Comment: The Government's decision to review the ownership of Aer Lingus raises a number of questions that have also cropped up in recent European privatisations.
The main issue is who should be purchasing the company. Another is should state funds be injected whether or not the company's numbers are in the red - something that arguably gives advantage only to the future shareholders. A final question is how transparent, efficient, and accountable should the privatisation process be? The decisions taken will inevitably favour some policy participants (such as investors taking over the company) over others (such as trade unionists and other social participants who may gain nothing).
To that end, a recent study by the TCD Policy Institute looks at the potential privatisation of the Irish carrier in the context of developments in Iberia Airlines of Spain, which was privatised within the past five years. What lessons does a comparative study with another European airline offer that may have a bearing on the Government's plans for the potential sale of Aer Lingus?
The Iberia case highlights a two-phase privatisation strategy. In the first phase in 1999, 40 per cent of the company was sold to well-established industrial and financial investors. Industrial partners included airlines such as American Airlines and British Airways (BA), and financial investors included principal Spanish banks (such as Banco Bilbao Vizcaya Argentaria and Caja Madrid) as well as established commercial entities (such the powerful El Corte Ingles department store).
The objective was to create stability with a solid base of partners, financial security given these investors' experience and resources, equilibrium in the sense that not one entity would ever control more than 10 per cent of the share capital of Iberia, and a solid management foundation given the experience that these investors represented.
Interestingly, an injection by the Spanish state was permitted by the European Commission just before the 40 per cent sale - even though the Commission had stated in 1992 that no more aids were allowed to Iberia - based on the argument that it was something that any reasonable market investor would have done given that the company was performing well at the time. As such, an equity injection was allowed by the Commission, even though this was not officially considered state aid.
The second phase of the privatisation included floating the remainder of Iberia in 2001. The ideas here were to raise funds for the treasury and to allow the "average citizen" ownership. Certainly, some may argue, the latter concept is somewhat dubious considering that Iberia actually belonged to the Spanish people before its sale.
Nevertheless, it is almost certain that allowing citizens to have a piece of the pie did no harm for the popularity of the governing Partido Popular at the time. Certainly, the privatisation process of Iberia, particularly in the first phase, lacked transparency and accountability. But it was efficiently performed and Iberia is currently one of the most successful European airlines.
Considering the Spanish experience, one of the ownership options that the Irish Government may consider for Aer Lingus is to have a solid base of domestic and international industrial and financial investors that offer stability, equilibrium and management expertise.
BA seems to have expressed interest in Aer Lingus. But, the Spanish experience shows that other international airlines (with attractive hubs in the US through which Aer Lingus may seek to expand) plus domestic financial entities that are well-resourced (such as Bank of Ireland and AIB) may also prove attractive partners.
Nevertheless, regardless of which combination of institutional investors is chosen, Iberia shows that it is also essential to combine corporate ownership with that of the people. Clearly, the Telecom Éireann sting of the late 1990s may make some wary of buying Aer Lingus stocks, but one bad experience should not necessarily negate this option - especially if solid institutional and financial investors are also on board.
The management buyout (MBO) option recently proposed could also be considered, but faces two obstacles. First, international industrial and financial investors, which the Government should also reasonably seek given other European airlines' experiences, may be discontented with the present management controlling a large percentage of the company. In light of this, the example of Iberia (where ownership by any investor could not be more than 10 per cent) may be desirable because all institutional owners are on roughly equal par and cannot make unilateral decisions.
Secondly, the MBO may be wrought with too many uncertainties. The most acute is if the intention of management is to buy the company, only to later sell it to other investors and make a profit that should have otherwise gone directly to the State.
The other issue that distinguishes the Aer Lingus case from Iberia regards potential ownership calls from Aer Lingus staff and pilots. Unlike the Iberia privatisation, which generally ignored demands of workers and staff, the Government must deal with workers' desires to own part of Aer Lingus. This is expected given the history of social partnership in Irish economic policy.
Moreover these investors' participation must be considered in order to ensure transparency and accountability in privatisation policy making, despite potential costs that seeking these concepts may have towards the efficiency of the process.
With this in mind, perhaps a wise strategy for the Government is to learn from the Spanish experience while remaining true to the Irish one: securing both industrial and financial investors as well as allowing citizens a stake in the airline, while also finding ways to offer workers and pilots part of their airline.
Raj S. Chari is a lecturer in the Department of Political Science, Trinity College, Dublin
