Things are starting to look up for Aer Lingus

The fact that Etihad’s energetic chief executive is showing interest in our one-time national carrier spells good news at a time when Ireland’s economy is in rebuilding mode, writes Kyran Fitzgerald

It has been a good week for Aer Lingus and by extension, the State, owner of one quarter of the airline.

The mood music has been improved by the release of a relatively strong set of quarterly results combined and by the news that the Abu Dhabi-based Etihad Airlines has snapped up almost 3% of the company. This produced a modest uplift in the Aer Lingus share price.

Goodbody Stockbrokers, however, upgraded the airline to a “buy” following the announcements.

Davy Stockbrokers predict that Aer Lingus is now on its way to matching 2011 levels of operating profit at just under €50m.

Tourism and Transport Minister Leo Varadkar was quick to exploit the feel good factor, arguing that Etihad’s decision to invest in the company represents a vote of confidence in both the one-time national flag carrier, and by extension, the country.

Etihad is a young airline, founded in 2003. It isexpanding at break-neck speed and this year reported a modest profit for the first time in its existence.

However, the company’s Australian chief executive, James Hogan, has huge ambitions for the airline, which is one of three from the Arabian Gulf now setting out to shake up international aviation.

Hogan came on board in September 2006 and since then has overseen rapid growth. The airline now flies to over 80 passenger and cargo destinations in the Middle East, Africa, Europe, Asia, Australia and North America.

It began flying to Dublin in 2007, since when it has carried over 750,000 passengers to and from Ireland.

Etihad has sponsored the All-Ireland senior hurling championship since 2008. It recently signed up to a new five-year deal.

The airline has emerged out of Abu Dhabi, the richest Sheikhdom in the United Arab Emirates.

Per capita income in this state amounts to around €50,000, while its sovereign wealth fund, weighing in at almost €900bn, is the biggest in the world.

The economy of Abu Dhabi is being transformed, with a shift away from dependence on hydro carbons to a future based on tourism-leisure, finance, transport and logistics. Abu Dhabi’s rulers have helped to bankroll the Irish bloodstock industry.

The new owners of Manchester City FC have pumped hundreds of millions into the club, which now plays at the Etihad stadium.

Last Monday’s Premiership title gunfight between the two Manchester clubs produced huge viewership figures, helping to boost the brand presence of the airline.

Etihad may be young, but its CEO, Hogan is something of a grizzled veteran.

Now 55, he grew up in Melbourne, a cosmopolitan city with a large population of southern European origin.

He started his career as a teenager with Ansett Airlines before moving to work for the car hire company, Hertz.

He went on to fill senior positions at British Midland (bmi), Granada, Gulf Air and the Australian Tesna consortium before being hired by Etihad.

In 2008, he made headlines when Etihad placed the world’s biggest order — worth $43bn — for 200 new Boeing and Airbus aircraft.

One of his ambitions is to topple Qantas from its position as Australia’s largest airline. Qantas is headed up by Dublin-born Alan Joyce.

Hogan is keen to stress that Etihad is not the corporate equivalent of a rich trust fund kid.

“We operate as a commercial entity. We receive no subsidies. We pay more to refuel our jets in Abu Dhabi than we do in Singapore or China. We do not dump capacity unsustainable into markets. We cannot afford to.”

The airline is non- unionised, though Hogan is keen to stress that it pays well. It is recruiting actively — not least in the Irish market where it recently took on around 60 people.

It now employs more than 100 Irish staff.

Hogan believes that Etihad has a big advantage over the legacy airlines, which it is challenging. It is not tied to old work practices, or contracts. It can build from the ground up.

As he sees it, Abu Dhabi and its airline are well placed to benefit from the shift of the balance of power to Asia and the emergence of Africa and Latin America.

New aviation routes are opening up which could eclipse the traditional routes such as Heathrow-JFK. He cites the burgeoning economic relationship between the UAE and Korea which recently bagged a $40bn contract to build four nuclear power plants in the Gulf.

The legacy airlines are “pulling whatever levers they have left” as they face up to challengers such as Etihad, Emirates and Qatar Airways.

The European airlines are held back by their government’s “limited vision of aviation”.

Etihad has targeted Australia as a source of traffic both work and leisure based. The country now exports over $50bn in iron ore to China, he points out.

Looking ahead, the emerging Chinese middle class is viewed as a big source of business.

Last year, Etihad started a service between the Gulf and Chengdu, the capital of Sichuan in South West China.

While Etihad is only now moving into the black, Middle Eastern airlines as a group made a collective profit of $700m — almost double that accruing to their European counterparts — on one quarter of the Revenue.

Assessing the significance of this week’s developments for Aer Lingus and Ireland, Joe Gill of Bloxham Stockbrokers believes that Etihad “have put down a serious marker and are going into this with their eyes wide open”. He believes that a sale of the Government’s 25% stake could be on the cards in the second half of the year.

Etihad has spent in the region of €12m to €15m on its stake, but it is a signal of intent. If the full stake is sold it could raise €130m, satisfying an initial requirement of the troika.

As Stephen Furlong of Davy Stockbrokers, points out, non-EU airlines can only buy minority stakes in European airlines, but a greater Etihad involvement could pave the way for reciprocal arrangements, including joint procurement.

The key attractions of Aer Lingus to Etihad would be its Heathrow slots and access to Aer Lingus routes across the Atlantic and also into parts of Europe.

“This is not a game changer. I don’t think there will be radical change in the slot portfolio. A condition of the IPO is that Aer Lingus adheres to certain frequency levels.”

Furlong believes that the development of Dublin as a major hub airport raises interesting possibilities, though analyst Joe Gill is more cautious about this, given Ireland’s small population. He does accept that the quality of facilities in Dublin make the airport attractive to would be buyers and expresses surprise that the Dublin arm of the DAA is not being considered for sale, given the DAA’s huge debts and the fact that Edinburgh Airport recently fetched £800m.

We may not be about to hit the jackpot as a result of the latest move into Ireland by Etihad, but the fact that its high-energy CEO is showing interest in Aer Lingus can only be good news at a time when our economy is in rebuilding mode.

If only we had a few oil rich local sheikhs of our own to bankroll some of our dream projects...

The CV

* Born: 1956, Melbourne, Australia.

* Career:

* 1975: Started career with Ansett Airlines — private airline. Later worked for Hertz Group.

* 1997: Service director, British Midland

* 1998 : Worldwide sales director, Granada Group.

* 2001: Chief executive, Tesna consortium.

* 2006 to date : President-chief executive, Etihad. Fellow, Royal Aeronautical Society.


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