Wednesday, April 29, 2009

Is Aer Lingus doomed or just chronically delusional?

AT one stage in Ireland, Aer Lingus, telecom company Éircom and the Catholic Church were considered to be of ‘systemic importance’.

But nowadays the importance of each is not as systemic and the record of Aer Lingus and Éircom, as public companies, has been a disaster as far as meeting expectations are concerned! The mainstream status of the Catholic Church has been hobbled by a plague of clerical paedophilia stretching back through living memory which were responded to wholly inadequately at the time.

If your business is in the process of losing over €107 million how wisely would you spend €5.8 million? Colm Barrington was appointed chairman of Aer Lingus last October. When Ryanair launched a bid for Aer Lingus last December Barrington spent this amount defending the bid. He wrote to Aer Lingus shareholder on 22 December 2008 urging them to reject the Ryanair offer – which was based on a cash offer of €1.40 per share for the 25% stake owned by the Irish Government. This valued Aer Lingus at €748 million as recently as last December.


Barrington’s letter stated:


· That Aer Lingus (on 22 Dec) is and will be a profitable business.

· Aer Lingus has (22 Dec) unmatched financial strength - net cash of €803 million

· Aer Lingus has a clear strategy for profitable growth

· That the board of Aer Lingus has delivered on its promises and has a vibrant independent future

Less than 80 days later, on 11 March 2009, Aer Lingus published its 2008 full-year results. These revealed a loss of €107.8 million and net cash of €653.9 million. But this is after burning €340 million last year.
The Government rejected the Ryanair offer in January. The shares in Aer Lingus currently trade at €0.59 and its market capitalisation is €315 million, equivalent to 97% of the 2008 payroll of €334 million. The €635.9 million cash that Aer Lingus claims is clearly not unencumbered in the view of the market makers and the cash drain
What value was obtained for the tissue of fantasy that the €5.8 million spent on defending this bid when the ultimate decision was essentially based on politics?

Ryanair also made an offer for Aer Lingus in November 2006, shortly after the Aer Lingus IPO based on a price per share of €2.80 but this was rules out by the European Commission on grounds that it would create a near-monopoly. Aer Lingus spent close to €25 million defending this unsolicited offer, arguing in 2006 that it has “excellent prospects as an independent company; a compelling customer proposition which competes successfully with Ryanair and a clear strategy to grow profitably with a 15% per annum return on capital”.

Aer Lingus has had a patchy history. Turnover in 2008 of €1.35 billion is similar to turnover of €1.32 billion in 2001, although the business mix is different. The airline flew 6.3 million passengers in 2001 and 10 million in 2008 having added to its aircraft capacity.
An IPO in September 2006 yielded €400 million and a further €104 million to augment a pension fund. But losses of almost €70 million were incurred in 2006 and when the losses of 2008 are taken into account, Aer Lingus has made a cumulative loss of €72 million since the IPO.

Ryanair claims that Aer Lingus is condemned to a future constrained by losses, sub-optimum scale, regional airline and declining traffic with a high cost base. Aer Lingus speak of “exceptionally challenging trading conditions, falling consumer demand and a weakening outlook for the dollar and pound sterling”.

Aer Lingus has a labour force of over 6,800 in 2001. It spent in the region of €300 million bringing this number down to fewer than 4,000 and is to spend a further €52 million from April 2009 on further streamlining. This had the effect of increasing the staff-passenger ratio from 923 in 2001 to almost 2,400 in 2007.

While job numbers were culled directors’ emoluments were not. Fees paid to non-executive directors, who are obliged to attend a handful of meetings, were increased from €18,000 to €45,000 in 2007. The remuneration package of Dermot Mannion, chief executive of Aer Lingus, since August 2005, increased from €530,000 to €1,115,000 in 2007 but was pared to €652,000 last year . His predecessor at Aer Lingus and current chief executive of British Airways, Willie Walsh, earned a comparable package in for running an airline with a turnover of £7.5 billion and profits of £694 million, after tax.

One of the consequences of the job cull is that the 25% shareholder, the Irish Government, is collecting €10 million less in social insurance and pro-rata less income taxes.

Ryanair has the ambition to become one of the Big-4 European airlines. The rate of airline closure and consolidation in the European airline industry has been accelerating. Air France / KLM has taken a 25% stake in Alitalia and the Lithuanian airline FlyLAL is bankrupt. Ryanair’s market capitalisation is currently €4.88 billion – comparable to Lufthansa and Delta Airlines but significantly higher than British Airways. It returned a Q3 (31 December 2008) loss of €106 million attributable to higher fuel costs in 2008. Ryanair carries more passengers in a single month than Aer Lingus do in a year.

The former chairman of Aer Lingus, John Sharman left this position last October. The guiding hand and wisdom of Seán FitzPatrick disappeared last December when it was disclosed that he concealed personal loan transactions at Anglo Irish Bank, which he founded, from its shareholders. Mannion left more recently. A reformed management team has been announced whose mission has been formed, whose role is to do what the 2006 defence document highlighted – to deliver value!

1 comment:

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