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Island's global economy may be threatened if Irish state sells its stake in Aer Lingus

The Republic's government has a big choice to make, says Dan O'Brien

Published 07/04/2015

An Aer Lingus plane
An Aer Lingus plane

Should the Republic's government sell its 25% stake in Aer Lingus, as appears imminent; or should it hang on to its minority shareholding in what was once known as the national carrier?

The debate on this matter has not always broken down along the usual, predictable lines. There are good reasons for that, not least because the decision is far from straightforward.

Senator Sean Barrett, a professor of economics at Trinity College Dublin, has been vocal in his opposition to offloading the State's shareholding. That is despite his being firmly in the free market camp on most transport issues, an area in which he is specialised. Donald Trump, an uber capitalist who usually opposes governments owning very much at all, has also come out against a sell-off on the basis that it could harm his investment in Ireland by making it harder to reach this island from the other side of the Atlantic.

Before looking at the factors that the government should prioritise in deciding whether to retain or sell its stake, let's deal with an issue that gets a much higher priority than it should. To illustrate this issue, consider another State-backed commercial enterprise.

The Irish government has recently set up the Strategic Banking Corporation of Ireland (SBCI). It has not done so to provide employment for bankers. It has done so because consumers of business banking services are being under-provided for in the context of an impaired banking system which has never been good at business lending. Lack of credit is bad for many people trying to start and grow business. It is, therefore, bad for the wider economy.

Decisions about the future direction of the SBCI, how long it continues to exist and whether it remain in State hands should be based on the efficacy of its role in the economy, not whether it provides a good living for its staff and management. That is how it should be for Aer Lingus, too.

Although it is both understandable and legitimate for the employees to seek to maintain the remaining legacy public sector privileges that they enjoy, the emphasis on protecting these privileges comes at a direct cost to everyone else. And the more that the privileges are protected, the lower the price that will be obtained for the asset, which is owned by everyone. This, de facto, amounts to a transfer of public assets to private interests.

The central public interest, and the one which should be the government's only consideration in the sale, is how it will affect connections between this island-state and the rest of the world over the longer term, in terms of destinations served, frequency of flights and ticket price. The strategic importance of having as many competitively priced flights - and direct flights in particular - to as many destinations as possible, cannot be overstated.

Ireland is among the most open and connected economies in the world despite the disadvantages of peripherality that comes with being an island. Trade - both imports and exports - with the rest of the world is among the highest of any economy on the planet relative to GDP. Ireland has more tourist arrivals relative to population than some internationally renowned destinations such as Spain. And no other OECD economy is as dependent on foreign companies for jobs in both the services and manufacturing sectors, which, together, account for the overwhelming share of total employment.

The degree to which this economy is plugged into the rest of the world is well illustrated by the astonishing fact that despite Ireland's tiny population the Dublin-London route is the second busiest international route in the world after Hong Kong-Taipei (it's no coincidence these two cities are located in the most populous part of the planet).

But the nature of the airline industry and its changing structure pose threats and risks to the national interest of maintaining and maximising connectivity.

Bussing people from one place to another at 30,000ft is a tough, unpredictable business. Demand for air travel is seasonal and very sensitive to events beyond any airline's control, such as recessions, wars and terrorist attacks.

The cost side of the business is no more stable. Fuel is the industry's second biggest cost, and, as the rollercoaster ride in oil prices in the 21st century shows, that makes it difficult to plan ahead.

With volatile demand and input costs, carriers can easily get into trouble. Even some of the biggest have ended up going out of business.

The conventional wisdom has long held that the European airline industry would become more like America's, with a few large players, unlike the pre-liberalisation era when every country, no matter how small, had its own flag carrier. While some consolidation has happened, many state-owned airlines have become competitive in the context of a liberalised EU aviation market (one of the lessons of the privatisation experiment over recent decades is that ownership - public or private - matters less than the competitive environment in which a company operates when it comes to giving consumers more choice and a better deal).

But if the pace of consolidation in the industry in Europe does pick up, a small airline like Aer Lingus could get squeezed. A good argument for selling now is that conditions may change for the worse and the €1bn+ that is on offer now may be a lot less in the future. It may end up being worth nothing at all.

But that one-off sum on offer is small beer in the context of an economy that has created wealth to the tune of well over €1,000bn (£730bn) in the last six years alone, and that despite an appalling recession. It can very reasonably expected to create considerably more than that over the next six years. Generating that wealth will require continued openness to the world, including good connectivity.

Militating against the mooted sale to IAG in that regard would be the likely long-term decline in direct flights to the US, the most important source of foreign investment in the Irish economy.

All big airlines now operate a 'hub and spoke' model. IAG is no different. For Britons travelling to the US, most are obliged to go through London, British Airways' hub. Because of capacity constraints, in Heathrow in particular, it is unlikely that IAG would end direct flights from Ireland to the US immediately if its takeover succeeded, but that seems probable over the longer term. That's a very good reason to oppose the sale.

We live in an uncertain world. But we can be certain that our highly globalised island economy would suffer a great deal if there were to be a significant decline in flight connectivity.

That is a risk that does not have to be taken. Although, there is a case to be made for selling Aer Lingus to IAG, maintaining a Government stake in what is a vital piece of national infrastructure seems the more prudent option.

Belfast Telegraph

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