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Markets News Wednesday: Aer Lingus talks with pilots end without agreement; Shares fall in Europe - - rise in Dublin
By Finfacts Team
Dec 9, 2009 - 9:56:54 AM
The trade union IALPA , which represents pilots, has said that talks with Aer Lingus ended last night, without agreement.
Aer Lingus has said it will implement a €97m restructuring plan with or without agreement.
IALPA says a cost reduction proposal which would have amounted to €33m a year and involved pay cuts, pay freezes and a substantial reduction in pilot numbers of 12-15%, was rejected by the airline.
The pilots are shareholders in the former State airline.
The Financial Times reports today that the new head of Aer Lingus has warned that the Irish airline risks being taken over by its larger rival Ryanair unless employees agree to his plans for sweeping cost cuts.
“If Aer Lingus isn’t capable of mastering its own destiny, then of course the likelihood that some form of non-independence might occur is more likely,” Christoph Mueller told the FT.
Asked if this meant a takeover by Ryanair, Europe’s biggest low-cost carrier, which has made two thwarted bids for Aer Lingus, Mr Mueller said: “Yes.”
Under Irish takeover rules, Ryanair can make a third bid from late January.
“I believe there is a correlation between our ability to have an agreement with the unions and the likelihood of a bid,”Mueller said. Ryanair holds just over 29% of Aer Lingus. The Irish flag carrier’s staff own 15% of its shares.
Martin Gahbauer, economist at the mortgage lender commented: “Confidence remained stable for a second consecutive month in November, suggesting that consumer sentiment is holding steady at the end of a volatile year for the index. At the beginning of 2009 we saw consumer confidence drop to record lows, but we have since seen this index return to pre-recession levels. In the last few months, consumer confidence has lost some of the upward momentum evident earlier in the year, and this is largely due to ongoing pessimism about the current economic situation rather than expectations for the future.
The downbeat assessment of the present situation is consistent with recent news that the UK has been slower to come out of recession than other countries. However, expectations for the next six months have not abated and remain at a high level.”
European shares were dragged lower Tuesday with banks leading the declines on worries over Dubai's debt and Greece's rating downgrade. Tom Vosa from National Australia Bank has more:
Sovereign debt worries
The Wall Street Journal reports that worries over finances of some of the world's governments rippled through financial markets Tuesday, as a series of negative credit-rating actions served as a reminder of the fragility of the global recovery.
Fitch Ratings cut Greece's credit rating a notch to the lowest level in the 16-nation euro zone, raising concerns that Athens could be sparking the biggest fiscal crunch the European monetary union has faced in its 10 years. Moody's Investors Service sliced ratings even more on Dubai government-controlled companies, renewing worries about the Arab emirate. Moody's also said the UK's rating would be at risk if it didn't lower its budget deficit.
Even as a fledgling recovery takes hold, the deterioration of some government balance sheets represents a continuing risk. For certain countries, like Greece, the financial issues largely predated the crisis; for others, like the US and UK, the problems are an outgrowth of initiatives to fight the economic downturn.
David Hauner from BofA Merrill Lynch Global Research considers the investment outlook for Europe, the Middle East and Africa:
US
President Barack Obama on Tuesday proposed an extension to his $787 billion stimulus, announcing job creation proposals, including a hiring tax credit and other measures to support the small business sector.
In a speech at the Brookings Institution think-tank, Obama proposed spending an additional $50 billion toward infrastructure, increasing Treasury Department lending to small businesses through the Troubled Asset Relief Program (TARP - - the financial sector bailout program), extending tax credits for business investment and offering state and local governments a fresh lifeline.
In addition, the proposals include a tax credit that rewards companies for hiring workers and tax rebates for individuals who make their homes more energy efficient.
In New York Tuesday, the Dow Jones fell 104 points or 1% to 10,286.
The Nasdaq slipped 0.76% and the S&P 500 slid 1.03%
Asia
Japan’s third quarter economic growth was revised sharply down, according to data released today. The cut to less than a third of the original estimate, resulted from a plunge in business capital spending in the three months to September 2009. Allowing for deflation, the economy contracted in nominal terms - - see link to report in Box below.
Bloomberg reports that China’s banking regulator plans to slow new lending to between RMB7 trillion yuan ($1 trillion) and RMB8 trillion yuan next year, a person familiar with the matter said.
The China Banking Regulatory Commission’s recommended range compares with RMB8.9 trillion yuan of new local-currency loans in the first 10 months of this year. The person spoke on condition of anonymity because he isn’t authorized to discuss the matter publicly.
The MSCI Asia Pacific Index fell 0.75% Wednesday.
The Nikkei 255 dipped 1.34%; the Shanghai Composite fell 1.73% and India's BSE Sensex 30 index declined 0.39%.
In Europe, the Dow Jones Stoxx 600 is down 0.82% Wednesday.
The ISEQ is up 0.16% in Dublin.
INM is down 11%; Aer Lingus is up 3.5% and Ryanair has gained 2.36%.
Pan Andean
Pan Andean, the Irish oil and gas producer, which is listed on the London small companies AIM market, has announced a takeover offer from Canadian company Petrominerales Ltd.
Pan Andean shareholders will receive £0.15 (15 pence per share) cash for each share they hold, plus a one for one share in Hydrocarbon Exploration, an unlisted Plc.
Hydrocarbon Exploration is a newly formed company into which Pan Andean will transfer its non-Colombian and non-Peruvian assets pursuant to the takeover being agreed.
The effect of the offer is that each shareholder will receive £0.15 a share for the Colombian and Peruvian assets of Pan Andean, with the US and Bolivian interests remaining with existing shareholders.
John Teeling, chairman, commented, “For some time now, we have been attempting to unlock the value of our assets. This opportunity values Peru and Colombia at roughly £18 million (equating to 15p for each Pan Andean share) whilst shareholders would also retain their interest in our Bolivian and US assets. Although Hydrocarbon Exploration will initially be an unlisted company we anticipate re-listing the business in due course.
The board has agreed to unanimously recommend that Pan Andean shareholders vote in favour of the Scheme”.
According to the World Meteorological Organization, the first decade of this century was the hottest since records began. Nadya Hutagalung, founder of Greenkampong.com, shares with CNBC's Chloe Cho how she is creating a greener environment.
Davy chief economist Rossa White comments: Budget set to deliver required cuts in spending - - "The Irish Budget for 2010 will be unveiled today (December 9th). Before that, the UK releases its pre-Budget report. Note that both countries have similar-sized deficits (as a % of GDP) this year, yet the contrast in tone today will be clear. The UK will not yet get serious about its public spending problem (with an election looming), while Ireland is set to cut the public pay bill and social welfare – both difficult politically. So far, Ireland has managed to more or less stabilise its deficit through budget consolidation with 5% of GDP. Today's consolidation package (worth almost 2.5% of GDP) will reduce the structural deficit significantly by cutting public spending.
There have been myriad leaks over the last fortnight. We can piece together most of the likely package today. The consolidation will amount to €4bn, as has been well flagged and long promised to the European Commission. About one-third, or €1.3bn, will come from graduated cuts (from the top down) in public pay. The welfare bill may drop by €700m-€1bn, mainly through cuts in the rate paid for unemployment assistance and in child benefit. Capital spending may be reduced by €1bn in nominal terms (although the volume fall is likely to be limited by falling tender prices). A carbon tax may raise €500m. That leaves €200-500m to be decided depending on the size of the welfare cuts.
What has been perhaps forgotten recently is that Ireland has to do it all over again in a year's time. Note that the structural deficit is €13-14bn. The €4bn plan today will have to be followed by €4bn in permanent cuts next year. This afternoon, it would be best to outline reductions in public employment of about 20,000, or 5%, for 2011 and to design this carefully during 2010. Likewise, very few of the recommendations of Colm McCarthy's spending group will come into force today. Note that this group came up with more than €4bn in non-social welfare savings. Again, there should be a plan to introduce €2bn of these for 2011 with the work beginning now. Finally, a recurring property tax is required for 2011 to replace the revenue from that source which has disappeared: setting up the valuation database is the first step."
Goodbody chief economist Dermot O’Leary comments: Economic View; Focus moves to expenditure cuts in today’s Budget - -"Ahead of the Budget today, the downgrade of the Greek sovereign and subsequent widening of yields on perceived “risky” sovereigns yesterday, provides a timely reminder of the consequences of failing to get public finances under control. There are specific issues around Greece, including: (1) already having the lowest credit rating in the Eurozone, even before yesterday’s downgrade by Fitch; (2) government debt levels approaching 130% of GDP; (3) lack of trust in the published statistics given its recent admission that its budget deficit would actually be over 12% of GDP this year rather than 6%, and; (4) a poor track record of public finance management.
Most of these issues were highlighted in Fitch’s downgrade yesterday, but it is clear that sovereign concerns are to the fore again. Ireland has already taken substantive actions in a bid to tackle its budget deficit, but the hard political decisions on public expenditure will be made later today. Many of the measures have already been leaked over recent days and weeks, including a 5%-6% cut in the public service pay and pension’s bill and a similar reduction in spending on social welfare. Capital spending is expected to be cut by close to 15%, while the only tax measure to be introduced will be the well-flagged carbon tax.
Budgets in Ireland are seen as plans for spending and taxes for the coming twelve months, but the measures announced today should be seen as the second stage, following the actions already taken, in a multi-year process to restore stability to the public finances. For a Finance Minister that only stepped into the job as this crisis began to unfold, it has not been an easy ride. Nevertheless, there has been recognition of the problems and a will to tackle them. Judging from recent commentary from Government, this will continue when Budget 2010 is announced later today (3.45pm). It needs to."
Goodbody's Eamonn Hughes comments: Ryanair; Are we there yet? Are we there yet? - - "Yesterday, Ryanair announced expansions from Charleroi and Dusseldorf, but the main focus was on comments from the Ryanair CEO, Michael O’Leary (MOL) that the Boeing deal could still be off. In recent weeks, the “is it on, is it off?” show has become a tedious process, so while MOL indicates that the deal is unlikely, it now appears that both parties have agreed on price, but are fighting on delivery conditions. At a press conference in Brussels for the expanded Charleroi base, MOL indicated that Boeing “want to go back and renegotiate the delivery conditions of the 200 new aircraft to make them inferior to the kind of conditions we have on the existing orders”. He has pitched that a company board meeting on December 17 will be the deadline on any deal.
It strikes us that the broad issues have been agreed and now it’s the detail. Yes, there are risks, but isn’t price the most important factor in most negotiations? Irrespective of these deal negotiations, it was becoming clearer in recent months that the underlying growth rate at Ryanair was starting to shift down a gear. Having previously targeted an average 15% growth rate in capacity for FY11 and FY12, we recently nudged down our growth rate to low double digit levels for FY11 (+12%) and FY10 (+10%), taking on board management guidance of over 80m pax by FY12 (we previously had 87m, at 15% p.a.). A deal is still awaited, but if concluded, we believe it would cement these base growth rates in the medium term. It would then underpin circa 7-8% growth from FY13 onwards, but with the flexibility to adjust growth rates post FY13 upwards or downwards by managing disposals.
So it appears we are still a week away or so from some medium term certainty on the strategy (hopefully). However, as a consumer cyclical stock, we think it ultimately always reverts back to pricing. While price and capacity growth are inter-related, the main reason that RYA has underperformed in recent quarters is the expansion of the yield decline coming through each quarter. So as soon as the pace of yield declines (anticipated to run at -20% this quarter) start to tick down, the market may revisit the story. We have yield declines at -15% in fiscal Q4 from -20% in Q2 & Q3 given easy comps and a final week in the quarter that straddles Easter. That could mean that the Q3 results in early February look a bit more interesting."
