Aer Lingus Group plc (incorporated in Ireland with limited liability under the Companies Acts 1963 to 2013, registered number )

Transcription

1 THIS CIRCULAR AND THE ACCOMPANYING FORM OF PROXY ARE IMPORTANT AND REQUIRE YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own personal financial advice from your stockbroker, bank manager, solicitor, accountant or other independent professional financial adviser immediately (being, in the case of Shareholders in Ireland, an organisation or firm authorised or exempted under the Investment Intermediaries Act, 1995 of Ireland (as amended) or the European Communities (Markets in Financial Instruments) Regulations (Nos. 1 to 3) 2007 or, in the case of Shareholders in the United Kingdom, an adviser authorised pursuant to the Financial Services and Markets Act 2000, ( FSMA ) or from another appropriately authorised independent financial adviser if you are in a territory outside Ireland or the United Kingdom). If you sell or have sold or otherwise transferred your entire holding of Ordinary Shares in Aer Lingus, please send this Circular, together with the accompanying Form of Proxy, as soon as possible to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. However, this Circular should not be forwarded or transmitted in or into any jurisdiction in which such act would constitute a violation of the relevant laws of such jurisdiction. If you sell or have sold or otherwise transferred only part of your holding of Ordinary Shares in Aer Lingus, you should retain this Circular and the accompanying Form of Proxy and immediately consult the stockbroker, bank or other agent through whom the sale or transfer was effected. Aer Lingus Group plc (incorporated in Ireland with limited liability under the Companies Acts 1963 to 2013, registered number ) IASS Proposal and Notice of Extraordinary General Meeting Investec, which is regulated and authorised in the United Kingdom by the FCA and the PRA respectively, and in Ireland by the Central Bank of Ireland for conduct of business rules, is acting exclusively for Aer Lingus as its financial adviser and sponsor in connection with the requirements of the Irish Stock Exchange and for no one else (including the recipient of this Circular) in relation to the matters outlined in this Circular and will not be responsible to anyone other than Aer Lingus for providing the protections afforded to clients of Investec nor for providing advice in connection with any transaction or arrangement referred to in this Circular. This Circular should be read as a whole. Your attention is drawn to the letter from the Chairman of Aer Lingus, which is set out on pages 4 to 11 of this Circular and which recommends that you vote in favour of the Resolution to be proposed at the Extraordinary General Meeting referred to below. Notice of an Extraordinary General Meeting of Aer Lingus Group plc, to be held at 2.00pm on 10 December 2014 at the Radisson Hotel, Dublin Airport, Co. Dublin, Ireland is set out at the end of this Circular. A Form of Proxy is enclosed for use by Shareholders in connection with the Extraordinary General Meeting. To be valid, Forms of Proxy, completed in accordance with the instructions printed thereon, must be received at the Company s registrar, Capita Asset Services, Shareholder solutions (Ireland), 2 Grand Canal Square, Dublin 2, Ireland as soon as possible but in any event by no later than 2.00pm on 8 December Completion and return of the Form of Proxy will not preclude Shareholders from attending and voting at the Extraordinary General Meeting or any adjournment thereof should they wish to do so.

2 FORWARD-LOOKING STATEMENTS Certain statements contained in this Circular are or may constitute forward-looking statements. Such forward looking statements involve risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Aer Lingus or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forwardlooking statements. Forward-looking statements are typically identified by the use of forward-looking terminology such as believes, expects, may, will, would, should, intends, estimates, plans, assumes or anticipates or the negative of such words or other variations of them or comparable terminology, or by discussions of strategy which involve risks and uncertainties. Such risks, uncertainties and other factors include, among others: general economic and business conditions, adoption, or a delay in the adoption, of new legislation, changes in technology, government policy, regulation, ability to attract and retain personnel and natural and man-made disasters. These forward-looking statements speak only as at the date of this Circular. Except as required by applicable law, the Listing Rules, the Market Abuse Regulations, Transparency Regulations, the Irish Stock Exchange, the London Stock Exchange or the UK Listing Authority or by any appropriate regulatory body, Aer Lingus expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Aer Lingus expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. PRESENTATION OF FINANCIAL INFORMATION Unless otherwise indicated, all references in this Circular to, euro or cent are to the lawful currency of participating member states of the European Union. The financial information presented in this Circular has been rounded to the nearest whole number of the nearest decimal place. In addition, certain percentages presented in this Circular reflect calculations based upon underlying information prior to rounding and, accordingly, may not conform exactly to the percentages that would be derived if the relevant calculations were based upon the rounded numbers. TIME All references in this Circular to times are to Dublin, Ireland times, unless otherwise stated. DEFINITIONS Capitalised terms used in this Circular have the meaning ascribed to them in the section headed Definitions in this Circular. 1

3 CONTENTS Page Expected timetable of principal events 3 Letter from the Chairman 4 Summary of the principal terms and conditions of the IASS Proposal 12 Risk factors 17 Additional information 20 Definitions 25 Notice of Extraordinary General Meeting 30 2

4 EXPECTED TIMETABLE OF PRINCIPAL EVENTS Date of issue of this Circular 18 November 2014 Latest time and date for receipt of Forms of Proxy from Shareholders 2.00pm on 8 December 2014 Extraordinary General Meeting 2.00pm on 10 December

5 PART I LETTER FROM THE CHAIRMAN Aer Lingus Group plc (incorporated in Ireland with limited liability under the Companies Acts 1963 to 2013, registered number ) Directors Colm Barrington*(Chairman) Christoph Mueller (Chief Executive Officer) Bernard Bot (Chief Financial Officer) David Begg* Montie Brewer* Laurence Crowley* Emer Gilvarry* John Hartnett* Nigel Northridge* Frank O Connor* Nicola Shaw* William Slattery* Nicolás Villén* Registered office Dublin Airport Co Dublin Ireland 18 November 2014 *denotes Non-Executive Director To the holders of Ordinary Shares of Aer Lingus Group plc and, for information only, to participants in the Company s Long Term Incentive Plan. Dear Shareholder, 1. Introduction IASS Proposal and Notice of Extraordinary General Meeting Since 2010, the Board and management team of Aer Lingus, in conjunction with its advisors, has been in discussion with the trustee of the main pension scheme for non-pilot employees in Aer Lingus Limited (the Irish Airlines (General Employees) Superannuation Scheme (the IASS, the Scheme )), daa, SAA and SR Technics (being the other participating employers in the Scheme) and relevant trade unions (comprising SIPTU, Impact and TEEU) along with ICTU regarding the issues arising from the funding deficit in the Scheme, which stood at 707 million as at 31 August The purpose of these discussions has been to seek a viable solution which will provide a level of clarity and certainty to all stakeholders on future pension arrangements for non-pilot employees in Aer Lingus Limited. Aer Lingus Limited has entered into a conditional agreement with the IASS Trustee and a memorandum of understanding and collective agreement with its key trade unions, subject to approvals, regarding a solution (namely, the IASS Proposal as described in this Circular) including, inter alia, a once-off payment by Aer Lingus of million for the purpose of providing new pension arrangements in new defined contribution pension plans for Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members. The IASS Proposal is intended to improve the pension prospects of Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members and, in turn, mitigate significant risk to Aer Lingus in the form of potential industrial action, disputes, claims and/or litigation and also provide Aer Lingus with a measure of stability for its non-pilot employment cost base during the period to 31 March Aer Lingus Limited s consistent position is that it is not responsible for the funding deficit in the IASS and that it has no obligation to increase its rate of contribution to the IASS in order to address the deficit in the Scheme. Nonetheless, the Board views the issues arising from the funding deficit within 4

6 the IASS as representing a real and significant risk to the success of the Group and considers that the solution delivers benefits for all stakeholders, including Aer Lingus, Shareholders and employees. Under the IASS Proposal, all affected parties are making a contribution in various forms to address the long standing funding issues affecting the IASS: (i) (ii) (iii) Shareholders are being asked to approve a once-off cash payment of million by Aer Lingus Limited under the Proposed Pension Contribution; Current and former Aer Lingus employees will have their expected level of accrued IASS pension benefit reduced. Both Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members will have their benefits reduced firstly through co-ordination (whereby the scheme benefits are designed to take account of any pension which is received from the State when calculating the target total benefit) with the Irish State pension, secondly through the application of a further 20% reduction in benefits and thirdly as the benefits will no longer be revalued prior to payment; Retired IASS Members will have their pensions reduced by between 0% and 20% depending upon the level of their annual pension. Aer Lingus believes that, based on an evaluation of all options and more than four years of complex multi-party negotiations, the IASS Proposal is an appropriate resolution which, while challenging for all parties, nonetheless delivers benefits for all stakeholders, including Aer Lingus, Shareholders and employees. Critically, as the Proposed Pension Contribution will be paid into new defined contribution pension plans, the IASS Proposal is significantly better than the alternative of maintaining participation in the multi-employer IASS which is no longer appropriate for the provision of sustainable pension arrangements for Aer Lingus employees, which has a significant funding deficit and which gives rise to a real and significant risk of industrial action, disputes, claims and/or litigation for the Group. Furthermore, the IASS Proposal provides benefits to Aer Lingus including industrial relations and legal risk mitigation, employment cost stabilisation and the establishment of sustainable pension arrangements for employees. Accordingly, the Board (other than Mr. David Begg who absented himself from all deliberations regarding the IASS Proposal for the reason set out in paragraph 10 below) is unanimously recommending the IASS Proposal. Due to the size and nature of the proposed once-off cash payment, the IASS Proposal is conditional, amongst other things, upon the approval of Shareholders which is to be sought at the EGM to be held at the Radisson Hotel, Dublin Airport, Co. Dublin, Ireland at 2.00pm on 10 December 2014, notice of which is set out at the end of this Circular. The purpose of this Circular is to provide Shareholders with details of the IASS Proposal, to convene the EGM and to explain why the Board considers the IASS Proposal to be in the best interests of the Company and its Shareholders as a whole. A notice convening the EGM, at which the IASS Resolution will be proposed, is set out at the end of this Circular. This Circular is exclusively concerned with the IASS Proposal. Aer Lingus Limited has also been involved in a separate set of discussions concerning the Pilots Scheme which is a single employer scheme for Aer Lingus pilots. As at 31 August 2014 (the most recent date in respect of which estimated Minimum Funding Standard data has been provided by advisors to the Pilots Scheme), the Pilots Scheme was estimated to have an actuarial deficit of approximately 220 million on the statutory Minimum Funding Standard basis. Aer Lingus has engaged in discussions regarding the Pilots Scheme with the trustee of the Pilots Scheme and IALPA. The parties have agreed a form of funding proposal that has been submitted to the Pensions Authority and this funding proposal does not involve any capital contribution by Aer Lingus Limited either within the Pilots Scheme or outside of the Pilots Scheme. The trustee of the Pilots Scheme is awaiting the decision of the Pensions Authority regarding the funding proposal. 2. Background to and reasons for the IASS Proposal Aer Lingus Limited currently participates in two main occupational pension schemes, namely the IASS and the Pilots Scheme. The IASS was established in 1954 and is a uniquely complex, multiemployer scheme for employees who fall within the category of General Employees (daa, SAA and SR Technics being the other employers participating in the IASS). At 30 June 2014 (and taking into 5

7 account known membership movements between 30 June 2014 and 31 December 2014, e.g. retirements, leavers and deaths), the IASS had 14,204 members, approximately 68% of which were current or former employees of Aer Lingus Limited. At the time of the Company s IPO in 2006, the then latest IASS actuarial valuation report demonstrated an aggregate surplus on an ongoing basis, before taking into account the costs of future discretionary indexation, of approximately 140 million. However, since then, the subsequent decline in asset values in 2007 and 2008, the increased cost of purchasing pension annuities as well as the changing demographics of IASS membership have resulted in a significant deficit emerging in the IASS on a statutory Minimum Funding Standard basis. At 31 August 2014, the IASS was estimated by the IASS Trustee s actuary to have a statutory Minimum Funding Standard deficit of approximately 707 million. In the absence of the IASS Proposal, it is likely that the IASS Trustee would have to very significantly reduce accrued benefits or seek the direction of the Pensions Authority to have the IASS wound up. Any wind-up of the IASS is likely to involve a significantly greater reduction in benefits for both Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members than that which is contemplated in the IASS Proposal. While Aer Lingus Limited believes and has consistently maintained that it has neither a constructive nor a legal obligation to increase its rate of contribution to the IASS in order to address the deficit in the IASS, it also recognises that this position could be subject to legal challenge. More importantly, as noted above, current and former employees of Aer Lingus Limited account for approximately 68% of the IASS membership. Accordingly, the potential winding up of the IASS presents a significant industrial relations issue for Aer Lingus together with a significant risk of disputes, claims and/or litigation that could have material adverse implications for Aer Lingus operations and financial performance in current and subsequent years. In summary, the IASS is no longer a viable scheme for the provision of pension benefits for the employees of Aer Lingus Limited. Furthermore, the multi-employer nature of the IASS is not appropriate for Aer Lingus current employment environment or ownership structure as a listed public limited company. One of the key outcomes of the IASS Proposal is the establishment of a modern, single employer pension arrangement. The elements of the IASS Proposal represent the outcome of a process of discussion and negotiation which commenced in 2010 under the auspices of the LRC and, which more recently has also involved IBEC, ICTU, the Labour Court and an Expert Panel established in March 2014 by IBEC, ICTU, the Department of Transport, Tourism and Sport and the Department of Jobs, Enterprise and Innovation. This process was the subject of interim and final recommendations issued by the Labour Court on 2 January 2013 and on 24 May 2013, respectively, which set the main parameters for the resolution of the issues arising. The report subsequently issued by the Expert Panel on 16 June 2014 built upon the Labour Court recommendations while varying certain elements of these recommendations. The arrangements underlying the IASS Proposal are intended to provide a level of clarity on pension arrangements for Active Aer Lingus IASS Members as well as providing cost stability for Aer Lingus and Shareholders. This in turn is intended to mitigate the significant industrial relations risks and the risk of disputes, claims and/or litigation. The benefits for Aer Lingus of the IASS Proposal are described in more detail later in the Circular. 3. Principal terms and conditions of the IASS Proposal The IASS Proposal seeks to address the issues arising from the funding shortfall in the IASS and to achieve certain targeted (but not definitive or guaranteed) pension benefit levels recommended by the Labour Court during 2013 and supported by the Expert Panel during In summary, the IASS Proposal involves a number of elements. These are: (a) a once-off payment by Aer Lingus of million comprising: i million employer contribution for the purpose of providing new pension arrangements in the New Current Employee DC Pension Plan for the benefit of Active Aer Lingus IASS Members; 6

8 ii million employer contribution for the purpose of providing new pension arrangements in the New Deferred DC Pension Plan for Deferred Aer Lingus IASS Members; (b) the cessation of benefit accrual and contributions with regard to the IASS as well as the implementation of changes to the IASS investment strategy; (c) the Pensions Authority approving the Funding Plan and Section 50 Application from the IASS Trustee (i) to reduce accrued IASS benefits for both Active IASS Members and Deferred IASS Members firstly through the co-ordination of accrued IASS benefits with the Irish State pension, secondly through a further 20% reduction in benefits and thirdly through the removal of revaluation of benefits prior to payment; and (ii) to reduce the pensions of Retired IASS Members by between 0% and 20% depending upon the level of their annual pension; and (d) the revision of the existing Aer Lingus DC pension scheme to a New Current Employee DC Pension Plan in respect of future service pension contributions for employees of Aer Lingus who are currently IASS members and in respect of the once-off payments for Active Aer Lingus IASS Members and the establishment of a New Deferred DC Pension Plan in respect of Deferred Aer Lingus IASS Members. Aer Lingus Limited will transfer the entire amount of million comprising the Proposed Pension Contribution to an escrow structure as soon as the required approval from Shareholders has been received. Aer Lingus Limited, daa, SAA and the IASS Trustee have agreed the form of the Funding Plan and Section 50 Application. The IASS Trustee has submitted the agreed form of the Funding Plan and Section 50 Application to the Pensions Authority and informed the Pensions Authority that the submission will be effective conditional upon approval of the IASS Proposal by Shareholders, any approvals required by daa and SAA from their shareholders, the transfer by Aer Lingus Limited of the entire amount of million comprising the Proposed Pension Contribution to an escrow structure and the reservation of the required funds by daa and SAA. If following confirmation by the IASS Trustee that the Funding Plan and Section 50 Application is effective, and if the Pensions Authority gives its approval to the Funding Plan and Section 50 Application, the once-off payments will be released from this escrow structure into individual accounts in the New Current Employee DC Pension Plan and New Deferred DC Pension Plan on receipt of the signed Waivers. The signed waivers will waive any and all rights to legal action against Aer Lingus and the IASS Trustee in relation to the IASS and are described in greater detail in Part II of this Circular. No payment will be released from the escrow structure into an individual account in the New Current Employee DC Pension Plan or New Deferred DC Pension Plan without the receipt of a signed Waiver from the relevant individual. No amount of the million will be paid to the IASS. If the IASS Trustee cannot or does not confirm to the Pensions Authority that the Funding Plan and Section 50 Application is effective or if the Pensions Authority does not give its approval, Aer Lingus Limited will have the right to have the entire amount of the million contribution returned to it. The implementation of the IASS Proposal, as described above, is subject to the following conditions which are currently expected to be satisfied by no later than 31 December 2014: (a) approval of the IASS Proposal by Shareholders; (b) following approval of the IASS Proposal by Shareholders, confirmation by the IASS Trustee that the Funding Plan and Section 50 Application are effective; and (c) following the confirmation by the IASS Trustee that the Funding Plan and Section 50 Application is effective, the Pensions Authority approving the Funding Plan and making the relevant direction following the Section 50 Application. In the event that any of the above conditions are not satisfied, this will result in an inability to implement the IASS Proposal. This is likely to increase the Group s exposure to the risk of significant industrial action and related claims and disputes in addition to the potential for protracted litigation related to the funding issues faced by the IASS. 7

9 If the IASS Resolution is approved by Shareholders and subject to all of the conditions specified in paragraph 3 of this Part I of the Circular, it is intended that, with effect from the Implementation Date, the IASS Proposal will be formalised as a Collective Agreement and registered as a Registered Employment Agreement under the relevant legislation when amended and as and when it is legally possible to do so. 4. The effects of the IASS Proposal on Aer Lingus If Shareholder approval is received and the IASS Trustee confirms to the Pensions Authority that the Funding Plan and Section 50 Application is effective, the IASS Proposal will involve a once-off exceptional charge of million in the Group s consolidated income statement and the recognition of a provision, also with a value of million, in the Group s consolidated statement of financial position for the financial year in which these events occur (currently expected to be the financial year ended 31 December 2014). Furthermore, implementation costs incurred in connection with the IASS Proposal will also be treated as an exceptional item. The Proposed Pension Contribution of million will be placed in an escrow structure. The cash amount in the escrow structure will be disclosed as a restricted cash balance in Aer Lingus consolidated statement of financial position. If the Pensions Authority approves the Funding Plan and Section 50 Application, both the value of the provision and the restricted cash balance will reduce in a corresponding manner as amounts are paid from the escrow structure to the New Current Employee DC Pension Plan and New Deferred DC Pension Plan on receipt of the Waiver described in more detail in Part II of this Circular. The annual stabilisation payments, which are described in paragraph 5(d) of this Part I of the Circular, will be recognised as staff costs in the Group s consolidated income statement for the financial period to which the stabilisation payments relate. 5. Benefits arising for Aer Lingus The IASS Proposal is expected to provide the following benefits: (a) Substantially reduces industrial relations risk faced by the Group The deterioration in the funding position of the IASS has been a considerable source of concern for Aer Lingus employees. As a result, this has exposed Aer Lingus to the risk of significant operational disruption arising from industrial action by general employees on account of funding issues in the IASS. Any such disruption has the potential to have a significantly adverse impact on Aer Lingus operations, future booking profile, profitability and business performance. Prior to the issuance of this Circular, affected Aer Lingus employees have balloted in favour of the IASS Proposal. The ballot was conducted on an aggregate basis by the SIPTU, IMPACT and TEEU trade unions representing approximately 97% of affected Aer Lingus employees. The UNITE trade union which represents approximately 3% of affected Aer Lingus employees did not participate in the aggregate ballot % of the votes cast were in favour of the proposed solution. If this positive result is followed by full implementation of the IASS Proposal, it will significantly mitigate this potential industrial relations risk. In addition, Aer Lingus Limited and its key trade unions have agreed to act reasonably and in good faith to establish an Internal Dispute Resolution Board (IDRB) to facilitate an improved industrial relations environment within Aer Lingus. (b) Provides clarity as to the likely total financial and legal impact of resolving funding issues in the IASS While Aer Lingus Limited s position, on the basis of firm legal advice that has been received, has been and remains that it has neither a constructive nor a legal obligation to increase its rate of contribution to the IASS in order to address the deficit in the IASS, this position could be subject to legal challenge. Any such challenges would be strenuously defended but protracted litigation could ensue and if a court were to find against Aer Lingus Limited in any such litigation, a very significant loss for Aer Lingus Limited could arise. The IASS Proposal is expected to provide clarity to Shareholders and the wider capital market on the proposed quantum of the contribution by Aer Lingus Limited to the resolution of this pension funding issue. 8

10 (c) Provides a sustainable solution for the IASS that otherwise may be forced to be wound-up and puts future pension provision for general employees (i.e. non-pilot employees) of Aer Lingus on a sustainable footing As noted in paragraph 1 of this Part I, the IASS had a deficit of approximately 707 million as at 31 August The IASS Proposal provides a mechanism to prevent the wind-up in deficit of the IASS on a Minimum Funding Standard basis and provides an outcome that improves the pension prospects of Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members in a way that will balance the interests of all parties, including Shareholders. It is in the Company s interest to place future pension provision for general employees of Aer Lingus Limited on a sustainable footing as this is a key factor in enabling Aer Lingus to preserve a constructive working relationship with staff and unions and to attract appropriately motivated and committed employees. In this way, Aer Lingus can continue to operate as a financially and operationally successful airline, differentiated from key competitors and capable of delivering the Company s core value carrier proposition. In addition, implementation of the IASS Proposal will enable Aer Lingus to address issues arising from the uniquely complex, multi-employer nature of the IASS through the establishment of modern, single employer pension arrangements. (d) Stabilises certain future staff costs In conjunction with the IASS Proposal, Aer Lingus has negotiated certain employment cost stabilisation measures which will provide Aer Lingus with a measure of stability for its non-pilot employment cost base in the period from 1 September 2013 until 31 March Under these arrangements, and if the IASS Proposal is approved by 31 December 2014, annual salary increments and annual salary inflation will not be payable to non-pilot staff in 2014, 2015, and As a result, any annual salary increments and annual salary inflation payable from 1 April 2017 onwards will be calculated by reference to a lower staff cost base than would otherwise be the case in the absence of employment cost stabilisation measures. This staff cost avoidance will be achieved through the agreement of staff and unions to waive any annual salary increment entitlements and pensionable pay increases during the period. This agreement from staff and unions has already been provided as a result of the ballot in favour of the IASS Proposal. In 2014, annual salary increments, payable on a phased basis over the course of the year, would have represented an increase of approximately 2% of relevant staff costs in the year before any annual salary inflation (payable in addition to any annual salary increment payment) is taken into account. Annual salary increments accumulate over time and have the effect of increasing the Aer Lingus staff cost base for the purpose of calculating future annual salary increments and future annual salary inflation. Aer Lingus recognises that there is a need for some moderate pay progression over this period and for this reason, the waiving by staff of contracted and expected pay increases in the period to March 2017 will be supplemented by a lower stabilisation payment. The Group will pay a total amount of 5,850 to each employee spread over the period between 2014 and 2016 as follows: Total Annual stabilisation payment per employee 2,250 1,800 1,800 5,850 The total amount of the annual stabilisation payments will be significantly lower than the staff cost increases which will now be avoided through the non-payment of annual salary increments and annual salary inflation. The staff stabilisation payments do not represent pensionable pay and will not be reflected in the calculation of future base salary costs following the end of the stabilisation period post 31 March Each payment is a once-off sum in the year in question. The staff stabilisation payments will not accumulate and will not be paid from 2017 onwards. 9

11 From a financial reporting perspective, these stabilisation payments to staff will be recognised as staff costs in the income statement for the relevant financial year in which they are incurred. 6. Taxation The Company s advisers have provided details of the proposed arrangements to the Revenue Commissioners and have sought confirmation on the correct tax treatment that will apply in relation to the payments to be made to the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan. They have also sought confirmation on the Irish tax implications for the employees in relation to any contributions that will be made. Based on the submissions made to the Revenue Commissioners, they have confirmed that on the basis that the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan will be approved for the purposes of Part 30 of the Taxes Consolidation Act: deductions will be available to the company in computing its taxable profits for all of the contributions made to the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan on the basis that the contributions will be treated as contributions to a scheme approved under Part 30 of the same Act; and no Irish tax liability will arise on an employee by reference to these contributions, as these are being made by the company to the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan. Payments from the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan to employees and former employees will be subject to applicable Irish taxes at the time of payment. 7. Risk factors The attention of Shareholders is drawn to the principal risks and uncertainties as set out on pages in the Group s annual report for the year ended 31 December 2013 and on pages 14 and 15 in the Group s financial results in respect of the six months ended 30 June There has been no change to these principal risks and uncertainties. Part III of this Circular provides an overview of the principal risks associated with the IASS Proposal. 8. Shareholder Voting and EGM The IASS Proposal is subject to the approval of Shareholders. Accordingly, an ordinary resolution will be proposed at the EGM for the purpose of seeking such approval. Set out on page 31 of this Circular is a notice convening an EGM, to be held at 2.00pm on 10 December 2014 at the Radisson Hotel, Dublin Airport, Co. Dublin, Ireland. This notice sets out the text of the ordinary resolution which will be proposed at the EGM. A poll will be conducted at the EGM in respect of the IASS Resolution. In the poll, each Shareholder present in person or by proxy will have one vote for each Ordinary Share held. The passing of the IASS Resolution requires the support of not less than 50% of the votes cast (whether in person or by proxy) in respect of the IASS Resolution. If you would like to vote on the resolution but cannot attend the EGM, you can appoint a proxy to exercise all or any of your rights to attend, vote and speak at the EGM by using one of the methods set out in the notes to the notice of the EGM. 9. Action to be taken You will find enclosed a Form of Proxy for use at the EGM. Whether or not you intend to be present at the EGM you are requested to complete the Form of Proxy (in accordance with the instructions printed thereon) and return it to the Company s registrar, Capita Asset Services, Shareholder solutions (Ireland), 2 Grand Canal Square, Dublin 2, Ireland as soon as possible and in any event so as to be received by no later than 2.00pm on 8 December The completion and return of the Form of Proxy will not preclude you from attending the EGM and voting in person if you wish to do so. 10

12 10. Recommendation In addition to his position as a Director, Mr. David Begg holds the position of General Secretary of ICTU, which is a party to the Memorandum of Understanding. For this reason Mr. Begg absented himself from all deliberations regarding the IASS Proposal during the period of its consideration by the Board and has not participated in the Board s recommendation herein. The Directors (other than Mr. Begg for the reason set out above), who have been so advised by Investec, consider the IASS Proposal and the passing of the IASS Resolution to be in the best interests of the Company and the Shareholders as a whole. In giving its financial advice to the Directors, Investec has taken into account the Directors commercial assessment of the IASS Proposal. Accordingly, the Directors (other than Mr. Begg for the reason set out above) unanimously recommend that you vote in favour of the IASS Resolution as they intend to do in respect of their own beneficial holdings, which, as at 17 November 2014 (being the latest practicable date prior to the publication of this Circular), amount in aggregate to 1,310,989 Ordinary Shares representing approximately 0.25% of the existing issued share capital of the Company. Yours sincerely Colm Barrington Chairman For and on behalf of the Board 11

13 PART II SUMMARY OF THE PRINCIPAL TERMS AND CONDITIONS OF THE IASS PROPOSAL As outlined in Part I of this Circular, the IASS Proposal involves a number of elements being: (a) a once-off payment by Aer Lingus of million comprising: i million employer contribution for the purpose of providing new pension arrangements in the New Current Employee DC Pension Plan for the benefit of Active Aer Lingus IASS Members; ii million employer contribution for the purpose of providing new pension arrangements in the New Deferred DC Pension Plan for Deferred Aer Lingus IASS Members. (b) the cessation of benefit accrual and contributions with regard to the IASS as well as the implementation of changes to the IASS investment strategy; (c) the Pensions Authority approving the Funding Plan and Section 50 Application submitted by the IASS Trustee (i) to reduce accrued IASS benefits for Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members firstly through the co-ordination of accrued IASS benefits with the Irish State pension, secondly through a further 20% reduction in benefit and thirdly through the removal of revaluation of benefits prior to payment; and (ii) to reduce the pensions of Retired IASS Members by between 0% and 20% depending upon the level of their annual pension; (d) the revision of the existing Aer Lingus DC pension scheme to a New Current Employee DC Pension Plan in respect of future service pension contributions for employees of Aer Lingus who are currently IASS members and in respect of the once-off payments for Active Aer Lingus IASS Members; (e) the establishment of a New Deferred DC Pension Plan in respect of Deferred Aer Lingus IASS Members. Aer Lingus Limited will transfer the entire amount of the million comprising the Proposed Pension Contribution to an escrow structure as soon as the required approval from Shareholders has been received. Aer Lingus Limited, daa, SAA and the IASS Trustee have agreed the form of the Funding Plan and Section 50 Application. The IASS Trustee has submitted the agreed form of the Funding Plan and Section 50 Application to the Pensions Authority and informed the Pensions Authority that the submission will be effective conditional upon approval of the IASS Proposal by Shareholders, any approvals required by daa and SAA from its shareholders, the transfer by Aer Lingus Limited of the entire amount of million comprising the Proposed Pension Contribution to an escrow structure and the reservation of the required funds by daa and SAA. If following confirmation by the IASS Trustee that the Funding Plan and Section 50 Application is effective, the Pensions Authority gives its approval to the Funding Plan and Section 50 Application, the once-off payments will then be paid from the escrow account into individual accounts in the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan on receipt of the signed Waivers referred to below. No payment will be released from the escrow structure into an individual account in the New Current Employee DC Pension Plan or New Deferred DC Pension Plan without the receipt of a signed Waiver from the relevant individual. No amount of the million will be paid to the IASS. If the IASS Trustee cannot or does not confirm to the Pensions Authority that the Funding Plan and Section 50 Application are effective or if the Pensions Authority does not give its approval, Aer Lingus Limited will have the right to have the entire amount of the million contribution returned to it. In addition, the Escrow Agreements will permit Aer Lingus Limited to instruct the Administrator to transfer funds from the accounts in order to restructure the arrangements following a review of the operation of the escrow structure carried out at five yearly intervals or upon an adverse change in 12

14 applicable legal, regulatory or tax rules, or upon the continuance of the escrow arrangement becoming uneconomic. A transfer of funds out of the escrow structure in such circumstances will occur only if Aer Lingus Limited formulates an alternative arrangement which it reasonably considers will achieve substantially the same economic objective as is intended to be achieved by the establishment of the escrow structure described herein. In combination, elements (a) to (e) above seek to address the issues arising from the funding shortfall in the IASS and to achieve certain targeted (but not definitive or guaranteed) pension benefit levels recommended by the Labour Court during 2013 and supported by the Expert Panel during The combination of restructured IASS benefits and revised IASS investment strategy which seeks to more closely match IASS liabilities over the Funding Plan period of 25 years noted in elements (b) and (c) above seeks to address the statutory solvency requirements (i.e. the Minimum Funding Standard) to which the IASS must adhere. In addition to the changes to the IASS, the separate onceoff contributions to the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan described in elements (a), (d) and (e) above seek to result in a substantially more favourable level of pension benefit for Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members than would be the case if the IASS were wound up on a Minimum Funding Standard basis in the absence of the IASS Proposal. This reflects a number of factors as follows: If the IASS were to be wound up, Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members would receive a transfer value which would likely only be worth a fraction of the full transfer value and on this basis would be unlikely to secure the same level of benefit as under the IASS Proposal; Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members would not benefit from the once-off contribution of million; If the IASS were to be wound up, pensions in payment would have to be secured at a significantly higher cost than assumed at the end of the Funding Plan period; The IASS Trustee s scheme actuary estimates that the removal of the unusual feature in the IASS Rules outlined in paragraph (a) below is likely to have an approximately 250 million positive impact on the current IASS deficit. The key elements of the IASS Proposal are set out below. (a) Employer contribution to the New Current Employee DC Pension Plan for Active Aer Lingus IASS Members and the New Deferred DC Pension Plan for Deferred Aer Lingus IASS Members referred to as once-off payments for the benefit of Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members The contributions of the majority of IASS Members are or were made on a Co-ordinated Pension basis. The IASS Rules have an unusual feature which allows these members to leave service prior to their normal retiring date and receive unfunded non-co-ordinated benefits. For those IASS Members with a full 40 years of accrued service, this rule permitting unfunded non-co-ordinated benefits has the effect of increasing members pension benefit by approximately 12,000 per annum (using the effect of non-coordination for recent employee leavers as an example). This unusual feature in the IASS Rules permitting unfunded non-coordinated benefits will be removed in the IASS for both Active IASS Members and Deferred IASS Members and will not apply in the New Current Employee DC Pension Plan and the New Deferred DC Pension Plan. Aer Lingus Limited will pay a once-off contribution of million in respect of Active Aer Lingus IASS Members. The once-off payment for the benefit of individual Active Aer Lingus IASS Members comprises a number of different elements. Firstly, this once-off payment will include a payment of 1,000 per active IASS service year at the time of cessation of benefit accrual in the IASS. This amount would be paid in respect of those employees of Aer Lingus who are Active IASS Members. 13

15 Secondly, a further amount will be payable from the million once-off contribution which is intended to bring each Active Aer Lingus IASS Member s projected (but not definitive or guaranteed) pension benefit at normal retiring date in line with the targeted (but not definitive or guaranteed) levels of pension benefit recommended by the Labour Court and supported by the Expert Panel. Thirdly, an amount of 30.2 million will be payable from the million once-off contribution in respect of a recommendation by the Expert Panel that an amount should be payable in respect of certain elements of Aer Lingus employees variable pay which is not eligible for pension purposes (e.g. shift pay, rostered daily allowances, cabin crew credits, etc.). Finally, an amount of 3.0 million will also be payable from the million once-off contribution in respect of stabilisation payments. Half of this amount will be payable as a cash payment (subject to income taxes and other charges in the normal manner). The other half will be payable directly into the New Current Employee DC Pension Plan. The once-off payments for Active Aer Lingus IASS Members will be paid from the escrow structure into the New Current Employee DC Pension Plan on receipt of the signed Waivers. It is important to note that former employees of Aer Lingus who have now left employment with Aer Lingus will not contribute to the stabilisation of future staff costs described in paragraph 5(d) of Part I of this Circular. Employees of Aer Lingus who left the employment of Aer Lingus and subsequently re-joined at a later date will receive a single payment in respect of their combined service. Deferred Aer Lingus IASS Members will receive a once-off payment of 44 million in recognition of the requirement of the IASS Trustee to consider and balance the interests of Active IASS Members and Deferred IASS Members. Similar to Active Aer Lingus IASS Members, the once-off payment for Deferred Aer Lingus IASS Members will be paid from the escrow structure into the New Deferred DC Pension Plan on receipt of the signed Waivers. (b) Cessation of IASS benefit accrual and contributions and change in IASS investment policy This component seeks to target the maximum possible benefit in respect of past service for IASS Members. With effect from the Implementation Date, the IASS would continue as a frozen scheme. In particular, the operational costs of the frozen IASS would continue to be met by the employers; the IASS would be closed to new members and benefit accrual for IASS Members who are still in employment with Aer Lingus, daa or SAA would cease; and payment of contributions by the employer and employees to the IASS would also cease on the Implementation Date. There would be a need for amendments to the IASS trust deed and IASS Rules and an application to the Pensions Authority and the Revenue Commissioners in order to implement these steps. The IASS Trustee would continue its implementation of a bond based investment strategy to target the maximum possible IASS benefit in respect of past service for IASS Members. The existing assets of the IASS will continue to be invested in a manner that is designed to provide cash flows that match expected benefits to be paid during the 25 year Funding Plan period and to also provide a capital value at the end of the 25 year term that matches the then Minimum Funding Standard values of the liabilities. Aer Lingus understands that the investment strategy involves a portfolio of assets comprising bonds of various durations as well as money market instruments to smooth out any cash flow discontinuities arising. Aer Lingus understands that the portfolio will be constantly monitored by the IASS Trustee and adjusted to achieve this matching objective. Aer Lingus understands that this bond based investment approach is designed to target but not guarantee the maximum possible amount of IASS past service benefit while assuming a certain level of risk. However, it is not possible to hedge all risks completely and residual risks, such as the risk of a sovereign credit default, corporate credit default, other adverse 14

16 events in the underlying asset portfolio or demographic development, such as an unexpected increase in longevity, cannot be completely eliminated. In the event of any such adverse event, deferred pensions and pensions in payment would need to be further adjusted, most likely through a Section 50 Application to the Pensions Authority. This could result in a reduction in the pension benefit expected by Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members and pensions in payment. The execution of the Waivers described later in this Part II is intended to address the risk of litigation against Aer Lingus in the event of any such reduction in pension benefit. Both employer and employee contributions (of 4.0% and 2.0%, respectively) to the IASS Second Supplementary Scheme, which was established at the time of the Aer Lingus IPO in 2006, would also cease. The IASS Second Supplementary Scheme was established to meet, insofar as funds allow and at the discretion of the trustees of the IASS Second Supplementary Scheme, the costs associated with providing cost of living indexation in respect of the pension benefits of IASS Members in any particular year that the IASS does not pay CPI indexation to its members. Aer Lingus and ICTU have agreed to make a joint approach to the trustee of the IASS Second Supplementary Scheme regarding the distribution to members of that scheme of any surplus arising after accounting for benefits accrued. (c) The application by the IASS Trustee to the Pensions Authority to reduce accrued IASS benefits This will involve a reduction in benefits for both Active Aer Lingus IASS Members and Deferred Aer Lingus IASS Members firstly through the co-ordination of accrued IASS benefits with the Irish State pension, secondly through a further 20% reduction in benefits and thirdly through the removal of revaluation of benefits prior to payment. (d) The application by the IASS Trustee to the Pensions Authority to reduce the pensions of Retired IASS Members This will involve reductions in the pensions of Retired IASS Members in accordance with the following table: Annual Pension Up to 12,000 Reduction Nil Between 12,000 and 60,000 10%, but reduced pension will not fall below 12,000 Over 60,000 20%, but reduced pension will not fall below 54,000 (e) Revision of the existing DC pension scheme to a New Current Employee DC Pension Plan for the purpose of future service benefits for Active Aer Lingus IASS Members who are employees of Aer Lingus Limited As pension benefit accrual in the IASS will cease, Aer Lingus proposes to revise the existing Aer Lingus DC pension scheme for the purpose of future service pension contributions of its own employees. Active Aer Lingus IASS Members who are employed by Aer Lingus Limited will cease to be Active IASS Members and become active members of the New Current Employee DC Pension Plan. The New Current Employee DC Pension Plan will comprise employees of Aer Lingus only. Membership of the New Current Employee DC Pension Plan will be deemed a contractual term for employees with employee contribution rates set at a minimum of 6.375% of pensionable salary. The employer will contribute 10% of pensionable salary and will have no additional contribution obligations to the New Current Employee DC Pension Plan other than for death in service life office obligations and operational expenses. Aer Lingus currently contributes on average 9.12% (which reflects both the IASS and the IASS Second Supplementary Scheme and after an adjustment to reflect the effect of the Irish State pension) of pensionable salary under existing arrangements. 15