Lingus to commit to fly to Heathrow Airport for the next 30 years, while everybody else is flying to Dubai. We have had long debates inside the company on making a commitment to Heathrow Airport. A commitment by Aer Lingus should be about ensuring the connectivity of the business community in Ireland. The same applies to the aiport at Dubai.
A significant change is occurring in the aerospace industry. Aeroplanes can travel much further than they used to. Every time Aer Lingus opens a new route — to Dubai, for example — it is increasing the level of connectivity.
I looked for an estimate of the cost of advisers and consultants to this process.
Mr. Mannion
We have completed phase 1 of the process and engaged advisers for a number of months. The fee for phase 1 is approximately €100,000. The Government has made a decision to proceed to phase 2. We will be sitting down with our advisers in the next two weeks to agree a fee structure. The fee so far has been nominal.
So far. Is there an estimate of what the cost of the process will be?
That is a fair question. I do not know where Mr. Mannion found cheap consultants.
With respect to Deputy Shortall, Deputy Healy is able to ask his own questions. He does not need support from any of us.
Mr. Mannion should answer the question.
He is trying to. People may be looking for something which has not been discussed or decided.
Mr. Mannion
The only fee negotiated and agreed is the fee of €100,000 for phase 1. We have yet to finalise a fee for phase 2. When we do so, it will be placed in the public domain. That is a fair answer to a fair question.
Deputy Glennon mentioned the figure of €171 million, an estimate by our actuary of the portion of the overall pension deficit relating to Aer Lingus. I cannot say the matter has been agreed with SRT and the Dublin Airport Authority but it is the best estimate by our actuary. In time the figure will be accepted. The trade unions have to speak on whether they accept this figure. The number is a matter for negotiation in terms of what element can be settled in the overall privatisation process. Suffice to say I believe we can reach agreement and move forward.
The Deputy also asked whether we could or should borrow €400 million. Such a sum is necessary to enable us to borrow another €1.6 billion in order to invest €2 billion in aircraft. We cannot borrow the entire €2 billion required. As in any sensible long-term capital acquisition programme, it must be balanced by an element of equity and debt. The right ratio is €400 million in equity and €1.6 billion in debt.
I can only repeat what I stated in the submission about job security. I have had extensive meetings across the organisation, not just with the trade unions but directly with staff in their places of work. My view is that the best way to ensure job security for everyone is to ensure Aer Lingus can continue to build on a successful recent track record. To do this we need new equity. Although we have not concluded that debate with the staff, the view is gaining increasing acceptance across the company and we will reach agreement on the issue of job security.
On Deputy Power's question about borrowing, the ratio has to be sensible. With equity of €400 million one can borrow €1.6 billion.
Why not borrow 100%?
Mr. Mannion
It is not available. It makes bad sense. Although house buyers can borrow 100%——
One can borrow 100% these days.
Mr. Mannion
Even if one can borrow 100% for a house, one must provide security. That is the challenge.
Most profitable businesses making €100 million per year on average can borrow enormous amounts of money without having to dilute their equity by up to 70%.
Mr. Mannion
To borrow the entire amount would push our debt-equity ratio to a level that would put us at risk in the event of a serious downturn in the industry. That is why we need to balance debt and equity.
Senator Morrissey asked if the shamrock offered the only value proposition for Aer Lingus. It is an important part of the company's value proposition. When I first met the committee last October, I offered an assurance that as long as I was associated with the company, the shamrock would continue to be the key brand image because it offered a huge value proposition for us. The key is the recent twin track of achievement by Aer Lingus: short and long haul services. Aer Lingus is the only full service carrier in Europe that has a profitable short-haul network. It is, therefore, the most efficient flag carrier in Europe. On long-haul services, we have a profitable track record which we want to grow and extend. Having returned to Ireland recently I am qualified to speak on the international perspective. The committee should not underestimate the extent of the international investment interest there will be in Aer Lingus because it is a proxy for Ireland Inc. There will be significant investment interest when it enters the market.
On Deputy Seán Ryan's point about privatisation, I offer further reassurance. When I joined last August, I sought no preconditions about the future ownership structure the Government might decide. My commitment was to serve the organisation for three years as chief executive, irrespective of the ownership structure on which the Government decided. I will fulfil that commitment. There is no shame in my having a private view in favour of privatisation.
It was a public view.
Mr. Mannion
While I have articulated my opinion whenever I have been asked the question, it has not prejudiced the manner in which I have conducted the affairs of the company since I joined, nor will it. After the disposition of the pensions issue for whatever amount of money it turns out to be, we need €400 million of fresh capital for the business. That is a precondition of the process which we hope to achieve.
I have a supplementary question. Mr. Mannion has said €400 million will enable the company to borrow €1.6 billion. Therefore, any surplus over €400 million will be kept by the Government. Does Mr. Mannion accept that Aer Lingus will be sold and privatised for €400 million to allow further borrowing, which the company has been doing all along to enable a successful company to be developed with little or no funding or capital invested other than the €175 million, which would not have been provided without the Labour Party?
Mr. Mannion
I can only repeat what I said. We need €400 million in fresh equity. The balance of the shares to be sold is owned by the Government. The disposition of those shares and how the proceeds are to be allocated are matters for the Government. We all know that part of the discussion process that has been ongoing for some time on pensions will involve a lump sum from the Government as a result of the privatisation process, in addition to an increase in contributions from the company and its employees. After the pensions issue has been dealt with, Aer Lingus will still need €400 million in fresh equity capital. I cannot make it clearer than this.
Mr. Mannion is incorrect that we all know about the lump sum for pensions. That was not the Government's position until the last few weeks. The former Minister for Finance, Mr. Charlie McCreevy, consistently said the Government would not top up the pensions fund.
I asked two questions, neither of which has been addressed. Mr. Mannion must address them.
We have overrun by 25 minutes. Another committee is waiting to come in——
May I have 30 seconds? The chief executive forgot to answer my questions.
Mr. Mannion
I did not. I await instructions from the Chairman of the committee.
Mr. Mannion may answer Senator Ross's questions and we will then finish. Before that, I will take one question from Senator Dooley.
In their restructuring, has there been any consideration of increases in pensions in line with wage inflation rather than the CPI? We discussed this issue at the previous meeting. There are two pension issues involved: the potential hole in the pension fund and pensions rising in line with the CPI only. In many cases pensioners have fallen behind because wage inflation has increased at a much greater level than the CPI. Has the restructuring of pensions to assist those pensioners been considered?
Mr. Mannion
Indexation with wage inflation would cost too much. Although it has been a union demand and is one of the issues Mr. Finucane has been asked to examine, from a company point of view, I rule it out. The deficit in the pensions scheme is related to CPI indexation. If we were to determine the deficit in terms of wage inflation, it would be a much higher figure. We are not in a position to respond. The chairman, Mr. John Sharman, would like to reply to Senator Ross.
Mr. Sharman
Although I did not see the "Prime Time" programme, the people to whom Senator Ross referred are brokers. I am encouraged that they are already trying to talk down the price. It means they are interested.
That is a good answer.
Mr. Sharman is being brave.
Mr. Sharman
The more serious answer is that members should not get hung up on the figure of €400 million. People talk about "selling the company". The company will raise capital by issuing new shares. It requires at least €400 million in new capital. I come from a school of thought that believes an airline cannot have too much capital.
The taxpayer loses out in the process.
Mr. Sharman
The taxpayer does not lose out.
The taxpayer owns 85% of the company but will end up with a small share.
Mr. Sharman
Would the Deputy rather have 85% of something worth €100 or 25% of something worth €2,000?
I thank Mr. Sharman, Mr. Mannion and Mr. Sullivan and the members of SIPTU and IMPACT who have appeared before us this morning. I apologise to the committee coming into the room after us for the delay.
The joint committee adjourned at 11.30 a.m. until Wednesday, 26 April 2006.