Airline issues stark warning about the ‘profound effect’ Covid has had
Aer Lingus has suffered a €1bn swing in its net debt position, the same amount that it will soon need to spend to replace its fleet of 20 aging short-haul aircraft.
The now loss-making airline issued the stark warning in a Labour Court submission, and said that the damage it is has suffered from Covid meant that it is already unable to compete with Ryanair on European routes.
The revelations are part of a detailed submission to the Labour Court where it is currently locked in a process with trade union representatives of ground staff.
It has warned Siptu that failure by its members to accept the pay freeze and cutbacks it is seeking could see it adopting an outsourcing model, rather than the direct-employment model it currently operates for ground-handling.
“This is not, as has been suggested by some, an employer looking to maximise an opportunity. It is a necessity,” the airline warned.
The airline outlined how it had experienced a more than €1bn swing from cash to net debt, and said its financial situation “will deteriorate further when the full-year results for 2021 are included”.
It had gone from being €277m cash positive at the end of 2019 to having net debt of €546m at the end of the first half of 2021, it said.
“That is a decline of €823m. When you factor in the profitability we would have expected to achieve in a normalised year (in 2019 it was €275m), that is a swing of over €1bn. This situation will deteriorate further when the full-year results for 2021 are included.
“To put that in a relevant context for you, that €1bn would have paid in full for an entire re-fleeting of our short-haul aircraft,” said the submission.
“Aer Lingus has had to add significant debt – €300m – purely to survive Covid. The terms of these debt structures are at commercial rates and therefore must be repaid with interest.
"This money must be repaid in the next three years and further debt may well be required if the new Omicron variant continues to seriously depress travel. Funding for aircraft re-fleeting is required on top of this, to ensure the long-term future of the business.
“Aer Lingus has the oldest short-haul fleet in the IAG group. Prior to the pandemic, this was the single greatest issue that the business needed to address. Aer Lingus needs to replace over 20 aircraft over the next eight years to avoid shrinking significantly. This will cost approximately $1bn.”
The airline warned that its short-haul operation had already decreased in size due to Covid – going from 37 aircraft in 2019 to 30 aircraft in 2022.
“The impact of the short-haul operation shrinking will also start to impede on our long-haul fleet growth, as the ability to connect into continental Europe is restricted. Either we can operate efficiently and profitably enough to finance this re-fleet, or we have far fewer airplanes and far fewer jobs,” it said.
Aer Lingus is also facing significant competitive pressure from Ryanair.
“Ryanair has been able to launch a far more extensive short-haul rebuild than us. This is because they have a cost base that allows them to put really low fares in the market to drive demand. We cannot put capacity in the market at these prices – it would only add to our losses.”
The airline blamed Irish Covid restrictions that were much more rigid than elsewhere, saying “our capacity, our load factors and our forward bookings remain well below where they need to be.”
In its peak month of August 2021, its capacity had reached just 30pc – even after EU travel had reopened in July.
“While the US did open again on November 8 and we did experience a pick-up in numbers (off a very low base), our booked loads for the coming winter season are significantly below break-even for the vast majority of our routes. Our forward bookings for the coming months also remain far below normal levels.
"This was the case before the recent Omicron developments and therefore this position is likely to be further exacerbated.”
It said despite offering “extremely competitive” round-trip fares to Newark of €208 and €317 to Orlando, it still had “lots of capacity”.
“People are not booking at this point. Very few want to travel this winter. The level of losses will significantly exceed anything we have seen before,” it said.
Although it planned getting back to 80pc of normal capacity by March and was continuing to add capacity to protect slots, if uncertainty continued into January “we may be forced to revisit our operational plans” for the rest of 2022.
“We are attempting to rebuild in a very uncertain world – and nonetheless we remain ambitious for a more normal summer in 2022. The alternative is unthinkable.”
The detailed warning to the Labour Court about the future of the airline was in response to the refusal by staff at Dublin Airport to accept three elements of an overall structural change plan already agreed by cabin crew and pilots.
Ground staff, who spent much of the past two years on greatly reduced wages, have refused to accept a pay freeze, a 10pc reduction in roster duty allowance payments, and the removal of a scheme that incentivised staff to charge passengers for excess baggage.