News Article - September 01 2006

Open Skies’ is key for Aer Lingus
  Aer Lingus chief executive Dermot Mannion will don his sales cap and hit the road on September 4 with a mission to tell the story of a small but progressive Irish airline to international pension funds and institutional investors. Aer Lingus chief executive Dermot Mannion will don his sales cap and hit the road on September 4 with a mission to tell the story of a small but progressive Irish airline to international pension funds and institutional investors. In keeping with a seven-year journey to privatisation that has been turbulent, protracted and sometimes unpleasant, Aer Lingus hit yet another snag last week. The US government has decided to delay implementing new rules to allow greater foreign ownership of US airlines. The move threatens to delay the long-awaited ‘Open Skies’ agreement beyond this year - it would allow non-US entities to purchase up to 25 per cent of voting shares in US airlines, while allowing European airlines greater access to the US and vice versa. A wider agreement would see Ireland negotiating a separate deal that would enable the likes of Aer Lingus to fly to any destination in the US. Aer Lingus at present flies directly to Boston, Chicago, Los Angeles and New York.

   With the forthcoming initial public offering (IPO) in mind, Mannion put on a brave face last week when asked about the delay to Open Skies. ‘’We’ve always had a plan B in mind,” he said. ‘‘It’s true we had anticipated Open Skies sometime in 2007, but our plan B is to grow capacity on our existing routes to North America and to look at opportunities eastbound from Ireland. We are uniquely placed in Europe to take advantage of Open Skies if, and when it comes.” Plan B aside, there is little doubt that an indefinite delay of Open Skies would be a significant setback for Aer Lingus. The delay announced last week will make Mannion’s job more difficult when he meets investors in early September. In the first place, much of the expected growth in revenues and profits in a privatised Aer Lingus are expected to be on its transatlantic routes. Following the events of September 11, the company turned its focus to developing and expanding its short-haul network into Europe.

   More than 50 new routes into Britain and Europe have been added since 2002.Last year, the number of passengers carried in continental Europe rose by 34 per cent. Late last year, Aer Lingus senior managers began to turn the airline’s attention back to an expansion of its transatlantic network. The company is expected to take delivery of two new long-haul A330s next summer at a reported cost of $190 million. The two aircraft will bring the number of long-haul aircraft at Aer Lingus to nine. They were acquired to allow the airline to serve the additional passengers it anticipated with the arrival of Open Skies in April 2008. In the new business plan, stretching to 2012, Aer Lingus has identified five new destinations in the US it believes could prove lucrative: San Francisco, Philadelphia, Florida (Miami/Orlando), the mid-Atlantic (Baltimore and Washington) and Texas. In particular, Aer Lingus believes there is potential for expansion in and out of San Francisco and Philadelphia. San Francisco, for example, would also offer Aer Lingus connecting traffic to Seattle, Portland, Reno and Vancouver. The importance of Open Skies to Aer Lingus cannot be overstated.

   Aer Lingus carried 8.04 million passengers last year, an increase of 15 per cent on the previous year. All of the gains, however, came on the airline’s short-haul network. Passengers on its transatlantic route remain static at 1.2 million. Without new routes to the US, growth at Aer Lingus will be seriously restricted - and growth is what the stock market will demand of the company once privatised. Transatlantic routes into and out of Ireland accounted for approximately 38 per cent of last year’s scheduled passenger revenue. A privatised Aer Lingus will need to increase this to above 50 per cent.

   In this sense, the issue of Open Skies presents more of a challenge to Mannion and Aer Lingus than the so-called terror threat that has disrupted the US and British aviation industries in the last few weeks. Mannion is correct in asserting that the aviation business has historically bounced back quickly from these types of events. Aer Lingus is now carrying about one quarter more passengers than it did before the events of September 11. The events of the last few weeks, while not helping sentiment towards Aer Lingus in the run-up to the IPO will not derail the stock market project if contained. Investors are more concerned with high jet-fuel prices and potential recession in the US than they are about terrorist threats, according to international aviation experts such as Daniel McKenzie, an analyst with Credit Suisse.

  ‘‘Terrorism is a risk we highlight as a general industry risk, but not one that has historically caused investors to run for the hills,” said McKenzie. In the absence of a collapse in international airline travel - assuming there is no September 11-type incident in the near future - new travel restrictions may even prove to be marginally positive for airlines such as Aer Lingus. The airline recently announced that it was imposing a charge of between €4 and €8 a bag on baggage checked in after January 17, 2007. The charges, which apply only to its short-haul routes, could yield the company about €30 million a year.

   With restrictions on the type of baggage allowed in the cabin, the airline could benefit from increased baggage fees as passengers leave more luggage in the hold. With about six weeks to go before the IPO, there is plenty of time for the travel chaos of recent weeks to recede into the background. Shares in the two airlines most affected in Europe, British Airways and Ryanair, began to rally last Thursday, indicating that the worst may be over for now. Barring a major disaster, Mannion is likely to find the subject down the list of priorities when he meets international investors in the coming weeks.

Source - The Post.IE (Thanks to VG)