Aer Lingus may 'return to profit' by early 2011

AER LINGUS chief executive Christoph Mueller yesterday told investors in London that the airline was not in danger of running out of cash and could return to profitability in the first quarter of 2011 following agreement with staff groups on a restructuring deal to save €97 million a year.

Mr Mueller also outlined the airline’s strategy, which will move away from being a point-to-point low-cost operator to operating more partnerships and alliances with bigger carriers. He wants to target markets in Asia for growth by feeding Irish travellers into one of Europe’s three major hubs: Heathrow, Frankfurt and Paris.

Aer Lingus said it made a “small profit” in the second half of 2009 but this was outweighed by the €94 million loss in the first six months of the year.

The airline has undertaken costcutting measures to save €97 million in 2012, when fully implemented. The saving this year will amount to €44 million, rising to €58 million in 2011. The delay is due to the time it will take to downsize its head-office operation and modernise its IT platforms.

Staff will ballot on the measures agreed with union groups in the coming weeks. These include a three-year pay freeze, pay cuts of 10 per cent across the board and about 676 redundancies.

Mr Mueller said the airline’s six management layers would be reduced to three and 170 out of 600 staff would be leaving its head office.

The restructuring plan will have a payback time of 9½ months compared with 2½ years for its last plan, which cost €117 million. Aer Lingus will book €40 million in cash costs from the latest redundancy package in 2010 and will take a €20 million profit and loss charge this year for redundancies in 2011.

Mr Mueller said that when he took charge last September, there was a view that Aer Lingus was “close to stop trading”.

“This is not true,” he told the gathering in London yesterday.

Mr Mueller said Aer Lingus had gross cash of €825 million at the end of December 2009. This was after burning through €400 million in cash last year as a result of redundancy costs, accounting for an operating loss and paying back some debt. He said €770 million of the airline’s cash pile was “unrestricted” and its €493 million debt relating to aircraft leases was “uncovenanted”.

This was Aer Lingus’s first investor day since becoming a public company in late 2006. More than 80 investors and analysts attended the presentations in London, which were led by Mr Mueller.

Aer Lingus also announced the details of its franchise agreement with Aer Arann. Under the deal, Aer Arann will operate 12 routes from the UK to Dublin and Cork. These will include three new routes and the service will operate under the brand “Aer Lingus Regional”.

Mr Mueller ruled out speculation that Aer Lingus might take an equity stake in Aer Arann or even take it over. “No, because we would destroy Aer Arann,” he said, in a reference to how the regional carrier would have to adapt to the Aer Lingus cost model if the national flag carrier held a stake in its smaller rival.

“We just charge Aer Arann a percentage of revenue as a franchise fee. We take no risk and will not take a risk.”

Mr Mueller said he believed the regional service could potentially feed passengers from the north of England and Scotland into Aer Lingus’s Dublin-based transatlantic operation. Travellers in the north of England have traditionally had to connect through Amsterdam for flights to the US. “Dublin is a far superior product [to Amsterdam],” Mr Mueller said.

Aer Arann will operate flights to Dublin from Edinburgh, Glasgow, Blackpool, Doncaster/Sheffield, Cardiff and Durham Tees Valley.