Can Aer Lingus Weather the Storm?

In the first six months of 2009 Aer Lingus lost €18.80 for every man, woman and child it carried on its fleet. In stark contrast to this stands fellow low-cost Irish carrier Ryanair which is expected to post profits in the region of €200-€300 million for 2009 as a whole.

Despite espousing the same ethos, these two airlines have produced dramatically different sets of results. This is due to Aer Lingus’s heritage rather than a lack of competence on the part of its management, as airline analyst Joe Gill explains: “a unique combination of being exposed to Europe’s fastest contracting economy and an uncompetitive cost structure lie behind these numbers. Aer Lingus can do little about the former (which is being exacerbated by air passenger departure taxes) but a lot on the latter. A radical change in cost per passenger (which was €131 in the first half of the year) is needed urgently.”

Indeed, the problems at Aer Lingus boil down to structural inefficiencies.  The airline has inherited a considerable underbelly from its days of public ownership. The extent of this is underscored when considering that there are baggage handlers at Aer Lingus earning in excess of €100,000 a year.  Ryanair’s average cost per passenger of €37 is 138% lower than the average short-haul passenger cost for Aer Lingus. A quick examination of the airlines’ respective structures shows why there is such a disparity in these cost bases.

This year Ryanair is expected to carry just over 67m passengers, while employing a 7000 strong workforce compared with 10m passengers and 4000 employees for Aer Lingus. The average employee salary at Ryanair is €50,000 per annum, while that at Aer Lingus is €82,000 per annum (salaries for senior management excluded for both firms). In practical terms, for every aircraft Ryanair operates it employs 30 staff while Aer Lingus needs 65 employees to get each of its planes off the ground.

Unfortunately for Aer Lingus’s management, the unions are in such a strong position that any attempts to restructure the airline have, to date, failed. After reporting losses of €22m for the first half of the year, in October 2008, Aer Lingus announced a €74m cost-saving plan. It involved up to 1500 job cuts, including the loss of cabin crew bases in Shannon and Heathrow. However the plan was met with such hostility, particularly from trade unions, that it has since been abandoned. The inability of the company’s management to follow through with these proposals has been catastrophic for the airline’s balance sheet.  Its cash reserves- a crucial asset for any airline- looks increasingly anaemic:  money holdings have fallen to €440m- 45% lower than in the first half of 2008- and some analysts fear that it could be reduced to as little as €300m by year end.

Despite the negativity surrounding the firm, the Aer Lingus business model still has great potential for profit- if it can be executed correctly. Hope for the airline lies with Christoph Mueller. The first non-native at the helm of Aer Lingus, the German CEO seems to have no illusion about the pressure he is under. The ink was still drying on his contract when he admitted the airline’s chances of survival were “just higher than 50:50”. 

Commenting on the new appointment Joe Gill added “the newly arriving CEO has no experience of the schoolyard finger-pointing that has defined the narrow-minded debates about Aer Lingus in the past. He is likely to put crystal clear choices to the business.” Mr. Gill noted that there is a need for a reduction in unit costs by at least 20% and a realization that unless “extreme measures” are adopted a forced merger could be on the cards.
Not only is Mr Mueller fully aware of the obstacles facing the airline, but he has a clear understanding of what needs to be done if Aer Lingus is to survive. In a recent interview, Mueller warned the airline’s 4000 staff to expect an “amputation” rather than “cosmetic surgery” as he attempts to restructure the ailing firm. While Mr. Mueller refused to be drawn on concrete figures, he said he was looking at ways “in which the cull could be minimized”.

The future for airlines around the globe has never been so uncertain. The International Air Transport Association (IATA) has retained its forecast loss of $9bn for the industry this year, and warns that any further upward move in oil prices would prove be disastrous.

This is a warning which Aer Lingus will surely heed when it unveils its latest cost-cutting plan at the end of October. If it can significantly cut costs, and restructure the airline according to its low-cost principals, then it could once again be profitable. If it fails, then we can expect a Ryanair monopoly on the Irish market.