SIPTU - The Union for All Workers - Printer Friendly Style

Submission to the Joint Oireachtas Committee on Transport

A Strategic Economic Asset

Aer Lingus is undeniably an essential part of our Island Nation’s economic infrastructure. It is a strategic economic asset which has been an essential component of our economic development and an important factor in attracting and driving the flow of inward investment over recent decades to the economic benefit of regions such as the Mid-west and the country as a whole.

On the periphery of Europe with no direct land access or even the advantage of a euro tunnel as in the UK, we are totally dependent on our air and sea links for transportation of goods and passengers. Further the importance of the United States in recent decades and contemporaneously to our economic development underscores the necessity of economic security particularly on those North Atlantic routes, whether in terms of tourism or in terms of the ease of communication between US parent HQs and the movement of high value product in and out of Ireland.

The identifiable growth of air freight globally and its importance to our high value exports also underlines the necessity for such economic security. In 2005, high value exports accounted for almost 25.6 billion euros worth of goods and overall (all values) accounted for 37.3 billion euros. Equally important at a human level we saw the effect of the earlier decision of Aer Lingus to cease its involvement in the return of human remains and the transportation of postal services. This resulted in a mass outcry and the reversal of that decision.

A Profitable Commercial and Competitive Airline

Aer Lingus is the most profitable and commercially successful flag carrier in Europe. Almost alone of all of the national airlines in Europe it has re-invented itself under fierce competition from the largest airline in Europe and other significant low cost carriers. It is highly profitable and over the last four years has accumulated profit in the region of 340m euros or an average of 80 million euros per annum. In a wider context, over the last decade, there was only one year, i.e. 2001, when it did not return a profit and that was in a year when many airlines went to the wall, including some household names like Sabina and Swiss Air.

Since 2001 over 50 new routes have been added and the work force halved from a level of 7,000 to the current figure of 3,500. If one were to take a crude measure of productivity as being the numbers employed, alone, then it is clear that Aer Lingus is a much more productive organisation than five years ago. If one factors in the more than 100% increase in routes and the change work practices which have accompanied the streamlining of the airline then it is easy to see how Aer Lingus scores so highly on its commercial mandate.

None of this was achieved under any element of privatisation or private influence. Rather it was achieved on a platform of public ownership and control together with social partnership. Critical to all this was the role of the work force and the unions representing them in committing to a change programme based on agreement and with identifiable outcomes for all of the Stake Holders. Further, this was achieved in direct voluntary negotiations, with the assistance of the State’s industrial relations machinery and with minimal industrial relations turbulence. Moreover, it was achieved with minimal State financial involvement and in 2001 the only contribution of the State was to a minimal level in the way that all European member states responded to the events of 9/11 and their impact on the aviation industry.

In the light of all of the foregoing a key question arises and that is – What more could privatisation bring to the table that has not been already demonstrably achieved by the current combination of public ownership and control and the involvement of the workers through a system of partnership on the ground?

The Need for Development

The workers and the unions fully accept the need for the Airline to develop its operations, services and routes. The advisors to the CRC, Farrell Grant Sparks and Paul Sweeney issued a report in 2005 which pointed to that need and this was accepted by all Aer Lingus unions – this acceptance being conveyed to the Minister for Transport, Martin Cullen, TD.

In so doing, it must be acknowledged, that the Airline has substantial resources of its own as the financial basis for such development. Indeed the former Chief Financial Officer of Aer Lingus Mr. Brian Dunne appeared before this Committee in 2004 and confirmed, in our understanding, that the Airline was funding its short haul fleet replacement from its own resources. Since then the current CEO Mr. Mannion has confirmed that the Airline is able to arrange for the purchase of two additional long haul aircraft, again by making its own financial arrangements. As we understand it the airline is in possession of a relatively strong balance sheet, its cash flow is relatively strong and “free cash” and liquid assets increased by almost 200 million euros in 2004. With regard to the 2005 performance, Shareholders funds increased by 75.5 million euros to 441.7 million euros and overall in the words of the Chairman Mr. John Sharman was recorded as another “year of success for Aer Lingus”.

The senior management team have a stated requirement to raise 2 billion euros for a capital programme out to 2012. This is positive evidence of forward planning for growth, all of which is welcomed, particularly by those several thousand workers who made a conscious decision to stay with the airline through the bad times and to pull it round into commercial success. However, what it does not say, as some of the more hysterical media commentators have tried to suggest, is that this is an airline in crisis. It clearly is not. On the evidence to date, all of the airlines current requirements appear to be met from their own resources and the ability of their strong performance and balance sheet to be able to negotiate financial arrangements. However, what is not being spelt out to the unions directly is the precise rationale for the two billion euros capital programme and the timing of the various tranches of same. The constraints imposed by confidentiality has rendered it extremely difficult for frontline negotiators and representatives to attain such a clear understanding.

The Flotation Proposal

The Government decided in 2005 that they would not invest in Aer Lingus and categorised this as a decision in principle which essentially was interpreted as a decision to part privatise. Arising from the advice of their consultants UBS and AIB Capital Markets, and other advice, they have decided to proceed to an IPO/Flotation as the vehicle for divesting of a majority of the State’s 85% holding in Aer Lingus. As we understand it, the range of yield from any such divestment, taking into account what market analysts suggest maybe a significant discount, is in the region of 300 million euros. With regard to the airline it is our understanding that if new shares are issued the most that will accrue to them is approximately 400 million euros. In other words the effect of privatisation on Aer Lingus will be to make available to them an extra 400 million euros, the price of four wide bodied jets, still leaving them with the task of securing the balance of their stated capital requirement at 1.6 billion euros. Far from securing their financial needs going forward, effective public ownership and control of a successful and profitable national airline will have been given up for less than a quarter of its capital needs and the price of four planes on the tarmac.

 Equally significantly, the effect of such issuance of new shares would be to dilute the employee shareholding from 14.9% to 9.7%.

If the Airline is strong enough to be able to attract the balance of 1.6 billion euros that it says it needs then the question surely arises as to why it would not be strong enough to attract, through borrowing and other financial arrangements, the relatively minimal amount of the other 400 million euros. The airline will answer that they need 400 million euros in equity in order to leverage the greater amount and that surely is where the question is posed for the State to invest.

State and Investment

In the light of the foregoing and the identified capital needs of the airline a clear challenge has been posed to the State as to why it cannot invest in Aer Lingus as the profitable commercially successful going concern that it is. To date some commentators, who should be better informed, have confused, deliberately or otherwise, the notion of investment with subvention. The claim that the State can and should invest to a reasonable amount has never been based on subvention but rather on commercial investment on the same basis as the daily operation of the market economy. Regrettably, the Government has also, in effect been hiding behind this confusion and worse, has offered the view that they cannot invest because of current EU competition rules. In 1984 the European Commission in its publication – EU Bulletin Volume 17 of the same year – made it clear to all member states what the basis for any State involvement in publicly owned companies could be. Consequently the ability of the State to invest in a publicly owned company under market investor principal is well established in the European Union for all member states. There should never have been the need for any confusion on the part of Government, their advisors or commentators who were supposed to be informed in these matters. Further on this point, the matter was pursued with the Commission by Proinsias de Rossa MEP, in 2004 and the former Commissioner Mario Monti restated the position in correspondence of the 30th August, 2004 and the ability of the State’s to so invest yet again became a matter of public record. Notwithstanding that the Minister for Transport declared in the Dail some four weeks ago, that the Government could not invest because it would be challenged in Brussels. The Minister has now confirmed that our view is the correct one – when it is quite clearly too late.

If the Government had taken a decision to invest on the market investor basis then it is reasonable to presume that the maximum level of investment would be to match whatever would be achieved by the flotation i.e. in the region of 300 to 400 million euros. While this would still leave Aer Lingus having to make arrangements for the balance of 1.6 billion euros, it would be no better or no worse than the result of privatisation, but without incurring the loss of public ownership of control and without raising the risks and fears to the workforce.

State Holding Company

As has been well established, the Irish Congress of Trade Unions in June, 2005, offered an alternative to privatisation. This alternative was encapsulated in the document “A New Governance Structure for State Companies”. When we met with the Minister for Transport in March, 2005 the unions were promised that, in accordance with the undertakings given under Sustaining Progress there would be full consultation prior to any decision on the future of the Semi State Companies. In the case of Aer Lingus, this was not only breached by virtue of the Government decision of May, 2005, effectively to part privatise, but was also breached by a complete absence of consultation and engagement on the Congress document. Almost immediately, following its issuance, it was rejected by the Department of Finance for reasons which have never been articulated by any process of consultation or engagement which would have allowed for the possibility of exploring the effectiveness of the State Holding Company concept as a vehicle for retaining Aer Lingus in state ownership and control and at the same time allowing it access to the capital it needs.

Golden Share

Much has been made by the Government of the protection to national interests, such as the Heathrow slots, by the retention of a “Golden” or “Blocking Share” by the Government. Regardless of the terminology actually used, what is being suggested is that, post privatisation the Government will retain a shareholding sufficient to ensure that it will be in a position to protect such fundamental concerns. However, the situation does not appear to be as clear cut as suggested by the Minister for Transport. Indeed the consultants retained by the Government in 2004 to evaluate ownership options regarding Aer Lingus pointed to this issue in their report of October, 2004. At page 28 they outlined the difficulties around the retention of “Golden Shares”. They pointed to the requirement for a specific legal review and the necessity to sound out the Commission with regard to compatibility with EU law. They did so against the backdrop of some ECJ judgements on the illegality of golden shares held by some member states.

More worryingly they observed at Page 6 of the same report that “any partial divestment or introduction of a new investor should be viewed as the first step towards an eventual exit by that investor (any likely the State) through subsequent sale or IPO”.

It seems from recent publications such as the Commission Staff Working Document “special rights in privatised companies in an enlarged Union – a decade full of developments” of July 2005 that the ECJ has set down very strict criteria for the use of such measures.

In the light of the assurances proposed by the Government, there is therefore, a clear challenge for them to specify in unambiguous detail how this objective can be achieved in conformity with EU law. If it cannot be, then there is a clear duty on the Government to reassess its current strategy and put it on hold before an irrevocable situation is reached with regard to privatisation.

Heathrow Slots

Much comment has been made on the question of the Heathrow Slots and rightly so. Notwithstanding the fact that they are traded on the “grey market” they are extremely valuable and could be asset stripped by a new buyer. Their value lies in the fact that they are effectively landing rights at one of the major international hubs. Aer Lingus has a large number of such slots and in the past the market has valued prime slot pairs at up to €20 million. Aer Lingus holds on to these slots because it is the national carrier and is committed to maximising their value for its own hub in Dublin.

However, in an increasingly competitive aviation sector there is increasing demand for slots as airlines expand their services and routes within that environment to either promote or respond to competition. At the extreme end we have the phenomenon of “slot busting” as was recently experienced in Germany. At a less extreme level, there appear to be currently issues arising at Dublin Airport over slots and it seems to be unclear as to who ultimately can or will control and police slot allocation in contested circumstances or where there might be slot busting. Where there is such lack of clarity over the effectiveness of any retained shareholding by the Government in a privatised Aer Lingus it begs the question that if there is any doubt as to how slot allocation can be policed and controlled in Dublin, how effective could the Irish State be in having any influence over the situation Heathrow, in another jurisdiction, as against private interest.

Employee Issues

As is well established and accepted by all parties Aer Lingus has a committed workforce who have turned the airline around into commercial success and profitability. Despite several opportunities to leave the airline on financial terms the majority have chose to stay with the airline and to make their future with it. In doing so they have made sacrifices in terms of pay foregone, changed work practices and demanning. They did so on a voluntary basis, by agreement and with no compulsory redundancy, in order to secure the future of the airline and their own. They have produced a airline which is the match of virtually any comparable airline in the world in terms of competitive performance and profitability. They did not go through all that to hand it over to the benefit of private investors or private venture capitalists to make a killing.

The decision of the Government now leaves them with a very clear focus on issues which have to be resolved. Many of these issues have been on the table for some considerable period time – the move to privatisation has moved a very clear spotlight on their resolution before there can be any effective change in the airline status.

These issues have been very clearly identified in correspondence to the employer and to the Department of Transport as being those of:

Job security

• No compulsory redundancy
• Agreement on core numbers
• 90:10 Ratio of Permanent to non permanent staff
• No outsourcing

Pensions

• Deficiency in Scheme with regard to indexation
• Unfinished business arising from Labour Court Recommendation 18095
• Employer’s liability for any shortfall arising in the base DB scheme

Terms Conditions and Procedures

• Maintenance of Agreements going forward

 Pay and Reward

• Settlement of outstanding claim

 Job Evaluation

• Resolution

Job and Employee Development

• Substantial enhancement

No Dilution of Employee Percentage Share Holding.

All of these issues have to be resolved to our members satisfaction prior to any move to privatise and to support this our members have resolved by secret ballot vote to take industrial action in the event that the employer proceeds to privatisation without agreement on these core issues of concern. Notice to that effect has been served on the employer.

Summary

The above and the attached Appendices detail our views on the issues before the Committee. We believe whether from the point of view of the workers, the country or the airline there is a very cogent argument for the retention of Aer Lingus in public ownership and control retaining its existing commercial mandate. The arguments advanced by the proponents of privatisation are not convincing from an economic or policy point of view and the employees are certainly not comforted either by the less than persuasive arguments advanced or by the experience of privatisation elsewhere.

There is little need to comment on the experience of Eircom except to note that two of our leading economists were reported in a Sunday Newspaper as calling for the re-nationalisation of the airline. Many of our members, and independent commentators, most recently as the Prime Time Programme on RTE on Tuesday last 4th April, have pointed to the experience in Irish Ferries and the fact that it also is a privatised formerly publicly owned company. Our members on the ground operations in Aer Lingus are particularly mindful of the Irish Ferries experience and the drive to outsource the workforce, there given that Aer Lingus in the recent past, even in public ownership, has attempted to outsource large sections of the airline’s operations. It would be important for the Committee not to underestimate the complexities of change management in the areas represented by SIPTU which are substantially in ground based operations, or the fears of the workers in those categories with regard to the future.

We would also remind the Committee of the experience of another Island Nation, who not that long ago took a disastrous decision to privatise their national airline. New Zealand Air went bankrupt in private ownership and had to be rescued by the New Zealand Government at more than twice the price they received in the initial divestment. The Air Line is now operating successfully commercially in public ownership for the benefit of the New Zealand people who at least understand the value of a strategic economic asset. The question for our Government is why do we have to re invent the wheel?

We as a Union have taken a very strong and unambiguous stand as far as the future of Aer Lingus is concerned. There are no corners on that position and it is one which is fully endorsed by our members. We have taken that stand for all of the reasons stated above. We are equally conscious that there are views in Government which are strongly ideologically opposed to our view. However, we do not believe that ours is a minority view. Many of the major local authorities in the State including all those in the greater Dublin area, Cork City Council, Limerick City Council, have passed resolutions against the privatisation of Aer Lingus. Notwithstanding the clear imbalance in power between local authorities and central government, it is a reasonable touchstone of how ordinary people view the issue. The Labour Party, Sinn Fein, The Green Party, Independent TDs and others hold the view that this is a wrong way to go. A recent RTE Poll on whether Aer Lingus should be privatised resulted in a majority of the respondents voting against – and this was against the backdrop of a barrage of pro-privatisation argument and propaganda in significant sections of the media and politics.

In summary, therefore, Chairperson and Members of the Committee we want to take this opportunity to thank the Committee for the opportunity to record our views and trust that through the efforts of the Committee, even at this late stage, that the weight of our arguments can have a positive influence on the future of our national airline.