A private placement of Aer Lingus shares could knock more than 15 per cent off the value of the airline, the confidential Goldman Sachs report to Government has suggested.

The report, which is being studied by senior Government Ministers, says a flotation of the airline will probably result in a 10 to 15 per cent discount from the airline's fair value, but the discount would be larger with a private placement.

The report explains why a major discount would be necessary in the case of a private placement of equity. "Investors will seek a discount ... in order to compensate them for the perceived risks of the investment structure."

It says these risks would be the lack of liquidity in the shares, the presence of other shareholders like the Government and the ESOT and the unprecedented nature of the investment.

It says an initial public offering (IPO) would involve "a discount to fair value of 10 to 15 per cent", but the private placement discount would be greater.

The report is broadly sympathetic to the idea of an IPO and points to successful flotations this year of Eircom and C&C. "Aer Lingus has the correct attributes for a successful IPO," it states.

However, it warns about the "cyclicality" of the airline industry and concerns over oil prices.

It says a flotation would require a "window of opportunity" in both the airline sector and the equity markets. "Thus the available window is shorter than for many other types of company," it states.

It says the airline's story and its recent performance would provide considerable support for an IPO and the omens are far better than when a previous attempt was made in 2001.

The report suggests preparation be done on an IPO and, when conditions are right, the company should go to the market.

The report cautions that any private placement would require more than just traditional institutional investors and may need a domestic consortium. It says any placement will "almost certainly be the first step to an IPO" as investors will want an exit strategy.

The report says that if new capital is not secured for the airline, the present management team might not remain.

It says this is because the future expansion would be put at risk and the current management team has no wish to expand the airline's fleet by taking on high levels of debt.

It says the loss of the current management team could be "damaging" because any new team would have to win the confidence of investors and this could take time.

The Cabinet sub-committee, set up to consider the airline's future will meet "in the coming weeks", a spokesman for the Minister for Transport, Mr Cullen, said last night.

"We understand the importance of taking the right decisions and mapping out a positive future for the company," Mr Cullen added.