I listened with great curiosity to a radio interview last Sunday with the Chairman of Aer Lingus, Colm Barrington, on the RTE Radio 1 programme, This Week. His primary goal was to categorically refute suggestions that Aer Lingus would go bust, or run out of cash, within 18 months. But he also presented a picture of a business in retreat, shedding capacity, coping with dramatically reduced revenue and lower passenger numbers.
A reduction in capacity of 9% ad the return of aircraft to lessors would seem to directly contradict the fundamental purpose of the 2006 IPO. It also raises very basic concerns as to whether Aer Lingus can ever be a leading, profitable, low-fare, low-cost airline on the basis of its cost structure, its business culture and stakeholder sentiment.
He indicated on Sunday that operating losses in 2009 would surpass those of 2008. But it was not clear if you meant that these would exceed €17.65 million reported last year or €96.28 million which was the reversal from the operating profit of 2007.
He also stated in a letter, dated 22 December 2008, to shareholders advocating rejection of the second Ryanair bid ‘that Aer Lingus is and will be profitable and that it had cash resources in excess of €800 million’. Perhaps the operating losses and the reduction in net cash accrue in the last 8 days of December and the remarks in your letter factually correct when it was written, but the defence cost Aer Lingus €5.84 million and shareholders would hope that it had been mounted on a foundation other than delusion and fantasy?
Aer Lingus wishes to be a leading low-cost, low fare airline so it is interesting to compare it with the current leader, Ryanair.
Cost Structure and Scale of Operations
A comparison between Aer Lingus and Ryanair:
2007 | 2008 | |
Ryanair average fare | €45.91 | €43.00 |
Aer Lingus average fare, short-haul | €93.96 | €87.97 |
Ryanair – number employed | 3,991 | 5,262 |
Aer Lingus – number employed | 3,905 | 4,035 |
Ryanair: ratio of employees to passengers | 10,648 | 9,673 |
Aer Lingus: ratio of employees to passengers | 2,400 | 2,478 |
Aer Lingus: average pay | €78,700 | €82,250 |
Ryanair: average pay | €56,772 | €54,227 |
Ryanair 2008 revenue (9 months to 31 Dec) | +11% | |
Aer Lingus revenue 2008 (12 months) | +2.4% | |
Ryanair passenger volume (9 months to 31 Dec) | +17% | |
Aer Lingus passenger volume | +7.4% | |
Ryanair fleet | 183 aircraft – to be increased by 12 Boeing 737-800 | |
Aer Lingus fleet | 42 aircraft to be reduced by 9% |
He stated in the interview, quoting Morgan Stanley, that Ryanair is likely to return a loss of €76.5 million in the year ended 31 March 2009. But he neglected to mention that if a loss arises it would be after taking account of an impairment charge of €220 million as a consequence of the 71% collapse in the value of its 29.3% shareholding in Aer Lingus since 31 March 2008.
Business Culture
Chief Executive’s emoluments
The immediate beneficiaries of the IPO were the professional advisors who pocketed €30 million, the chief executive whose emoluments increased from €530,000 paid to Willie Walsh (now Chief Executive at BA) in 2005 to €982,000 paid to Dermot Mannion in 2006 when the business made a loss of €69.926 million and the fees paid non-executive directors.
Mannion’s total remuneration during his tenure at Aer Lingus was €2.9 million and the cumulative loss in that period was €72 million. The emoluments of Michael O’Leary in 2007 and 2008 were €2.21 million but Ryanair earned a profit of €1,008.8 million.
Non-executive directors
Annual fees paid to non-executive directors increased from €18,000 to €45,000 immediately after the IPO to attend up to 20 board and committee meetings in a year. It would appear that quite a few of the non-executive directors did not bring any personal experience of the aviation industry to Aer Lingus.
Barrington refers to Seán FitzPatrick, the former senior independent director in glowing superlatives. He advise that “served Aer Lingus extremely well and had a significant and positive influence on the company both before and after the IPO” The public may not share his Barrington’s exuberance given that FitzPatrick’s abrupt departure from the boardroom at Aer Lingus coincided with an unprecedented violation of public trust that the Garda Fraud Squad and the Director of Corporate Affairs are investigating. The economic blight that has descended on Ireland is at least partially attributable to the downfall and nationalisation of FitzPatrick’s Anglo Irish Bank a consequence of which is a 16% drop in revenue this year at Aer Lingus.
The annual reports of Aer Lingus are as colourful and elaborate as the cosmetic counter in Harrod’s. The 2008 issue is adorned with elaborate graphics, photographs of the great and the good and superlatives about Aer Lingus and corporate social responsibility. There are comments by anonymous customers in full-page settings. “Aer Lingus, very nice staff. On time. Classy. They are very clean…” reminded me of an excerpt I would expect from the script of an edition of the television sitcom Are Your Being Served?
But does a publication of such supreme artistic merit really define Aer Lingus as being leading, low-cost and offering low-fares?
The annual report of Ryanair is plain vanilla, with no photographs, no clichés, and no personal comments from strangers’ about staff hygiene but plenty of data.
Stakeholder Sentiment
Colm Barrington became a director of Aer Lingus on 19th September 2008 and Chairman on 3rd October and have been acting chief executive since 6 April 2009 following the departure of Dermot Mannion. The performance of Aer Lingus shares since he took over, compared to that of several other airlines is summarised below:
Symbol | 3 Oct | 18 May 2009 | Change | % Change | |
BA | BAY.L | £1.65 | £1.58 | -£0.07 | -4.2% |
Lufthansa | LHA.DE | €12.93 | €9.19 | -€3.74 | -28.9% |
Qantas | QAN.F | €1.68 | €1.04 | -€0.64 | -38.1% |
Air France-KLM | AF.PA | €15.07 | €9.57 | -€5.50 | -36.5% |
Ryanair | RY4B.IR | €2.27 | €3.33 | +€1.06 | +46.3% |
Aer Lingus | AER.L | €1.39 | €0.60 | -€0.79 | -56.9% |
The market capitalisation of Aer Lingus is now €320 million despite the net cash of €600 million.
The market capitalisation of Ryanair is €4.86 billion Its passenger throughout in 2001, a relatively short 8 years ago, was similar to that of Aer Lingus currently.
Michael O’Leary
He joined 3-year old Ryanair as a director in 1988 when he was 26 years of age. Ryanair flew 592,000 passengers and employed 379 persons that year.
When Michael became Chief Executive in 1994 Ryanair flew 1,666,000 passengers and employed 523 persons.
When Ryanair achieved the same passenger throughput in 2001 that Aer Lingus currently has, it employed 1,467 persons.
He owned 65,000,016 shares in Ryanair on 30 June 2008.
Aer Lingus and Ryanair share one feature in common. Neither has declared a dividend. Ryanair uses its retained earnings of close to €2 billion to develop and resource the business which is now flying 51 million passengers. The equity of Aer Lingus is being eroded by losses and the resources provided by the IPO are not being used from now on to augment capacity and expand the business.
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