The Cabinet has approved the partial sale of Aer Lingus in order to fund the rescue of the airline. The search for a buyer will start immediately and will focus on airlines that have expressed interest in Aer Lingus in the past.

Top of the list is British Airways, which was sounded out by AIB Capital Markets earlier this year about buying the airline after plans for a flotation were abandoned.

BA already has a link to Aer Lingus via the Oneworld alliance. Iberia, another member of Oneworld, has also been mooted as an investor, but the Spanish airline played down its interest yesterday.

Financial investors such as venture capital funds are unlikely to be interested because the extent of the airline's difficulties, according to banking sources.

Up to 35 per cent of the airline will be offered to a strategic investor. The Government will retain a minimum stake in Aer Lingus of 51 per cent and the airline's staff will be allowed to increase their shareholding from its current level of 5 per cent.

The Government will remain the majority shareholder because the airline has to remain in Irish hands in order to avail of the bi-lateral aviation agreement between Ireland and the US, which gives Aer Lingus access to US airports.

It is probable that the Government will have to sell all 35 per cent if it is to raise sufficient funds to pay for the restructuring. The airline is estimated to require between £150 million (€190 million) and £200 million to pay for a redundancy programme, and make good a shortfall in working capital. Even if it is successfully re-organised, the company will not make profits until 2003.

Aer Lingus was valued at less than £500 million before the attacks on New York and Washington which sent the aviation industry into a tailspin. The sale of 35 per cent may not even raise £100 million in the current climate, according to some sources. The redundancy payments to the 2,000 staff who will lose their jobs would have to be reduced in that case.

The Minister for Public Enterprise, Ms O'Rourke, told the Dβil yesterday that "the scale of the redundancy payments cannot be finalised without reference to the stake in Aer Lingus which external investors may be interested in purchasing - and on what terms".

The Minister said the Government was not in a position to co-invest or guarantee loans to the airline because of the tough stance being taken by the European Commission on the issue. "The European Commission is opposed to the State providing any support in any form to Aer Lingus," Ms O'Rourke said. The Commission was clear "that only private sector investment should be contemplated to secure the future of the airline".

Aer Lingus unions were highly critical of the Minister's proposals but were divided on how the issues could be best addressed. SIPTU, which represents clerical and catering staff who will bear the brunt of the job cuts, continues to favour state ownership while IMPACT, which represents pilots, cabin crews and middle management, has adopted a more flexible approach.

Mr Noel Dowling, SIPTU's national industrial secretary, dismissed the Government's survival plan. "There is no plan because, on the Government's admission, there are no funds available," he said. IMPACT assistant general secretary, Ms Christina Carney, said the Government should match any private sector investment and that there should not be a cap on the size of the employee stake.

The size of the staff shareholding will be a central part of the negotiations between unions and management over the restructuring plan. The precedent set at other State companies is for staff to get up to 15 per cent in return for productivity gains.

It is unlikely that any common approach to negotiations will be thrashed out between SIPTU and IMPACT before their financial advisers complete analysis of the company's options - and those of the Government. This is not likely before the end of the week.

Ms O'Rourke came in for criticism in the Dβil yesterday over her handling of the crisis. Fine Gael said the Minister had last week described Aer Lingus as a "strategic national asset" and was now saying that the only future for this asset "is to sell it in a car boot sale and when it is on its knees, to anyone who will produce a few pounds to keep it going". It would be a "classic asset-stripping arrangement" that has been witnessed in other areas, according to Mr Richard Bruton, the Fine Gael director of policy.