Remember the great Aer Lingus debate?

3 years on: How IAG’s purchase of Aer Lingus has played out for Irish tourism

Introduction

Just three short years ago on 26th May 2015, the Irish Government agreed to sell the State’s 29.7% holding in Aer Lingus after months of debate and negotiations with International Airlines Group (IAG). Subsequently, Ryanair, who had previously made unsuccessful attempts to acquire Aer Lingus, sold its 30% stake for €2.55 per share in July, with Aer Lingus’ shareholders officially accepting IAG’s takeover offer in August. IAG assumed control of Aer Lingus on 2nd September 2015 at a cost of €1.5 billion.

The takeover was vigorously debated in political circles, the media and within the travel and tourism industry. On one side the sale of a national asset was predicted to weaken Ireland Inc.’s strategic connectivity with the outside world, lead to the sale of valuable Heathrow slots, job losses and the demise of the Aer Lingus brand with its iconic green shamrock on aircraft tails. This strong protectionist position was vigorously challenged by the prospect of financially healthier future for Aer Lingus within a good synergistic airline group. The backing of a strong parent would secure the airline’s future through an expanded fleet and route network thereby improving connectivity and boosting employment, FDI, trade and tourism. What has been the reality? Has it been good or bad for Irish tourism?

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3 Years On

Looking back on the pre-sale debate it is evident that much of the discussion was not only founded on a strong protectionist philosophy, but on an unrealistic understanding of the influence of the Government’s minority shareholding in a publicly quoted company, and a lack of appreciation of the business dynamics shaping the international airline industry. Some of the concerns expressed at the time by business and tourism interests, particularly in the South West and West, and the apprehensions of the company’s workforce were very real.

The experience of the last three years has demonstrated that not only have the fears not been realised, but the benefits delivered by the new owners continue to accelerate growth, boost traffic, creating new job opportunities and driving tourism growth particularly from North America. To date the outcome has been decidedly positive in the national interest and in particular for Ireland’s tourism industry.

Aer Lingus expansion on services from North America has been a prime driver of double digit growth in high yielding tourist flows from both USA and Canada to Ireland in each of the past two years. The market has been the majority source of the annual incremental increase in Ireland’s tourism earnings in each year. The level of growth would not have been possible without the opening of new gateways and the boosting of capacity year round by Aer Lingus. The benefit is most apparent from the double digit annual increase in tourism receipts from North American visitors, up 27% since 2015 to over €1.5 billion. The impact of the arrival of high spending tourists from North America in greater numbers has benefited most areas of the country, but particularly Dublin and the Wild Atlantic Way, as well as boosting visits outside of the traditional peak months. Tourism has been a major beneficiary of Aer Lingus growth and the airline’s plans and ambitious targets for the next four years provide an opportunity to continue to grow tourism.

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The outcome: Aer Lingus returns a stronger performance under IAG ownership

Since joining IAG, Aer Lingus has consistently outperformed other airlines in the group on several key performance metrics.

Revenue and profit has increased on the back of efficient capacity growth with higher productivity, and cost initiatives, including savings leveraged through IAG. This performance was achieved in the face of increasing competitive pressures across the industry and falling airfares.

In the first full year of IAG ownership, Aer Lingus operating profit rose by €109 million to €233 million, with adjusted operating margin up 5.9 points to 14.9%. The performance reflects a step change from prior years, creating a more competitive cost base and positioned the airline to continue on its growth strategy. In 2017 Aer Lingus operating profit was €269 million, an improvement of €36 million, with adjusted operating margin increased by 1.3 points to 16.2%.

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Record transatlantic growth

Since joining IAG in 2015, Aer Lingus has launched 6 new North American services to Hartford, Los Angeles, and Newark, Miami, Philadelphia and Seattle, marking the largest ever transatlantic expansion in the airline’s 60 year history on the route. This year Aer Lingus, serving 13 North American gateways, will provide a total of 2.75 million seats. During the summer months up to 114 flights each week will provide almost 29,000 seats in each direction, serving New York (JFK) and Boston from both Dublin and Shannon, with services from Miami, Orlando, Washington, Philadelphia, Newark, Hartford, Chicago, Seattle, Los Angeles, San Francisco and Toronto to Dublin.

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Aer Lingus has almost doubled its North American transatlantic capacity from Dublin over the past five years, with double-digit annual growth, peaking at +24% in 2017. Growth in 2018, based on current schedules, is set at +15%.

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Aer Lingus has helped turn Dublin Airport into one of Europe’s largest transatlantic hubs with over 1 million passengers connecting on Aer Lingus services this year. This accounts for at least one in every three passengers on Aer Lingus flights across the Atlantic beginning or ending their journey elsewhere in the UK and across mainland Europe. In addition, Aer Lingus has been particularly successful in feeding traffic into its transatlantic services through partnerships with US carriers such as JetBlue and United. The strategy of growing connecting traffic has enabled Aer Lingus to launch new routes and grow capacity on a sustainable basis and in instances where point to point travel alone would not be commercially viable. This has been to the benefit of inbound tourism to Ireland offering more gateways and more frequency options for visitors to Ireland.

This accelerated growth highlights the need for continued investment in hub infrastructure, runway capacity and aircraft parking positions by Dublin Airport.

The busier and long-standing markets are being flown by A330 aircraft, while smaller leased Boeing 757-200 narrow body aircraft serve Hartford and Philadelphia from Dublin, and Boston and New York from Shannon. This summer Aer Lingus will operate a 13 strong Airbus A330 fleet consisting of 5 A330-200s and 8 A330-300s bringing North Atlantic strength up to 17 aircraft (13 A330s and 4 B757-200s) the largest transatlantic fleet in the airline’s history to date.

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Aer Lingus targets continued growth on North Atlantic

Aer Lingus is due to take delivery of the first of 8 new single aisle A321neoLR aircraft in time for summer season 2019, marking the next phase of an exciting expansion and growth in Irish tourism. The new fleet will allow the launch of new routes as well as delivering frequency growth on current services operating alongside the A330 fleet and replacement of B757 aircraft on lease from ASL Airlines. The new aircraft are ideally suited for connecting Ireland with gateways along the east coast of North America, and have been described by IAG Chief Executive, Willie Walsh, as a ‘game changer’ for Aer Lingus.

Earlier this year Aer Lingus invited airports in the US and Canada to present commercial proposals for Ireland route development. A ‘stronger than anticipated response’ has been reported by the airline which are now in the final stages of evaluation. An announcement on 2019 plans can be expected within a few months.

The Heathrow Slots

Aer Lingus services connecting Dublin, Cork and Shannon to Heathrow have marginally increased since IAG have taken ownership. The fear of a reduction in service has not been realised. A peak weekly schedule of 88 flights per week between Dublin and Heathrow remains unchanged, while frequency on the Cork route has increased from four to five flights on selected days and Shannon maintains three daily flights.

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Short haul network

Flights connecting Ireland to Britain and mainland Europe continue to be developed with increased frequency on several routes and the launch a limited number of new services. On cross-channel routes Aer Lingus Regional network has been strengthened, in part to facilitate connecting traffic at Dublin, while Shannon has a new service to Edinburgh.

Summer capacity on mainland European routes has increased by 10% since 2016, including adjustments to match demand, providing on average 65 routes each summer. Over the past 3 years Aer Lingus has launched new services linking Dublin with Montpellier, Pisa, Murcia and Split, together with a new Cork to Dusseldorf route.

More jobs delivered

New jobs have been added across the airline, including flight and cabin crew, maintenance and engineering, ground support, and guest services. For example, the airline recruited 100 additional pilots at the end of 2017.

The airline has been increasing active in recruiting for its apprenticeship and other training programmes. Recent recruitment has included intake into a 4 year Aircraft Maintenance & Engineering Apprenticeship and cadets into its Future Pilot Programme.

Opportunities and challenges ahead

While Aer Lingus continues to expand growth may not be limited just to the existing geographical markets that it currently serves. Willie Walsh, IAG’s CEO, speaking recently at the CAPA Airline Leader Summit suggested that future expansion could see growth into new regions beyond the traditional European and North America markets, including an opportunity to perhaps fly direct into Asia as growing trade between Ireland and Asia.

However future growth for Aer Lingus is not without its challenges. Global economic growth levels, oil prices, and terrorism shocks are just some of the external variables that can impact on aviation. However Aer Lingus growth into the future will also be predicated on Irish airport capacity expansion; this is most evident at Dublin Airport where both terminal and runway capacity are being urgently addressed to facilitate further airline growth. ITIC fully supports Dublin Airport in its efforts to grow capacity at the airport particularly the new runway which is due to begin construction at the end of this year.

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