Richard Curran: Did we sell Aer Lingus too low?
Last week I was fortunate enough to fly home to Ireland after a very enjoyable summer holiday. The Aer Lingus flight from Geneva to Dublin was like many others I had taken with the airline over several decades.
It is always nice to see that Aer Lingus logo, the sound of Irish accents and the familiar tones of a reassuring Aer Lingus flight captain (probably from Clontarf) that the weather in Dublin "isn't quite as good as here in Geneva".
Perhaps the most reassuring part of the whole customer experience is how little has changed three years after the takeover of Aer Lingus by British Airways' parent group IAG.
The brand remains the same, as does the presence of a Dublin-based senior management team, the positioning of the airline for consumers and the general feel of it.
Yet, an enormous amount has changed at Aer Lingus in the last three years. This week in 2015 shareholders voted overwhelmingly (over 95pc) to approve the takeover of the airline by IAG.
The buyout was facilitated by the Government's decision to back the €1.5bn takeover which ensured a €335m payday for the State's 25.1pc shareholding.
After spurning two lower offers for the stake, the Government backed the €2.50 per share cash offer put on the table by IAG chief executive Willie Walsh.
Since then, the financial position of the group has changed dramatically. Aer Lingus had reported revenues of €468m for the first six months of 2015 as the airline was in the throes of the takeover bid.
In the first six months of 2018, revenues were €899m, an increase of 92pc in three years. The first half of 2015 saw the airline reach an operating profit of €34.5m. It was €104m for the same period this year.
Bear in mind, Aer Lingus also had north of €640m in net cash on its balance sheet at the time of the bid.
Such has been the rapid growth in revenues and profits, that it raises the obvious question - did the government sell too cheaply?
The answer is speculative and would need to estimate how much of the airline's growth in the last three years would have come without the IAG takeover. Equally, the value of something is the price somebody is willing to pay for it at the time.
Before Willie Walsh came knocking on the Aer Lingus's door, the company's shares were trading at €1.50 each, valuing the business at €900m. IAG paid a full €1 a share more in the takeover.
And of course there is the question of what would have happened if the airline had insisted on going it alone. It would not have been able to catch the industry cycle to the same extent in the last three years and might have seen its share price suffer even more.
The airline's operating profits in the first half of 2015 were not only one-third what they are now, but had declined by 10pc on the 2014 performance.
The key to Aer Lingus's extraordinary growth under IAG has been its expansion into new transatlantic routes while developing Dublin as a transfer location.
Not much had changed on my Geneva to Dublin flight last week except the number of travellers who weren't Swiss or Irish and who were flying on from Dublin to North America.
Since the takeover, Aer Lingus has added routes from Dublin to Philadelphia, Seattle, Newark, Los Angeles, Connecticut, and Miami.
There are two more routes due to be announced in the coming weeks. The airline has also ordered four new long-range Airbus A321 aircraft. These should help its reach even further.
Aer Lingus CEO Stephen Kavanagh has said the airline has run a scoping exercise on dozens of US cities, examining passenger demand and correlating it with cities that might do a deal on landing charges.
In an interview at the weekend he said it is not absurd to imagine Aer Lingus more than doubling its current transatlantic daily loads during his term in the job, while also investing further in the European network.
One of the drawbacks of an international takeover, for an Irish firm, is that local management has to make an investment case to HQ for the resources to expand and grow.
We see it with US multinationals with big operations in Ireland, such as Microsoft, Apple or Intel.
However, in Mr Kavanagh's case, he is making the case for investment capital for Ireland, to a chief executive who used to do his job. It probably has pros and cons, but on balance is a far better situation.
And Mr Kavanagh is probably pushing an open door right now with IAG. Aer Lingus has been the star performer within the wider IAG group.
Between March and June for example, its operating margin was 20.8pc. Iberia's was 10.4pc, while British Airways managed 15.4pc. Vueling's operating margin was 9.3pc.
But it is really on the scorecard of return on invested capital that Aer Lingus shines for IAG. Its RoIC in the last four quarters was a massive 27.8pc. This dwarfed other airlines in the group, with Iberia at 12.2pc, Vueling at 13.1pc, British Airways at 16.9pc and the overall group figure running at 16.2pc.
It suggests that IAG is managing to milk very significant returns relative to the capital it has had to invest to achieve them. The question of getting it on the cheap rears its head a little again. The Government didn't snatch the offer out of Willie Walsh's hand three years ago, but instead spurned two lower offers and negotiated hard securing key commitments.
The whole country was obsessed with retaining Heathrow slots after a takeover three years ago. The Government received a commitment the slots would be held by Aer Lingus. They were stronger assurances than what existed before but are not necessarily legally binding.
Aer Lingus also committed to continue operating its daily winter and summer scheduled frequencies between London Heathrow and Dublin, Cork and Shannon for at least five years and a further two if airport charges do not increase above certain levels.
At the time, IAG said it believed Aer Lingus could deliver up to 2.4 million more passengers by 2020 and the airline would have a net 150 new employees rising to 635 new jobs by 2020.
The State put the €335m proceeds of the sale into a special connectivity fund within the Irish Strategic Investment Fund (ISIF), of which €93m has been invested so far. Given that ISIF has around €7bn to invest, the additional €335m doesn't seem too significant, but it could be useful post-Brexit when it comes to investing in new shipping infrastructure and export routes to Europe which need to bypass Britain. Dublin Airport has this week announced a new €16m passenger transfer facility which ties in well with the Aer Lingus expansion plan. The number of passengers using Dublin to transfer from one flight to another has grown from 550,000 to nearly 1.6 million since 2013.
The Aer Lingus takeover has so far delivered what IAG promised and more. Yet it is obvious Willie Walsh bought it at the right time and for the right money.
But there are possible clouds on the horizon. If other European airports secure US immigration clearance rights, Dublin's expansion could face fresh competition. US president Donald Trump's de-stabilising trade wars could seriously impact transatlantic passenger growth. Brexit remains a very uncertain issue. As fuel prices continue to tick up, airline management are always aware of the cycle in their industry.
Perhaps the real test of the value of the takeover to Ireland Inc could emerge in tough times rather than in good ones. If there is a downturn, how quickly might Dublin's place within the wider group be truly tested?
But three years after the sale of Aer Lingus as a standalone Irish company, the outlook is positive. Willie Walsh may have got a bargain, but Ireland Inc stands to do well out of it too.