THE first-quarter 2011 results from Aer Lingus bear the scars of high oil prices, rising airport charges, the timing of Easter, a cabin crew dispute and a tough Irish economy.
Together, these factors generated an operating loss of €53.7m, equivalent to €31 per passenger. The carrier reduced capacity by 11% in the same period, as it closed long haul in Shannon and other routes from Gatwick. This helped increase yields by about 9%, which limited losses.
Looking forward, conditions should be better in Q2 and Q3 as the absence of volcano disruption and seasonal summer demand swings the business back into the black. Overall, we now estimate full-year profit will be about €20m, sharply lower then the €58m reported during 2010. An encouraging element is the strong balance sheet, where net cash of about €400m remains, an important resource for the airline and shareholders.
Figuring out the longer term prospects is trickier. Rumours during the week that an institutional placing by the Government was likely are ridiculous. A placing of that size would need a discount that further dilutes an already weak share price. Moreover, the Government, rightly, wants assurances regarding connectivity and the use of Heathrow slots before exchanging its shares with anyone. Both would be lost via a placing to institutional investors.
The rational and logical future for Aer Lingus lies within a much larger carrier competing in a fast consolidating industry. Yesterday, Portugal decided to sell its carrier TAP while Poland plans the same with LOT. Ireland, which is effectively in receivership, must also sell assets if taxpayers are to be relieved of crippling debts. Aer Lingus should be part of that process. The key question for taxpayers, and their political representatives, is what airline offers the best long-term prospects?
IAG (the merged BA/Iberia) offers connectivity and Aer Lingus Heathrow slots are very valuable to it. Lufthansa, with its BMI unit and as part of the STAR Alliance, is a viable merger partner too. Ryanair, with 29.9%, is a contender also but politicians, civil servants and Aer Lingus are opposed to that Irish solution. Isn’t it remarkable that a home grown carrier, now the second most valued airline in the world, is sneered at when consideration about the future of Aer Lingus is debated? London and Frankfurt, it seems, are the answer to all of “Paddy’s” problems in some people’s minds.
Before anything happens, however, some other matters must be addressed. Aer Lingus employees and their retired colleagues are part of a pension fund with a severe deficit that must be resolved. The OFT in Britain is completing an investigation about Ryanair’s holding in Aer Lingus which has a bearing too. Airport charges in Ireland, that were raised by 40% last year amid a deep recession, are uniquely sensitive for Aer Lingus, given its Ireland focus. Factors such as these, and the never-ending challenges that face all airlines (oil, economic confidence etc), will occupy the minds of managers, employees and investors for the foreseeable future.
Joe Gill is director of research at Bloxham Stockbrokers