Executive Summary

• There will be wave of additional industry consolidation in Europe over the next year
• Pension Underfunding is playing a key issue in failed merger talks from BA/Iberia to even BA/Qantas.  While it is talked about as “valuation issues”, one of the largest is pensions and benefits
• While the EU Competition Commission is not likely to have changed its view on EI/FR, another suitor could put together a new bit Irish and EU regulatory backing
• Failed startup carriers like Silverjet and Eos may have been underfunded, but they avoided some of the legacy cost issues now plaguing the industry.
• BA needs to gain approval for its Merger with American Airlines- which we support fully.  That union is becoming even more important as the economic climates- and cargo and passenger numbers fall
• There are parallel lessons for the airline and auto industry when it comes to organized labour.

To say that Aer Lingus has been on defense as of late is an understatement.   I am personally impressed by both the airlines management and Irish Governments handling of the Ryanair bids, with the exception of the golden parachute for senior execs, that was later retracted.   Today there is even rumour of fresh takeover talks from the Merrion Stockbrokers team.  

 No potental takeover bid can be successful until the potential suitor has  an answer for what will happen with under-funded pensions and long-term labour contracts.  Until this happens nearly all  airline merger talks will end in tears.

In the case of Aer Lingus, the Irish State should not be left holding the bag for the debts, Alitalia style. Nor should the good people of Ireland need to face up to what US Authorities did with United Airlines in 2005, where the Federal Pension Guaranty Corp took over the airlines pensions for an exchange in a stake in the new United Airlines. 

There are some also some new harsh realities out there that airline labour needs to face up to.   No where is this more true than at Air France where pilots routinely appear to strike due to minute changes in retirement dates and work rules.

This is a now all too recurring theme in the airline sector, as earlier this week BA was said to have been valued below fellow oneworld partner Iberia.   One of the key reasons for this financial faux-pas is that BA owes its pension fund a good deal of cash and is not current with contributions.   While Walsh is out there claiming the any deal that does not value BA above Iberia is “not acceptable” to BA shareholders- why are those same shareholders not demanding answers on the pension underfunding?

 I am no fan of these pension obligations, and were I a shareholder I would be asking management some serious questions about how they are going to solve this pension shortfall, or ultimately it is not the shareholder, but rather the EU taxpayers that will start footing the bill.

 One of the reasons that we as consumers should be sad to see some airlines like Silverjet, Eos, and Sterling go is that that they knew the secret: don’t create a labour contract or pension plan that you cannot afford.  Instead, be good to your employees, and create an innovative, agile, and fun environment in which to work.  We feel that Virgin may well have the right balance here at the moment.  In addition, American Airlines has managed to create through shared-sacrifice a stronger relationship with its organized labour, at the cost of ousting of their former CEO (Bob Crandall) in order to regain credibility.     

This bring me back to a key point that I plan to continue supporting which is the AA/BA anti-trust application should be given fast track approval by the EU Competition Commission, as they currently are in a position to make a merger work.   They have the cash, the teams, and will be able to get concessions to harmonise workforce rules.  These are going to be keys to long-term viability.   Other truly viable applications should also be given the same treatment.   Ryanair and their bid were unrealistic and bad for EU consumers. 

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