annual report 2009 - Aer Lingus

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Chairman’s Statement Aer Lingus Group Plc – Annual Report 2009Chairman’s StatementDear fellow shareholdersCommercial OverviewLast year was a very difficult one for AerLingus. We experienced adverse conditionsin all our markets and particularly in Ireland,where economic recession, high unemploymentand loss of consumer confidence contributedto a significant decline in the demand forair travel.Conditions in the Irish market were exacerbatedby the introduction, in April 2009, of a €10tax on air travellers. It is difficult to understandwhy air travellers should be singled out forsuch a tax at a time when Irish commercialactivity, and especially travel and tourism,urgently requires stimulation rather thantaxation.Our North American and UK markets werealso adversely affected by weak economicand consumer conditions there along withthe strength of the Euro against the US dollarand pound Sterling. Combined with the highcost of accommodation and other goodsand services, our strong currency has madeIreland an even more expensive option forinternational travellers. Reductions in thecost base of our economy at all levels willbe important for its future success.The severity of the economic downturnin 2009 and its impact on air travel wasunprecedented. Aer Lingus entered 2009with too much capacity and several long haulroutes that were no longer sustainable in thechanged market environment. Fare discountingto fill these surplus seats was not the solution,and the lower fares we offered had the effectof diluting our yields across the system. Ouraverage system-wide yield in Q1 2009 was14.5% lower than in the same period of 2008.These factors contributed to our operatingloss of €93 million in the January-June 2009period. At the same time our gross cash declinedby €155 million, from €1,207 million at 31December, 2008 to €1,052 million at 30 June,2009. This reduction reflected approximately€97 million spent on staff restructuring costsand €137 million on aircraft purchases, withthese outflows being partly offset by inflowsfrom borrowings and other miscellaneous items.The significant operating loss and the reductionsin our cash emphasised the need for significantchanges at Aer Lingus, which commencedin April 2009.First we re-geared our flight schedule to bettermatch the existing demand conditions, particularlysuspending our direct services to San Franciscoand to Washington D.C. However, by providingAer Lingus services to and from our establishedbases in Boston, Chicago and New York withan expanded range of connecting flights onUnited Airlines and JetBlue Airways, we arenow offering indirect services to a muchbroader range of North American cities thanwere available a year ago. Our new codeshare arrangements with Aer Arann aredesigned to offer similar frequency and costimprovements on our European network.We also set about preserving our cash, throughthe operational measures referred to above,through reductions in our existing fleet andthrough significant deferrals of our futureaircraft orders. We have stretched out futureorders so that new deliveries will generallycoincide with the need for replacement ofexisting aircraft. We greatly appreciate theassistance of Airbus SAS in achieving thesechanges. We are confident that any futuregrowth opportunities can be serviced withsurplus aircraft from manufacturers, aircraftlessors and other secondary markets.These actions have had a positive impacton our financial results. In the July throughDecember 2009 period, Aer Lingus reporteda small operating profit of €12 million (ascompared to an operating profit of €3 millionin the same period a year earlier). At the endof 2009 our cash balance was €829 million. AerLingus continues to have a strong balance sheet.We also set about changing the culture, thework practices and the cost base at all levelsin Aer Lingus. These changes started with theboard where, in order to give the programmea kick start, our directors agreed to substantialreductions in their fees. This was unprecedentedin Irish business and makes our directors’fees among the lowest of equivalent plcs.I greatly appreciate the support of all ofthe directors in giving this leadership.We also have the benefit of a substantiallynew senior management team, lead by ourChief Executive Officer, Christoph Mueller.Christoph joined Aer Lingus on 1 Septemberand his drive, expertise, knowledge andpersonality have been major contributors tothe cultural changes that we are experiencingat Aer Lingus. Later in this report Christophwill explain to you his vision for Aer Lingusand how he, his management team and hisstaff will make Aer Lingus more attractive toour customers as Ireland’s Civilised Airline.Radical changes in corporate culture –particularly when they involve reductions inpay and increases in work – are not easy toachieve. However, Aer Lingus’ employeeshave grasped and accepted the need forchange. Their contributions to the changeprogramme (named Project Greenfield) havebeen outstanding and are hugely appreciated.I believe that the changes that are beingimplemented at Aer Lingus will inure to thebenefit of all our stakeholders; providinga better and differentiated product for
Chairman’s Statement Aer Lingus Group Plc – Annual Report 2009our customers, providing a secure, vibrantand positive working environment for ouremployees and providing an attractiveinvestment proposition for our shareholders.Market conditions remain difficult in 2010.However, while I am not expecting anyimmediate economic miracles, I know thatthe changes that have been made at AerLingus and the people who are managingand executing them are already contributingto improved operating results and cashprotection, which will be enhanced as theeconomic environment improves.ShareholdersAer Lingus’ shareholding base suffers froman over-concentration among a small numberof shareholders, with three shareholdersholding approximately 70% of our shares.This situation is exacerbated by the fact thatour largest shareholder – Ryanair Holdings – isalso our most significant competitor. We believethat Ryanair’s presence on our shareholderregister and its actions, including its attemptsto disrupt Aer Lingus through two unsuccessfulhostile takeover attempts, is damaging to theinterests of the shareholders of both companies.Any combination of Aer Lingus and Ryanairwould result in a near monopoly of air transportin and out of Ireland and would be detrimentalto the public interest. As a result it is unlikelyto be successful. In addition, it is unlikely thata shareholding of this size by a major competitorwould be allowed to prevail in most other EUjurisdictions as it is clearly anti-competitive.The actions we are taking to position Aer Lingusfor a successful future – providing a qualityand good value service based on an efficientoperation and supporting the developmentof the Irish economy generally – are the bestways to maximise value for all our shareholders.BoardI am extremely grateful for the support of allthe board members during the past, difficultyear. The unanimous support of all of thedirectors for carrying through difficult issueshas been a vital ingredient in effecting thechanges already made. Management can relyon the full support of the board as they continuethe vital change programme at Aer Lingus.I would particularly like to thank our SeniorIndependent Director, Laurence Crowley,who joined the board in early 2009 and hasbeen invaluable both as a questioner and asupporter to me during the last year. I wouldalso like to welcome Montie Brewer andNicola Shaw, who have recently joined asindependent directors. Montie and Nicolabring huge experience of the airline andtransport sectors and their appointmentsreflect Aer Lingus’ ongoing commitment tobest corporate practice and to board refreshment.Leslie Buckley also joined the board duringthe year as a non-executive director. Leslie’sextensive worldwide experience acrossseveral business sectors has brought a freshperspective to the board.Christoph Mueller joined the board followinghis appointment as Chief Executive Officer.Two non-executive directors, Anne Mills andChris Wall, retired from the board during thelast year. I would like to thank both Anne andChris most sincerely for their immense hard workand support for Aer Lingus over many years.Following their resignations from the company,both Sean Coyle and Dermot Mannion resignedfrom the board.People2009 was a challenging year for Aer Lingus staff.Following an extensive series of negotiations,the members of five staff unions voted tosupport the Project Greenfield proposals,despite the significant changes that elementsof this programme will involve for staff. Theoverall vote across all five unions was 74%in favour of the proposals.It is a great tribute to Aer Lingus staff and amark of their support for the company thatagreement on these crucial measures wasachieved without any disruption to ourpassengers. Despite intense negotiations overseveral months, our staff retained the positiveand friendly attitude to our passengers for whichAer Lingus and its people are so admired.We also welcomed new talent to the AerLingus management team and enhancedthe responsibilities of existing executives.As already mentioned, Christoph Muellerjoined as Chief Executive Officer and anexecutive director. Christoph was appointedafter a rigorous process and global searchand he has the track record and skill-setto lead the Aer Lingus team through thecurrent difficult operating environmentand to make the airline successful as heis already demonstrating.Michael Grealy joined as Director of HumanResources and Organisational Change. Michaelis focussed on making the necessary changesto the way we do business while maintainingour reputation for excellent customer service.Andrew Macfarlane joined as Interim ChiefFinancial Officer and is making a significantcontribution to addressing the key financialand reporting challenges that the airline faces.Stephen Kavanagh has been appointed ChiefCommercial Officer with commercial responsibilityfor both the long and short haul businesses.Stephen’s contribution in this vital area isalready making a positive financial impact.Enda Corneille has been appointed Director ofShared Services, where he will have particularresponsibility for ensuring that Aer Lingus’information technology is brought up to thevery latest standards. Enda will also continuein his role as Corporate Affairs Director.We expect to announce the appointmentof a new Chief Operating Officer shortly.I am confident that under Christoph’s leadershipthis new management team will bring aboutthe changes required to make Aer Lingussuccessful. The repositioning of the company’sproduct, the re-gearing of its operations, theimproved efficiencies and the reduced costsproduced by Project Greenfield are the keyelements in achieving this success. Importantly,Aer Lingus’ staff have shown that they wantthe company to succeed and that they areprepared to participate in the changes requiredto achieve success. I expect that over timethese factors will be significantly to thebenefit of all our stakeholders.SincerelyColm BarringtonChairman28 April 2010
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