Republic's influence in airline sector set to expand

Aer Lingus is unique among European flag carriers in maintaining short-haul profits despite the intense competition from Ryanair, writes Joe Gill

No-one should be surprised that Republic continues to be at the heart of revolution in the international airline industry.

Seventy years ago Charles Lindbergh identified Rineanna (Shannon) as a key base for Pan American's transatlantic services. Foynes, and later Shannon itself, pioneered air services between Europe and the US. Ireland was at the centre of all key air travel records between 1919 and the 1940s (such as the first woman aviatrix - Amelia Earhart - to cross the Atlantic, first east-west and west-east flights, etc).

More recently, Aer Lingus was one of the first airlines to operate the wide-body Boeing 747 Jumbo in the 1970s, and in the 1990s the company was the first to introduce the twin-jet, wide-body Airbus A330 to transatlantic operations (which has since been followed by numerous airlines worldwide).

Aside from these technical milestones, Irish executives have also been key to revolutionising the business models most appropriate for commercial air travel.

Nowhere is this more evident than in the rapid development of Ryanair, which was underscored by its recent move to sharply increase its scale at Dublin airport. Ryanair is the leading short-haul airline across all of the EU, with profit margins (over 20 per cent ) that are the envy of companies in Europe, the US and Asia. It will carry almost 35 million passengers in the current year, giving it a 6 per cent share of all short-haul traffic in Europe.

Furthermore, its continuing growth contains a significant threat to the viability of many other airlines in Europe, and puts pressure on managers to either restructure or exit the sector.

In the past year a number of European flag carriers, including BA, Iberia and Air France, have highlighted their decisions to curb capacity growth in short-haul, allowing low-cost specialists like Ryanair to exploit the growth potential in that market.

In that light, the progress made by Aer Lingus has been highly credible. Operating within a State-owned structure, it has evolved as the only European flag carrier capable of maintaining profits on short haul despite the intensity of competition from Ryanair.

Aer Lingus is now at a key crossroads. Its short-haul business could further reduce its cost base to facilitate fare competition against Ryanair's massive expansion at six Irish airports during 2005. Or it could set out to expand its short-haul volumes as a means of lowering unit costs. Such a path is high-risk given the proposed new routes and fares planned by Ryanair in 2006.

On long haul, Aer Lingus appears keen to tap the inherent demand for direct services into and out of the Republic to the US, Middle-East, Asia and Africa. All of these offer passenger traffic potential but the key to unlocking that is economics. Infrequent services (either seasonal or intra-week) can prove very expensive in staff costs and require high load factors and reasonable yields to be justified.

A further complication is that the aircraft cycle has turned up sharply in the past nine months, pushing up prices and lease rates for both narrow and wide-body aircraft. That makes an acquisition programme more challenging as returns on capital are an important financial measure of success in such a cash-consuming and capital-intensive industry.

Aside from the airlines themselves, the financing of aircraft is also an intellectual hotspot in the Republic, and one set to flourish further. A number of key global aircraft leasing companies such as CIT, GECAS, RBS Aviation and Babcock and Brown have established the Republic as their global headquarters for non-US operated fleets. The combined fleet under their management is well in excess of 300.

That activity will further expand due to arcane US tax regulations that encourage US leasing companies to locate in the Republic. Given the billions involved in this form of financing, the Republic is benefiting in the form of capital markets activity and high-level employment.

Many of the key managers in these companies started their careers working within GPA, which before its demise was the largest aircraft-leasing company in the world. It is also worth noting that aside from domestic businesses, Irish expertise is spawning key aviation developments globally at present. The most high profile of these has been the appointment of former Aer Lingus executive Willie Walsh as chief executive of British Airways and the selection of Brian Dunne as finance director of the parent company for Air Canada.

Other less obvious threads are equally significant. For example, Tiger Airways, a low-cost carrier based in Singapore, has been seed-financed by the Ryan family.

Air Asia, the largest low-cost airline in that region, was part-founded by an Irish entrepreneur who previously worked with Ryanair and Aer Lingus. Boeing's new long-haul twin-jet, the 787, has its customer finance programme managed by an ex-GPA Irish manager, and a new low-cost project in the US, SkyBus, is part-managed by an ex-Ryanair executive.

In Australia, the Qantas low-cost carrier Jetstar, which completed a massive 115 Boeing 787 aircraft order prior to Christmas, has a chief executive who began his career in Aer Lingus. Irish managers are also evident among the upper echelons of Middle-East carriers such as Qatar and Emirates, both of which are committed to huge wide-body aircraft acquisition programmes.

All this activity underlines the intellectual capital that has been developed in the Republic in aviation over recent decades. It will continue to be deployed inside and outside the Republic to support the growth and expansion of this most significant form of international mass transport.

Joe Gill is research director at Goodbody Stockbrokers and a specialist on low-cost airlines.