The Irish Entrepreneurial State

Aer Lingus Part 2

Paul Sweeney27/06/2018

In the last blog I set out how Aer Lingus, an entrepreneurial Irish state company, grew into a major company with over 14,000 employees in several sectors. Here I will continue the story, including its role in the birth of Ryanair and demonstrate that successive governments have no coherent enterprise policy because they privatised a major indigenous company, Aer Lingus, while simultaneously pleading that they support indigenous firms.

 

Early Days of Aviation

Until the 1980s there was no competition in aviation. It was controlled by governments, who saw it as an arm of the state for prestige. In fact, any changes in airfares had to be approved by both governments on each route - not by the airlines, before they could be changed. Indeed no airline could fly to another country without both governments agreeing it in advance and fixing fares.

 

Air travel was expensive, comfortable and pleasant and you booked with travel agents. You got complimentary food and drink and you did not have to pay for every single item. You were transparently gouged by airlines on prices then, thanks to governments, but today the gouging is secretive and cumulative as this recent story from an Aer Lingus customer shows. Nonetheless, today most airlines, including Aer Lingus, do still offer good services which are much cheaper than in the past, but at a price.

 

Early Liberalisation: Aer Lingus was first airline in Europe to try to exploit Fifth Freedom.

Aer Lingus did charge high fares, but it was also the first airline in Europe to try to exploit the new liberalised aviation laws in Europe. But its innovation was initially seen off by the bigger airlines because there was no effective Competition Directorate to stop bullying (anti-competitive practices) at that time.

 

The first EU aviation liberalisation, “Fifth Freedom Rights,” allowed an airline to fly from its base to another city in another country, pick up and drop passengers and then fly on to yet another country. Aer Lingus tried this on two routes, but the bigger incumbent airlines fought back aggressively on pricing and Aer Lingus could not compete. The EU did not intervene to stop predatory pricing then.

 

Aer Lingus Backed GPA, taking 45% and lending its support

Tony Ryan of GPA (Guinness Peat Aviation) and Ryanair learnt his aviation leasing as a leasing executive in Aer Lingus. Without the financial backing of Aer Lingus in taking a substantial founding 45% stake in GPA, and also the corporate support of Aer Lingus, a respected and trusted national airline, Mr Ryan would not have made the money which enabled him to start Ryanair. In a way, Aer Lingus was the “grandfather” of Ryanair, but it also made a lot of money out of GPA before its failed floatation.

 

Tony Ryan, made a fortune from GPA and used much of it to fund Ryanair. Ryanair did struggle for many years, requiring Tony Ryan’s support. It also relied on state subsidies, including no rent on its Head office and the government putting Aer Lingus off three routes - which it had built up - and awarding them solely to Ryanair in 1988. One was Stansted, now its main base. This was a crucial state intervention in the market in favour of Ryanair.

 

The Aer Lingus investment in GPA was made as a founding shareholder in 1975 and may have been as little as £37,500 for 45 per cent of the company.  Tony Ryan and the bank, Guinness Peat Group (in which Aer Lingus also had a share), were also shareholders. Aer Lingus also invested a further £11m during a rights issue some years later. The total gain from this investment amounted to over £80m (€102m) from a progressive reduction in its shareholding.  It also shared in the substantial profits over the years.

 

With the collapse of GPA in June 1992, following its failed IPO, Aer Lingus was forced to dramatically write-down its investment. This it did, with adverse publicity, but it had already made huge profits on its small investment, both in annual profits share and in realised capital gains from reductions in its shareholding.

 

If Aer Lingus had not backed Tony Ryan in establishing GPA, which made him a lot of money, some of which he invested in Ryanair, Ryanair would not exist.

 

Many Top Executives were trained by Aer Lingus.

Aer Lingus trained many skilled aviation workers who work all over the world and its management included Willie Walsh, its former CEO, who is now CEO of IAG, its British parent which bought Aer Lingus from the Irish taxpayer when privatised in 2015. Alan Joyce, CEO of Quantas, also learnt his trade in Aer Lingus, as did senior executives in several other airlines, aviation and other companies.

 

Aer Lingus was sold to Britain’s IAG  on 17th August 2015

Aer Lingus was privatised for no clear reason. It was doing well, had a good future (making large profits since), was a major indigenous company and ironically, government policy was to support and grow indigneous firms. Yet governments sold off a key Irish company, which we citizens had owned.

 

Aer Lingus has made substantial profits since privatisation, with €269m last year. IAG, its parent made €2bn but paid back €500m to shareholders - rather than re-invest it, as far too many companies do in these days of financialisation.

 

Privatisation favoured over Indigenous Industry

I argued in an Irish Times article at the time that privatisation “would be a symbol of the failure of a substantial part of enterprise policy, namely the building and retention of successful Irish companies.”

 

I argued the sell-off was not good value either as  “The Aer Lingus slots are worth up to €925 million, it has net cash of €445 million and one of the most valuable brands in Ireland. Thus the BA-IAG offer of €1.3 billion was a very poor one” . I said if we were to try to recreate Aer Lingus as it was at the time of sale, it would cost a multiple of this offer “which, frankly, was peanuts.” The state got only €325m for its golden share of 25%. Interestingly, Aer Lingus made profits of €611m in the last three years.

 

Instead of privatising the state’s Golden Shares, I counter-argued, in vain, that the government should buy out Ryainair’s “illegal” holding in Aer Lingus and take back control of the company. It “must move to snap up shares which Ryanair, under British competition rules, has to sell and thus we build a controlling interest of 50.1 per cent of Aer Lingus. This share ownership should be put at arms-length within New Era, the State development board. Its financial experts would assess any future requests for capital for expansion on commercial terms and allow the company to grow under Irish ownership.”

 

Instead there was no strategy, no interest in an innovative approch to the issue of ownership, but instead a slavish obedience to what the professionals and the media wanted (a deal).

 

Just before the deal was completed, I again wrote in the Irish Times that “Ireland needs a good pool of strong indigenous firms. A small globalised state needs governments to manage its economic role in the world. A state-controlled Irish airline is one such strategic company. It is not too late to change, especially when wrong.”

 

The modern state in a globalised economy is still powerful – ours rescued all our private banks and speculators. More than ever, the modern state has to be more active on the economy directly. It already passively spends hundreds of millions in subsidies to private interests, annually. Aer Lingus showed what one commercial state company can do. It did generate a huge amount of value and of managerial and skilled talent in its 79 years as a state-owned company.

 

 

 

 

Posted in: Corporate governance

Tagged with: aerlingusprivatisation

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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