Interview: Aer Lingus chief executive Christoph Mueller

Dublin
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Aer Lingus has just turned 75 yet its recent history has been as taxing as anything in its past. On the one hand its story is the same as any other mid-sized European national carrier with a much-loved brand battling for relevance in the ultra-competitive world sandwiched between network giants and cut-throat low-cost rivals.

But alongside the usual market ups and downs and fuel price volatility all airlines have faced, it has had to contend with the meltdown of its home nation's economy and the most fundamental of low-cost carriers not only growing up on its doorstep, but latterly as its largest shareholder - leaving the spectre of a renewed hostile takeover attempt ever lurking in the background.

Tasked with trying to find a role in today's increasingly competitive environment for Aer Lingus is German national Christoph Mueller. His vision for the way through is what he concedes on the face of it appears contradictory pillars of independence and partnership.

"We are looking for ways where we can tackle our scale problems without giving up the independence of Aer Lingus," he says, talking to Airline Business days ahead of the airline's 75th anniversary celebrations. "Independence for us is not just independence to wave our own flag. I believe it is very important to our survival," he says. "[But] we need partners to fulfil our mission to connect Ireland with the world. We are too small to do it on ourselves. So we need partnerships."

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©Billypix 

But before Mueller could turn his attentions to the long term, there was the issue of surviving to ensure there was even a long term to think about. "The first months [at Aer Lingus] were a bit like a patient in the emergency room. We were losing a lot of cash. Without immediate action, we would have a serious problem," he says of the Irish carrier's perilous position when he took over in October 2009. The airline's first-half losses had quadrupled, and already battling high fuel costs, faced the twin threat of an uncompetitive cost base and revenue climate that was to get far worse as the global financial crisis hit.

"We addressed the cost issues right away," Mueller says, noting that even without a deep analysis of the carrier's operations it was clear capacity had to be cut. "On the North Atlantic we had contributed to overcapacity, so pruning back our long-haul network was an absolute necessity. The first three months we just had to stop the bleeding," he says. The cuts worked. Within three months the airline enjoyed a cash-positive December. "We bought ourselves some breathing space."

That breathing space has been cemented. A combination of capacity management, a wide-ranging cost savings programme, a shift in strategy and a recovery in global, if not Irish, economic activity helped the carrier to a €140 million ($200 million) operating turnaround last year in posting profits of €57.6 million - a sharp improvement on two years of losses.

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In the process it cut capacity 14%, including scaling back its London Gatwick expansion, saw passenger numbers fall 10% and cut staff levels by 300 in 2010. But crucially revenues remained virtually unchanged at €1.22 billion as it boosted yields and, after cutting its long-haul operations by a quarter, this part of the business has returned to profit.

Mueller say the lion's share of the improvement came not through capacity cuts, but through a change of strategy. The airline had moved further than most network carriers to a low-fares, point-to-point reinvention in the last decade. But within months of joining in 2009, Mueller concluded Aer Lingus needed to differentiate itself from Ryanair and began shifting towards a hybrid model.

"It's a very simple marketing approach. The travelling public in Ireland wants to have a choice. We have not abandoned our low-fare approach. [But] we don't use low cost as a description of our business model because for the customer the suggestion is a no-frills product," Mueller says, adding its service levels are a strength. "Our service is there. I cannot even switch it off. People will deliver it."

The airline has developed a modular product to cater for popular business routes such as Dublin-London Heathrow, as well as its high proportion of VFR traffic. "The challenge then has been to offer a service flexible enough to cater for business traffic on one flight, and that can operate almost as a charter flight on the next one," he says.

The shift in strategy has seen it build back transfer traffic. Transatlantic traffic alone grew 23% to more than a third last year, and its transfer product is now enhanced by the move into the contemporary Terminal 2 at Dublin airport. It also offers US customs clearance - only previously available outside North America at Shannon in the west of Ireland.

"Transfer traffic has enabled us to compensate for the weakness of the Irish economy. But that cannot go on forever," says Mueller. "If the Irish economy was to shrink a fourth consecutive year, we cannot compensate it one more year with transfer traffic alone.

"Even in our most pessimistic view in 2009 we had assumed the Irish economy would kick back in 2011 and have healthy growth in 2012," he adds. Passenger numbers from Dublin have fallen five million from a high of 23.5 million. "In the framework of three consecutive years of decline, to revitalise Aer Lingus was quite difficult," says Mueller. Capacity, excluding 2010's ash cloud and weather disruptions, will be flat for the coming year.

The Irish market woes, together with its relatively small size, has seen the airline turn to partners to expand. This has included innovative partnerships such as its link-up with JetBlue Airways, its Madrid-based transatlantic venture with United Airlines, as well as its codeshare with British Airways on London-Dublin flights and its feeder deal with Aer Arann - boosting business traffic on provincial UK routes into Ireland (see P26).

"We are bottom-line driven. For us partnership is not a joining a country club attitude. Every partnership is subject to a business case and we have been quite successful," he says. High on the agenda is whether to join a global alliance. Aer Lingus is no stranger to this world, having been a Oneworld partner from 2000 to April 2007, before leaving as part of its repositioning as a low-fares carrier.

"We are too small to become religious on alliances. We really have to extract money from an alliance. We are currently evaluating whether the benefit of joining one of the three alliances is larger than the costs associated with joining one of the alliances," he says.

Part of the Star Alliance founding team 16 years ago, Mueller says technology means more can now be done outside of an alliance. "What was only possible in 1996-97 with a full codeshare is today possible without even thinking of a codeshare. That is why I believe certain elements that were exclusive to an alliance are today available to everybody."

He also notes the North Atlantic joint ventures can be more important than the alliance as they operate like a single entity and will be another factor to consider. "There will certainly be a move in one or other direction by Aer Lingus in the foreseeable future," he says. If it opts for alliance membership, cases can be made for all three camps. It retains links with Oneworld's British Airways, has developed its partnership with Star's United, and codeshares with SkyTeam carriers.

But exclusivity, to which Mueller believes there has been a softening in approach among some of the alliances, is likely to be a key given the importance Aer Lingus attaches to its existing cross-alliance relationships.

All this works towards keeping in Aer ­Lingus in control of its own fate, so that any partnership or even equity partners can be on its terms. This is further supported by the bolstering of its cash position.

The future of Aer Lingus has itself been a regular topic of debate, ever since Ryanair in 2006 began building up a stake in the carrier. This still stands at 29% today after two failed attempts to gain control of Aer Lingus - blocked by a failure to secure acceptance for its offer and ultimately by European Commission regulators - and the carrier remains periodically linked with fresh interest.

The ownership question is also reignited by fresh pressure on the Irish Government, which holds a 25% stake, to sell assets to help repay loans. "Their [Irish Government] only policy is we are not going to sell it to Ryanair," said the latter's chief executive Michael O'Leary recently. But he argues Aer Lingus would be broken up if taken over by another carrier. "I think the only way to keep the future of the brand is to sell it to Ryanair."

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Christoph Mueller with the Irish Taoiseach Enda Kenny, together with cabin crew in 1940s uniform during recent Aer Lingus 75th anniversary flights with the Iolar aircraft 

Economist Colm McCarthy's review for the Irish government urged against a fire-sale of assets. But as it holds only a minority stake it may be an easier asset to sell - although Ryanair's presence might complicate sale efforts. Mueller says: "Maybe the time has come anyhow because the government has kept the 25% predominantly to protect Aer Lingus from a hostile take-over by Ryanair, because it is important for the government to keep two carriers. If that now becomes more unlikely due to the most recent EU ruling on Aegean and Olympic [blocking the merger], then there is no reason really for the government to hold [the stake]," he says.

As for having Ryanair on its board, Mueller describes them as very professional shareholders. "We were able to establish a very professional environment in which we talk to each other. We have always declared from both sides we are in fierce competition and we compete on 85% of our route network."

But Mueller sees the shift in Aer Lingus strategy meaning it is more complementary to Ryanair. "We are basically not fishing in their pond, and not the other way around."

But if Aer Lingus is complementary to Ryanair, the latter is seldom complimentary to it. This is epitomised by Aer Lingus's 75th anniversary. After all how many majority shareholders would mark the occasion by issuing their own release to mark 75 years of "high fares, delays and strikes" at the carrier? "All this marketing noise Michael is making, that is his business model and I will not criticise that," Mueller says diplomatically.

He adds: "There was when I arrived a real obsession with Ryanair among our employees, predominantly because they were so scared [of a hostile takeover]. That is gone," he says. "We are able now with our employees to position Aer Lingus next to Ryanair as a different proposition and that is very healthy I believe for the employee relationship."

Mueller believes the backdrop of a feared Ryanair takeover and Irish economic woes helped secure cost savings under the Greenfield scheme. This generated more than €50 million savings last year and targets almost €100 million in total by the end of 2011. "In the absence of the financial crisis in Ireland that would not have been possible. Everybody in the company has understood the cost-saving measures are to be seen within the framework of our independence as a carrier."

But more is perhaps required. In the context of higher fuel prices and widening first-quarter losses, the airline is assessing whether its existing cost-reduction programme is enough to protect future profitability. And it continues to walk a tough line with unions, as recent threatened industrial action from some of its pilots demonstrates.

"It's a big challenge," Mueller says of keeping labour on board, noting the last decade of labour relations has been a difficult one. While he believes this has improved, he acknowledges mistrust remains as a result of the recent history. "Not as a complaint, but as an observation, the repair job in labour relations takes years and that is the reason why I am quite realistic. We will have that issue ongoing, but so far we have managed it."

The last decade, dealing with blows from the foot and mouth outbreak in 2001 through to the economic crisis, has been tough for Aer Lingus. But Mueller believes its journey positions it for challenges ahead. "I believe that in 2009 we were right to reposition Aer Lingus, but Aer Lingus joining the no-frills world was one of the foundations of today's success. It is easier to build up, rather than carving out."

TURNING POINTS 

For Christoph Mueller, fire-fighting was not a new experience. Almost a decade ago he was fighting an ultimately unsuccessful survival battle with Sabena, having taken the helm in its final year. "I have specialised on turnaround and restructuring cases, and I'm not limited to one airline model. I have worked in traditional hub carriers, low-cost carriers and charter carriers," he says. This took in senior positions at Daimler Benz and Lufthansa before Sabena, and as aviation director at pan-European leisure airline group TUI Travel before taking the Aer Lingus role.

So what does he take with him from these experiences? "One thing, you have to have endurance and you have a lot of optimism, and you have to have a good team." And he speaks fondly of the Irish carrier. "From a personal and emotional perspective, Aer Lingus is such a nice airline. It has a place in the airline community that is really justified."

NEW PARTNERS 

Partnerships have been key to the growth of Aer Lingus and one of the newest has been its link with Irish regional operation Aer Arann to operate feeder routes into Ireland from provincial points in the UK using its ATR fleet as Aer Lingus Regional flights.

"They provide frequency on routes we can't with our A320s," says Mueller. "If you fly only once a day, you do not attract business travellers, because they don't want to overnight. The amount of business passengers we have on the ATR is much more than we anticipated. We have a really nice potential based on a win-win, and we see potential to expand that."

Mueller is clear a feeder arrangement is preferable to an equity step. "When Aer Arann went into examinership, the examiner asked us if would be interested." He though points to his belief that combining carriers will always meet at the higher cost level. "I think it would endanger Aer Arann's competitiveness by investing a stake."

Aer Lingus also has an intriguing tie-up with United Airlines on transatlantic flights from Madrid, one of the few instances of a European carrier taking advantage of the EU-US open skies to operate transatlantic flights outside its home market.

"We operate the aircraft very cost efficiently and United is selling it at very reasonable yields and it works," says Mueller. He believes this type of operation could be strategically important for the future. But he believes the obstacle to further such deals with United or other US carriers hinges on labour agreements in the USA.

Look back at our 2003 cover interview with then Aer Lingus chief Willie Walshe_SFlbflightglobal.com/WalshLingus