(Another) new direction at Aer Lingus
Earlier this week Aer Lingus held its first Investor Day since becoming a PLC in 2006. The presentation which was held in London saw a group of investors and analysts hear chief executive Christoph Mueller outline his vision for the Aer Lingus of the future.
As part of the presentation the company outlined the current status of its cost reduction program, referred to as "Project Greenfield" within the company. Having reached agreement in principle with its staff groups, including pilots, Aer Lingus expects that the proposals will be accepted when ballotted and that implementation will begin within the next two to three months. During 2010 the saving in staff costs are exepected to reach €40m (annualised €50m). Once fully implemented, ie including head office staff reductions and flattening of the organisation structure from 6 layers to 3, benefits in staff costs are expected to save the company €74m per year by the end of 2012. Non staff cost savings are expected to deliver €4m in 2010 rising to an annual €23m by the end of 2011. The payback period for the implementation costs of each phase is projected to be 10 months with Aer Lingus taking a €40m charge in 2010.
The Investor Day was an opportunity for Christoph Mueller to address the perception that Aer Lingus is operating from a weak financial base. At the end of Decmber 2009 the company had gross cash and deposits of €825m, approximately €55m of which is restricted relating to certain lease obligations. The airline's net cash pile fell by €400m during 2009. There were four contrbiutory reasons for the reduction :
- A 2009 operating loss
- Restructuring costs
- Capital expenditure on aircraft
- Repayment of maturing debt
Looking towards 2010, Aer Lingus says that it is too early to predict the financial outcome but it does expect that full year revenue will be lower than in 2009. The company also pointed to the fact that the severe January weather has impacted forward bookings for Q1.
In recent years at Aer Lingus a succession of chief executives have stamped their personal direction on the airline's course and the arrival of Christoph Mueller would appear to be continuing that trend. Whilst some may argue that a chief executive's role involves plotting a strategy for a company, Aer Lingus has enjoyed a number of strategy changes in the recent past. As Aer Lingus began to emerge from the dark ages of state ownership the company was reinvented as a low cost dot com carrier during Willie Walsh's tenure at the helm, a period which also saw the first real attempts at tackling the company's crippling cost base. Traditional elements of a legacy type carrier such as short haul business class and the carrier's frequent flyer progam, TAB, also went by the wayside. With the arrival of Dermot Mannion in 2005 , following Walsh's departure for the greener fields of BA, another new direction was plotted as Mannion attempted to replicate his success at Emirates with a siginificant expansion of long haul services both west and east bound. This growth in long haul which carried with it signifciant capital costs was joined by the establishment of the company's first bases outside the Republic of Ireland at Belfast and London Gatwick. During Mannion's time at the helm the carrier also broke its links with the Oneworld Alliance, preferring to position itself as a point to point carrier along the lines of traditional low cost carriers.
The press release released for the Investor Day says that Aer Lingus has reviewed its business model to make sure that it best serves its customer base - "Based on this review the Group intends to enhance its demand-led business model to ensure that it continues to reflect the cost sensitive requirements of the majority of its customer base but offers the appropriate additional optional service enhancements to customers in a modular way.", a statement which must surely be eligible for a Golden Bull Award for 2010. In other words the company has listened to its traditional customer base many of whom who do not see Aer Lingus as a low cost airline and who wouldn't be averse to the notion of "pay as you go" for the use of an airport lounge.
No airline has ever successfully transformed itself from a legacy type airline to a low cost carrier. Legacy carriers have tended to establish independent LCCs rather run the risk of causing damage to brands which have taken lifetimes to establish. And certainly no carrier has ever successfully attempted to combine low cost operation and long haul business models under the same roof. Having stared into that abyss on more than one occassion, even Ryanair's Michael O'Leary has stepped back, making it clear that should Ryanair dip its toe into low cost long haul that it would be through the establishment a separate airline.
Previous attempts to change direction at Aer Lingus have suffered for a variety of reasons - Willie Walsh's vision of a LCC was hampered by the operating cost structure of a legacy carrier whilst others have done little to enhance the brand. Reading between the lines of this week's latest change in direction it would appear that the company is attempting to reverse many of the decisions made in recent years and to bolster the brand image which is still strong and evocative for many in the Irish diaspora.
This week, Christoph Mueller rolled the clock back some way with his vision of the future. At the Investor Day he confirmed the establishment of a franchise agreement with Aer Arann which will see the latter operate 12 routes from the UK to Dublin and Cork under the "Aer Lingus Regional" banner. (remember Aer Lingus Commuter ?). The operation is a no risk venture for Aer Lingus which will not be taking an equity stake in the privately owned carrier. Mueller sees hubbing as the way forward. He does not see passenger volumes on routes to Asia being high enough to warrant Aer Lingus delving into that market again. Instead he sees the traditional hubs, especially London Heathrow as the route out of Ireland. In recent weeks there has been speculation that Aer Lingus is "alliance shopping" again and with the proposed United Airlines arrangement looming close will we see the carrier apply for Star Alliance membership ?
For the first time it does appear that Aer Lingus is making serious inroads into its cost structure and tackling the headcount issue, a foundation on which to rebuild the brand image. There is room for two large carriers in the Irish market - Aer Lingus and Ryanair - but only if they occupy separate niches.