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Comment: Aer Lingus Management Buyout/MBO Proposal-A Contrarian View
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Clearly the current management have...done a very good job. However, we should be careful about the trap of falling for the cult of the company hero which characterised the business media in the US and Europe during the 1990's boom. July
12,
2004--The
year 2001 was an annus horribilis for Aer Lingus, Ireland's State
airline. In the early summer the chief executive Michael Foley resigned
following Ryanair
had been founded in 1985 and had built its business by providing low
fares on the Ireland-UK routes. It made air travel a choice for many
people who would not have paid the cartel prices of the regulated
industry. Both Aer Lingus and its political masters had not taken the
Ryanair challenge seriously. In 1993 a rescue plan which became
known as the 'Cahill Plan' had involved a Government investment of £175 million and an allocation of 10% of the
equity to the workforce in return for more In the aftermath of 9/11 Aer Lingus was losing £2 million each day. The late Bernie Cahill was replaced as chairman by Tom Walsh, the former chief executive of AIB Bank. Walsh had a reputation of having an aggressive style and he supported the appointment of Willie Walsh as chief executive. Walsh had been Chief Operations Officer and had joined the airline as a cadet pilot in 1979. The dire situation that was faced by the airline helped to concentrate minds and a rescue package was agreed with trade unions with the support of the Government.
The web became a central sales channel and 700 temporary workers were laid off in addition to the permanent staff redundancies. There has been a remarkable turnaround in the interval and from a loss of €140 million in 2001, the company reported a profit of €69 million in 2003. The good brand equity which the company has built up has been instrumental in confirming that the State airline can compete vigoursly in the new aviation environment. Clearly the current management have also done a very good job although the company has to shed up to 1.300 further jobs. However, we should be careful about the trap of falling for the cult of the company hero which characterised the business media in the US and Europe during the 1990's boom. Ryanair had in fact written the script and as we have pointed out in a previous comment, it's important to remember the distinction between the successful entrepreneur and management employees facing challenges in an existing long established company. The industry as always continues to face a bumpy ride, in coming years. In a Special Report on low cost airlines in the current issue of the Economist magazine, it's stated that budget airlines in the US control pricing in the market. Flexible workforces mean that airlines such as Southwest, the model for Ryanair and the fourth largest American airline by passenger numbers, need only 80 workers to fly and support each aircraft, compared with 115 or more at a traditional carrier. In Europe, the Economist quotes calculations made by Keith Mullan of Aviation Economics, a London consultancy, in relation to the approximately 100 aircraft which Ryanair has on order from Boeing and the 107 A319's which easyjet has on order from Airbus. According to Mullan each aircraft would have to carry 250,000 passengers to earn their keep. Ryanair carried 23.1m passengers in the year to end March 2004 while easyjet carried 21.1m in 2003. In order to fill all the aircraft arriving in their fleets each 2 weeks up to 2008, both airlines will need between them to attract 52m new passengers a year, more than double their current numbers. The Economist suggests that attracting so many new passengers will not be an easy challenge as the current pattern of low-cost traffic in Europe is essentially a British/Irish phenomenon. Ryanair had built its business on what airlines refer to as 'VFR' ( visiting friends and relatives) traffic between Ireland and the UK. However, VFR traffic is much more prevalent in a homogeneous market such as the US than in a fragmented European market. Aer Lingus as an airline offering low fares but with some frills will also be sucked into the vortex. It needs at least €1 billion to fund new aircraft purchases and some form of sale is on the cards. However, a management buyout where the support of the workforce would be won by increasing its equity stake up to 25% would be precedent setting for the privatisation of any other state enterprises. The Government has a difficult decision to make. The disappointment among small investors in the Eircom telecoms floatation in 2000 overhangs the option of publicly floating Aer Lingus. The option of a management buyout is also difficult as private equity groups would only participate if there is an exit strategy with a big profit on the horizon. Meanwhile, giving the senior managers who presided over the turnaround, the opportunity to become immensely wealthy even though they had faced an open goal, may not be politically palatable. Either way, the management will do well, whatever the decision may be. - Michael Hennigan Our Comment feature has been incorporated in the: The Finfacts Ireland News & Comment Service from October 2004
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flexible work practices. In
the late 1990's as Ryanair responded to the development of the online
channel and the elimination of travel agent intermediaries, the chairman
Bernie Cahill and the rest of the management missed the significance of
the web. The Aer Lingus website remained a static brochure information
one. Despite the 1993 plan, the company remained an overmanned
bureaucratic organisation. However, it had one asset which had been
built up since its foundation more than six decades before. Aer Lingus
had a an excellent reputation for customer service with the Irish
public.
