THE SCALE of the problems facing Aer Lingus are reflected in its sizeable losses – €108 million last year and a further €93 million in the first half of 2009 – and the rate at which the airline is haemorrhaging cash as it struggles to return to profitability. Time is not on its side. By last June, the company’s net cash position had almost halved in just 12 months – declining by some €363 million. And since then, its cash balance has deteriorated further. Unless the airline makes far-reaching changes to its cost base, its future as an independent operator is not sustainable.
In negotiations with trade unions representing its workforce, the airline is seeking major job and pay cuts as well as changes in work practices to produce annual savings of €97 million. Progress has been made in talks with cabin crew but there is no agreement with pilots, the highest paid cohort within Aer Lingus. And in the absence of an accord with all unions, a management taskforce was established last week to consider the possibility of compulsory redundancies and fleet reduction. Chief executive Christoph Mueller has indicated that it will seek “north” of 1,000 job losses as it grounds aircraft and closes loss-making routes.
All airlines are operating in tough market conditions, beset by a range of uncertainties including the economic downturn, fluctuating oil prices and intense competition between carriers as a price war escalates and passenger fares are cut. But Aer Lingus has encountered its own particular difficulties. It has defeated two hostile takeover attempts by Ryanair and the past 15 months have seen major management changes at chairman and chief executive level.
The big problem confronting Aer Lingus is its continuing status as a high-cost airline struggling to compete against low-cost carriers such as Ryanair and EasyJet. The latter have much lower cost bases and operate with greater efficiency in a low fares market. Aer Lingus has engaged in a succession of cost-cutting exercises in recent years but as the economic downturn intensified, it has struggled to compete in both the short-haul and long-haul (transatlantic) markets. Payroll costs at the company remain far higher than at its counterparts.
For Aer Lingus to survive as an independent operator, it must make a very painful adjustment to its cost base. Otherwise it will be vulnerable either to a third takeover bid from Ryanair or to a scenario, as Michael O’Leary predicted recently, whereby Ryanair will be responding within a couple of years to an Aer Lingus request “to rescue it”.
For now, Aer Lingus remains master of its own fate with a brand that continues to command significant customer loyalty. But for how long that remains the case will be determined by the success or failure of the latest attempt to turn it around. As a company in which the employees have a substantial shareholding (19 per cent), the interests of workers and shareholders are closely aligned. That should make a resolution of its difficulties more achievable. But there is no minimising the risks and challenges involved.