June 2, 2015
Listening to the debate on Aer Lingus last week was like being propelled backwards to the 1970s when every country had to own an airline. The airline business, like almost every industry, has changed profoundly since then, yet the political language has hardly budged. Why do people think national when they are discussing the most international, by definition, of all industries? It seems like a national airline is an industrial fetish, a bit like the economic equivalent of Fifty Shades of Grey.
The plain vanilla commercial reality is that, unfortunately, it is not who owns them that determines whether they thrive or not, but how many choose to travel with them.
So the national interest is whether the airline has a solid future.
This seems so obvious but unfortunately many people continue to argue that “we need links to the outside world” and therefore having a domestic, or at least part domestically-owned, national carrier, is essential. But consider the fact that Ireland became an exporting and trading phenomenon without a national shipping company, yet the vast majority of our trade goes by sea.
Many shipping companies use our ports. They are competitive, they do the job and do you have any idea what they are called? Do you care? The same goes for air transport. You don’t need a government-controlled airline to be a normal country plugged into the world; nor do you need a government-controlled shipping company to be a trading economy.
Once we appreciate this fact, it’s easier to see what is in the best interest of Aer Lingus, the company and its staff. The single best underwriter of Aer Lingus will be the number of passengers.
There are two big trends in the international airline business. The first is low cost in rich countries and the second is full service in growing parts of the world. In Europe, the low cost carriers are cleaning up.
Even though people still think of Ryanair as the upstart and Aer Lingus as the incumbent, Ryanair will carry 90 million passengers to Aer Lingus’s nine million. The upstart is ten times bigger than the old hand.
Even BA, a company indelibly linked with British air travel, is only the third biggest carrier in Britain, behind Easyjet and Ryanair. In fact, Ryanair’s ambition is to grow to 150 million passengers by 2020 and next year to knock Easyjet off its number one perch across the water. Ryanair is three times bigger than BA and 30 per cent bigger than German giant Lufthansa.
Ryanair has spawned copycat airlines such as Norwegian, Pegasus Airways, Wings and Wizz, all challenging conventional carriers. The future of mass-market air travel in Europe is low cost. And the trick the low-cost carriers stumbled upon is a bit of consumer psychology that we never thought about: people don’t so much travel to destinations as travel at a price – and if you make the price low enough, people will take a chance.
Also cheaper fuel has enhanced the profitability of low-costs airlines over full-service ones. This is because the low cost can squeeze almost every cost bar fuel. Therefore, between 40 per cent and 45 per cent of a low-costs airline’s cost is fuel, so if fuel costs collapse, profits shoot upwards. This makes low-cost carriers look like a better bet for fresh capital.
And remember the airline business is capital intensive because without new planes a company can’t expand capacity.
The other big trend globally is Asian air travel. Orders of planes from China are still very strong. Typically, as a country gets richer, air travel grows two times as fast as GDP and this can be seen very clearly in global trends.
Twenty years ago, passengers were most likely to fly on an airline from Europe or North America. Over the next 20 years (according to Boeing), 62 per cent of air traffic will be from outside North America and Europe. Emerging markets will grow faster than established markets.
Regions growing above trend are Asia Pacific (6.3 per cent), Middle East (6.4 per cent), and Latin America (6.2 per cent), while European (3.9 per cent) and North American markets (2.9 per cent) will be below trend.
So where does this leave Aer Lingus?
It doesn’t want to be a Ryanair-lite and it can hardly have an Asian strategy. In addition, the airline industry is going through a massive growth spurt. So standing still is not an option.
Consider this global change. Today, there are nearly 21,000 jet airplanes commercially operated in the world. The world’s largest fleets are in the United States, China, Russia, the United Kingdom and Germany. Over the next 20 years, the world’s fleet will grow at an average rate of 3.6per cent annually. This means that more than 36,700 new planes will be built.
Aer Lingus needs to get its hands on some of this new capacity. Firstly it needs the routes of another big partner to generate more business into Ireland and it needs the balance sheet of a bigger partner to expand.
Wouldn’t a tie-up with a bigger player that could open up all sorts of American cities like Dallas, Miami, San Diego and Denver to Irish tourism make sense? They are well served by BA and Aer Lingus is going to piggyback on those networks.
Why would Aer Lingus seek a partnership with the likes of KLM or Lufthansa when BA is the obvious partner for Aer Lingus.
Don’t get me wrong: I love flying Aer Lingus and I get a real feeling of coming home when I fly back to the country on Aer Lingus.
For years, Aer Lingus was, in my head anyway, synonymous with home. It still is, but given what is happening to the global airline business, it is hard to see the future for the company without the significant balance sheet, access to cash and access to routes of another bigger carrier. That is just the way the airline business is going.
The best way to safeguard Aer Lingus was to sell it.