The decision on whether or not to proceed with a 900m flotation is arguably the most politically sensitive issue facing the Fianna Fail/ Progessive Democrats coalition in the run-up to next year's general election.

The government's financial advisers, AIB and UBS, are working on a document covering possible solutions to the pension deficit at the airline, and their final report will be presented to transport minister Martin Cullen by the end of this week.

Cullen intends to bring proposals to the cabinet within a fortnight of receiving that report, and the government will then have to take a decision on the proposed sale of Aer Lingus.

Taoiseach Bertie Ahern indicated recently that part of Aer Lingus would be sold off to allow the airline to grow, but many political observers feel that the government has yet to make a final decision on the matter. Some stock market sources also remain to be convinced that the government will opt for privatisation.

The government's advisers favour an initial public offering (IPO) of up to 60% of the airline, in a move that could value Aer Lingus at between 800m and 900m.

It is thought that any notion of another airline coming in as an equity investor ahead of an IPO has been ruled out.

If the government does opt for a sale, the state will retain at least 25% of the equity.

Staff at the airline own a 15% stake under an employee share ownership trust.

The chief executive of Aer Lingus, Dermot Mannion, needs 500m in cash to fund a 2bn aircraft purchase order to effectively double the size of the fleet. That money will have to come from the proceeds from the flotation and the airline's internal resources.

It is thought that Aer Lingus management wants the flotation to take place in June or July, which would give the company and the government about four months to prepare for the flotation. "It's a tight time-frame, but you need a sense of urgency to get these things away, " said one market source.

The pension deficit at the state's aviation pension fund, which includes workers at Dublin Airport Authority and SR Technics staff (formerly with the aircraft maintenance company TEAM Aer Lingus) could run to 336m if indexlinked pensions continue.

It has been suggested that about 200m from an IPO could be transferred to the pension fund. The UBS/AIB report is expected to examine this could be effected.