Business Irish

Friday 15 February 2019

Airport charges deal could end the Aer Lingus saga

Aer Lingus
Aer Lingus
Richard Curran
Richard Curran

Richard Curran

You only have to look at the Aer Lingus share price to see what way the wind is blowing in relation to the proposed takeover of the airline by IAG.

Several weeks since transport minister Paschal Donohoe "rejected" the offer on the table, talks are still alive and well. Both sides are getting into the nitty-gritty of discussing connectivity and jobs.

As the unions seem to want a 'jobs for life' deal at Aer Lingus, there isn't much room for manoeuvre on jobs. Union leaders were forced to deny suggestions that they were warming to the deal, despite emerging from a face-to-face meeting with IAG's Willie Walsh recently saying he had no new assurances to give.

Walsh cannot guarantee a job for life for anybody at Aer Lingus - but he can spell out how lots of new jobs will be created as the airline grows. The only thing at issue is the mix of jobs. The maths is quite simple really.

Aer Lingus has some fat in its cost base, but not nearly as much as it used to have. The big issue for Walsh is that he doesn't want to pay for duplication of functions like treasury, procurement and some back office administration.

After he spends €1.4bn buying Aer Lingus, he surely expects to grow it. That means more jobs elsewhere in the business.

The connectivity issue is all about Cork and Shannon. News reports last week suggested that Walsh doesn't want to guarantee routes to Heathrow beyond five years, because he could be screwed on landing charges.

If he commits to retaining routes for 10 years, Shannon and Cork could charge him what they like - thereby making the routes unprofitable.

The situation with Dublin is different. Airport charges are set by the Aviation Regulator and are currently capped at €10.27 per passenger - as long as the DAA delivers on quality of service targets. However, the charges can increase if the DAA triggers for capital projects are reached.

Walsh won't be too worried about Dublin/Heathrow routes. They will always be profitable and the role of the Regulator could ensure he doesn't get screwed on price. But Shannon and Cork are different.

Ryanair passenger numbers from Shannon for example, are set to climb by over 300,000 to 750,000 following a confidential deal on charges with the airline. Shannon and Cork are free to do a deal on landing charges with Aer Lingus covering the next 10 years if they want.

This might go some way towards guaranteeing the routes remain profitable for IAG. Walsh might want to switch use of the Heathrow slots to a different route in a few years, if he believed he could make more profit elsewhere. But as long as he knew he wasn't going to lose money on Cork and Shannon, he might be more likely to give a longer-term commitment to retain them.

Three developments now point to a deal being struck on the IAG/Aer Lingus takeover. Firstly, discussions taking place around the detail of things like the landing charges regime. Secondly, trade unions having to deny they are warming to a deal. Thirdly, the share price is around €2.40 and has climbed back up towards the offer price.

The odds on a deal are shortening by the day.

Is PTSB's glass quarter-full or three-quarters empty?

Permanent TSB's financial results for 2014 have debits and credits in more ways than one. The good news in the headline figures masks some pretty bad news inside.

The good news is that the bank reduced pre-tax losses last year to just €48m, from €668m in 2013. New mortgage lending is up 100pc to €429m. It has reached agreement to sell around €5bn of loans, mainly in the UK. It is in the process of raising fresh capital that will see €400m in loan notes repaid to the State.

Not so good is the fact that it is still losing money, almost eight years after house prices began to fall and two years after they started to go back up; it is just halfway towards disposing of non-core assets; there is no realistic hope of the State getting back all its €2.7bn; and its loan-to-deposit ratio is falling but still at 138pc.

Chief executive Jeremy Masding has made very good progress dealing with mortgage arrears. Permanent TSB has kept up with targets in reaching a variety of settlements.

But one interesting element to the results is the fact that the business has just 11pc market share in new mortgages - but retains 2,300 staff in 77 different branches.

Permanent TSB's wage bill, at €108m was higher than it was in 2012 when the banking operations employed nearly 300 fewer staff. In fact, if you exclude a pension charge in 2013, staff costs went up by 13pc last year. Hiring more staff at a taxpayer-funded bank that is still losing money is hard to justify.

Administrative, staff and other expenses rose by €63m last year, primarily due to an increase in "legacy legal and compliance-related liabilities" and its comprehensive assessment and restructuring plan.

These legacy legals include the botched job the bank did on trying to transfer people out of trackers, without fully explaining the facts, something the Central Bank is now investigating. It looks set to cost Permanent TSB millions.

Permanent TSB continues to shrink. When it sells off the rest of its non-core assets, it will have a loan book of under €20bn.

Undoubtedly, it will land an investor or investors for the equity it is offering, because there is potential upside for a mortgage lender in the Irish market. However, we have no idea what shareholding the new investors will get for their €400m, while the taxpayer bought 99.2pc of it for €2.7bn.

Masding has made progress and he inherited a complete mess. But as AIB looks towards a re-float, Permanent TSB remains the problem child in the State's banking family.

 

In Kenmare's world of woe it never rains but it pours

A flood was the last thing Kenmare Resources chief executive Michael Carvill needed near the company's Mozambique titanium mine. It caused a power outage, not the first either.

It comes in the wake of collapses in the market price of the minerals it extracts and an 80pc collapse in the share price since it rejected a takeover bid last June.

The company that made the bid - Australian rival Iluka - hasn't gone away, and talks have continued around a possible second offer. But it will obviously be at a much lower valuation should it materialise.

Also there have been discussions in the background between the company and its lenders around $300m of borrowings. These may well reach a positive conclusion, but interruptions to production are most certainly not welcome with so much going on in the background.

Kenmare shares initially fell during the week (on the back of the flood hold-up) but regained after it emerged the company has a solid stockpile of product already stored.

It's hard to see Kenmare holding off a bid second time around.

rcurran@independent.ie

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