Clouds on horizon as airline burns cash

ANALYSIS:Alarm bells are ringing in the Aer Lingus cockpit as the recession hits passenger numbers, writes CIARÁN HANCOCK

A FEW minutes before Dermot Mannion was interviewed on RTÉ’s Morning Ireland radio programme yesterday, Aer Lingus ran an ad for a four-day seat sale offering fare reductions of up to 30 per cent on flights to Europe.

It’s a good offer but in these recessionary times there’s unlikely to be a flood of customers to its website. Mannion said “consumers are going to get very good value this year”. He was pitching to an important constituency. Yet there was no mention of shareholders and how they were going to get any value from their investment. Aer Lingus shares plunged 26 per cent yesterday to just 58 cent as institutions were spooked by its bleak outlook and the alarming rate it is burning cash.

Suddenly Michael O’Leary’s €1.40 a share offer from last December looks positively generous and it’s worth remembering that he bid twice that amount in late 2006.

Both times Aer Lingus’s top brass advised shareholders to reject Ryanair’s bids as they fully undervalued the business. Mannion wasn’t offering any apology to investors for those statements yesterday.

The outlook for Aer Lingus is cloudy, as it is for most airlines at present. Aer Lingus is hugely dependent on Ireland, which is in the middle of a deep recession. Passenger traffic at Dublin Airport fell by 12 per cent year on year in February.

Aer Lingus acknowledged yesterday that revenues and long-haul passenger numbers would decline in 2009. It guided analysts that its operating loss for this year could be as high as €55 million if fares decline by 16 to 17 per cent. This is entirely possible in the current climate. In February, fares fell by more than 15 per cent.

Its much talked-about cash pile is dwindling at a rate of knots. Aer Lingus had net cash of €803 million last June. By the end of this year, that could be down to €400 million. With four new aircraft due from Airbus in 2010, analysts say its net cash could conceivably be below €300 million by the end of next year.

That would still be a useful buffer, and one that most airlines don’t have, but it’s far from the solid backstop that chairman Colm Barrington portrayed in December as part of its defence against Ryanair’s bid.

Trying to grow the business at a time of global recession is an unenviable task and Mannion deserves a bit of slack. Yet the jury is out on his attempts to diversify the business away from its roots in the Republic.

The Belfast base, launched more than a year ago, is not expected to reach break-even until the end of 2010. Its decision to pitch its tent at Gatwick and “green south London” sees it go head-to-head with easyJet, which is long established there. It’s a risky punt. There are all sorts of alarm bells ringing in the Aer Lingus cockpit at present.

With no upturn in the economy on the horizon, it’s not clear how Mannion will land her safely.

Aer Lingus: 2008 results

Revenue: €1.35 billion (+5.6%)

Pre tax loss: -€119.7 million (-195.9%)

Net cash: €653.9 million (-13.6%)

The former state airline hit some turbulence in 2008 with exceptional charges, primarily related to redundancy costs, causing it to record a pre-tax loss of €119.7m. This compares to a pre-tax profit of €124.8m in 2007. Although passenger numbers grew 7.5% to 10 million it expects long-haul numbers to drop by 10% in 2009, which will only be slightly offset by a 5% rise in short-haul primarily on the back of a new base at Gatwick.