Martin Cullen (Waterford, Fianna Fail)

What I have before me is the legal opinion drafted by the legal experts. I am in their hands regarding that interpretation.

I move:

That Dáil Éireann, pursuant to section 3(5) of the Aer Lingus Act 2004, approves the disposal of shares in Aer Lingus Group plc by the Minister for Finance in accordance with section 3(2) of the Aer Lingus Act 2004, the general principles of which were laid before Dáil Éireann on 4 July 2006.

The motion seeks the approval of the House for the general principles of the disposal of shares in Aer Lingus. The Aer Lingus Act 2004 contains a provision requiring the approval of the Dáil for the general principles of any proposed disposal of shares in Aer Lingus. A document setting out the general principles was therefore laid before the House earlier this week.

Before addressing the general principles, I would like to trace some of the background to the proposed public offering of shares. Aer Lingus was founded by the Government in April 1936 to provide air services to and from Ireland. From a modest beginning with a single aircraft, the fledgling airline grew steadily over the following decades. A significant milestone in 1958 was the inauguration of transatlantic services to New York using a fleet of three leased Lockheed aircraft. The 1960s saw the airline take delivery of a fleet of Boeing aircraft and, in the early 1970s, the iconic Boeing 747 was introduced and, throughout the 1980s, continued to service the north Atlantic. By the early 1980s, Aer Lingus had diversified significantly. Its subsidiaries included hotels, a computer processing company, personnel and project management services, a helicopter operation, airframe maintenance and engine overhaul companies, and other business.

However, the company was adversely affected by the economic downturn of the early 1990s resulting in serious financial losses. A restructuring plan, Strategy for the Future, subsequently referred to as the Cahill plan, was introduced by management in 1993 to return the group to profitability. The plan entailed an injection of €222.2 million of new equity by the Government over a three year period and covered all the commercial and operational areas of the business. In subsequent years, the company was able to take advantage of the upturn in the industry and performed strongly. In the period from 1994 to 1999, Aer Lingus implemented a major disposal of its non-core assets, including CARA, Aer Turas, PARC and TEAM.

The tragic events of 11 September 2001 acted as the catalyst for a further financial crisis. Faced with major threats to its viability, Aer Lingus implemented a radical survival plan which included the reduction of over 2,000 staff, extensive work practice changes, a pay freeze and the sale of non-essential assets and remaining non-core subsidiaries. In addition to cutting costs, the company also implemented a new low fare strategy and expanded its network within existing resources. As a result of the implementation of this plan and the commitment of management and employees, the company turned around its financial performance. Since then, the company has continued to perform well in a particularly challenging operating environment and has posted good results for 2005.

Aer Lingus has a proud record of success in serving the economic interests of the State. The airline's history, which has been punctuated by the need for radical rationalisation measures, most notably in the 1990s and in the aftermath of the 2001 terrorist attacks in the US, demonstrates the need for the airline to be able to access equity to fund growth.

Repeated calls have been made for the State to invest in Aer Lingus. It is true that a State investment in a State company made in accordance with the so-called market economy investor principle is capable of surviving a challenge under the European Union's state aid rules. In practice, however, the application of the principle is not straightforward and investments in Aer Lingus cannot be guaranteed to accord with it. The guidelines published by the Commission in 1994 on the application of the EU treaty provisions concerning state aids in the aviation sector states the following in the conclusion of its introduction:

An important element in the Commission's judgement will be the fact that the company has already been granted State aid. Therefore the Commission will not allow further aid unless under exceptional circumstances, unforeseeable and external to the company. Moreover, given the fact that Article 222 of the Treaty is neutral with regard to property ownership, the Commission cannot impose the privatization of an airline as a condition of the State aid. However, the participation of private risk sharing capital will be taken into account in the Commission's analysis.

It will be recalled that the capital injection of €222.2 million, which was made by the State in the company as part of the 1993 Cahill plan, had to be approved in advance by the European Commission and this approval was given on the understanding that the investment would not be repeated. Any further State investment in Aer Lingus could therefore be expected to be the subject of a critical appraisal by the European Commission. Challenges could also be brought before the European Court of Justice by other member states, airlines or even ferry companies.

In the aftermath of the terrorist attacks of 2001 and the ensuing aviation industry downturn, it was clear from contacts with the European Commission that the prospect of approval for a Government investment to support the survival plan was remote, even though it was argued that there was compelling evidence that an investment would satisfy the market economy investor principle. The rules pertaining to state aid are complex and give rise to issues, such as approval and susceptibility to legal challenge, which do not apply to private sector investments. Even if an investment by the Government in Aer Lingus withstood scrutiny, there could be no guarantee that this would always be the case. This absence of certainty in regard to the access to funds hinders the ability of Aer Lingus to prepare effective business plans and puts it at a disadvantage in a very competitive industry.

In these circumstances, even if competing priorities facilitated Exchequer investment in Aer Lingus, the possibility of an investment being made by the Government as and when needed without raising state aid concerns would be far less certain than would be the case if the company could access investment through the international capital markets.

The company's potential to expand in existing and new markets improved markedly as a direct result of its turnaround and improvement in competitiveness. The company has identified a range of new and exciting opportunities for expansion and has launched a large number of new European routes over the past few years. More recently, it inaugurated its first ever east bound long-haul service to Dubai. The potential for growth has brought sharply into focus the need for new funding to finance business expansion.

Recent history has shown that the airline business is becoming increasingly competitive and some well-known airlines have gone to the wall. The emergence of a significant number of low cost carriers has brought new challenges to traditional industry structures and assumptions. Against this backdrop, the Government's strategic aim for Aer Lingus is to ensure the company has access to sufficient resources over the long term to enable it to compete successfully and develop its business as market opportunities emerge and to give it the strength in its balance sheet to withstand industry downturns and external shocks, both of which are recognised features of the airline industry.

To provide the company with this certainty, I brought proposals to Government last May on its investment requirements and future ownership structure. These proposals took account of consultations with the trade unions in line with the terms of Sustaining Progress. In its decision, the Government agreed to a reduction in the State's shareholding in Aer Lingus, while retaining a significant stake of at least 25.1% to protect key strategic interests, provided that the Minister for Finance and I are satisfied that this level of reduction is warranted on foot of the analysis prepared by our advisers for the IPO.

Following the Government's decision, the Minister for Finance and I appointed financial and legal advisers to advise us on the most appropriate investment transaction mechanism for Aer Lingus and the scale and timing of the proposed transaction. The advisers reported to us at the end of last year. On the basis of the advice we received, we brought proposals to Government on 4 April for the implementation of an investment transaction for Aer Lingus. Arising from that meeting, we are proceeding on the following basis. In line with the Government's decision of May 2005, the Government intends to reduce its shareholding in Aer Lingus while retaining a significant stake. The company will also issue new shares to fund business development through an initial public offering of the company's shares on the Stock Exchange. The Government will retain a minimum stake of 25.1% in the company to protect the State's key strategic interests. The transaction is to be implemented as soon as possible, subject to Stock Exchange rules and market conditions. This will provide the company with ongoing access to capital on the same basis as its main competitors and give it the means to develop and grow in coming years to the benefit of the airline's consumers and staff and the economy as a whole.

Throughout the process, the importance of securing the support of Aer Lingus workers has been to the forefront of our minds. I met the trade unions on a number of occasions over the past year with regard to the future of Aer Lingus and met them twice in the month before I finalised the proposals for a transaction. I am aware of the concerns of many staff in Aer Lingus with regard to the proposed IPO, particularly in respect of issues such as job security and pensions. However, I am confident these issues can best be secured in the context of a strong, growing and competitive company.

Arising from my consultations with the trade unions, Aer Lingus management was mandated to engage with the trade unions with a view to addressing the issues identified by the unions. There has been an intensive process of engagement and a range of proposals have been tabled and discussed to address the concerns expressed. The proposals include measures pertaining to job security, pensions and the ESOT shareholding. There is now a basis for bringing these matters to a satisfactory conclusion in the near future.

I will now discuss the general principles of the IPO. For legal reasons, I am restricted in what I can say about Aer Lingus and its business at this stage in the privatisation process. Accordingly, as required by the Act, I am seeking the approval of the House for the general principles of the sale. I have clearly indicated in the general principles laid before the House that the Minister for Finance intends to dispose of a number of shares in Aer Lingus by way of an initial public offering. At the same time the company intends to issue new shares to raise fresh equity for the business to fund development. The shares will be listed on the Irish and UK stock exchanges. As a practical matter in flotations of this nature, many of the details will not be decided until much closer to the IPO date and some issues such as the definitive offer price range and the exact structure of the offer will not be decided upon until closer to the marketing process.

The primary objective of the share offer is to allow Aer Lingus to raise funds to ensure that it has the financial strength to fund business development and to withstand the external shocks and industry downturns that are a recognised feature of the aviation industry. The possibility of raising new equity also affords the company the opportunity to address the concerns of the Aer Lingus trade unions and workers arising from the funding of the company's main pension scheme.

The Government is committed to selling shares so that a majority of the shares in Aer Lingus will be held by institutional and private investors after the transaction is completed. Without a commitment to ensuring that a majority share of the company will be held by the private sector it would be more difficult for the company to raise equity through the issue of shares. The Minister for Finance and I will decide on the actual number of shares to be sold at a date much closer to the IPO itself and this decision will take account of considerations such as market conditions and the level of demand. The State will retain a shareholding of at least 25.1% with a view to protecting strategic interests.

The offer structure will be an institutional offer to both domestic and international institutions, including institutions in Europe and the United States. In addition, there will be an offer through financial intermediaries in Ireland. A minimum application amount of €10,000 will be set for retail investors in Aer Lingus which will facilitate participation by members of the public in the share offer. The allocations of shares to institutional and retail investors will be decided on the basis of the demand for the shares established by the underwriters for the IPO.

The process of offering shares for sale will commence with the issue of a prospectus. The prospectus will include a price range for the shares, although the IPO share price could ultimately be above or below this range. Following the launch of the offer, the underwriters will market shares to institutional investors in Ireland, the rest of Europe and the United States and to Irish stockbrokers acting as intermediaries for retail investors. These institutions then submit competing bids to buy shares. Following this marketing or bookbuilding process the Minister for Finance, in consultation with me and the company, will agree the IPO share price with the underwriters.

The proceeds to the Government will depend entirely on the number of shares disposed of and the price per share. The proceeds will be paid into the Central Fund of the Exchequer. The company's equity requirements, including requirements for pension agreements, will be met through the issue of new shares as distinct from the sale of the Government's shares. The exact amount of new equity to be raised by the company will be decided just before the IPO, having regard to its anticipated requirements and market demand for the shares.

A shareholding of over 25% is significant under the provisions in company law, notably in enabling such a shareholder to prevent a compulsory takeover of 100% of a company and in denying the remaining shareholders the ability to pass special resolutions. Examples of such resolutions are making changes to the memorandum and articles of association. As a major shareholder, the State will also have representation on the board and thereby the opportunity to influence key decisions subject to the fiduciary duties of directors.

Consideration has been given to the possible need for further safeguards over strategic interests in the context of the disposal of a majority shareholding in the company. London Heathrow Airport currently serves an important role in ensuring connectivity to and from Ireland. The scarcity value of slots at Heathrow could give rise to the possibility of decisions being taken in the commercial interest of Aer Lingus that are not in Ireland's strategic interest. On the other hand it must be acknowledged that the importance of Heathrow as an international hub for Ireland is expected to decline as other hubs such as Amsterdam, Paris and Dubai gain in importance. It will also become less relevant as the range of destinations to which direct services from Ireland are available increases and as Dublin evolves as a hub airport in its own right. The Government has mandated the Dublin Airport Authority to proceed with a significant capital investment programme, including in particular the development of terminal 2 for this purpose.

I am optimistic about the potential for new long-haul services both to the east and west and I am in discussions with Singapore and Thailand on new bilateral agreements. Aer Lingus is not subject to any obligation to provide services to Heathrow Airport. It is doing so on a purely commercial basis, as is the privately owned British Midland. This speaks volumes about the commercial value of such services.

Nevertheless, measures must be taken to ensure that sufficient slots are available for services between Ireland and Heathrow to preserve access to the global network of connections available at Heathrow. New articles of association, adopted by the company as part of the IPO process, will, for the purpose of providing the required safeguard, provide that sales of slots at London Heathrow would be subject to a shareholder's resolution. In accordance with company law, these provisions of the articles of association could not subsequently be changed if opposed by the State as a 25.1% shareholder in the company.

It is intended to provide that a resolution relating to the sale of slots may not be adopted if it is opposed by a defined percentage of shareholders. This percentage will be set at a level some 5% or so in excess of the Government's retained shareholding. In effect this mechanism will enable the State with the support of other shareholders, or of a significant shareholder such as the employee share ownership trust, ESOT, to block a slot sale that is against Ireland's strategic interests.

It will also be necessary to set out the criteria that will be applied in considering any resolution relating to the sale of slots. The criteria will ensure sufficient services between the State airports and Heathrow to allow passengers connect throughout the course of the day with key long-haul destination flights to and from Heathrow. The connectivity requirements in each case would take account of services provided on the relevant routes by other carriers and would also take account of the evolution of connectivity to and from Ireland from other hubs, particularly Paris, Amsterdam and Dubai. Exceptions to this would be allowed in the case of services that are loss-making and not expected to return to profitability and in respect of short-term leasing arrangements for slots.

There is no proposal to have a golden share, namely, a provision for a Government veto over company decisions that is not based on the Government's shareholding and the associated voting rights under company law. Golden share arrangements have been found to run counter to EU law. The proposed approach to safeguarding slots has been developed following consultations with the European Commission concerning the treaty rules relating to free movement of capital. It is evident from these consultations that a protection mechanism for Heathrow slots that could be exercised solely by the Government would be regarded by the Commission as a special right that would be challenged before the European Court of Justice. This is the reasonable and balanced approach to providing safeguards for Heathrow services while respecting the legal constraints of the treaty rules and the need for the company to protect its financial welfare.

The final decisions with regard to the implementation of the transaction will be sensitive to market considerations. The draft prospectus relating to the company and the IPO will be lodged as soon as possible this month. The necessary regulatory approvals under the prospectus rules will be completed over the summer period. The offer period will commence once the prospectus is issued and is expected to last a number of weeks. This will depend on market conditions and the level of demand. I expect this transaction to be completed before the end of September.

Certain issues have been identified by the trade unions as the key concerns of staff in Aer Lingus regarding the IPO. As well as engaging with the trade unions under the terms of Sustaining Progress prior to the Government decision last year to proceed with an investment transaction for Aer Lingus, I met with the trade unions on a number of occasions earlier this year. The trade unions identified the key concerns of staff as pensions, job security and dilution of the employee shareholding with new shares being issued in the company. I then mandated the company to engage with the trade unions to address these concerns. Discussions between the company and the trade unions on these issues are continuing and I am confident that these can be brought to a satisfactory conclusion soon.

While pension issues are primarily a matter for the company and the staff, the Minister for Finance and I stated that we were open to the company using part of the proceeds from issuing new shares in the IPO to supplement the funding position in the company's pension scheme as an element of an overall solution on funding involving increased employer and employee contributions. The position of pensioners will also be addressed in any solution that is agreed. The final figure will be reached in measures to address the concerns of workers. The potential to raise funds through the IPO process presents an opportunity for both the company and staff to supplement the funding of the company's main pension scheme and in this way create a far healthier position which is in the best interests of both the company and staff.

I will now turn to the issue of the level of the employees' shareholding in Aer Lingus and the potential impact of the IPO on that shareholding. The employee share ownership trust, ESOT, in Aer Lingus currently holds approximately 12.4% of the shares in the company while existing and former employees hold approximately 2.5% of the shares. The issue of new shares by the company in the IPO process will have the effect of reducing the proportionate shareholding in the company by the ESOT and employees. This reduction in proportional shareholding will not, of itself, dilute the value of this shareholding. Rather, the value is likely to be enhanced as a result of the IPO both because of the provision of new equity to the company and the increase in the liquidity of the company's shares.

The terms of the existing ESOT agreement which was negotiated a short number of years ago in view of a potential third party investment, provide for substantial safeguards against dilution of the ESOT's shareholding. The company is currently consulting with trade unions and the ESOT on further measures to counter potential dilution. This process does not entail, as speculated upon in some sectors of the media, the granting of free shares to the ESOT. I understand there has been active dialogue on all of these issues and that a considerable level of progress has been made to date. The company is making every effort to bring the outstanding matters to a satisfactory conclusion in a timely manner.

I wish to set out briefly the position on the negotiations between the EU and the US on an aviation agreement.

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