No soft landings in Irish dogfight

For years, Ryanair and Aer Arann have been knocking lumps out of each other, writes Ciarán Hancock

WHEN JOHN Sharman stands up to address Aer Lingus shareholders at its annual meeting in Dublin today, he is expected to paint a bleak picture on its trading outlook.

Investors are likely to be told that Aer Lingus will break even at best this year, given the rocketing price of fuel.

While booking levels are good, fares are under pressure and oil at $120-plus a barrel is crucifying the industry.

On Tuesday, Aer Lingus's bitter rival Ryanair warned that it would probably only break even in the current financial year, which in its case ends next March.

Even then, Ryanair said this would only be achieved if it could put through a 5 per cent rise in average fares, which includes its baggage and check-in fees.

That gloomy forecast was predicated on oil continuing to trade at around $130.

Were it to fall to $100 a barrel, Ryanair said it would post a profit of $350 million.

In the days since Ryanair's announcement, the price of oil moderated to the low $120s a barrel, giving some hope that the airline might end the year in the black.

"In some ways it was classic Michael O'Leary," says one aviation analyst who asked not to be named. "He's prepared the market for the worst and if the price of oil drops sharply, Ryanair should make a tidy profit and he'll look like a genius for having steered them through a really tough environment. He also knows that a number of airlines will probably crash, which will allow it to fill some gaps."

At a briefing in London, O'Leary name-checked a number of airlines that he reckons are in danger of going bust.

Prominent among them is Irish regional carrier Aer Arann.

Under the ownership of Pádraig O'Ceidigh, Aer Arann has grown from offering shuttle services to the Aran islands on propeller planes to operating more than 600 flights a week to 40 routes in Ireland, the UK and France. Less than 24 hours after O'Leary had written its obituary, Aer Arann issued an upbeat "trading update".

Passenger numbers rose by 3 per cent to 430,100 in the first five months of this year. It had its busiest May ever, carrying 105,677, 10 per cent ahead of the same month of 2007.

Ryanair's declarations on Aer Arann are part of a long-running spat between the two airlines.

Michael O'Leary recently won the Dublin-Kerry public service obligation contract from Aer Arann.

For the past couple of years, the pairing have been knocking lumps out of each other on the Dublin-Cork route.

"The biggest problem that we are facing is that Ryanair is all over us like a rash," O'Ceidigh told The Irish Times.

"We are taking a hit, but that's because Ryanair is dumping seats on the Cork route. They are using predatory pricing to get us off that route."

At the beginning of the year, O'Ceidigh made a complaint to the Competition Authority in relation to the Dublin-Cork route.

"The Competition Authority is looking into the matter," O'Ceidigh said.

Ryanair dismissed his claims and also suggested that the Competition Authority was on the verge of dismissing the complaint.

"It's complete nonsense," said Jim Callaghan, Ryanair's head of regulatory affairs. "Aer Arann has made a complaint, which we've responded to and we understand that the Competition Authority is dropping the complaint.

"There's absolutely no truth in the claims that were made and we expect a decision in a number of days."

Sources close to the Competition Authority suggested that no decision was imminent and there is no indication as to which way the regulator will rule.

Callaghan pointed out that Ryanair had less than a 10 per cent share of the Dublin-Cork route when Iarnród Éireann's hourly train services are taken into account.

He also said the route is profitable for the airline, although many in the industry question that assertion, given that its fares are only about €35 each way, including taxes and charges.

Whatever the truth, Aer Arann has scaled back its Cork services.

O'Ceidigh admits that Aer Arann is experiencing "tough times" at present, but declares confidently that the airline will survive.

"As things stand now we will be profitable, but the profits will be small," he said, adding that they will probably represent a couple of percentage points of its sales.

As an unlimited company, Aer Arann is not obliged to publish its financial details. O'Ceidigh said this decision was taken for competitive reasons, to shield information from its rivals, particularly in the UK.

He said turnover this year would be about €110 million compared with about €104 million in 2007 - a 5.8 per cent rise.

"We don't have any comfort zone, but we are profitable and we're keeping our heads above water," O'Ceidigh said.

According to O'Ceidigh, Aer Arann has the most fuel-efficient fleet in the skies and fuel accounts for only 15 to 18 per cent of its costs. This compares with about 35 per cent for Aer Lingus and up to 50 per cent for Ryanair, the leanest operator in the market.

"We operate routes that work in a sweet spot for the aircraft that we fly," O'Ceidigh said. "Fuel is not a big part of our costs."

Being unlimited might shelter Aer Arann from media scrutiny, but it also means that were the airline to crash, its debt would shower down on O'Ceidigh, who wholly owns the company.

Has he considered changing the corporate structure? "No I haven't, and the reason I haven't is that we wanted to keep it private . . . for me it was worth the risk."

He says it has debts of about $40 million relating directly to the purchase of new aircraft in recent times.

"That's the only debt we have in the company, there's no other debt."

O'Ceidigh is no longer involved day-to-day with the business having handed over the controls in the past couple of years to Garry Cullen, an aviation veteran.

O'Ceidigh, who got involved with Aer Arann in the mid-1990s, said Cullen and his management team are doing a "great job" and says he no longer has sleepless nights about its future.

"I'm gone past that. It's tough, it's very, very difficult out there and every day is a challenge for the company. But we're surviving."

Would he sell or seek an investor? "That's always possible. I haven't approached anybody and I haven't put a for sale sign up.

"Now is not a good time to be selling an airline."