Friday, 29 August 2008
Aer Lingus this week appointed Colm Barrington as Chairman, once he joins the board in September. Mr Barrington is CEO and a director of Babcock and Brown Air Limited, the Irish based aircraft leasing company. He knows a bit about the business’ ups and downs, starting his career with Aer Lingus 40 years ago and later living through the 1990s upheavals with GPA.
Although the leasing company has weathered recent storms better than mainstream Babcock and Brown (which he left last year), Mr Barrington will have empathised with the language used by the airline’s CEO, Dermot Mannion, yesterday when yesterday he announced the need for “further fundamental changes” in Aer Lingus’ operating cost base, in order “to ensure the long term viability of the business”.
- Colm Barrington to be new Chairman of Aer Lingus, arriving at a time when “fundamental change” is needed;
- 1H-08 result not bad, given high fuel costs and capacity expansion;
- Strong balance sheet to help weather storms, but there are other issues;
- Ryanair still a fierce competitor and part owner;
- Too many aircraft arriving, but still a need to maintain long haul network;
The carrier’s unions, already feeling some pain, have not responded warmly to implications that there is more to come, suggesting some pushback if new announcements are in the offing. Indeed, despite the negative fuel environment, now capped by sluggish economies across its network, Aer Lingus’ performance was not all that bad, still returning a margin of 17.4% on capital over the full 12 months to 30-Jun-08. And it possesses a strong balance sheet, thanks to the IPO, with solid cash reserves of just over EUR800 million, enough to see it through some negative times.
And, judging by share price movements as fuel prices fell over the past month, investors are feeling a little more comfortable.
Aer Lingus share price (EUR): Sep-07 to Aug-08
Source: Centre for Asia Pacific Aviation & Yahoo financial
But that cannot not substitute for long term sustainability. And Aer Lingus’ planning these days needs to exhibit several dimensions. While outlining the reasonably favourable (in the circumstances) first half result of EBITDAR of EUR36 million, Mr Mannion’s expose of Aer Lingus’ strategy didn’t refer explicitly to the elephant in the corner of Dublin Airport - and most other airports to which the flag airline flies. But it is not going away. And every step of Aer Lingus’ performance will inevitably be measured against part owner, Ryanair’s, results, not the least by Mr O’Leary. His influence, directly and indirectly, just won’t go away.
Aer Lingus shareholdings: Aug-08
Source: Aer Lingus
In July, when the stock price dived, Mr O'Leary said he was "happy" to see Aer Lingus’ valuation slide, because that showed the carrier was "going nowhere without our (Ryanair’s still outstanding takeover) bid". But there is still some strength in there.
Thus, for example, the smaller airline’s relatively aggressive expansion for the Jun-08 period, against 1H-07, was actually accompanied by improved aircraft utilisation: short haul capacity increased 19%, with utilisation up by 30 minutes to 10.6hr per day, while long haul capacity grew 31% in 2H-08, following the delivery of two A330 aircraft in 2H-07; here again utilisation rose just over half an hour, to 14.0hr per day. In Jul-08, the latest month for which traffic data are available, short haul load factors inched up one basis point, to 85.2%, but on the more fragile long haul network, the 81.0% achieved was down just over one percentage point.
Against this background, planned winter season capacity reductions of 11% for long haul and 1% for short haul will still leave the airline considerably more active than it was last year. It has been able to delay delivery of an A330, but still has nine A320s coming - like it or not - in the first half of next year. The A330 delay allows Aer Lingus to rely increasingly on its long haul codeshare relationships, particularly with United and JetBlue, an operating mode which it will seek to extend, in order to remain a force in north Atlantic markets. But any operating improvements are going to have to generate considerably higher staff productivity still, perhaps offsetting the need for staff reductions.
There has been some good news on the revenue side, generating 5% additional yield per passenger from ancillaries, which as an item were up 25% to EUR69.7 million. In flight sales, seat selection, travel insurance, along with new baggage fees and online booking charges made up the bulk of this growth. There is limited percentage upside for the latter two, especially as passengers become more baggage conscious, but greater attention to the margins (including the inevitable fuel surcharges) now means the difference between profit and loss.
Aer Lingus ancillary revenue improvement, 2007/08; EUR/pax
Source: Aer Lingus
Incoming chairman Barrington will have no illusions about being able to skim through his board papers in the car on the way to the next meeting. There are interesting times ahead for the little Irish battler, but it is financially better equipped than many around it to weather difficult operating conditions.
Delaying a few aircraft deliveries next year may be an art for Mr Barrington to share with his colleagues, but the elephant will continue to trample not so silently around the room. And that’s not so much about art.
Vicky Karantzavelou - Friday, August 29, 2008