Aer Lingus may need its share of the luck of the Irish to pull it back from the brink of pending financial disaster.
The airline requires equity investment via a public flotation or a strategic alliance, combined with a severe cost cutting programme, to pre-empt repetition of its 1993 financial crisis, according to a confidential report carried out by consultants NCB Corporate Finance. The report was commissioned by independent arbitrator Phil Flynn, who is tasked with finding a settlement to a long-running pay dispute.
The NCB report warns that if 'warning signals are ignored Aer Lingus will be unable to remain viable'. The report's forecast of impending financial doom seemingly contradicts Aer Lingus' 130 per cent increase in pre-tax profits to I£40.9 million (US$69 million) in 1996 and forecasts of I£30.2 million for 1997.
The stark message is based on 'declining operating margins, the likely onset of an industry downturn and the need to begin to address fleet replacement', says NCB. The airline requires a high level of profitability to fund fleet investment yet faces low profit margins and high costs.
Aer Lingus plays down the likelihood of a flotation but welcomes the mandate from the Irish government - its 95 per cent shareholder - to explore the possibility of a strategic alliance. The airline is in discussions 'with a number of strategic partners', but British Airways is tipped to be a hot favourite. Aer Lingus will present the government with proposals on potential partners by the end of the year.
Despite the financial difficulties ahead, the report recommends pay increases of 5.5 per cent for Aer Lingus' 5,000 employees (excluding pilots). Staff would receive a 2 per cent increase backdated to April 1996, another 2 per cent from April 1997, and a final 1.5 per cent rise from September 1997.
Flynn believes the pay increase is justified to help establish 'a joint commitment to industrial peace' and recognises that 'morale would be adversely affected if a pay increased was refused.' But the pay increase will come at a price. The wage hike is conditional on the unions agreeing to I£50 million (US$85 million) in cost savings.
The plan proposes alternative pay arrangements for pilots. In place of the planned 17 per cent pay increase, pilots would receive average increases of 7 per cent, variable according to seniority. The main beneficiaries would be junior and middle-ranking pilots, who would receive 30 per cent increases in a bid to reverse growing pay disillusionment. Out of Aer Lingus' 370 pilots, 70 mainly junior pilots have applied for jobs with other airlines, according to the Irish airline pilots' association.
The plan proposes that the airline's 53 most senior pilots are removed from the payroll by offering early retirement and then rehiring them on five-year fixed term contracts.
Lois Jones
Source: Airline Business
