Stephen Kavanagh spent his first day as chief executive of Aer Lingus being grilled by politicians. While it was not a memorable start in the strictest sense, he is unlikely to forget it.
“That is something you will take to your grave in terms of a first day as CEO,” he says.
He and former Aer Lingus chairman Colm Barrington appeared before the Joint Oireachtas Committee on Transport to explain their support for International Consolidated Airlines Group's (IAG) €1.4 billion offer to buy the Irish airline.
It was February 2015, and the debate over the IAG bid was in full swing. The crunch issue was whether the government should agree to part with the State’s 25 per cent stake in Aer Lingus, which was meant to protect the airline’s landing slots at Heathrow, considered critical to the Republic’s export and tourist industries.
Some Heathrow slots were selling for tens of millions of euro. Opponents believed IAG and its Irish chief executive, Kavanagh's former boss Willie Walsh, wanted to buy Aer Lingus to snare these assets for the benefit of another group airline British Airways.
By the time that Kavanagh appeared at the committee, a political fog had obscured the core issue: Aer Lingus’s future. Those close to the deal later said his and Barrington’s intervention helped clear the air and get the sale across the line.
Oireachtas committees apart, it was an unusual situation for an incoming chief executive. Aer Lingus was a listed company subject to a bid that would see a bigger group absorb it. This meant that Kavanagh would head a subsidiary rather than an independent plc. Nevertheless, he supported the deal
There was a reason for this. He was one of the architects of a strategy designed to position Aer Lingus as a transatlantic airline by connecting European and North American flights through Dublin. The strategy, dubbed “gateway”, was a response to previous loss-making efforts to lure customers to transatlantic services by selling seats at big discounts.
Instead of focusing on a point-to-point service with a limited market at either end, Kavanagh and some colleagues realised that Aer Lingus could instead exploit Ireland’s position on Europe’s fringe.
About 70 million fly across the north Atlantic every year. Most of them travel through Irish airspace and more than half make at least one stop. That means that Dublin Airport has the potential to compete for business on these routes.
As a first step Aer Lingus positioned its Paris-Dublin and Dublin-Boston services together and sold the tickets at competitive prices. It then began feeding traffic from services from British regional airports. It now flies more than two million passengers a year across the Atlantic, giving it 3 per cent of the market.
While he knew the airline could continue to develop this on its own, Kavanagh believed it could exploit more opportunities with less risk as part of a bigger group. Thus he felt the IAG offer was a chance that the company should not miss.
“You need to exploit opportunities as they arise,” he says. “My biggest fear was that time would slip away.”
Kavanagh argues that had that happened Aer Lingus would have faced increased competitive pressure while capital markets would become more sceptical and less likely to reward any success that it might have achieved.
Sustainable
“Yes, we had gotten to a point where we were convinced we had a sustainable and profitable business model, but the challenge was would that ultimately reward stakeholders and, independently, would we be able to fully exploit the opportunities? Our analysis was that we would not.”
He insists it was “very much touch and go” in terms of whether the deal would go through yet a year ago, five months after IAG’s first approach, the government finally agreed to sell the State’s holding. Kavanagh believes that few people other than Walsh, himself a former Aer Lingus chief executive, could have navigated the maze of peculiarly Irish political concerns that the process involved.
“I think the local knowledge was of significant importance. Even the management of the IAG board in terms of the length of time it took, I think that required the skills that Willie brought to the table.”
Aer Lingus became part of IAG in September. Within weeks Kavanagh and Walsh announced that in 2016 it would fly three new routes, from Dublin to Hartford Connecticut; Newark, New Jersey, and LA, and that it would get three new Airbus craft.
It will have 14 long-haul craft and serves 10 US cities. A further, as yet unnamed, new route is planned for next year, while the carrier is also likely to increase the frequency of flights to existing destinations such as New York, Chicago and LA.
The Aer Lingus chief is particularly excited about Hartford. He says it will be the “first time that the network is focused on Dublin”.
The city is Connecticut's biggest but has not had a direct service to Europe since the recession. While it is almost three hours' drive from Boston or New York JFK airports, it is far enough for anyone to offer connecting flights. So in air transport terms it is caught between a rock and a hard place.
Expectations
The Dublin route will plug Hartford into a network of 30 cities. So keen is Connecticut’s state government on the proposal that it has guaranteed that if Aer Lingus’s revenues from the route fall short of expectations, it will make up the difference. Kavanagh does not expect to have to call on this.
In essence, this is how the “gateway” strategy is meant to work. Launching one route should open a host of others at either end. It opens a host of opportunities, Kavanagh says.
“Aer Lingus had seven long-haul craft in 2010, by the end of summer 2016 we will operate 14, we have therefore already doubled in six years.
“There is the potential opportunity over the next five years to increase the fleet to 20.” Each long-haul craft creates 100 jobs, he notes. However, he also says that Dublin Airport must have the right infras tructure for this to happen.
Passenger numbers there hit a record 25 million in 2015 and will exceed that this year. Dublin Airport Authority (DAA) is planning a new runway for 2020, but Aer Lingus believes it needs to invest in other areas before then. These include transfer facilities, more parking stands for the large craft that fly long distances, more taxi-ways and more boarding gates.
The airline now has thousands of passengers transferring between flights every day so it needs to be punctual and efficient. However, congestion has left some long-haul craft waiting for long periods before being able to unload passengers.
Constraints
“As an example of the type of constraints we are facing, we are adding two A330 wide-body craft at the end of the third quarter of this year – literally if they had gone in in April of this year there was no place to park them,” Kavanagh says. “
So over the winter months, working with the DAA, we have to find additional stands and apron space for new aircraft, and that's before we grow again in 2017."
It is not that the airport authority is not co-operating. In fact, the gateway project needs the DAA's collaboration and Kavanagh is at pains to stress that its chief executive, Kevin Toland, and his managers have been willing partners. "We have reached agreement in recent weeks in terms of the type of infrastructure that is required," he says.
“The issue for us all is that lead times are against us, we are not just looking for decisions, but quick decisions.” .
Any disagreement is not over what is required but timing. Runways, taxi-ways, piers and gates can take years. As a consequence, Kavanagh would like to see work starting on some projects now.
He also argues that the DAA should plan ahead in anticipation of growth. So while Aer Lingus will be able to expand in 2017, its chief executive is worried whether it will be able to maintain the momentum through 2018 and beyond.
Momentum
If it does keep that momentum he believes it is very hard to say where the limit is to potential growth. So far it has only captured 3 per cent of a 70 million-strong market which itself is growing. Every percentage point is close to one million more passengers. As part of IAG it can tap into a much larger pool of potential customers.
He is confident that Aer Lingus will need more than the five new long-haul craft over five years, to which IAG originally committed. Each will create 100 new jobs for pilots, crew and other staff. Kavanagh argues that the benefits will not be limited to his company, but should spill over into the broader economy.
Aer Lingus is 80 years old today. What will it look like in another 80 years? Does Kavanagh believe it will even be around?
“As long as there is a requirement to fly metal to get from A to B, I do. If we fully exploit the opportunity in gateway, we’ll be a much bigger business.
“The issue in Aer Lingus has always been scale, it’s never been ambition. If we can combine scale with ambition I think it sets us up well for the next 80 years.”
CV
Name: Stephen Kavanagh Post: chief executive, Aer Lingus Why is he in the news? Aer Lingus turns 80 today and it is also one year since the government agreed to sell the State's 25 per cent stake in the airline, effectively allowing its sale to IAG, owner of British Airways, Iberia and Vueling. Career: Kavanagh began working at check-in 27 years ago while studying for a BComm in University College Dublin. After his education he moved to head office, where he worked with Alan Joyce, now head of Qantas, and subsequently Willie Walsh, who led Aer Lingus before going to BA and then IAG. He worked on the airline's flotation and became chief planning officer before succeeding Christophe Mueller last February.
Family: He and partner Clodagh have two boys aged five and seven months. Something that won’t surprise: He did a masters in transport logistics. Something that might surprise: He gets the bus home to Drumcondra every day.
