Friday 15 December 2017

Emmet Oliver: Aer Lingus needs more than cosmetic makeovers

Ever since it floated in September 2006, Aer Lingus has been held back by one core problem. Forget its elevated cost base, forget the presence of Ryanair on the share register, forget (if you can) the highly political make-up of its board.

The central handicap facing the airline ever since the IPO has been a confidence-sapping identity crisis.

The carrier does not know what it is and unfortunately may never know. The airline has, in some respects, hired a succession of makeover artists, rather than chief executives.

Each new CEO has turned his back on the work of his predecessor, and the lack of a consistent strategy at the top is starting to drag the airline towards the financial abyss.

When Willie Walsh took over the helm in 2001, he effectively rejected the work of predecessor Michael Foley by ditching the airline's previous gilded image and cost base, with Walsh even selling off the airline's precious art collection.

Walsh ditched the premium cabin on key routes like London, and managed for a few years to give Ryanair genuine competition on short-haul routes.


When Walsh departed for British Airways, Dermot Mannion arrived in 2005 and immediately rejected Walsh's idea of Aer Lingus being a genuine threat to Ryanair on short-haul routes. Taking on Ryanair had reached "saturation'' point he told this reporter at one stage.

Mannion opted instead for a major ramp-up of long haul and started services to Dubai and extra routes to the US. He also decided Aer Lingus should ramp up aircraft purchases and get out of the Oneworld alliance which was no longer "relevant'' because Aer Lingus was all about direct flights. Mannion also said the airline wanted to remain independent and look at expanding out of the UK via a hub at Gatwick.

This week, German chief executive Christoph Mueller is putting the engines into reverse thrust once again.

Gatwick is going into "hibernation'', passengers are to be fed into big global hubs, aircraft purchases are being reversed or halted, the airline is not opposed to the idea of joining an alliance and it wants to be seen as more EasyJet than Ryanair.

Regional services, despised by previous Aer Lingus chief executives, are once again on the agenda and all kinds of full-service extras are to be offered in exchange for higher fares.

The tepid reaction of the market suggests this latest image makeover will take time to gather admirers. The airline is now going to be a hybrid, neither a cost-conscious Ryanair or a full-service British Airways. Instead it is going to be something in between and maybe even profitable.

The destruction of value at Aer Lingus since it floated at €2.20 a share has been nothing short of extraordinary (shares were trading this week at 68 cent).

While Mueller can be blamed for little of this, the airline has effectively become a furnace in which shareholder's money gets incinerated.

The return on equity at the airline is minus 12.5pc and the erosion of cash has been astounding, with net cash dropping from €757m at the end of 2007 to €280m at the end of 2009, according to numbers issued this week by Goodbody Stockbrokers.

Clearly Mueller is the latest makeover man attempting to deal with this situation, and the Irish brokers at least have congratulated him so far on the cost reductions he has forced through.


That latest makeover -- to become Ireland's EasyJet -- however will not be easy. Firstly, EasyJet is not a short haul/long haul operator like Aer Lingus, but the differences are bigger than that.

EasyJet is profitable for a start, it has been increasing its cash, not draining it away. It is committed to keeping fares at present levels, believing this will help attract passengers trading down. EasyJet, like all airlines, wants to attract this trading down traffic, known by aviation analysts as substitution.

Aer Lingus is the same. But its problem is that wherever it goes there is always somebody else, usually cheaper, to trade down to, whether it be EasyJet or Ryanair.

Also the idea of charging customers for extra services and better food seems to go against the whole 'trading down' phenomenon.

Business travellers are prepared to trade down and are doing it in their droves, but when they trade down that means they demand even more convenience and proximity to their destination.

With their main hub at peripheral Dublin Airport, that is going to make things difficult for Aer Lingus.

Aer Lingus may also want to feed its passengers into larger carriers, but they already have their own regional services doing that -- for example, Air France has CityJet.

Time will tell whether the new changes will work but, based on recent history, makeovers have to be permanent and credible and not purely cosmetic.

Irish Independent

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