Tuesday 24 October 2017

Viva Las Vegas: Aer Lingus boss to gamble on winter route on way to more growth

Interview: Stephen Kavanagh, Chief Executive, Aer Lingus

Now owned by IAG, Aer Lingus has significantly expanded its transatlantic operations in the past couple of years. Its ceo Stephen Kavanagh tells John Mulligan that there is a lot more opportunity for the airline to scale up, and that Dublin Airport can become a primary hub for Europeans travelling across the Atlantic

Aer Lingus ceo Stephen Kavanagh is focused on developing the airline’s ‘quality of network’ rather than a great spread of destinations
Aer Lingus ceo Stephen Kavanagh is focused on developing the airline’s ‘quality of network’ rather than a great spread of destinations

There are two long-haul Airbus A330s undergoing winter maintenance in the hangar near Stephen Kavanagh's office at Dublin Airport.

Passenger seats have been stripped bare and are huddled outside the jets, the St Patrick and St Ronan, waiting to be reupholstered - just one of the jobs being taken care of during the slacker winter months.

But if Kavanagh has his way, those planes will in future be spending more of their time in the air.

Jammed during the summer, the transatlantic routes they serve are quieter at this time of year. It's handy for maintenance, but having over €500m worth of assets sitting idle means they're not making money.

And so Kavanagh is throwing the dice with his plan to operate an Aer Lingus service between Dublin and Las Vegas next winter. But it's a calculated risk - like one taken by the gambler who's been playing blackjack, but has been busy counting cards.

"We are working to build a business case to operate a seasonal service to Las Vegas," he says. "We need to find a balance to the peak summer months, where the US consumer the main source of our traffic and where Ireland is the destination."

Aer Lingus hasn't yet decided, he adds, if the service will be year-round, or just "tactically" deployed during the winter months.

"We've a lot of issues to put to bed, not least the cost of the operation, but we think there's demand there," says Kavanagh. "We can see from our own traffic data that for the Irish consumer Las Vegas is very attractive."

The service would operate no more than three times a week, and possibly two, he adds.

All this is part of a wider strategy that Kavanagh (49), whose father spent his own career in the Dublin Airport police and fire service, has been a low-key architect of over the past number of years - including helping build the airport into a European hub for transatlantic travel.

Kavanagh has worked his way up through the ranks, starting on check-in desks when he was just 18, before rising to become chief commercial officer at Aer Lingus when the airline's former boss, Christoph Mueller, joined in 2009.

It was a tumultuous time. Mueller had to embark upon a rapid cost-cutting and restructuring programme at the Irish carrier to align the business with a new economic reality at the time. The nation's finances were headed down the tubes, a slide reflected in companies and in consumers' pockets across the country.

But now Kavanagh, who succeeded him in early 2015 as British Airways owner IAG tabled a €1.36bn offer for the Irish carrier, presides over a very different airline. Not only is it part of the International Airlines Group (IAG), which also owns Spanish carriers Iberia and Vueling, but it has expanded rapidly - and is continuing to do so.

And although the changes under Mueller (who's now working at Gulf carrier Emirates) were sweeping, Kavanagh reckons more recent history at Aer Lingus has been more transformative.

"We have delivered more change in the past two years than we delivered in the previous decade," he says.

"What has enabled that is the success of the growth. It's far easier to restructure and far easier to achieve change in a growth scenario. We have become more cost-efficient, more competitive and sustainable."

And profitable. In 2015, the year it was acquired by IAG, Aer Lingus posted a €124m operating profit. That compared to €72m it made in 2014. The growth in its transatlantic services has played an important part in achieving that profit boost.

In 2015, the adjusted operating margin at Aer Lingus was 8.9pc. IAG's group figure was 11.2pc.

But in November, Kavanagh told investors that Aer Lingus's previous 12-month adjusted operating margin was in excess of 13pc, and it was targeting a return on invested capital (a key measure of how efficiently a company generates profits) of five percentage points above the IAG target, which is about 15pc.

IAG, headed by former Aer Lingus boss Willie Walsh, has also been keen to use Aer Lingus as a tool for capturing more transatlantic traffic. Last year - in its first full year under IAG ownership - Aer Lingus added 350 jobs, bringing its total to more than 4,000.

And being part of the bigger airline group has enabled Kavanagh to scale up Aer Lingus much faster than would have been possible as a standalone entity.

This is a point continually made by Aer Lingus management and IAG in early 2015 when they were being grilled by politicians who wanted it to remain an independent company with the State retaining its 25.1pc stake. Last year, IAG said it was adding long-haul A330-300s to the Aer Lingus fleet. This summer, it will have 15 jets serving North America, including four leased Boeing 757s.

Since it was acquired by IAG, Aer Lingus has boosted frequencies on existing routes, announced a new service to Miami (it begins later this year) and opened routes between Dublin and Newark (New Jersey), and Hartford (Connecticut). Later this year, it will start flying between Dublin and Miami (it already serves Orlando).

So how many US cities does Kavanagh think Aer Lingus could serve beyond the 11 it will have with Miami and Las Vegas?

"There are a limited number of gateways (in the US) that we would wish to serve," he says. "We think we have the capacity to serve more.

"New technology aircraft bring us the potential to add more. But we also see opportunities to grow on the existing networks. We want to fly to where people want to fly.

"If we continue to grow New York JFK, for example, it just improves the efficiency of the hub at Dublin and it means that there's more connecting opportunities to the UK and Europe as a result. It's not necessarily the spread of destinations, it's more the quality of the network that we're focused on."

Dublin is now the fifth-largest airport in Europe for connectivity to North America, hot on the heels of Amsterdam.

At the moment, Aer Lingus has about a 2.5pc share of total transatlantic capacity, flying 1.7 million such passengers last year out of a total 11.9 million it carried in 2016.

The ambition, says Kavanagh, is to "at least" challenge the 3pc of transatlantic capacity figure.

That would see it add between three and five more aircraft, adding as many 500 jobs. The airline will offer more than 2.2 million transatlantic seats this year.

About half its transatlantic passengers fly point-to-point - from one airport to another. But about a third of passengers who take an Aer Lingus long-haul flight have first taken another flight to connect to a long-haul service, with the remainder using the long-haul network to fly onwards to a further, final destination.

"We've had great success in recent years at becoming relevant as a gateway," says Kavanagh. "For a consumer in Newcastle, if an airline is only flying to two or three destinations (in North America), then you're a secondary consideration to a secondary hub.

"If you have a dozen destinations in North America, delivering on value and service, then when you're considering a journey across the Atlantic, you'll think Aer Lingus. It's not a third or fourth option any more. That's what we've built and what we'll continue to develop."

Don't even think of describing Dublin as a secondary hub. It gets Kavanagh riled up. He argues the point is to think big. Dublin, he says, has an opportunity to be more than that, able to provide a "compelling proposition" to customers who currently fly to the US out of London, Amsterdam or Paris, for instance.

"The opportunity doesn't exist forever," he says, noting how other carriers such as Iceland's low-cost carrier WOW are flying passengers from Ireland via Reykjavik to the US. WOW is also considering setting up a base in Dublin.

"If you don't take it, someone else will. That's what we need to recognise, not just from an Aer Lingus perspective, but from a Dublin perspective and an Ireland Inc one."

And a small part of the jigsaw includes the once unthinkable - a deal with former arch nemesis Ryanair.

The pair have all but sealed a so-called interlining agreement that will effectively see Ryanair feeding passengers from its extensive short-haul network to long-haul Aer Lingus routes. It will involve revenue-sharing and back office co-operation with ticketing.

Both airlines downplay the significance, Ryanair management pointing out that its planes are full most of the time anyway, giving little leeway for carrying many passengers who'll be connecting to Aer Lingus.

Turning 50 next December, Kavanagh is not far off the age of 55 that Willie Walsh once described as his own "ideal" retirement age. Walsh has since said he's realised that 55 is still young.

Kavanagh tussled with former EasyJet chief operating officer Warwick Brady to secure the Aer Lingus chief executive role, and says he has no plans of going anywhere soon. Brady is now deputy chief executive at Stobart Group, the UK transport firm that owns Aer Lingus Regional operator Stobart Air.

"I worked for many years to try and develop the business and the opportunity," says Kavanagh, who famously doesn't drive but gets the bus to and from work from his home in nearby Drumcondra.

"I believed I could add value in that context. That was the reason I had the ambition to be chief executive," he says. "Ultimately - I won't say it's a lifetime's work - but I'd spent 26 years in Aer Lingus. There weren't many things that I hadn't some hand or part in, or supported. The ability to have some influence over the delivery of that opportunity was something that was too good an opportunity to pass."

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