Just what kind of airline would investors in Aer Lingus be buying into, asks Emmet Oliver.
Ever since Aer Lingus was rescued from near bankruptcy after September 11th, the airline has suffered from something of an identity crisis.
Often described by observers as neither fish nor fowl, the airline has successfully managed to incorporate the best of what the low-cost carriers can do on price, with the service levels of which the traditional flag carriers like British Airways or Lufthansa like to boast.
This "hybrid" model - as Aer Lingus executives like to describe it - has served the airline well in the last five years, but as the airline's flotation has neared, investors and the financial community generally have been asking for more clarity - precisely what kind of airline is Aer Lingus?
With the release yesterday of an indicative offer price range of €2.10 to €2.70, the question has finally been answered, at least partially. Aer Lingus for all its downward pressure on fares (its average short-haul fare is now €67 exclusive of taxes and charges) and its trimming of employee numbers (it employs 3,475 compared with 5,000 several years ago) has found it difficult to pass itself off as a Ryanair-type carrier.
This is understandable when you ponder the following simple statistic: last year, Ryanair carried 34.8 million passengers with 3,063 employees, whereas Aer Lingus carried 8 million passengers with 3,475 employees.
The large list of advisers which have been preparing Aer Lingus for sale over the last few months know these statistics well.
They have apparently decided that instead of trying to dress Aer Lingus up as Ryanair mark II, it is far better to face the reality that Aer Lingus remains a flag-carrier airline in the mould of an Iberia, British Airways or a Lufthansa.
Putting the airline in this company is why the valuation - before privatisation - of between €600 and €775 million may seem underwhelming to some.
However, the blunt reality is that low-cost carriers like Ryanair and easyJet are in a different league to Aer Lingus in terms of return on capital and earnings growth. In scale terms there is also no comparison. Aer Lingus post-privatisation will be worth the considerable sum of €1.3 billion, but Ryanair is worth more than €5.5 billion.
In terms of the key measure of margins - the ratio between profits and total revenue - Ryanair can boast a figure of almost 22 per cent, whereas in 2005 Aer Lingus posted a figure of 8.2 per cent.
As long as Aer Lingus is perceived as a mini-BA or Iberia, the share price range released yesterday will be regarded as broadly credible.
However a more gloomy scenario would arise if the markets do not believe the airline's story and do not believe it really is a mini-BA, never mind a Ryanair. Instead, fund managers may choose to see the airline as a small regional player facing cutthroat competition on both long- and short-haul which is likely to ultimately erode its profits.
The recent flotation of Air Berlin, another low-cost operator, suggests that things do not always go smoothly when trying to convince the markets of your pricing bona fides. In that case, the airline was initially sold on the basis of being the German equivalent of easyJet, but the markets did not believe it and the airline's advisers had to be beat a hasty retreat. In the end, Air Berlin shares had to trade even at a slight discount to Lufthansa.
While Aer Lingus is a different type of airline in a different type of market, the Air Berlin experience illustrates that flotations of airline stocks rarely tilt in the favour of the sellers. In many ways, a score draw is the best the sellers can expect.
Ironically, the airline is probably more concerned with these considerations of value than the Government. The Government does not need the money - it expects to have €3 billion extra at the end of the year than it forecast for.
The Government could gain as much as €293 million from the sale of its shares and of course it will retain a lucrative 25 per cent stake in the carrier as well, but Brian Cowen hardly needs these funds to bolster his spending plans. As a result, this Government has gone into the whole privatisation process in a relatively relaxed frame of mind.
Of course, if the airline eventually sells towards the lower end of the valuation range, the Government leaves itself open to the charge that taxpayers' money has not been properly protected and the airline has been sold too cheaply.
After five years of bitter recrimination about the sale itself, the Government will probably be relatively sanguine about these attacks. As one source close to the transaction said yesterday: "Everyone will be just relieved if it gets away."
For the company its main challenge for the rest of this month is to sell the IPO (initial public offering) to some very hard-nosed institutions in Ireland, Britain and the US.
The kind of US funds Aer Lingus will be seeking to persuade certainly will want to know what kind of airline they are dealing with.
While brand Aer Lingus retains the loyalty of over 8 million passengers a year in this country and while the phrase the "national airline" still gets used regularly in debates, this matters little to potential buyers.
One of the potential US buyers for instance is mutual fund Fidelity, which already has a sizeable stake in Ryanair. It recently announced it had taken stakes in 18 companies across a range of industries. If Aer Lingus manages to sell a stake to this company, it will be judged on the standards of the fund's other investments which range from home-appliance company Whirlpool to a US firm making Winnebagos.
However, Aer Lingus will not have to expose itself to the disciplines of the US mutual funds too much because Irish investors must retain at least 50 per cent of the shares because of a US-Ireland bilateral agreement.
The Irish funds though are not likely to be soft touches either, and they will expect Aer Lingus to add value in the years ahead, regardless of what category the airline falls into.
There were increasing signs yesterday that despite a €10,000 minimum limit on participation in the privatisation, ordinary investors are interested in the shares. Stockbrokers were reporting strong interest, despite the bitter experience of the first Eircom flotation.
Many investors will no doubt buy the shares on the basis that they will enter the market undervalued in price terms. In that case, the investors will probably sell on very quickly and take a decent profit. Some investors are even preparing to exit after a few weeks, although those who remain shareholders for a year will qualify for bonus shares.
Long-term investors need to consider far more nebulous industry trends. Can air travel develop any further? Is the airline market going to have to adjust to a future era of $70-a-barrel oil prices and green taxes?
The long-term investor needs to factor these trends in his or her calculations, whereas the short-term investor will be in the happy position of just needing a short-term bounce spread over a few weeks.