AER LINGUS will put firm proposals to Government on a suitable strategic alliance partner for the airline by the end of this year, the company's chief executive, Mr Gary McGann, has said. He has also said the company is actively considering putting bigger planes on the Dublin/London route to cope with demand.
Aer Lingus, which reported pre tax profits of £40.9 million for 1996 on Wednesday, has been asked by the Department of Transport, Energy and Communications to put forward proposals on a strategic alliance by the end of 1997. The alliance may include partner taking an equity stake in the airline.
Mr McGann told The Irish Times that the company has spoken to several potential suitors, but it is not simply a question of joining with a large operator, such as British Airways, or a question of how much another player would be willing to pay.
"A strategic alliance is not a panacea in itself," Mr McGann says. "There are many issues at stake."
He says Aer Lingus must also be attractive to a potential partner. "You'll get no strategic alliance if your company is a dog."
A key issue in any alliance is what: "feed" traffic you can give the other partner, in other words how many passengers you can feed into their business, he says.
Air France, for example, is not in good shape, he says. "However, it is a company which is attractive to other airlines because of its good geographical position - and is well placed to take traffic out of Africa, and Asia.
Because of Ireland's geographical position, Aer Lingus will never be able to offer the range of services which a London Heathrow, or other major hub based operator can offer. Heathrow is the key airport for developing services, he says.
Aer Lingus needs to be better at being a full service airline, delivering superior quality products, "interlining" with the major players and giving customers the maximum scope on travel options, he says.
By interlining he means using Aer Lingus as the first leg of a two leg journey far customers who want to Hyto destinations not offered by Aer Lingus. The state airline could never be a major player on long haul flights, although it flies to North America. Nor can it be a low cost, or simply, "point to point service", he says.
Instead, the airline must carve a niche in between, concentrating on offering customers a quality service and an apparently seamless journey to their chosen destination. The development of the aviation industry makes this imperative, he says.
Major players such as KLM and British Airways are acquiring franchisees with a view to getting feed traffic from dependent suppliers with a lower cost base.
Mr McGann says identifying a suitable strategic partner is not an easy task. Should Aer Lingus link up with one partner, and "close the door" on others? Another problem is to find a partner with compatible service standards, he says.
"Remember, it's our name which will be on the ticket," he says. Being a stand alone operation is not an option because of the way the industry is evolving, he says.
The airline currently operates a number of lines. Under this arrangement Aer Lingus feeds Delta with customers who wish to travel from New York, Boston and Chicago to elsewhere in the US.
It also has code sharing agreements with Finnair, KLM and Sabena Current retained earnings on the Aer Lingus balance sheet is £190 million. Mr McGann would like to increase this to £250 million, something which he indicates could be attained next year.
Undoubtedly the company will need equity - Mr McGann points out that a new A-330 costs $150 million (£97 million). However, he says that Aer Lingus is lucky in one respect - it has one of the youngest airline fleets around. "But we must never again get into a situation where we need... massive investment to replace an ageing fleet."
Mr McGann says there are several options for the airline for adding to the fleet. It could lease planes, or buy them on a lease purchase basis.
"There is room for Aer Lingus to grow its business, in Europe in the US and in some parts of the Middle East, but we cannot do it on our own."
Aer Lingus has been under intense pressure from Ryanair, the independently owned Irish airline company which is adding more routes to Europe next month and could be floated shortly. This would give it more funds to extend its fleet.
Ryanair says it is now the biggest operator on the Dublin London route. Mr McGann says he is satisfied with Aer Lingus's performance on this route. We are doing extremely well and Heathrow is the single biggest onward connection airport in the world." (Ryanair does not fly to Heathrow.)
He says Stansted - where Ryanair flies to - has been "very good" for Aer Lingus and the company can grow its business to this destination. "But, one of the questions is, do we need a bigger fleet?"
Mr McGann argues that there is room for both airlines on the route. Ryanair is a low cost, no frills airline which markets itself as such. The airline has been very focused and built its business very well, he says.
"Ryanair sells on price, we sell on product and service," he argues. "We look after the customer, they sell seats."
He maintains that, as products, Aer Lingus and Ryanair are very different, and says there is clearly a market for each.
Aer Lingus still has many problems, one of which is TEAM, its aircraft maintenance division. However, Mr McGann says "it is probably the section that has made more progress than any other section within Aer Lingus in 1996". He says it is not the "level of nightmare that everybody perceives it to be".
People have this perception that it is the airline's "purgatory on earth", he says. TEAM has won back several important contracts, including work for Virgin, and its client list now features some of aviation's biggest names, he says. These include Lauda Air, BA and UPS.
"The order book for 1997 is higher than we could ever have contemplated," he says. A strong order book helps TEAM to prepplan for rostering and importantly for supplies - helps it to get better deals on purchasing.
Last year, he said, it lost £5.5 million, slightly more than in 1995, because of problems early in the year. Now, he claims that it is on course to make a profit by 1999, if orders remain firm and the industrial relations situation there can be kept on an even keel.
TEAM must make a profit by 1999, he says, because "there is no concept that we can carry a loss maker".
He says the company is never happy with profit levels. Last year, it only made a 5.5 per cent return on sales, "BA is making half that again," he says. We need to make 8-9 per cent if we want a long term viable company.
The advent of competition means that prices have been driven down and will remain very competitive in the future. "For us to be competitive we also have to drive down our own (operating) costs," he says.
