ANALYSIS:New chief Christoph Mueller faces the tough task of extracting more concessions from staff, writes ARTHUR BEESLEY
CHRISTOPH MUELLER starts work as chief executive at Aer Lingus on Tuesday, the 11th man in 16 years to take charge of the ailing business. Although Aer Lingus has seen little by way of stability in recent times, Mueller arrives at a moment of acute and increasing fiscal weakness. Both the airline’s independence and its very viability are again under threat.
Newly released financial results show that day-to-day losses ballooned in the first half of the year to €93 million, from €23.4 million in 2008. Despite recession, the total number of passengers carried by Aer Lingus actually rose 1.7 per cent to 4.94 million. Yet they paid less for flights, eroding the airline’s revenues by as much as 12.2 per cent. Worse still, the amount of cash held within the business dropped by €363 million to €439.6 million in only 12 months.
Thus the situation is truly dire. While there was no guidance from Aer Lingus, analysts say the full-year operating loss could be in the €100-€150 million range, while cash could fall below €300 million at year-end. That airlines throughout Europe and the wider world are under similar strain can be no consolation – and a looming onslaught of cutbacks will be no less controversial.
For Mueller, who led the flight division at British-based holiday giant TUI Travel in his last job, the prime task will be to stabilise the company so that it stops burning through cash at a dangerous rate.
When appointed last month, he said he was excited about the medium-term prospects for the airline. It is a measure of the daunting task he now faces that he did not make reference to the immediate term.
And daunting it will be. Aer Lingus has already scaled back its transatlantic services next winter by 25 per cent.
Delivery of new aircraft has also been delayed, a move apparently forced on it by bankers. Lenders refused it the necessary money because of its cash burn, the company revealed. “No bank is prepared to lend money to an airline that is burning through €400 million of net cash in a 12-month period, as we have done,” said Seán Coyle, chief financial officer.
Next comes the really difficult part: extracting big concessions from a hard-pressed workforce that has yielded a huge number of redundancies in a long series of reform programmes since the near-collapse of Aer Lingus after the 9/11 attacks on the US in 2001.
From the remarks of company chairman Colm Barrington, it is clear that Mueller will be charged with executing a large-scale retrenchment. “While traffic volumes have stabilised, consumer confidence remains weak and we see no sign of any improvement in the near-term. We continue to experience a significant reduction in average fares, which are down 17.1 per cent in the period,” Barrington said.
“This revenue environment, coupled with an uncompetitive cost base, means that we must now take difficult but necessary steps to address our business model and cost base so that we ensure Aer Lingus is viable over the long term.”
Informed sources say there will be two strands to the plan: pay cuts and job cuts. Industrial relations in Aer Lingus are deeply antagonistic, so unrest is likely. Whether that culminates in any industrial action remains
to be seen. But a level political pressure on
the Government also seems inevitable, given that the State owns 25.4 per cent of Aer Lingus.
Still, airline workers would be but one group of workers among many to suffer financial hardship in the current malaise. Given large-scale redundancies in the economy at large and tax hikes, scarcely a family in the State has avoided the vicissitudes of the downturn. In that context, winning significant public support for any industrial action in Aer Lingus may prove difficult.
Although much depends on the as yet unknown parameters of the retrenchment scheme, preparations have been in train for some time. “This plan is very well-advanced. He [Mueller] has seen it. It’s not going to be news to him,” said a senior figure who has been briefed on the process.
Simply put, Aer Lingus is likely to make the argument that its cost base is out of kilter
with airlines elsewhere. “Staff costs per passenger” carried by Aer Lingus fell 10.7 per cent to €30.77 in the first half of the year. Although the figures might not be strictly comparable in an absolute sense, EasyJet’s 2008 annual report points to “crew costs per seat” of £5.07 (€5.76). While a rationalisation that would go anywhere near bridging a gap that big would present a wrenching challenge for Mueller and his workers, it may be the cost of survival. “A radical change in cost per passenger is needed urgently,” wrote analyst Joe Gill of Bloxham Stockbrokers in a note to clients. “The newly arriving chief executive has no experience of the schoolyard finger-pointing that has defined the narrow-minded debates about Aer Lingus in the past. He is likely to put crystal clear choices to the business.”
There are three choices, according to Gill. First, he says an independent strategy requires at least a 20 per cent cut in unit costs. Second, he says Aer Lingus has no financial future in its current form. Third, he says failure to adopt extreme measures “will either break Aer Lingus or limp it in to a forced merger”. The terms of such a merger would be “materially worse” than the €1.40 per share set out in Ryanair’s second offer late last year.
If this stands as a rather bleak assessment of the outlook for a company that used to characterise itself as a beacon of Irish commerce, the stock market on whose confidence Aer Lingus depends appears to agree. Down 65 per cent in 12 months, the stock was trading around 50 cent per share last evening. Its flotation price, less than three years ago, was €2.20 per share.
Ryanair has incurred massive losses on its Aer Lingus shares since Michael O’Leary’s lightning bid for the airline in 2006 and its stakebuilding since then.
Still, it is difficult to avoid the conclusion that a Ryanair takeover would become considerably easier if Aer Lingus failed in the coming weeks and months to stem its losses. While EU competition regulators ruled in the past against a Ryanair takeover of Aer Lingus, the current banking crisis shows that strict anti-trust rules can easily be set to ensure the survival of a business.
Mueller himself knows what happens when airlines don’t deal with their problems. He was the last chief executive of Sabena, the Belgian airline that collapsed in 2001. After long years of adversity, more pain is in store at Aer Lingus.
Arthur Beesley is Senior Business Correspondent of The Irish Times