The Minister for Public Enterprise, Ms O'Rourke, has expressed reservations about the proposal that British Airways and American Airlines jointly take a 10 per cent stake in Aer Lingus.

Ms O'Rourke received a report from the board of Aer Lingus yesterday proposing that the airline conclude a strategic alliance with American and BA, the two leading partners in the Oneworld alliance.

The proposal, which will have to be approved by Government, includes a commitment that BA and American will sponsor Aer Lingus for membership of the global alliance. The two airlines have also indicated an interest in acquiring a 10 per cent stake in Aer Lingus.

Ms O'Rourke said BA and American were desirable partners, but she didn't necessarily see equity as being the dominant characteristic of the partnership. "As regards the equity situation, I myself feel that equity is not perhaps the best way forward for Aer Lingus. I feel that this might distort decisions that Aer Lingus would be making in the near future," Ms O'Rourke said.

However, the Tanaiste and Minister for Enterprise, Trade and Employment, Ms Harney, has backed the idea that BA and American be given a stake in the national airline. "In any alliance there has to be a stake," she said.

Ms Harney, who was speaking in Luxembourg, reiterated her view that it was no longer appropriate for the State to own airlines or airports and said the alliance would help in a flotation of Aer Lingus on the stock market by making it a more attractive proposition. "It would certainly increase its value and make it easier to raise the capital that it needs."

Ms O'Rourke, speaking in Galway last night, said the Government would look critically at the equity issue. But her own personal opinion, rather than the Government's or Cabinet's view on the matter, was that Aer Lingus might be better to proceed directly to an initial public offering (IPO) to raise funds, rather than sell an initial 10 per cent to BA and American. "An IPO might be a cleaner way to go at it," she said. Aer Lingus said in the report that it needed equity capital to meet existing growth plans and to maximise the potential benefits of membership of an alliance. Possible sources of capital included the alliance partners or an IPO, but the issue of equity was one for the Government, it said.

Ms O'Rourke has referred the report from the Aer Lingus board to consultants Salomon Smith Barney and expects to bring it to Cabinet in six to eight weeks' time.

Her initial reaction appeared to accord with that of the Aer Lingus group of unions which said that, while it felt it was in the best commercial interest of the airline to enter a strategic alliance, an equity stake was neither a necessary or sufficient condition for its success.

Mr Tony Walsh of SIPTU said the union would be concerned that if companies like BA or American were to take an equity stake they would want to interfere in the workings of Aer Lingus. He also said he had some concerns about the industrial relations policies of BA. British Airways welcomed the Aer Lingus announcement although it said a definitive agreement had yet to be completed. "BA is extremely pleased that Aer Lingus has expressed an interest in a strategic partnership with us. We look forward to hearing from the Irish Government and to working with Aer Lingus to explore all options and to conclude the details of an agreement," chief executive Mr Robert Ayling said.

Oneworld is the largest global airline alliance and is made up of British Airways, American Airlines, Cathay Pacific, Canadian Airlines, Qantas, Spain's Iberia and FinnAir. Aer Lingus and Greece's loss-making Olympic Airways are the only national carriers in Europe to remain outside an alliance framework as the airline industry rapidly consolidates into major groupings.

Aer Lingus is particularly keen to conclude a link-up as it believes that to continue trading as an unaligned independent airline would result in a deterioration in profits of the order of £20 million over the next three to five years.

Membership of Oneworld will provide Aer Lingus with access to an extensive global network through code-sharing arrangements, provide better connections for passengers as well as offering agreements on air miles.