Retail investors in Aer Lingus may have to settle for approximately half the shares they subscribed for because of higher-than-expected demand from institutions which believe the airline can benefit from oil prices which have come back to $60 a barrel.
The final price of the airline's shares will be set tomorrow evening with advisors facing a central dilemna.
There is pressure to price the IPO "to go" so that Irish institutional investors can avail of a premium when the shares list on October 2nd, but equally recent falls in crude oil prices have altered the financial outlook for the company, particularly in 2007.
This has placed pressure on the advisors to move the valuation range upward.
At present the shares will list at €2.35-€2.45 according to sources, but there is pressure to change this. Final institutional offers are expected to be submitted in the next two days and, based on these, the final price will be struck. Retail investors completed their orders last week through eight nominated stockbrokers, with up to €200 million of shares ordered. This was well beyond what the IPO co-ordinators had expected.
Orders from staff have also been higher than expected, with a group of pilots clubbing together to place orders beyond what they are entitled to as members of the Employee Share Ownership Trust (Esot).
Either way the Government looks set to get a higher-than-expected return from the flotation. This is a key goal of the Department of Finance, which has been closely following the IPO process from the outset.
The level of international interest has also surprised the promoters of the IPO, with leading institutions in the US and UK climbing aboard. Hedge funds have also shown a strong appetite for the shares, although the co-ordinators will have a preference for institutional funds, preferably Irish. In addition, feedback from a presentation to fund managers in Edinburgh is believed to have been encouraging. The airline's investment roadshow concluded last week in the US.
Airline shares have been performing well recently. The Amex Airline Index, which measures the performance of leading US and global airlines, closed down last week slightly, but was up 2 per cent on the week. On the futures market, the November crude oil contract fell $1.04 to $60.55 a barrel on Friday, ending the week down 5.4 per cent on the back of swelling inventories and easing threats to global production. Virtually all major airline shares were up last week, including British Airways and Ryanair.
The announcement that US president George Bush was prepared to back a diplomatic solution to Iran's nuclear programme has triggered major falls in oil prices. World oil prices peaked at about $78.40 seven weeks ago.
While this is good news for Aer Lingus, airlines around the world are now coming under pressure to reduce or remove the fuel surcharges they put in place to deal with higher oil prices.
As revealed in The Irish Times two weeks ago, a report on the Aer Lingus pension scheme by consultants Buck Heissman suggests the deficit in the scheme may be higher than originally predicted by Mercers, the pension consultants. However the company and the unions have accepted the figures used by Mercer, although the airline's prospectus includes the pension scheme as a risk factor. While argument continues over the true extent of the deficit, neither management nor unions are prepared to re-open the pension negotiations at this stage.
l The chairman of British Airways, Martin Broughton, will visit Dublin today to deliver a speech on aviation and trans-Atlantic business links. He is expected to be downbeat about the chances of an "open skies" deal between the US and the EU. Such a deal would be a key driver of growth for Aer Lingus, which is currently restricted to serving just a handful of US airports.
