A group of Irish investors is understood to be looking at buying the 35 per cent stake in Aer Lingus put up for sale by the Government. The consortium of businessmen may be prepared to make a strategic investment in the troubled national airline, according to a source close to the Government. A separate Aer Lingus source said such a move should not be ruled out. A deal with local investors would have several attractions to the Government, according to sources. It would offer the prospect of a better price than could be achieved through a trade sale to another airline. Although a tie-up with another carrier is seen as the most likely option, such a party is unlikely to pay the £150 million-plus (€191 million-plus) that Aer Lingus hopes to raise through the sale of a 35 per cent stake.

All the obvious industry suitors for Aer Lingus are in financial difficulty. American Airlines, which partners Aer Lingus in the Oneworld alliance, yesterday announced record losses after September's terrorist attacks on New York and Washington. British Airways, another potential investor, also has financial problems that would militate against an investment in Aer Lingus.

Allowing Irish investors to take a stake would have the attraction of allowing the Government to sell down its holding even further if necessary, and not jeopardise the vital bilateral aviation agreement with the US. The agreement, which gives Aer Lingus valuable rights to fly the Atlantic, requires the airline to be Irish-owned. The Government has said it will retain a 51 per cent stake in the airline after the current process is complete to safeguard the agreement and reassure staff who are concerned over privatisation.

SIPTU and IMPACT, which represent most of the 6,300 Aer Lingus workers, oppose even the partial sale of the airline, although IMPACT has taken a more pragmatic stance. The staff are expected to increase their stake to 15 per cent from 5 per cent, in exchange for productivity gains and the loss of 2,000 jobs.

Any investor is expected to demand the right either to increase its stake at a later point or exit via a public offering of the airline when the industry recovers. The former option could be problematic if the investor is another European airline, but not if the investors are Irish. Aer Lingus does not expect to return to profit until 2003 and no pick-up in business is foreseen until the second half of next year. Most of the cash raised through the sale of equity will fund a redundancy programme. The airline claims it does not have any cash for lay-offs and that it will have a shortfall of up to £50 million in working capital until it returns to profitability. The airline will also require investment capital.

It emerged yesterday that the Government's cash contribution to the rescue would be limited to less than £10 million. The EU has only authorised compensation payments for the impact of the closure of US airspace for four dates after September 11th. It has also allowed governments to meet some of the cost of the additional security measures introduced since the attacks. Department of Public Enterprise sources said yesterday this would be worth less than £10 million to the airline. The Government has also agreed to indemnify Irish airlines, including Ryanair and Aer Lingus, for war risks for another month.