deathray
10th May 2005, 18:54
From Business Plus Magazine
The financial transformation of Aer Lingus under Willie Walsh wasn't
quite as impressive as it first appears.
THE TROUBLE WITH bringing in a young chief executive who stands company strategy on its head is that you're stuck with the new strategy when he leaves. That's the position Aer Lingus, the national airline, finds itself in as it contemplates life after Willie Walsh, whose three-year tenure as chief executive fundamentally altered the company's modus operandi. Walsh has departed to fry bigger fish at British Airways. In his wake he leaves a business strategy that probably isn't viable in the long term but which definitely suits the national interest.
Through the latter half of the 1990s, Aer Lingus wasn't just a scheduled airline; it was also involved in aircraft maintenance, cargo handling and holiday charters. Group employment peaked at 8,300 people in 1998 and as the company divested the non-core activities, employment across the company was reduced to 6,800 by the time Walsh became chief executive in October 2001.
Now the headcount is down to 3,900 and Aer Lingus doesn't do anything else other than fly from A to B. In the process of getting back to basics, group turnover at Aer Lingus has been reduced from €1,325m in 2001 - the year when Walsh became boss - to €907m last year, Walsh's last year in charge. That 3 5 % reduction in turnover over three years is an outcome that would get most bosses the sack. Instead though, Walsh has been hailed as a management super-hero.
Aer Lingus had been involved in restructuring long before Walsh got the top job. But there was a sense of panic at the airline when Walsh became chief executive in October 2001, due to the fall-off in passenger traffic after the September 11 attacks in New York. In August that year, the airline had lost its long-standing chairman, Bernie Cahill, when he died in an accident. He was replaced by Tom Mulcahy, the retired AIB boss who had no airline experience. Mulcahy wasn't alone. Apart from airline staffers and Paddy Wright, the board directors were political appointees who knew little about the airline sector
Prior to Walsh's arrival, the chief executive had been John O'Donovan, the company's finance director who became acting chief executive in June 2001 when Michael Foley was suddenly ousted as boss over a staff matter. O'Donovan created the vacancy for Walsh by jumping ship to Bank of Ireland days after 9/11. In the weeks following 9/11, transatlantic traffic was badly hit and the board took fright.
One week after September 11, the airline announced that it was letting go 600 temporary staff, taking seven aircraft out of the fleet and scrapping services to Washington and Newark. In the event, the carnage wasn't as bad as feared. In fact transatlantic traffic through 2001 was unchanged from 2000, and for the full year the reduction in the company's turnover was just 2%, despite the load factor falling four points to 72%.
Nevertheless, an inexperienced chairman and his board were badly spooked by 9/11. So when they selected Walsh, the former pilot turned chief operations officer, for the top slot, they also signed up for his agenda. Until Walsh's arrival, the Aer Lingus business model was based on premium pricing. All the planes had business cabins and executives would pay €800 for a weekday roundtrip to the continent. Fares were cheaper back in steerage but still a lot more expensive that the Ryanair alternative. The model had served the airline well for decades. Customers paid through the nose for tickets and the model financed thousands of cushy jobs, just like it did at other European state-owned airlines. But Walsh was spooked too. The young gunslinger had seen the future and its name was Ryanair. Walsh was convinced that high-fares, full-service airlines didn't have a future. So he decided that if you can't beat `em, join `em. After taking the top job he declared: "The way forward for this business is based on a view of the industry that sees competition increasing and fares falling.
"We are committed to getting our customers to their destinations as cheaply, simply and efficiently as possible. To achieve this we must continue to drive excess cost out of the business. Making healthy profits based on this business model means continuing to drive greater efficiency and an unrelenting focus on cost reduction. This we are committed to doing."
If Mary O'Rourke, the minister in charge of Aer Lingus, and her department officials had a different view it was never enunciated. Walsh was left to get on with the job without, it appears, any interference from the airline's owner. And Walsh was as good as his word. He sold off, shuttered or outsourced anything that was non-core (cargo, maintenance etc) and fired hundreds of staff. He cut fares and drove the internet sales channel. On the route network, he turned his back on internal flights in Ireland and scaled back the commitment to London and provincial UK to find the aircraft that would serve new routes from Dublin and Cork to all over Europe. Where once the Aer Lingus European network was Paris Amsterdam, Brussels, Frankfurt and Rome, now the airline has services to Seville, Valencia, Warsaw, Budapest, Hamburg, Venice, Nice, Lyon etc. Business traffic on these new routes is incidental; as with Ryanair, the prime target market is the leisure traveler.
Walsh's strategy delivered big improvements in the airline's bottom line in 2002 and 2003. But last year the progress stalled, which raises the question whether his low fares strategy and focus on continental Europe instead of the UK might be coming unstuck as fuel charges go through the roof.
There is no doubt that Aer Lingus has been offering value for money but the passenger growth has not been commensurate with what's on offer. Through 2004, there was an increase of almost 100 km in the average length of a flight, to 813 km,
while the average fare was €80 compared with €82 the previous year. The load factor, the number of seats filled per flight, grew from 81 % to 82 %, but the number of passengers carried has not increased at anything like the rate one would expect from a competitive, go ahead low cost carrier.In fact there is a view that all Walsh did was to convert former higher fare routes into new lower fare routes. The average flown fare in Europe has been reduced by 23% from €103 in 2001 to €80 in 2004, while over the same period the average sector length has increased by 36%. Not surprisingly, passenger numbers on these continental routes have soared.
Transatlantic has also been showing growth. Thanks to the strength of the euro against the dollar, the average transatlantic fare has been reduced by 23% since 2001 to €253 last year. The public responded with strong bookings growth on this route in 2003, though less so last year.
But of course any business can boost sales by reducing its prices. The question is whether there will be any profit margin left over when the costs are factored in.
Though Walsh delivered on the low fares part, reducing the overhead was still a work in progress when he quit for British Airways a few months ago. Despite the redundancy programme since 2001, Aer Lingus' employee productivity still has some way to go; the average Ryanair employee processes 5.6 times more passengers than his or her Aer Lingus counterpart.
Ryanair is the giant bogeyman lurking over Aer Lingus' shoulder. In the UK market, where Aer Lingus and Ryanair were competing directly for customers, Walsh scaled back services and redeployed the aircraft to European destinations that Ryanair doesn't touch. Ryanair has so far avoided a head-to head with Aer Lingus on many of its routes and the cynical might say it is simply biding its time until it gets what it wants out of the government in terms of new terminals at Dublin Airport. Then, with no more political constraints remaining, it can pounce and carve another chunk out of Aer Lingus' market share.
There are also other competitors to worry about. City Jet/Air France is now bigger on the Dublin-Paris route than Aer Lingus and takes a lot of passengers from Aer Lingus on the London route too. BMI is still very active in the Dublin-UK market and recently launched a new dedicated Ireland website. And on the Atlantic, American Airlines is set to join the crowd.
Could Walsh have adopted a different strategy? It's arguable that he went too far in cutting fares, especially on routes that were cash cows. Just because Walsh scrapped business class didn't meant that the business big shots and civil servants who were prepared to pay through the nose had disappeared. They're still there, not quite as concerned about the ticket price as maybe Walsh thought they were.
Now it is mooted that the State should sell control of Aer Lingus to private investors. Those investors might stick with the low fares model, though there are lots of reasons why they might not. But once you cut your prices in business, it's hard to get them back up. In any event, low fares to Ireland from all over Europe, the UK and the US are one way of providing a fillip to the tourism sector here, and that benefits the wider economy. The cheap access also encourages overseas workers to locate here, which suits multinational employers. In that sense, Walsh gave back to Aer Lingus a strategic role that sits well with the airline being in, and remaining in, State ownership.
The financial transformation of Aer Lingus under Willie Walsh wasn't
quite as impressive as it first appears.
THE TROUBLE WITH bringing in a young chief executive who stands company strategy on its head is that you're stuck with the new strategy when he leaves. That's the position Aer Lingus, the national airline, finds itself in as it contemplates life after Willie Walsh, whose three-year tenure as chief executive fundamentally altered the company's modus operandi. Walsh has departed to fry bigger fish at British Airways. In his wake he leaves a business strategy that probably isn't viable in the long term but which definitely suits the national interest.
Through the latter half of the 1990s, Aer Lingus wasn't just a scheduled airline; it was also involved in aircraft maintenance, cargo handling and holiday charters. Group employment peaked at 8,300 people in 1998 and as the company divested the non-core activities, employment across the company was reduced to 6,800 by the time Walsh became chief executive in October 2001.
Now the headcount is down to 3,900 and Aer Lingus doesn't do anything else other than fly from A to B. In the process of getting back to basics, group turnover at Aer Lingus has been reduced from €1,325m in 2001 - the year when Walsh became boss - to €907m last year, Walsh's last year in charge. That 3 5 % reduction in turnover over three years is an outcome that would get most bosses the sack. Instead though, Walsh has been hailed as a management super-hero.
Aer Lingus had been involved in restructuring long before Walsh got the top job. But there was a sense of panic at the airline when Walsh became chief executive in October 2001, due to the fall-off in passenger traffic after the September 11 attacks in New York. In August that year, the airline had lost its long-standing chairman, Bernie Cahill, when he died in an accident. He was replaced by Tom Mulcahy, the retired AIB boss who had no airline experience. Mulcahy wasn't alone. Apart from airline staffers and Paddy Wright, the board directors were political appointees who knew little about the airline sector
Prior to Walsh's arrival, the chief executive had been John O'Donovan, the company's finance director who became acting chief executive in June 2001 when Michael Foley was suddenly ousted as boss over a staff matter. O'Donovan created the vacancy for Walsh by jumping ship to Bank of Ireland days after 9/11. In the weeks following 9/11, transatlantic traffic was badly hit and the board took fright.
One week after September 11, the airline announced that it was letting go 600 temporary staff, taking seven aircraft out of the fleet and scrapping services to Washington and Newark. In the event, the carnage wasn't as bad as feared. In fact transatlantic traffic through 2001 was unchanged from 2000, and for the full year the reduction in the company's turnover was just 2%, despite the load factor falling four points to 72%.
Nevertheless, an inexperienced chairman and his board were badly spooked by 9/11. So when they selected Walsh, the former pilot turned chief operations officer, for the top slot, they also signed up for his agenda. Until Walsh's arrival, the Aer Lingus business model was based on premium pricing. All the planes had business cabins and executives would pay €800 for a weekday roundtrip to the continent. Fares were cheaper back in steerage but still a lot more expensive that the Ryanair alternative. The model had served the airline well for decades. Customers paid through the nose for tickets and the model financed thousands of cushy jobs, just like it did at other European state-owned airlines. But Walsh was spooked too. The young gunslinger had seen the future and its name was Ryanair. Walsh was convinced that high-fares, full-service airlines didn't have a future. So he decided that if you can't beat `em, join `em. After taking the top job he declared: "The way forward for this business is based on a view of the industry that sees competition increasing and fares falling.
"We are committed to getting our customers to their destinations as cheaply, simply and efficiently as possible. To achieve this we must continue to drive excess cost out of the business. Making healthy profits based on this business model means continuing to drive greater efficiency and an unrelenting focus on cost reduction. This we are committed to doing."
If Mary O'Rourke, the minister in charge of Aer Lingus, and her department officials had a different view it was never enunciated. Walsh was left to get on with the job without, it appears, any interference from the airline's owner. And Walsh was as good as his word. He sold off, shuttered or outsourced anything that was non-core (cargo, maintenance etc) and fired hundreds of staff. He cut fares and drove the internet sales channel. On the route network, he turned his back on internal flights in Ireland and scaled back the commitment to London and provincial UK to find the aircraft that would serve new routes from Dublin and Cork to all over Europe. Where once the Aer Lingus European network was Paris Amsterdam, Brussels, Frankfurt and Rome, now the airline has services to Seville, Valencia, Warsaw, Budapest, Hamburg, Venice, Nice, Lyon etc. Business traffic on these new routes is incidental; as with Ryanair, the prime target market is the leisure traveler.
Walsh's strategy delivered big improvements in the airline's bottom line in 2002 and 2003. But last year the progress stalled, which raises the question whether his low fares strategy and focus on continental Europe instead of the UK might be coming unstuck as fuel charges go through the roof.
There is no doubt that Aer Lingus has been offering value for money but the passenger growth has not been commensurate with what's on offer. Through 2004, there was an increase of almost 100 km in the average length of a flight, to 813 km,
while the average fare was €80 compared with €82 the previous year. The load factor, the number of seats filled per flight, grew from 81 % to 82 %, but the number of passengers carried has not increased at anything like the rate one would expect from a competitive, go ahead low cost carrier.In fact there is a view that all Walsh did was to convert former higher fare routes into new lower fare routes. The average flown fare in Europe has been reduced by 23% from €103 in 2001 to €80 in 2004, while over the same period the average sector length has increased by 36%. Not surprisingly, passenger numbers on these continental routes have soared.
Transatlantic has also been showing growth. Thanks to the strength of the euro against the dollar, the average transatlantic fare has been reduced by 23% since 2001 to €253 last year. The public responded with strong bookings growth on this route in 2003, though less so last year.
But of course any business can boost sales by reducing its prices. The question is whether there will be any profit margin left over when the costs are factored in.
Though Walsh delivered on the low fares part, reducing the overhead was still a work in progress when he quit for British Airways a few months ago. Despite the redundancy programme since 2001, Aer Lingus' employee productivity still has some way to go; the average Ryanair employee processes 5.6 times more passengers than his or her Aer Lingus counterpart.
Ryanair is the giant bogeyman lurking over Aer Lingus' shoulder. In the UK market, where Aer Lingus and Ryanair were competing directly for customers, Walsh scaled back services and redeployed the aircraft to European destinations that Ryanair doesn't touch. Ryanair has so far avoided a head-to head with Aer Lingus on many of its routes and the cynical might say it is simply biding its time until it gets what it wants out of the government in terms of new terminals at Dublin Airport. Then, with no more political constraints remaining, it can pounce and carve another chunk out of Aer Lingus' market share.
There are also other competitors to worry about. City Jet/Air France is now bigger on the Dublin-Paris route than Aer Lingus and takes a lot of passengers from Aer Lingus on the London route too. BMI is still very active in the Dublin-UK market and recently launched a new dedicated Ireland website. And on the Atlantic, American Airlines is set to join the crowd.
Could Walsh have adopted a different strategy? It's arguable that he went too far in cutting fares, especially on routes that were cash cows. Just because Walsh scrapped business class didn't meant that the business big shots and civil servants who were prepared to pay through the nose had disappeared. They're still there, not quite as concerned about the ticket price as maybe Walsh thought they were.
Now it is mooted that the State should sell control of Aer Lingus to private investors. Those investors might stick with the low fares model, though there are lots of reasons why they might not. But once you cut your prices in business, it's hard to get them back up. In any event, low fares to Ireland from all over Europe, the UK and the US are one way of providing a fillip to the tourism sector here, and that benefits the wider economy. The cheap access also encourages overseas workers to locate here, which suits multinational employers. In that sense, Walsh gave back to Aer Lingus a strategic role that sits well with the airline being in, and remaining in, State ownership.