Major challenges facing the new Aer Lingus chief executive

ANALYSIS:Another chief exits the flight deck at Aer Lingus, as the airline continues its freefall. What's next for the troubled airline? asks ARTHUR BEESLEY

DERMOT MANNION’S abrupt exit from Aer Lingus reflects exceptional pressure on the loss-making business as it battles recession at home and further afield. No airline in the world is immune from these unforgiving forces, but the risks to Aer Lingus are particularly acute.

The company’s bank balance is depleting at an alarming rate and it needs to find a way of arresting the trading losses that threaten to cripple the business altogether. With no decisive change in strategy put in place to counter this mounting crisis, Mannion appears to have lost the confidence of Aer Lingus chairman Colm Barrington, certain board members and institutional investors.

Of great concern is the speed at which the deterioration has taken hold. After a pretax loss of €119.7 million in 2008, Aer Lingus had operating profit for 2009 in its sights as late as last December. By March, however, it was forecasting annual day-to-day losses of up to €55 million as consumers and business travellers took fright at the elimination of some 1,000 jobs per day in the wider economy in the opening weeks of the year.

With cash on the Aer Lingus balance sheet declining 13 per cent in 2008 to some €654 million, there were forecasts that the current rate of “cash burn” would see the bank balance slip to €400 million. Such an enormous decline would be the wrenching consequence of ongoing losses, fleet replacement costs and the €120 million cost of a redundancy package.

While Barrington wanted immediate action to offset these dangerous trends, high-level sources with inside knowledge of the business say Mannion was found wanting in that regard. “There wasn’t a sufficient sense of urgency,” said one senior figure.

Mannion’s own acknowledgment yesterday that the appointment of a new chief executive would bring “fresh thinking and new ideas” to the company says much about his vision for the business and his hunger for any new round of retrenchment after four years of bruising encounters with the airline’s formidably resilient trade unions.

Thus the task for Mannion’s successor – whomever that may be – is to protect cash resources within Aer Lingus, cut its trading losses and tackle high costs in its long-haul operation as passenger numbers decline. The overriding aim must be to avoid a situation in which the company becomes overwhelmed by the loss of cash. With shares in Aer Lingus down 65 per cent in the past 12 months, the restoration of market confidence will be crucial.

In normal circumstances, doing that while navigating the competing factions represented on the Aer Lingus board would be a very challenging job.

Given the overbearing weight of the current pressures on the business, it will be decidedly more difficult to execute while dealing with the competing claims of the Government, institutional investors and trade unions, all of whom are represented on the board. This is to say nothing of constant friction with the pugnacious Ryanair chief Michael O’Leary, whose airline is the largest Aer Lingus investor with a 29.8 per cent stake.

Stabilising the business was never going to be easy. Yet Mannion’s hand in any engagement with unions and the Government was appreciably weakened by his acceptance last year of an extraordinarily generous “golden parachute” clause in his employment contract which would have yielded him €2.8 million if he left Aer Lingus after any successful bid for the business.

Mannion gave up these rights after coming under pressure from Minister for Transport Noel Dempsey, Ryanair and trade union interests. That these three are frequently in fundamental disagreement about how Aer Lingus is run speaks volumes about the exceptional nature of the deal between Mannion and John Sharman, Barrington’s predecessor in the chairman’s seat. This contract – and similar terms for five other senior executives – was agreed by the airline’s remuneration committee but was never placed before its board for approval.

Low-key by nature, Mannion came to the business in 2005. He succeeded Willie Walsh, a man whose supremely affable nature caught the public imagination as he brought the airline back from the brink of collapse in the aftermath of the 9/11 attacks on the US.

Mannion’s technocratic style did little for his public appeal, but he achieved the near-impossible task of bringing the airline on to the stock market in 2006. However, the privatisation was marred from the off by Ryanair’s lightning bid to acquire the business. Mannion has been fighting fires ever since, most recently when Ryanair launched a second but ultimately unsuccessful bid.

Mannion won few friends with his move to sever the airline’s operations between Shannon and Heathrow in favour of a Belfast service.

The prime decision here was taken by an executive team led by Mannion and it was not specifically referred to the Aer Lingus board for approval. Sign-off without board consent – like those lucrative golden parachute deals – may have been in line with normal corporate governance. But it raised doubt about Mannion’s political antennae. That the Shannon service was partially restored later raised questions as to whether the retention of a partial service might have been the safer strategy to pursue in the first instance.

Mannion is but the latest in a growing line of business chiefs to call it a day as storms of unparalleled magnitude rain down on the Irish economy. He is unlikely to be the last.

Arthur Beesley is Senior Business Correspondent of The Irish Times