February was a bad month for the Aer Lingus chairman, Mr Bernie Cahill. Two serious problems emerged at the State airline - and Greencore shareholders blocked his reappointment as chairman.

Aged 71, Mr Cahill had led the board of the food group since its flotation in 1991. That year he also became chairman of Aer Lingus.

Foot-and-mouth disease struck British livestock in February, the month Mr Cahill received the first of two complaints alleging sexual harassment against the company's chief executive, Mr Michael Foley. The woman who made the allegation was Ms Joan Loughnane, a SIPTU worker-director. The second complaint was made in March, by Ms Anne Lawlor, who worked as personal assistant to Mr Foley.

The Europe-wide alert caused by foot-and-mouth was the third major setback to a business already suffering from low bookings caused by the US downturn and a spate of pay strikes. Two months later, a special meeting of the Aer Lingus board heard these factors would squeeze profits this year to £15 million (€19 million). The company had forecast a £50million profit in a projection that allowed for a £30-million cost base increase due to pay rises.

The effect of these developments was to reduce the notional valuation of Aer Lingus by up to 40 per cent or £200 million - sources familiar with the company believe the profit fall could diminish its value to £300 million, compared with a maximum valuation last year of £500 million.

Yet more woe was imminent. In May, a board subcommittee upheld the complaints against Mr Foley, who was then effectively suspended by a separate disciplinary subcommittee. As Mr Cahill took charge of the airline's senior executive team, Mr Foley protested his innocence and alleged a conspiracy to "frame" him. The company said Mr Foley produced no evidence of conspiracy. In addition, Mr Cahill denied Mr Foley's claims that he had colluded with the investigation.

Following the High Court's refusal to block the process on his behalf, Mr Foley was given until today to make a written or oral submission to the subcommittee before it takes further disciplinary proceedings against him.

All this in the year Aer Lingus was scheduled to follow Eircom onto the stock exchange. The Government has now turned its back on flotation and corporate finance advisers have been told to prepare for a trade sale.

The sense of deja vu is palpable. It was Mr Cahill who developed the rescue plan that brought the airline back from the brink of closure in the mid1990s.

Since its turnaround, the company championed flotation. When the Government cleared the way for a public offering in December 1999, the Minister for Public Enterprise, Ms O'Rourke, described flotation as the best and most effective means of securing resources to replace the Aer Lingus fleet. In a clear indication that the company had missed the slot, she spoke last Friday of preventing a financial situation that might harm the airline or its 6,000 staff.

"They're so demoralised in there and in the Department," said one source. "The thing appears to be utterly jinxed. Even before the Foley case happened, the flotation was kiboshed."

Many insiders attributed industrial relations tension to inter-union rivalry after most cabin crew defected to IMPACT from SIPTU. This increased anger over poor pay, a legacy of Mr Cahill's rescue plan.

In affidavits read to the High Court, Mr Foley questioned why Ms Loughnane made the first complaint against him in February "in or about" the time he reached a pay deal with IMPACT. Four months had passed since the alleged incident.

"He was getting a handle on the business, doing well," said a very senior airline figure of Mr Foley. "The only thing that held up the flotation was the industrial disputes."

If Eircom's poor performance and volatility of airline stocks meant an initial public offering was always going to be difficult, securing a trade buyer will be no less a challenge.

"It's not a palatable target," said one businessman familiar with the airline. "It's an unfashionable industry at any time and Aer Lingus is at rock bottom."

Still, sources close to the process believe the Government is determined to release Aer Lingus into the private sector.

Citing the company's troublesome industrial relations, one well-placed person said the diminution in the company's value would not delay a sale if a bidder emerged.

"The Government simply wants to get the company off its hands because politically it is a problem as long as it's in State ownership. The Exchequer won't miss £200 million here if that was the price or sacrifice of losing the company. The funds to be raised were never the primary consideration when flotation was on the agenda."

Of course, this assumes a bidder will emerge - and that the company's workforce can be persuaded to agree to a deal. While IMPACT and SIPTU have decried proposals for a trade sale, it was notable that both agreed this week to reenter talks on an employee share option plan.

Meanwhile, Government sources stressed the field of prospective buyers was not limited to the aviation sector.

Pricing will be crucial. And while business sense suggests buyers will always seek to acquire well-priced assets, other issues stand in the way of a quick sale.

Significant difficulty surrounds the US-Ireland bilateral agreement governing transatlantic aviation. It prevents the Government selling more than 49 per cent of Aer Lingus to a foreign investor. According to the airline analyst at NCB Stockbrokers, Mr Shane Matthews, lifting that restriction would require an "open-skies" agreement between the Republic and the US.

"That would result in a de-emphasis on Shannon airport," he said.

If such a change was not forthcoming, industry experts said the Government might limit the sale to a 49 per cent strategic stake in Aer Lingus. Citing the example of Eircom shareholders KPN and Telia, who have long sought to leave the Irish firm, aviation specialists believe this solution is less favourable.

A prospective purchaser must also take on 6,000 staff in the airline. "The two words that summarise the problem are cost and base," said a figure who recently worked at a high level in the company. "If the core issue is cost and one of the most important elements of cost is payroll costs, that creates an enormous problem."

Citing Ms O'Rourke's meetings this week with the airline's unions, he said: "You have a minister who seems to see it as her duty in life to represent the interests of the workforce. Her reflex is towards meeting a pure political calculus."

An additional factor is that Aer Lingus needs up to £200 million to renew its fleet. As profits are ploughed back into the business, the return to an investor would be minimal in the short term.

Analysts also suggested the international aviation scene is not favourable to a deal. They cited the poor stock market performance of Spanish carrier Iberia, which was floated in April, and the failure last year of British Airways and Dutch airline KLM to conclude a link.

"There's no compelling evidence of successful trade sales," said the airline analyst at Davy Stockbrokers, Mr Stephen Furlong. "It's still possible to do an initial public offering but that might not be the consensus view." Aer Lingus would need a strong recovery in the next 12 to 18 months for that to happen, he added.

On the plus side, potential buyers could acquire very valuable peak landing slots at Heathrow airport in London. Two things are clear, however. A quick sale will not happen and Mr Cahill's problems will not end when the subcommittee takes disciplinary action against Mr Foley, the man he head-hunted last year.