If you had to describe Aer Lingus in purely technical terms, you might struggle. According to its chief executive Christoph Mueller, it’s an online network carrier with a hybrid short-haul operation that operates a hub modelfor long-haul but isn’t part of an alliance.
Mueller is credited with rescuing it from potential oblivion by picking elements of other airlines’ business models to suit - and so far he seems to have got it right. Soon after his appointment in 2009, when it lost €154 million before tax, it turned a corner, recording an operating profit in 2010 and pre-tax surpluses in 2011 and 2012, the latest being €41 million. Mueller claims the third-highest margin of any European carrier, at 5%, behind easyJet and, of course, Ryanair.
He describes the airline at the point he arrived in Dublin four years ago with one word: “unsustainable”. More than 600 redundancies and a cull of unprofitable routes - long and short haul - were undertaken, and eight offices in Dublin alone reduced to two. These were among 500 cost savings identified. Aer Lingus’s pricing policy was torn up.
“At the time, there was a ‘me too’ strategy with Ryanair, optimising the load factor,” he recalls, adding that neither the low-cost or the legacy model “made any sense” in Aer Lingus’s case, as it had neither the cost base to compete with its budget rival or enough population for a legacy carrier.
“The high times of alliances are over… they will be replaced by joint ventures, that is the model for the future”
“We call ourselves a value carrier. We have remained low cost from a people point of view, whereas on the revenue side we are modular. We offer a seat like on Ryanair with a small difference that we fly to main airports. The customer values this and we can charge €20-30 more,” he explains.
The modular approach means Aer Lingus is offering what it thinks the customer will pay extra for, be they business passengers wanting flexibility and Fast Track, or holiday customers flying in economy wanting to treat themselves to a business-class meal - an option it also offers.
Limits on the home front
When it comes to the bigger picture, Mueller has a problem in that Aer Lingus’s home market is limited - a population of 4.7 million, although as he is quick to point out, there are another 17 million of Irish descent living abroad.
The market might be small, he says, but the propensity to travel, because of the diaspora, is very high, an average six times a year compared with the EU’s 1.5 times.
To bolster this, Mueller has developed Dublin as a transfer hub, with 30-50% of passengers on each US service transferring there. “That enables us to fly a much larger long-haul fleet than one just serving the island,” he said. Dublin airport saw more than 25 million passengers before the economic crisis; it is now at 19.1 million, a chance for Aer Lingus, he believes. “We would love to do more,” he says.
He takes a measured approach to expansion here. Aer Lingus has nine Airbus A350s on order that allow for a small long-haul capacity increase from 2015, but which are really like-for-like replacements for the core fleet of seven long-haul aircraft and no major expansion is anticipated.
Meanwhile, one change has been to lease three Boeing 757s for the thinner routes to North America; Shannon to Boston and New York, and Dublin to Toronto, freeing an A330 for the busier Dublin routes. This spare capacity will be used next year to expand San Francisco frequencies.
“We sell almost 90% of long-haul tickets on the internet. That is unmatched in the entire world”
He is proud of one statistic relating to long-haul. “We are the only online network carrier. We sell almost 90% of long-haul tickets on the internet. That is unmatched in the entire world.” When it comes to the global distribution systems, the modular approach suits him again. “We now selectively work with them where we are forced to, like Germany. In Ireland, it’s less than 1% non-internet distribution.”
This is a major part of why he will not return to an alliance. Aer Lingus quit oneworld in 2007 when it briefly adopted the no-frills formula. “It is a pretty expensive country club,” he said. “It cost us €40-50 million just to upgrade our IT system. We would never earn it back in terms of passengers because the Irish diaspora is quite concentrated around the world - the US, Australia, Hong Kong.”
Selective code sharing is his favoured approach. He goes further: “The high times of alliances are over. Seamless travel for the customer can be achieved much easier today. I believe alliances will be replaced by joint ventures - that is the model for the future.”
No plans for flying solo
There is no go-it-alone plan, however. It is no secret that Aer Lingus was in advanced merger talks with an unnamed carrier before Ryanair scuppered a deal by announcing its third hostile bid for its rival in summer 2012.
The UK Competition Commission ruled four months ago that Ryanair must reduce its stake from 29.8% to 5%, meaning that Aer Lingus will be in play again. Mueller expects an appeal by Ryanair to be heard in February, but accepts Ryanair, which he describes as “the poison pill”, may remain on its share register, limiting its appeal to investors “for another year or so”.
Etihad, which has a 3% stake in Aer Lingus, is unlikely to increase its shareholding soon while it digests its other, more major investments. Mueller says, however, that the two carriers’ commercial relationship has outperformed “on both sides”.
He outlines Aer Lingus’s attractions to an investor and its expansion strategy.
“We have a business that is scalable and we have a healthy balance sheet. Our slot portfolio in many airports, Heathrow, JFK, Amsterdam, is very attractive.”
He adds: “We would like to grow inorganically, but that doesn’t mean we want to buy an airline.” He says Aer Lingus, with its low cost base, could instead expand by replacing another carrier on a section of its routes that were unprofitable - long or short haul.
There is a track record of similar arrangements here, like the now defunct partnership with United Airlines to operate its Washington-Madrid route and the deal with Virgin Atlantic to fly its Little Red domestic connections.
Mueller says the extra four A320s flown for Virgin bring unit costs down.
Ryanair and Aer Lingus have 80% of the market in Ireland and Mueller argues that he has beaten off competition because others cannot compete with his cost base. He points out that Aer Lingus owns more than half its fleet of 48 aircraft, with its only debt being the remaining leases. He says that having only BA, Lufthansa and Swiss, plus the US and Middle East carriers making up the remaining 20%, is a sign that he is right about the passenger-friendly modular approach.
“Our business model is scalable, easyJet is migrating towards it,” he says, adding that the US carrier JetBlue, famous for its seatback TVs on its short-haul aircraft, is its “closest ally” in this respect.
Mueller is clearly a fan of the optional extras - he has just introduced Wi-Fi on to long-haul flights and will extend it to short haul next summer. Having sorted the basics, he is starting to have fun. The near future may bring some surprises.
