Aer Lingus rapidly running out of runway
Thu, Oct 08, 2009
With losses mounting and the demand for seats falling, radical steps are needed if the airline is to remain solvent, writes CIARÁN HANCOCK
IT MUST have felt like Groundhog Day for Aer Lingus workers yesterday. For the third successive year, they are being asked to agree to a major reorganisation that will significantly change their terms and conditions. If they don’t sign up to this plan, the airline has warned that its future viability cannot be guaranteed. Workers have been told in no uncertain terms that they have six weeks to sign up to the first phase of the plan – which involves 489 job cuts – or management will begin slashing routes, beginning with its long-haul services, and selling aircraft. Compulsory redundancies will also be introduced and the directors have indicated that they will meet strike action head on.
Tough talk from an airline that has always ended up compromising on its restructuring plans in the past. Aer Lingus wants to cut 676 jobs over the next two years. That amounts to 17.3 per cent of its total workforce. In financial terms, it wants to shave €74 million off its staff costs. That’s 24.6 per cent of its near €300 million annual staff bill. Those workers on €50,000 are facing a pay cut of 10 per cent and having to accept a new, lesser pension scheme. It’s no wonder trade unions described the plan as “draconian” and “vicious” and have made it clear that strike action will follow if this plan is pursued.
Staff interviewed by broadcast media yesterday also vented their anger at the latest round of cuts, given that they have already accepted two major reorganisations over the past two years. It’s hard to blame them. Unlike in previous years, there are no other jobs in the economy to go to for alternative employment.
The only crumb of comfort is that Aer Lingus has no immediate plans to outsource activities such as cleaning and catering, largely because staff in these areas have already had their terms reduced under previous plans. Chief executive Christoph Mueller even suggested to staff meetings yesterday that Aer Lingus could sell catering services to third parties, such is the leanness of the operation.
This doesn’t deflect from the huge challenges facing Aer Lingus. According to management, all of its long-haul services are loss making. Demand from business travellers has collapsed. About 70 per cent of its €93 million operating loss in the first half of the year related to long-haul services. Plans to fly to the west coast of the US next summer have been axed and its winter service from Shannon to New York is to be trimmed to three flights a week. One long-haul aircraft is to be mothballed.
Aer Lingus’s new bases in Belfast and London Gatwick are also operating in the red, although the company said they are heading in the right direction. Consumer demand, particularly in Ireland, which still accounts for 85 per cent of Aer Lingus’s business, is down and fares are under huge pressure. In addition, Ryanair has been flooding the market with cheap or free seats.
Globally, airlines are expected to rack up combined losses of €11 billion this year, the worst in living memory. Aer Lingus’s operating losses could hit €150 million this year and top €100 million in 2010. Clearly, radical action is required if the airline is to remain solvent.
In June 2008, Aer Lingus had a cash pile of €803 million. But it has been steadily eating into that fund to makes ends meet. It has already halved and some analysts believe the cash pile could dwindle to just €130 million by the end of 2010. This net cash, a legacy from the 2006 IPO, was to have been used to buy new aircraft. Aer Lingus has about €1 billion worth of aircraft on order.
The money has evaporated yet the fleet commitments remain in place. This is clearly an unsustainable position and is the reason why the airline has to urgently tackle legacy work practices and terms and conditions.
One of the most interesting aspects of yesterday’s announcement was that Aer Lingus is to apply for an Airline Operating Certificate (AOC) in the UK. It says this would enable it to operate routes from Britain to non-European Unions countries, including Russia, Turkey and in north Africa. This would also give Aer Lingus the opportunity of moving its aircraft from Ireland to the UK, a nuclear option that could be exercised if pilots here don’t play ball with its redundancy programme.
“That option is always there,” finance director Seán Coyle admitted yesterday. Coyle said it could take three to six months to secure an AOC in the UK. Separately, talks are continuing with United Airlines on the proposed joint venture service from Washington to Madrid, which is due to start next March. Under the deal, Aer Lingus would staff and operate the aircraft for this service. Coyle said this plan, which was the brainchild of former chief executive Dermot Mannion, is still under review. A final decision will be made in two to three weeks, he added.
One source suggested yesterday that if the Washington service takes flight, Aer Lingus could relocate aircraft currently serving transatlantic routes to Ireland to the US, where it could avail of lower local operating costs.
Again, such a move would diminish the influence of pilots in Ireland, a powerful lobby within the airline. Coyle said the current proposals – which, if all goes to plan, would have a payback time of less than a year for the airline – would reduce its average costs per passenger by about 10 per cent. This would still be almost twice the level of Ryanair, the leanest short-haul operator in Europe by a country mile, but would move it closer to British low cost operator EasyJet.
There are some similarities between Aer Lingus and EasyJet. Both fly to main city airports and have a slightly more human face than Ryanair.
“People prefer to fly with Aer Lingus when they can but they’re not prepared to pay excessively for it,” Coyle said. He is probably right although, as time goes by, that premium is reducing.
Ultimately, implementation of this plan will come down to management’s determination to push through these measures. The investment community will be urging them on but you can expect politicians across the country to push for a compromise.
Already some board members are queasy about the plan. David Begg, general secretary of the Irish Congress of Trade Unions and a director of Aer Lingus, said that if the airline’s proposals were not accepted by the staff then they could not proceed.
One thing is certain. Aer Lingus cannot continue in its current state. Something has to give. It’s just a case of who blinks first.