Roll call of companies and advisers tied to the flotation is growing, writes Emmet Oliver

All stock market flotations carry risks for their backers, advisers and sponsors. But the roll call of people and companies who are tied into the Aer Lingus flotation appears to grow every day.

While the company's management are more exposed than anyone else, the success or failure of this venture could also have repercussions for a wider circle of characters in Irish business and political life.

Minister for Transport Martin Cullen only has to consult his colleague Mary O'Rourke about the risks of being publicly identified with any stock market flotation, particularly of companies formerly held in State ownership.

Flotations by their very nature attract criticism. Price the stock too cheaply and there is fury about taxpayers being short-changed and the company's accumulated value being thrown away. Make the stock too pricey and the shares hit the market overvalued and take a hammering in the first three months of trade. In that case investors blame the Government and the airline for being too greedy and exposing shareholders to unforgiving market forces.

But nobody should feel too sorry for the political and corporate backers of this flotation. The second group (four advisory firms alone) will be paid well, and the Minister may be in the middle of an election campaign by the time the shares face their first concerted pressure.

But leaving aside the Minister and the band of advisers, other companies are increasingly climbing on to the IPO bandwagon. This week's announcement by the Dublin Airport Authority (DAA) was closely influenced by events at Aer Lingus.

The DAA, chaired by Smurfit executive Gary McGann, last year unveiled a relatively modest plan for a new terminal. It was to be 50,000sq m (538, 195sq ft) with a cost of €170-€200 million. This week McGann and colleagues, who pride themselves on controlling costs, told a press event in Dublin they had decided a 75,000sq m facility was needed instead.

Declan Collier, the chief executive, said a 90,000sq m facility might be needed in future years as demand increased.

The cost of the new facility is now coming in at €395 million. Aer Lingus is the key factor in the need to upscale. Senior DAA staff admitted as such this week. One said the company had to take a leap of imagination on the Aer Lingus business plan, which envisages expansion on long haul and consolidation of short haul. Gary McGann specifically mentioned Aer Lingus and its long-haul plans as a driver of the DAA's need to re-visit its earlier plan.

It is understood that Aer Lingus were happy for the second terminal to move towards 80,00 sq m. This kind of talk made some DAA executives uneasy. Speaking during the week, one commented: "We have to be careful with Aer Lingus; while we are very supportive, we cannot abandon all sense. We don't want to build a facility that is under-used. We have to see if they come through on their promises".

If the Aer Lingus long-haul plan does not work, investors who buy the shares may not be the only victims. After spending €600 million (the cost of the terminal and its related works) the DAA will be as relieved as Dermot Mannion to see new Aer Lingus services stretching from Cape Town to Hong Kong to Sydney.

The DAA will not be the only ones getting hot under the collar later this month. Just about any brokerage worth its salt in Dublin is selling the airline's shares as intermediaries. Eight is the current count. Commission on the share sales comes in at 1 per cent, which is not bad for a day's work considering all of the investors must pony up at least €10,000.

However, the brokerages will only be worrying in the immediate period before the sale - once trading starts their nerves will ease.

At that stage investors can either sell their shares or buy more. Either way the commission keeps rolling in.

As most first-year business students know, two-thirds of mergers and acquisitions do not enhance earnings in the long term. But the record of airline capital investment is not much better.

A research note on Aer Lingus, seen by The Irish Times, from Deutsche Bank, puts it bluntly: "Overall the airline industry generally fails to make its cost of capital".

It adds: "We believe analysts and market observers tend to disparage further capital commitment to the airline sector".

The key question it also raises is the climate into which the capital investment is being made. In relation to the airline sector, the bank claims few investors believe current trading conditions "can continue into the next two to three years".

This is believed to be a reference to long-term oil trends and a gathering feeling that the salad days of aviation are over. Likely to impact on the sector long term are attempts to tax aviation fuel and taxation on tickets in order to sanction the industry for its polluting of the skies.

The security context is also negative, with quick turnarounds of aircraft likely to come under pressure.

Clearly, when the price of Aer Lingus shares is set later this month, there will be creative tension between the short-term outlook and the long-term prospects. Short term, the airline has a lot to recommend it: margins are among the highest in the industry, the airline is reasonably profitable and its fleet is relatively modern.

But the long-term prospects are more uncertain, with the industry itself struggling to cope with the end of decades of cheap oil. While nobody wants to drift into melodrama, a high-profile hijacking or security scare could put the final nail in the coffin of quick turnarounds.

Getting this balance of risk right is going to be difficult. The Government has the final say in what price will be struck, although Government advisers will also shape the thinking. Getting it right is difficult, although speaking about the Eircom flotation price in 2000, the Taoiseach made it sound all very matter of fact.

"The prospectus and the price range set prior to the flotation were agreed by the Government and the company. The final price of €3.07 was within this price range and just above the mid-point of the range. The balance sheet of the company at the time of the flotation was very strong. The price set by the Government for Eircom at the flotation was set on the basis of what the market was prepared to pay".

Based on this, it sounds like the exercise could almost be performed by any corporate financier in his or her sleep. Simply set up a price range and stick a pin in the middle figure.

In the case of Aer Lingus, the list of companies and people dependent on where the pin goes is growing by the week.