Thursday 21 November 2019

Aer Lingus needs to think about global trends in air travel - not local concerns

Ryanair hasn't just powered ahead of Aer Lingus, it has moved ahead of everyone.
Ryanair hasn't just powered ahead of Aer Lingus, it has moved ahead of everyone.
Aer Lingus emblem

David McWilliams

Like most Irish people, I like flying Aer Lingus. I like the staff, I like the feeling of being at home, but I can see what is happening. The airline is caught in a rapidly changing market having to offer a traditional, almost nostalgic, service in a world where customers' expectations about flights are changing rapidly.

The reality of Irish aviation is the fact that Aer Lingus will fly nine million passengers this year and Ryanair will fly 90 million. Yet for many Irish people, Ryanair is still the upstart and Aer Lingus the national treasure. This disparity between reality and perception appears to distort the discussion around the Aer Lingus takeover by IAG, the British Airways-led airline conglomerate.

But Ryanair hasn't just powered ahead of Aer Lingus, it has moved ahead of everyone. It carries three times more passengers than British Airways and 20 million more than the German giant Lufthansa.

The airline business is going through enormous change and the question is where all this will leave a company like Aer Lingus? If Aer Lingus needs the protection of a big owner like IAG, then the Government needs to act in the best interests of the company and let it go. So let's stand back a bit and try to assess the reality of the aviation business right now.

Low-cost airlines are the only ones really growing in Europe. What this tells us is that the low-cost model of airline travel is winning all over Europe. Ryanair has spawned copy-cat airlines like Norwegian, Pegasus Airways, Wings and Wizz, all challenging conventional carriers. British Airways is actually only the UK's third biggest airline after Easyjet and Ryanair. The future of mass-market air travel in Europe is low cost. And the trick the low-cost carriers stumbled on is a bit of consumer psychology that we never thought about: people don't so much travel to destinations but travel at a price; if you make the price low enough, people will take a chance.

What does Aer Lingus do in this context?

There are other global trends in the airline business that will affect Aer Lingus.

Last week, I had the pleasure of interviewing Gus Kelly, the Irish CEO of the world's second largest aircraft leasing company, Aercap. Kelly runs a huge global business, leasing planes all over the world.

One of the big trends he alluded to is the massive growth in air travel across Asia. He told me that orders of planes from China are still very strong. Typically, as a country gets richer, air travel grows two times as fast as GDP and this can be seen very clearly in global trends.

People like to travel. But the type of people who travel has changed rapidly.

Twenty years ago, passengers were most likely to fly on an airline from Europe or North America. Over the next 20 years (according to Boeing), 62pc of air traffic will be from outside North America and Europe. Emerging markets will grow faster than established markets. Regions growing above trend are Asia Pacific (6.3 pc), Middle East (6.4 pc), and Latin America (6.2pc), while European (3.9pc) and North American markets (2.9 pc) will be below trend.

Today, there are nearly 21,000 jet airplanes commercially operated in the world. The world's largest fleets are in the United States, China, Russia, the United Kingdom and Germany. Over the next 20 years, the world's fleet will grow at an average rate of 3.6pc annually. This means that more than 36,700 new aeroplanes will be built.

Of these new aeroplanes, 13,000 have already been sold and are awaiting delivery. Isn't that extraordinary? The countries with the largest backlog are the United States, China, Indonesia, Russia, and India.

With all these planes in the skies, the battle for the customer will become intense. This brings me to the Heathrow slots.

Conventional wisdom says these are necessary for Irish people to connect with other destinations. As a reasonably frequent flier I can tell you I will do almost anything to avoid Heathrow.

Over the past few years I have been working in Abu Dhabi a bit and the planes of the Gulf carriers from Dublin are always packed with Irish people going to Australia and Asia.

Each day 1,200 Irish travellers use the Gulf carriers. Dublin-based travellers can use literally dozens of airports to make connections. We don't need Heathrow.

Maybe I am not representative, but it seems the idea that we need Heathrow to connect is a bit outdated. For travellers from Cork or Shannon, maybe this is not the case.

So where do all these changes realistically leave a company like Aer Lingus?

It seems logical to accept this bid because the fall in oil prices has re-rated up the value of airline companies. It could be a great price. Some €1.36bn is more than twice what Ryanair offered a few years ago. Think about it: between 40pc and 45pc of an airline's cost is fuel, so if fuel costs collapse, profits shoot upwards.

A tie-up with a bigger player could open up all sorts of American cities like Dallas, Miami, San Diego and Denver to Irish tourism because they are well served by BA and Aer Lingus could piggyback on those networks.

All told, this is a national deal which shouldn't be scuppered by local concerns articulated by the TD who shouts loudest.

Irish Independent

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