Airline aims to navigate through the turbulence

Much has been written about the Aer Lingus saga over the last year. The Government has taken a decision to sell its stake to IAG, the owner of British Airways. 

Ryanair will, presumably, follow.

A good way to make a small fortune in the airline industry is to start with a large one. Running airlines is a losing proposition. As of about five years ago the cumulative profitability of all US airlines over the previous 60 years was negative.

Indeed over perhaps a century the industry has lost money. That is an astounding fact. Such losses are not down to a few catastrophic years either but reflect regular cycles of large losses and small profits.

Given that, and given the unfavourable economics of the industry — high entry costs, a structural need for excess capacity, limited asset substitutability, atomised demand, and a secular rise in fuel costs — it perhaps does not make sense for nation states to be involved in the industry.

This was the argument made when Fianna Fáil sold off a major stake in Aer Lingus, that it could prosper better with freedom to raise and deploy capital outside state control. What is at question now is whether the State is better off with a retained stake or not.

This might be easier to answer if we had not blown the National Pension Reserve Fund on a zombie bank, but in principle there is nothing wrong with stakes in airlines, no more than in banks or other firms.

For Aer Lingus there is a dilemma. As the airline industry is one that loses money, a Red Queen race is in operation. To remain among the few that make profits, airlines need to be prepared to spend more and more. There is a financial economy of scale at operation here, as well as economies of scale more generally.

Thus mergers and other scale-enhancing activities are the norm. It is possible — if a firm is lucky, plucky, and rich enough — to gain that scale and grow. This is what the likes of Ryanair and easyJet did. But now that they are large they have the organisational and financial firepower to see off most challenges.

Herein lies the problem I and I suspect many have with this sale. Back in the day, before the plucky underdog Ryanair (yes, they were that once) came on board, we had a nice cartel on the Dublin-London route. Fares in the middle 1980s of hundreds of pounds were routine. It took competition to break that and to drive down fares and to drive up capacity to where we are now.

With upwards of 5m passengers on the various Dublin-London routes, any fare increase or decrease is meaningful. But competition doesn’t really exist with two companies, and that is what we will have here.

Competition, whether in airlines or radio or newspapers, is the lifeblood of innovation and customer satisfaction. It is hard to see how this deal improves competition on the major route which Aer Lingus operates. If anything it has the potential to retard rather than enhance it.

Aer Lingus was in a bind. To grow it needs capital, lots of it. Even with rates as low as they are now and a market boom, airlines are never, for the reasons noted above, a great bet. Thus the need to get with IAG.

The State cannot mandate competition. They can mandate the conditions under which competition can flourish. But as we have seen in many other business areas, as we have seen with the tardiness of the opening up of the legal system, the Government doesn’t really seem that concerned about competition.

That’s a pity.


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