cutting to survive
Those who think the idea of Aer Lingus going bust is fanciful should look at the CEO's career
The savage cost-cutting plan, which was announced this week, marks the end of Christoph Mueller's brief honeymoon at Aer Lingus. With the former state-owned airline bleeding prodigious volumes of red ink, only extreme measures can save it from extinction.
This week, almost three years to the day after it was first floated on the stock exchange, new Aer Lingus boss Christoph Mueller unveiled his plans to cut costs at the airline.
Ever since he was first appointed to succeed Dermot Mannion last July it has been clear that Mueller would have to take drastic measures to stave off disaster at Aer Lingus. The company lost €120m last year and expects to lose a further €140m this year. These losses mean that it is rapidly eating through its cash reserves.
At the end of 2007 Aer Lingus had net cash €757m in the bank. This had fallen to €653m by the end of last year and to just €439m by the middle of 2009 with analysts predicting that it will have just €280m left by the end of this year. At this rate of cash-burn Aer Lingus would have exhausted its cash reserves by 2011 at the latest.
For those who think that the notion of Aer Lingus going bust is fanciful, Mueller's own career should serve as a wake-up call. He was the last chief executive of the Belgian flag carrier which crashed and burned in the aftermath of the 9/11 terrorist attacks in 2001 when its parent company Swissair collapsed. Just because Aer Lingus was a state-owned flag carrier for the first 70 years of its existence is no guarantee that it too won't disappear.
Sabena
Indeed, Aer Lingus almost followed Sabena into oblivion in late 2001.
With demand for air travel having collapsed following 9/11 it was only the shock therapy administered by then chief executive Willie Walsh that kept the company flying.
However, as soon as Walsh was squeezed out in January 2005 following a very public disagreement with then Taoiseach Bertie Ahern over the privatisation of the company, Aer Lingus fell back into the comfort zone.
While the four-year reign of Walsh's successor Dermot Mannion did see the eventual privatisation of Aer Lingus in October 2006, he lacked Walsh's ruthless cost-cutting instincts.
Even worse, the privatisation left Aer Lingus with a totally dysfunctional shareholding structure.
Less than a week after the flotation, Ryanair launched the first of two bids for Aer Lingus. Although both of these bids failed, their legacy has been deadlock at Aer Lingus.
With the State holding 25.1pc, the employee share ownership trust 14.2pc and Ryanair 29.8pc, neither side has been able to prevail over the other.
As if all of this wasn't enough to be getting on with, Ryanair is eating Aer Lingus alive.
In 2008, the average short-haul fare at Aer Lingus was €87.75, more than twice the average Ryanair fare of just €40.
Ryanair can charge far lower fares than Aer Lingus because it is much, much more efficient.
In the year to the end of March 2009 Ryanair's 6,340 staff cost the company a total of €309m and processed 58.6 million passengers.
That works out at the equivalent 9,200 passengers per staff member and an average staff cost of €5.27 per passenger.
Passengers
Meanwhile, in calendar 2009, the 4,000 Aer Lingus staff processed 10 million passengers, an average of 2,500 per staff member while the total Aer Lingus payroll of €334m worked out at the equivalent of €33.35 per passenger flown.
That's no way to run an airline. Quite clearly something had to give.
Although his appointment was announced in mid-July, Mueller didn't start at Aer Lingus until the beginning of September while he served out a period of "gardening leave" agreed with his previous employers, German travel group TUI.
Less than a week before he took over the controls at Aer Lingus the airline had published an appalling set of half-year results.
In the six months to the end of June operating (pre-interest) losses at Aer Lingus quadrupled to €93m while its sales fell by 12pc to €555m.
Even worse was the continuing haemorrhage in the airline's cash reserves, which almost halved over the previous 12 months to €439m.
Although Aer Lingus managed to boost short-haul passenger numbers by 3.6pc to 4.4 million in the first half and capacity by 4pc, short-haul revenue was down by almost 10pc due to a 13pc fall in average fares.
However, while the performance of Aer Lingus's short-haul business was merely poor in the first half, its long-haul operations turned a truly awful set of numbers.
Passenger numbers dropped by almost 12pc to 528,000, average fares were down by 18pc while revenue collapsed by 28pc.
While long-haul capacity utilisation was up by 2.5 points to 70pc this was only achieved by slashing available seat capacity by18pc.
These dire first half results meant that the German-born Mueller had no choice but to act quickly.
He didn't bother with the sort of plamas that is the stock-in-trade of many newly-appointed Irish bosses.
Instead he explained the gravity of the situation facing Aer Lingus and the need for drastic action with brutal candour, warning staff that "amputation" rather than "cosmetic surgery" would be needed to reduce costs at the airline.
He was as good as his word. The cost-cutting plan, which was announced on Wednesday, a mere five weeks after Mueller's arrival, was one of which any sawbones would have been proud. Designed to cut annual costs by €97m, the plan will see almost 700 Aer Lingus staff, a sixth of the total, lose their jobs. These job losses come on top of the 100 temporary staff who were informed last month, many of them by text, that their contracts would not be renewed.
For those who are keeping their jobs the news is also grim. Not alone does Aer Lingus propose to impose pay cuts for all staff earning more than €35,000 a year, with most staff likely to see their gross incomes fall by at least 10pc, it is also planning to shut its current defined benefit (final salary) pension scheme and replace it with a much less generous defined contribution scheme.
The reaction of the Aer Lingus trade unions has predictably been one of outrage with SIPTU, IMPACT and Unite all criticising the plan and making vague threats of dire consequences if the company persists with its proposals.
Meanwhile, Ryanair boss Michael O'Leary asked why the Government had rejected his company's second bid for Aer Lingus last year, which he claimed would have created 1,000 jobs.
Was this, many wondered, the opening shot in a renewed Ryanair assault on Aer Lingus?
While O'Leary denied that his company was contemplating a third bid, his starring role in the Lisbon Treaty referendum 'Yes' campaign will have done Ryanair's cause no harm at all in Brussels.
All of which means that Mueller's cost-cutting plan, no matter how unpalatable its contents, is about as good as it gets for Aer Lingus and its employees.
If the Aer Lingus trade unions reject his proposals then it will almost certainly be a question of when rather than if their members are thrown on Michael O'Leary's tender mercies.
Irish Independent
