Aer Lingus has made substantial progress over the last couple of years. Just a short while ago, the group was facing a financial crisis which threatened its very existence. Yesterday it reported a continued rise in profitability, with a final net profit for last year of over £32 million, up from £15 million in 1995. Its finances are now sufficiently sound to allow it to accelerate the search for a strategic alliance partner.
However the group's performance in 1996 was not as healthy as the bottom line figures would suggest. Of particular concern is a decline - albeit a small one - in the profits earned on its core air transport business, which fell to £42.2 million last year from £43.6 million the previous year. Profit margins on this business were squeezed due to tough competition in the marketplace, as demonstrated on the key Dublin/London route. A rising volume of passengers and healthier margins will both be required if overall profitability is to rise in the years ahead.
The main reason for the major improvement in the group's overall profitability last year was lower net interest payments. The cash injection from the Government has reduced its borrowings and thus interest payments, while the group has more cash in the bank due to asset sales. This has left the balance sheet in a healthier state and means Aer Lingus is in a much stronger position to plan further investment and seek a strategic alliance partner.
However, if profitability is to rise further from here on, then Aer Lingus must earn more from its core business. Management has a number of issues to tackle in the months ahead, Cost control is vital and the group faces some key industrial relations issues in this regard, many of which result from last year's pay agreement with its pilots. A new mechanism is being developed in tandem with the company's unions to address these issues.
While many of the group's subsidiaries have been sold, TEAM Aer Lingus remains. It recorded losses of £5.5 million last year. However, Aer Lingus management says that its performance is improving significantly and it should move to profitability by 1999.
Looking at the group as a whole, the key issue will be to develop plans for a strategic alliance with another airline. The Government has asked for a plan on this issue by the end of the year and management is flow working on this.
Aer Lingus already has alliances with a number of airlines, such as the US carrier Delta. But what is now in prospect is a more far reaching link up with a large international partner, which may include the sale of some of the company's equity. There is no doubt that the alliance route is the correct way forward for Aer Lingus. As a relatively small airline with a limited route network, an alliance with a bigger partner would allow it to offer its customers direct access to a much expanded route network, as well as providing other financial and business benefits. Now the task is to find the correct partner and set the terms for a deal.