Listening to the debate on Aer Lingus last week was like being propelled backwards to the 1970s when every country had to own an airline. The airline business, like almost every industry, has changed profoundly since then, yet the political language has hardly budged. Why do people think national when they are discussing the most international, by definition, of all industries? It seems like a national airline is an industrial fetish, a bit like the economic equivalent of Fifty Shades of Grey.
The plain vanilla commercial reality is that, unfortunately, it is not who owns them that determines whether they thrive or not, but how many choose to travel with them.
So the national interest is whether the airline has a solid future.
This seems so obvious but unfortunately many people continue to argue that “we need links to the outside world” and therefore having a domestic, or at least part domestically-owned, national carrier, is essential. But consider the fact that Ireland became an exporting and trading phenomenon without a national shipping company, yet the vast majority of our trade goes by sea.
Many shipping companies use our ports. They are competitive, they do the job and do you have any idea what they are called? Do you care? The same goes for air transport. You don’t need a government-controlled airline to be a normal country plugged into the world; nor do you need a government-controlled shipping company to be a trading economy.
Once we appreciate this fact, it’s easier to see what is in the best interest of Aer Lingus, the company and its staff. The single best underwriter of Aer Lingus will be the number of passengers.
There are two big trends in the international airline business. The first is low cost in rich countries and the second is full service in growing parts of the world. In Europe, the low cost carriers are cleaning up.
Even though people still think of Ryanair as the upstart and Aer Lingus as the incumbent, Ryanair will carry 90 million passengers to Aer Lingus’s nine million. The upstart is ten times bigger than the old hand.
Even BA, a company indelibly linked with British air travel, is only the third biggest carrier in Britain, behind Easyjet and Ryanair. In fact, Ryanair’s ambition is to grow to 150 million passengers by 2020 and next year to knock Easyjet off its number one perch across the water. Ryanair is three times bigger than BA and 30 per cent bigger than German giant Lufthansa.
Ryanair has spawned copycat airlines such as Norwegian, Pegasus Airways, Wings and Wizz, all challenging conventional carriers. The future of mass-market air travel in Europe is low cost. And the trick the low-cost carriers stumbled upon is a bit of consumer psychology that we never thought about: people don’t so much travel to destinations as travel at a price – and if you make the price low enough, people will take a chance.
Also cheaper fuel has enhanced the profitability of low-costs airlines over full-service ones. This is because the low cost can squeeze almost every cost bar fuel. Therefore, between 40 per cent and 45 per cent of a low-costs airline’s cost is fuel, so if fuel costs collapse, profits shoot upwards. This makes low-cost carriers look like a better bet for fresh capital.
And remember the airline business is capital intensive because without new planes a company can’t expand capacity.
The other big trend globally is Asian air travel. 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.
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), 62 per cent 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 per cent), Middle East (6.4 per cent), and Latin America (6.2 per cent), while European (3.9 per cent) and North American markets (2.9 per cent) will be below trend.
So where does this leave Aer Lingus?
It doesn’t want to be a Ryanair-lite and it can hardly have an Asian strategy. In addition, the airline industry is going through a massive growth spurt. So standing still is not an option.
Consider this global change. 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 3.6per cent annually. This means that more than 36,700 new planes will be built.
Aer Lingus needs to get its hands on some of this new capacity. Firstly it needs the routes of another big partner to generate more business into Ireland and it needs the balance sheet of a bigger partner to expand.
Wouldn’t a tie-up with a bigger player that could open up all sorts of American cities like Dallas, Miami, San Diego and Denver to Irish tourism make sense? They are well served by BA and Aer Lingus is going to piggyback on those networks.
Why would Aer Lingus seek a partnership with the likes of KLM or Lufthansa when BA is the obvious partner for Aer Lingus.
Don’t get me wrong: I love flying Aer Lingus and I get a real feeling of coming home when I fly back to the country on Aer Lingus.
For years, Aer Lingus was, in my head anyway, synonymous with home. It still is, but given what is happening to the global airline business, it is hard to see the future for the company without the significant balance sheet, access to cash and access to routes of another bigger carrier. That is just the way the airline business is going.
The best way to safeguard Aer Lingus was to sell it.
I’m not convinced. If Ryanair was able to grow despite being headquartered in Ireland then why can’t Aer Lingus? Aer Lingus has almost €600 million in cash so the price being paid by IAG is very low. Aer Lingus is one of a few former national airlines that is actually profitable so why, as they say, should we try to fix something that isn’t broken. In 7 years time when the concessions regarding job losses etc expire we will have wholesale rationalisation i.e. we’ll have another round of asset stripping and job losses a la Eircom. We shouldn’t over-estimate the… Read more »
I really don’t know why I don’t like this argument but I don’t. It reminds me of the argument that it doesn’t matter who you sell your land to because the land can’t go away. We all know how bad that argument that was and how bad it was for the welfare of every country that espoused it.
” it is hard to see the future for the company without the significant balance sheet,”
Surely, the answer is simple: just as they’ve done with the banks, the government should enable them to rebuild their balance sheet?
The more I think about this the worse it seems. One should consider the “cui bono” scenario – who benefits from this deal? Let’s see. 1. The government – they want cash so they can “buy” the next election by giving pay rises etc to curry favour with parts of the electorate. (David, even you would agree with doing that) 2. The leadership, unions and other shareholders of Aer Lingus. Again, mostly, Insiders, so of limited benefit to Irish tax payers – do we really need more fat cats?? 3. IAG / British Airways / Ryanair as there will be… Read more »
Paschal Donohoe the sanctomonious little twerp got his 15 minutes of fame in being seen to be a ‘hard negotiator’ so as far as he was concerned the whole pathetic spectacle was worth it.
Aer Lingus as a small airline is solvent and strong and with a reliable income that is manageable and with a good team can be successful as has been shown in its past record to date . Most other airlines both large and small are weaker and almost bankrupt and with larger overheads and are too big to manage and will fail .Iberia under the same flagship as British Airways is an example of too big to fail and with too many staff and overheads . Submitting a a national asset to a foreign sovereign will in time weaken the… Read more »
I have to say I am bit biased on that: I love Aer Lingus. I love everything what they stand for, from their livery through their excellent service to the fact that the A330-200 take-off speed is higher than Ryanair’s 737. Aer Lingus is one of the few Irish brands that can compare favourably with any international competition (I would throw into that the best beer in the world, Murphy’s, which had been available in small bottles in the students supermarket near my college in Krakow, but it’s only available in cans here and it’s not the same; Aran jumpers;… Read more »
Aer Lingus’s decline compared to LOT’s decline: modern fleet, excellent service and yet shrinking customer base… Before (aerline driven by unions, not profits): http://centreforaviation.com/analysis/lot-majority-stake-attracts-airline-interest-but-restructuring-and-potential-synergies-will-be-key-113580 After (de-unionisation and bringing in more transparency): http://blogs.wsj.com/emergingeurope/2014/04/02/lot-polish-airlines-swings-to-net-profit/ Disclaimer: I am not claiming that privatisation is always the way to go. Depends on what one means by privatisation. Privatisation it’s the way if it’s done by tender and preceded by breaking down a monopoly (if there is a monopoly). In many cases of Polish privatisations there had been no calls for tender (it was privatised by bribes) and “privatised” companies had been sold to state-owned companies… Read more »
Mr. McWilliams, you state (and I agree) that “The single best underwriter of Aer Lingus will be the number of passengers.” Forgive me, but I cannot find anywhere in your article any explanation of how you correlate the takeover by IAG as a means to that end. Did I miss something? For the life of me, I can’t make heads nor tails of this paragraph: “Aer Lingus needs to get its hands on some of this new capacity. Firstly it needs the routes of another big partner to generate more business into Ireland and it needs the balance sheet of… Read more »
All this is in play around the world and all that is talked about is domestic politics. It is like pissing on a fire to try to put it out!! Bill Holter!! Bill H: Did you hear about this? You really have to wonder how it is that so much is going on all around us yet almost nothing is being reported by the mainstream press. I know it is hard to do, but imagine yourself 20 or 30 years ago, could what is currently happening ever be “slept through” as it is today? Could markets have just snoozed it… Read more »
I think you’re wrong on this issue David. The airline is not the key issue here, access to the Heathrow slots is. Take those slots off the table and then see what offer IAG makes in that scenario. I’m not a fan of Aer Lingus. I remember the absolute cheek of them robbing emigrants blind(and I was one) charging £200 sterling on the Dublin/London route TWENTY years ago. Ryanair charges 40 Euro return(plus 30-40 Euro ground transport costs to central London) to fly in Gatwick/Luton/Stansted in today’s money. Moving swiftly on. Those slots are our pipeline into London which is… Read more »
Here’s the pitch. In 2022 Ms. Michelle O Li Ri from Shanghai flies Business /Tourist class from Dubai to Dublin Terminal 1. She uses the terminal facilities to shower/have a meal/shop/business meeting. She connects for her business class flight to London/New York/Frankfurt etc. Alternatively she walks to Terminal 2 and connects to a range of low cost airlines connecting to most locations in Europe. There are 350 million Chinese middle class with growing spending power. Look what happens when they’re turned loose in BT. We turn Dublin Airport into a shopping mall/convention centre with an airport attached..like Dubai. Only more… Read more »
It’s not at all surprising to see that the goal of privatization is presented as the best way to go in the paper addressing the business community.
If Aer Lingus is presently successful and government owned great lets build on that and appropriate the resources.
If or when it becomes privatized then holding or promoting false beliefs that the company will have any motive other than maximizing profit is the result of and the task of good propaganda.
Once it is privatized it is accountable to no one.
I doubt that Dublin will remain in the hub business, like today, if BA takeover Aer Lingus. Therefore I am very sceptical. BA do have choices to make with regards to LHR slots. And BA’s biggest concerns are it’s ability to compete with KLM-Air France Lufthansa Middle Eastern long haul airlines. Our idiot politicians are concerned with LHR slots. Actually, for Irish air flyers, connectivity to Amsterdam-Schiphol, Paris CdG, and Frankfurt are of critical importance because they enable us to access cheaper long distance connections. Likewise Aer Lingus on terminal 5 in JFK, is a massive advantage. I don’t rate… Read more »