US embassy cable - 05DUBLIN606

C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 000606 
 
SIPDIS 
 
E.O. 12958: DECL: 01/31/2015 
TAGS: EAIR, ECON, ETRD, EFIN, ELAB 
SUBJECT: GOI UNVEILS AVIATION POLICY PACKAGE 
 
Classified By: Political-Economic Counselor Mary E. Daly; Reasons 1.4 ( 
B) and (D). 
 
1.  (C) Summary: On May 18, the Irish Government announced an 
aviation policy package that includes plans to sell a 
majority stake in Aer Lingus, the national carrier, and to 
build a second terminal at Dublin Airport.  The package 
capped months of negotiations between the governing party, 
Fianna Fail, and its coalition partner, the Progressive 
Democrats, as to who would build and operate the new 
terminal.  Critics, including opposition parties, have called 
the package a "fudge" for its failure to specify when, by 
what method, and how much of Aer Lingus will be sold.  This 
lack of specificity could portend a delay in the carrier's 
privatization beyond the 2007 general elections, which would 
be safer for Fianna Fail, given the party's support among 
airline labor.  Such a delay would also allow the GOI more 
time to see whether possible renewed U.S.-EU attempts to 
reach a trans-Atlantic Open Skies agreement might provide the 
carrier greater access to the U.S. market.  End summary. 
 
The Aviation Package 
--------------------- 
 
2.  (U) On May 18, the Irish Cabinet approved a long-awaited 
package of policy measures for the aviation sector.  The 
package's key components include plans to: (1) sell a 
majority stake of Aer Lingus, the national carrier; (2) build 
a second terminal at Dublin Airport by 2009, to be owned by 
the Dublin Airport Authority (DAA); (3) conduct an open 
tender to choose the second terminal's operator; (4) 
construct a new pier for aircraft parking stands at Dublin 
Airport by 2007; and, (5) prepare to build a third terminal 
when the yearly passenger volume for the first two terminals 
combined reach 30 million (likely by 2015).  Aer Lingus 
Chairman John Sharman and the DAA issued statements welcoming 
the package, which Transport Minister Martin Cullen described 
in a news conference as the "first-ever comprehensive plan 
for the long-term success and growth of Irish aviation." 
 
3.  (U) The package caps several months of negotiations 
between the governing party, Fianna Fail, and its coalition 
partner, the Progressive Democrats.  (Willie Walsh's 
resignation as Aer Lingus CEO last November, due to 
government indecision on Aer Lingus, future, catalyzed the 
negotiations.)  Although the two parties had agreed by late 
2004 to privatize Aer Lingus, attempts to secure Cabinet 
approval faltered over differences on Dublin's new airport 
terminal.  The Progressive Democrats, who campaign on a 
free-market platform, had pressed for the private sector 
rather than the DAA, a state body, to build and operate the 
terminal.  Fianna Fail, with several parliamentary seats in 
Dublin constituencies and strong labor support at the 
airport, preferred the DAA to be the terminal's builder and 
operator.  The final package was a compromise, whereby the 
DAA would build the terminal, but would compete with private 
parties for the right to operate it. 
 
Unanswered Questions 
-------------------- 
 
4.  (U) Several significant questions remain, however, 
regarding the privatization of Aer Lingus, which posted a 
final, pre-tax profit of euro 1.2 million in 2004 after 
dedicating euro 98 million from its operating profit to 
severance packages for 730 staff.  Minister Cullen declined 
to specify the percentage share of the carrier that would be 
sold and the timing and method of the sale.  He said that 
advisors would be chosen to make recommendations on these 
issues, but added that the Government would keep at least a 
25 percent share.  (With Aer Lingus, 3,500 employees holding 
a 14.9 percent stake, a 25 percent Government share would 
mean that, at most, a 60.1 percent share would be offered to 
investors -- 10 percent less than was recommended by a 
government-commissioned Goldman Sachs report in 2004.) 
According to the Irish Times, the Government also seeks to 
ensure that private investors will retain the Aer Lingus 
brand name and the carrier's 44 daily Heathrow slots 
(variously valued at euro 300 million or above), but has not 
specified the method for doing so.  Moreover, there has been 
no public discussion of the possibility that Aer Lingus, if 
majority-owned by non-Irish citizens, might forfeit rights 
under the U.S.-Irish aviation agreement. 
 
5.  (U) Questions also surround the second airport terminal, 
which the DAA has estimated will cost euro 130 to 190 million 
to build, with possible ancillary costs of euro 100 million. 
The DAA has not clarified where it plans to build the 
terminal, although it is considering two sites on property 
that it owns.  Funding for the terminal is also an issue, 
since the DAA has debt worth euro 400 million.  Minister 
Cullen stated that the new terminal's operator would have to 
respect the wage/benefit terms and union rights that were 
reached in last year's national wage bench-marking agreement, 
known as "Sustaining Progress."  (This condition was included 
to secure labor buy-in to an open tender process for 
operating the second terminal, since competition between the 
terminals might otherwise have entailed pay and staff cuts.) 
Cullen did not clarify, however, how these terms would be 
protected after the expiry of Sustaining Progress in roughly 
18 months, well before the new terminal's expected completion 
in 2009. 
 
Criticism of the Package 
------------------------ 
 
6.  (U) The aviation package prompted criticism from several 
quarters.  Ryanair CEO Michael O'Leary threatened legal 
action to block construction of the new terminal and faulted 
Prime Minister Ahern for breaching 2002 election campaign 
promises to allow the private sector to develop the 
structure.  The McEvaddy Brothers real estate development 
firm, which owns 150 acres adjacent to the airport and wishes 
to build the new terminal, also said that it would pursue 
action against the Government under national and EU 
competition law.  Opposition political parties jointly 
described the aviation package as "a fudge" for its lack of 
clarity on when, how, and how much of Aer Lingus would be 
sold.  A May 20 Irish Times editorial also referred to the 
package as "a fudge," saying that it "demonstrated a serious 
lack of coherence and joined-up thinking in Government about 
how Irish air travel and its facilities can be developed." 
 
Aer Lingus and the U.S.-Irish Agreement 
--------------------------------------- 
 
7.  (C) The time frame for Aer Lingus, privatization remains 
"up in the air," Colin Hunt, Special Advisor to Minister 
Cullen, told Emboff on May 20.  Hunt noted that the 
Department of Transport would place a public tender in the 
coming days advertising for advisors on the sale of the 
carrier's majority stake.  These advisors would likely need 
six months to make their recommendations, making possible a 
placement with investors by the third quarter of 2006.  Hunt 
cautioned, however, that that the timing of the sale, which 
he believed would take the form of an IPO for retail 
investors, could slip beyond that target.  He added that the 
proceeds of the sale would go toward the estimated euro 1 
billion needed to purchase eight or nine long-haul aircraft, 
which Aer Lingus hoped to put on new routes to North America, 
the Middle East, Asia, and Africa. 
 
8.  (C) Hunt acknowledged that new North American routes 
would depend on liberalization of the U.S.-Irish aviation 
agreement, which Minister Cullen aimed to pursue as part of 
the aviation package.  Hunt recalled that Irish negotiators 
had conveyed Cullen's support for an Open Skies arrangement 
during April discussions with USG counterparts.  The Irish 
side, however, was unable to conclude such an arrangement 
because of the likelihood of legal action against Ireland by 
the Commission.  Cullen planned to address this legal bar 
with EU Transport Commissioner Barrot during a planned late 
May/early June meeting in Dublin as well as in the Transport 
Council meeting later in June.  In those discussions, Cullen 
would emphasize the unfairness inherent in allowing 15 Member 
States to maintain Open Skies while preventing others, like 
Ireland, from negotiating such agreements -- a situation 
that, according to Hunt, contravened the principles of fair 
competition in the EU common aviation market. 
 
Factors Determining Investor Interest in Aer Lingus 
--------------------------------------------- ------ 
 
9.  (C) An institutional placement would be the likely 
vehicle for selling Aer Lingus, majority stake, as opposed 
to a retail/stock market float, Emboff was told on May 20 by 
Joseph Gell, aviation portfolio manager for Goodbody 
Stockbrokers, one of Ireland's largest financial houses. 
Gell said that floating the carrier's shares to retail 
investors would be too risky, given the possibility that the 
shares could tank before the 2007 general elections (just as 
share values in Eircom fell immediately after the 
then-state-owned phone company's stock was floated to retail 
investors in 1999).  Fidelity, Wellington, and Janus would 
probably express interest in an institutional placement for 
Aer Lingus.  These funds, however, inclined toward 
investments in low-cost carriers, like Southwest, and would 
focus on Aer Lingus, plans for competing on short-haul 
routes with Ryanair and easyJet.  Gell observed that the new 
Aer Lingus CEO, Dermot Mannion (formerly of Emirates), would 
need until late 2005 to assemble a management team and put 
forward the carrier's business plans.  Institutional 
investors would also want to see the level of union buy-in to 
these plans, since Aer Lingus would have to countenance 
further staff cuts to compete with the likes of Ryanair. 
 
10.  (C) Other factors would also determine investors, 
interest in Aer Lingus, said Gell.  For example, although the 
carrier was profitable, its estimated pension deficit was 
euro 200 million.  Aer Lingus, long-haul strategy was a 
question too, since it recently announced plans to stop 
service to Orlando due to lower-than-expected earnings on the 
route.  This decision, along with the recent cessation of 
Baltimore service and disappointing earnings on Los Angeles 
service, seemed to contrast with Aer Lingus, reported 
aspirations to expand trans-Atlantic service in the context 
of a liberalized U.S.-Irish bilateral agreement.  Gell said 
that the retention of a government share in Aer Lingus would 
deny investors a free hand with the airline, but would not 
scare off investment, just as government shares in Lufthansa 
and Air France had not deterred private investment in those 
carriers.  Gell believed that Aer Lingus could be valued at 
euro 300 to 900 million at the time of placement, depending 
on the cost of fuel prices, the overall state of the aviation 
sector, and the quality of the carrier's business plan. 
 
Comment: A Decision to Delay 
---------------------------- 
 
11.  (C) The aviation package represents a decision not so 
much to privatize Aer Lingus as to delay privatization.  The 
process could conceivably stretch beyond the 2007 elections, 
which would be safer for Fianna Fail, given the party's 
support among airline labor.  Another advantage to this delay 
is that Ireland would have more time to sort out the issue of 
liberalizing U.S.-Irish aviation relations.  As the 
Department of Transport and financial experts have conveyed 
to Post, liberalization that would allow Aer Lingus 
additional access to the U.S. market would presumably enhance 
the carrier's value ahead of an institutional placement or 
stock market float.  After declining to commit to an Open 
Skies arrangement in April, the Irish Government seems 
prepared to see whether bilateral liberalization can be 
achieved via possible renewed U.S.-EU attempts to reach a 
trans-Atlantic Open Skies accord.  If such attempts do not 
materialize or succeed, the Irish believe that they would 
have a stronger case to make to the Commission to pursue a 
bilateral solution, even in the face of the Commission's 
legal objections. 
KENNY