Saturday 25 May 2019

Take Walsh's money, and kick county councillors out of the airline business

Aer Lingus was hamstrung for years by politicians - now they're at it again

Willie Walsh, chief executive of International Airlines Group, speaking to journalists as he left Leinster House last week after his meeting with the Oireachtas Committee on Transport. Photo: Frank McGrath
Willie Walsh, chief executive of International Airlines Group, speaking to journalists as he left Leinster House last week after his meeting with the Oireachtas Committee on Transport. Photo: Frank McGrath
Colm McCarthy

Colm McCarthy

On Thursday last, Willie Walsh, chief executive of IAG (International Airlines Group), the prospective bidders for Aer Lingus, provided members of the Oireachtas Committee on Transport with an elegant tutorial on how commercial airlines actually work.

He was wasting his time - the assembled deputies and senators showed not the slightest interest. Instead, they focussed relentlessly on constituency or trade union angles. Several sought unconditional assurances on the maintenance of specific routes or the introduction of new ones serving airports in their home counties or on jobs-for-life commitments for Aer Lingus staff. In effect they were inviting Mr Walsh to commit his employers IAG to losing money in their constituencies. He declined as politely as he could. The enhanced role of Oireachtas committees was meant to be a key political reform resulting from the bubble disaster. Last Thursday's county council meeting suggests that nothing has changed.

The political discussion of the IAG proposal has been conducted rather as if Aer Lingus still belonged to the politicians. Anyone concerned about the airline's future will be breathing a sigh of relief that it does not. An airline route network designed by the members of the Oireachtas Committee on Transport would truly be a sight to behold. There is no computable limit to the amount of money these people would lose running an airline. Aer Lingus had to be rescued with taxpayers' money on several occasions when it was the plaything of politicians. The members of the Oireachtas Committee should be left severely alone in their nostalgia for political management of the Irish airline business.

Ireland is doubly fortunate in that it is the home base for Ryanair, Europe's largest short-haul carrier, and for Aer Lingus, one of the few (former) state airlines to have adapted successfully to the new competitive environment. The Irish Government holds 25.1pc of the shares in Aer Lingus and stands to collect about €340m if the proposal goes through.

It is worth considering what might happen if IAG walks away. There appear to be no other viable bidders. Ryanair have been turned down by the competition authorities, since a combined Aer Lingus/Ryanair would, they conclude, be too dominant on Irish routes. Other potential bidders, such as Air France/KLM, Lufthansa or easyJet, appear not to be interested.

Several small legacy carriers in Europe have gone bust and disappeared, Cyprus Airways being the latest casualty. Malev of Hungary, Swissair, Olympic of Greece and Sabena of Belgium, once the playthings of local politicians, have gone into the history books. Most of the former state-owned carriers that survive are struggling, including SAS in Scandinavia, TAP in Portugal and Alitalia, recently rescued yet again on the brink of bankruptcy. Had Aer Lingus not been privatised when it was, it is fair to speculate that it too would have been prevented, by politicians, from responding to the new commercial realities. Left as a small stand-alone carrier outside the consolidating European groupings, the next industry downturn could see Aer Lingus bite the dust as so many others have done.

The airline is modestly profitable, growing its long-haul business, replacing its fleet and appears to have a viable future. People should understand that this sets it apart from most of the legacy carriers in Europe. It is also the reason for IAG's proposal, as Willie Walsh outlined to his non-receptive audience on Thursday. Aer Lingus has been through a continuous process of restructuring and cost reduction since Walsh himself took over the leadership of the loss-making airline in 2001. It has managed to survive in head-to-head competition with Ryanair and has finally been able to build a mini-hub at Dublin connecting passengers from the UK and continental Europe onto its limited range of North American services.

Previous management teams at Aer Lingus saw the potential for this type of operation 25 years ago. They were prevented from pursuing the opportunity by politicians who insisted on the maintenance of the compulsory Shannon stopover, which - believe it or not - actually banned airlines from flying direct from Dublin across the Atlantic. Some of the contributors to Thursday's proceedings would doubtless reinstate the compulsory stopover, and halt the current success of Aer Lingus long-haul, if they thought they could get away with it. It was quite nauseating to watch Dail deputies from the Shannon region applaud the recent success of Aer Lingus on the Atlantic in the knowledge that politicians frustrated Aer Lingus management for decades in pursuing precisely the same strategy. Willie Walsh was not the first manager at Aer Lingus forced out by county councillors masquerading as national politicians.

The Aer Lingus board is supportive of the IAG proposal and released a statement supporting the commercial logic of the takeover on Friday. IAG owns three airlines at present. These are British Airways, the Spanish legacy carrier Iberia, and Vueling, a low-fare operator based in Barcelona. All three are operated independently and all three seem to have decent prospects, Iberia after a painful restructuring along the lines of those already undertaken at BA and Aer Lingus.

Walsh told the committee that IAG plans to develop and expand Aer Lingus and has no intention of pillaging the famous Heathrow slots as has been alleged by opponents of the takeover. There should be no difficulty in believing what he said. All of the Aer Lingus routes into Heathrow (from Belfast, Cork, Dublin and Shannon) are profitable and all help to feed traffic into the extensive BA network at Heathrow. Why would IAG pay €1.36bn for an airline in order to neglect it?

BA has plenty of slots at Heathrow, more than half of the total, and currently uses a dozen of them for its services to Dublin and Belfast. It could reallocate these slots to other routes tomorrow morning without spending €1.36bn on the purchase of Aer Lingus. BA serves Irish destinations from Heathrow in order to make money, as does Aer Lingus. It is absurd to worry that Dublin-London routes, the biggest city-pair market in Europe and second-biggest in the world, would ever be abandoned by commercial carriers.

The politicians and trade union leaders who have scared people on this issue are creating work for themselves: scare people, and then offer to allay their fears. The routes from Cork and Shannon to Heathrow are profitable and deliver connecting traffic to BA services. Walsh made a specific commitment to these routes last Thursday, additional to his commitment on the disposal of Heathrow slots. Neither should have been necessary - it is in the commercial interest of IAG to do what they say they are planning to do, since services to Heathrow from Irish airports make financial sense.

It also makes sense to develop further the transatlantic connecting business through Dublin. BA currently loses some of this traffic through other European hubs, notably Amsterdam. As the board of Aer Lingus has acknowledged, the link-up with IAG, and specifically with its British Airways subsidiary, makes good strategic sense for the airline.

There is just one issue which should concern our shareholder-politicians. Is there another bidder? If not, is the IAG offer adequate? The Aer Lingus board, including the Government appointees, is supportive of the proposal. The Government should take the money and get the county councillors out of the airline business.

Sunday Independent

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