Full Privatisation of Aer Lingus

A guest post by Drs Donal Palcic and Eoin Reeves from UL:

Yesterday the Minister for Transport signalled the possibility of selling the remaining 25 per cent stake in Aer Lingus (as recommended by the report of the Review Group on State Assets and Liabilities published last April). News of other planned sales, such as the sale of a partial stake in the ESB, is expected over the coming days. So does the sale of the remaining government held shares in Aer Lingus make sense? This can be assessed in terms of the government’s objectives. First, this is about raising exchequer revenues, so how much can the government expect to realise? With shares trading at 67.5 cent as of this morning (compared to the IPO price of 220 cent) a 25 per cent stake is likely to be worth in the region of €90m (leaving a lot more to be sold if the €2bn target in the programme for government is to be reached). Net revenues will of course be reduced when professional expenses and discounts are taken into account.

Are there any other advantages to be accrued from the mooted sale? The common argument in support of selling state owned enterprises (SOEs) is that performance will improve under private ownership. But Aer Lingus operates as a privately owned enterprise and is not subject to obvious political interference (a problem traditionally faced by some SOEs). So selling the remaining 25 per cent will not have any impact in terms of improving enterprise performance.

What are the likely downsides to the possible sale? The obvious one is that the 25 per cent stake constitutes an important degree of state influence over the island economy’s airline. We have discussed the importance of the state retaining control over strategically important industries before here and here. But suffice to say that Eircom provides an example of one of the biggest privatisation failures worldwide and this could have been avoided if the state had not relinquished complete control when it privatised the company. The lessons in relation to Aer Lingus are obvious.

One of the big strategic issues in relation to Aer Lingus concerns the Heathrow slots. The Minister for Transport stated that the strategic reasons for retaining a stake in the airline no longer exist and that the issue of Heathrow landing slots was not as important as it was since people are now using connections other than Heathrow. Aer Lingus has 23 landing slots in Heathrow. Currently 13 slots are being used on the Dublin route [BMI also operates on this route and has 4 landing slots], 4 on the Cork route, 3 on the Shannon route and 3 on the Belfast route.

Data from the UK’s Civil Aviation Authority shows that, in 2010, over 9.5 million passengers travelled from the Republic of Ireland to the UK, with just over 51 per cent of all passengers travelling to London. A quick glance at the traffic on the Dublin, Cork and Shannon to Heathrow routes for 2010 (see table above) illustrates the importance of the Heathrow link, with slightly over 44 per cent of passengers to London going through Heathrow. In general, the vast majority of passengers from Ireland to Heathrow are carried by Aer lingus (they are the sole operator from Cork and Shannon; while on the Dublin Heathrow route they operate significantly more flights than BMI).

While the number of passengers travelling to airports in London other than Heathrow has increased considerably over the years, based on the above figures for 2010, it is hard to see how the Minister can claim that the “strategic” argument for retaining a stake in Aer Lingus no longer applies. For an island nation like Ireland, which is heavily dependent on international connectivity, the Dublin/Cork/Shannon to Heathrow routes are of considerable strategic importance. Although the sale of the government’s 25 per cent stake does not mean that flights on these routes will stop overnight, it does leave the government powerless to prevent an undesirable change in ownership in the future (think Eircom).

Given the relatively small amount of cash that is likely to be raised, one must question whether this mooted proposal makes sense. Our scepticism appears to be shared by the company itself, which reportedly is not in favour of a quick sale. Moreover, Joe Gill of Bloxham sounded a sceptical note when interviewed by Matt Cooper on Today FM yesterday. Mr. Gill raised the issue of the Heathrow slots and also highlighted the difficulties posed by the company’s pension deficit (in the region of €400m). He also suggested that a special dividend by cash-rich Aer Lingus (it has cash balances of approximately €350 million) offers an easier way for the government to raise much needed cash from the company. Notwithstanding the issues that arise in forcing a special dividend one wonders if this route makes more sense than relinquishing full control over the airline.

Household Debt Restructuring Post Number 4012

The household debt restructuring (I’m not going to use the ‘f’ word) debate rumbles on. From the blanket coverage in the Sunday papers, Colm McCarthy’s Sindo post and Stephen Donnelly’s pieces were, I think, the best. For context, earlier in the week Seamus Coffey looked at the numbers in arrears from the Central Bank. From Colm’s article:

It would be wrong to dismiss the ‘forgiveness’ campaign as just a silly season space-filler revved up by a woolly-minded media. There is a real problem for many people and some mortgage debt will have to be written down. You cannot get blood out of a stone.

The danger is that the campaign will encourage everyone in negative equity to disguise themselves as stones and to lobby politicians for relief from debts that they are able to service. The politicians need to understand that debt relief, beyond the minimum necessary to acknowledge that some people simply cannot pay, comes at the expense of a bankrupt Exchequer. Do they really want to go to the IMF/EU looking for a further loan to recapitalise the banks yet again?

The best way to proceed is for all banks to be treated equally, regardless of ownership, and encouraged to write down mortgage debt that cannot realistically be serviced. The process will not be left entirely to the bankers, in whom public confidence remains weak, and it makes sense to have active oversight from the Financial Regulator to ensure, for example, that there is no preferential treatment for favoured borrowers, such as bank staff.

Debt write-downs should be expedited where these are unavoidable and extra staff assigned to the task. A modernised personal bankruptcy code would help and legislation has been promised.

I agree with Colm’s assessment of the situation. With the date of the expert group’s report hurtling towards us, it might be useful to consider a few worked examples of debt restructuring as and when they become important to us. Here is a google spreadsheet considering those cases.

I chose just one restructuring instrument, a debt/equity swop, although there are many others. See appendix 2 of the MARP report for worked examples internationally. The headings of the spreadsheet should take you through the logic of the examples.

First off, these are archetypal cases made up to make some points about types of mortgages in difficulty, so they are subject to a series of assumptions I detail in the spreadsheet. They are not meant to be anything other than exemplars, though they are driven by real life cases I’m familiar with. Anybody wishing to improve the ‘reality’ of the examples, by including interest and arrears for example, or another debt restructuring mechanism, please have a go on google docs and I’ll link to your examples in the comments.

Second off, it’s pretty clear from the spreadsheet that very few cases actually qualify for some kind of restructuring. Of the 6 cases, only 2 mortgages are deemed ‘sustainable’ when the bank takes a 45% equity stake, and only 1 is sustainable when the bank takes a 35% stake. So, under the present set of arrangements, the rest of these mortgages would most likely end up becoming court cases, with the attendant stresses on household and society, and the possibility of the bank recouping only the secured asset. If, and it’s a big if, these examples are any guide to reality at all, an efficient personal insolvency mechanism is clearly the first step towards resolving the debt crisis, with a subset receiving some form of restructuring.

It’s clear there is a need for an efficient filter to decide, based on individual circumstances, which mortgages aren’t sustainable, which are, and which might be, given other considerations.

In practice, here’s how I see such a filter working.

1. The process is done through the banks but supervised by the regulator. Another quango or NAMA we really don’t need. Banks are best placed to work things out with their borrowers, but they should be supervised–especially the uncovered banks and subprimes but most importantly the ‘pillars’. A metric agreed by both sides on the debt profile of the individual lender and borrower should be constructed.
2. The implementation should be a menu of options available to the bank, one of which *must* be used depending on the outcome of a series of tests for income, etc., applied in stage 1. The penalty for misrepresenting yourself to the bank should be fraud charges. Cute hoors need not apply in other words. This will reduce the moral hazard element enormously.
3. This menu will include: straight out bankruptcy, debt/equity swops, repayment rescheduling, debt writedowns in cases where the banks have clearly acted inappropriately, giving the house back to bank in full and final settlement but renting the same house again, and more.

The principle, I feel, should be means tested income streams plus arrears rather than negative equity. Each menu item (a, b, c, etc.,) will come from an individual pot of money in the banks (e, f, g, etc.), all overseen by the regulator in a monthly report to them.
4. The objective is to be fair to both parties (lender and borrower) while allowing people to get on with their lives. The perspective, in some sense, is social welfare rather than letting banks or borrowers off the hook. Understanding you’ll never get this just right is key.
5. The guidelines should have the force of a directive on the banks from the regulator, eg it should remove a lot of the discretion from the banks and add clarity to the process while differentiating between ‘can’t pay’ and ‘won’t pay’ and ‘might pay’ and ‘will never pay’.

Update: Karl’s Business and Finance piece this month is excellent on this issue.

Debt forgiveness, one more time.

This Irish Times article reports Morgan Kelly’s keynote ISNE lecture where he discussed debt forgiveness and, in particular, mortgage debt relief. From the piece:

“We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness, which by our standards are not very large,” he said.

“This sum to sort out tens of thousands of people with big problems does not seem enormous.”

Seamus Coffey has some thoughts on Prof Kelly’s argument here.

Readers should know I’m in favour of debt forgiveness for households, and have been for some time. It may be worth discussing the pros and cons of such a policy again.

Update: Jagdip has some thoughts on this debate on NamaWineLake.

Do fiscal spillovers matter for recovery?


In the drive to fiscal policy coordination, the potential of fiscal spillovers should feature more heavily, especially for small open economies like Ireland. Sadly they don’t, as this new research shows. Other models hold out more hope (but in a static setting), but the principal findings are that small open economies can’t rely on larger trading partners to help them overcome large cyclical slumps in output.

Money quote from the first linked piece:

“Even under very high multipliers, a 1% of GDP fiscal expenditure stimulus in Germany would raise the GDP growth in Ireland by only 0.3 percentage points after 2 years, in Portugal by 0.1 percentage points, and have virtually no effect on growth in Greece. Similarly, fiscal policy changes in Germany alone have only a small impact on the trade balance of the peripheral countries, and are thus unlikely to contribute to the reduction in peripheral countries’ imbalances.”

This is worth considering in the context of monetary, and perhaps fiscal, union in the EU. The source document for the spillover calculations is this IMF report.

Morgan Kelly’s Hubert Lecture

Prof. Morgan Kelly delivered the Hubert Butler Annual lecture tonight in Kilkenny as part of their Arts Festival. The audio of his talk is below, just click play to listen.

Morgan Kelly Hubert Butler Lecture