Hitt og þetta 1. september 2006

DJ FOCUS:Fuel Costs, Not Terrorism, May Ground Airline IPOs

By Victoria Howley

LONDON (Dow Jones)-- Sensitivity to terrorism won't ground initial public offerings for airline companies, but high fuel prices and overly aggressive valuations could clip the wings of Aer Lingus and others, analysts say.

The Irish government this week confirmed plans to privatize the national airline on London and Dublin exchanges, saying it would sell most of its 85.1% stake but retain at least 25.1% of the company.

FL Group (FL.IC), the Icelandic investment company, will sell all but a third of Icelandair Group through an IPO that Chief Executive Hannes Smarason said he expects will raise around EUR200 million in new capital.

Aer Lingus will test the market at a delicate time. Two other recent IPOs for airline companies, Air Berlin PLC (ABI.XE) and Air China (601111.SH), made weak trading debuts and passengers are fearful after the alleged plot to attack transatlantic flights.

Icelandair's market entry will lag behind Aer Lingus'. The deal didn't take place in the second quarter as planned, but FL Group is due to decide its new schedule in the next few weeks.

Smarason's declaration last week that FL Group is considering a listing for Sterling, another of its airlines, is a further indication that the company is confident about the IPO market and that the Icelandair deal will go ahead.

As far as Aer Lingus is concerned, analysts say the messy precedent set by Air Berlin and high fuel costs will overshadow concerns about terrorism when management starts meetings with investors in the second week of September.

Travel is unlikely to drop off because of raised fears of terrorism, they say, despite the alleged plot against passenger flights that was revealed Aug. 10.

"Barring a major terrorist event, passengers will get on with the business of traveling. Stock prices have recovered," said Stephen Furlong, an analyst at J&E Davy, part of the Bank of Ireland Group (BKIR.DB).

Furlong said fuel prices are a more pressing issue for airlines. Indeed, with the cost of oil hovering above $70 a barrel, Air China blamed fuel expenses for its weak debut Aug. 20 on the Shanghai Stock Exchange.

Shares rose only 5% to 10% on the day, in stark contrast to the 50% to 80% gains other Chinese companies have posted on their first day of trading this year.

Lessons Of Air Berlin

Air Berlin, a German low-cost airline, has only just risen above its EUR12 issue price, even though the IPO was completed in May. Shares edged to EUR12.10 Friday, up from EUR11.25 on the first day of trading.

"Any airline planning an IPO can learn important pricing lessons from Air Berlin, although Aer Lingus has a better track record," Furlong said.

An investor who opted not to join Air Berlin said selling stakeholders and the company were too ambitious about its valuation.

The German carrier eventually raised EUR443 million after cutting the size and price of the deal. The investor said the changes were made because the market was concerned about the impact of fuel costs on earnings, as well as competition from easyJet PLC Holding (EZJ.LN) and Ryanair Holdings PLC (RYAAY).

Bookrunners Commerzbank (CBK.XE) and Morgan Stanley (MS) priced the Air Berlin stock at EUR12 after tightening the price range to EUR11.50 to EUR14.50 from EUR15 to EUR17.50. The size of the deal was also reduced, according to bankers away from the transaction.

Aer Lingus seems mindful of the Air Berlin experience. The company is using a wide EUR700 million to EUR1 billion valuation range in preliminary talks with investors. The scale of the range reflects the difficulty in valuing an airline, where earnings are always volatile, a person familiar with the company's plans said.

Valuing Aer Lingus at EUR700 million to EUR1 billion, with the Irish state retaining 25.1% or more, means that the IPO could raise up to EUR600 million, according to Furlong's research.

The investment case is that of a successful turnaround that needs funding for growth, he said. Aer Lingus has improved margins and cut costs, but going forward it needs to develop low-cost long-haul operations.

Another analyst said Aer Lingus has to prove it can weather competition from Ryanair in the short-haul market while pursuing its long-haul strategy.

"I'm not surprised airlines are coming to the IPO market now," he added. "The sector is making good profits again and the security threat will always be there."

-By Victoria Howley, Dow Jones Newswires; 44 20 7842 9261; victoria.howley@dowjones.com

(Louise Nordstrom in Stockholm contributed to this report.)

(END) Dow Jones Newswires

September 01, 2006 10:02 ET (14:02 GMT)

Copyright (c) 2006 Dow Jones & Company, Inc.

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