I should like to welcome this Bill. It gives me great pleasure always to speak on Bills to do with the air companies, as I have had occasion to do in the other House, because of my own personal connection with Aer Lingus and Aerlínte over a period of 12 years, where, indeed, I spent the formative years of my adult life. I should like to say to the House that from my experience of the company at that time, although one would have no difficulty in making criticisms because all of us, no matter what organisations we are in, can see what is wrong and suggest how it could be put right—there are many criticisms one could make—I know that by the standards of international airlines, Aer Lingus was, and to my knowledge from the studies I have made of it since then, still is, one of the most efficient airlines in the world.
I can recall that towards the end of my period in Aer Lingus the Air Express Bureau in Brussels, which is run by the European airlines as a joint service to them, developed a method of comparison of efficiency which took account of the different elements which go to make up the economy of an airline, a method of measuring efficiency which took account of the fact that different companies had different planes operating over different stage lengths, with different degrees of seasonality. They were able to take out these separate factors, leaving behind the true residue, the element of efficiency, and compare the efficiency taking due account of these factors which tend to make companies incomparable with each other. It is my recollection that from that study at that time Aer Lingus emerged as the most efficient of the European airlines, efficient in the use of its resources, in securing the highest return on the investment, securing high load factors on all its routes and, on the whole, I think it has preserved that since then—although I have a criticism to make later on about Aer Lingus itself, as distinct from Aerlínte, in its load factors in the last couple of years.
I should like to say a few words first about Aerlínte. The progress of this company has been nothing short of phenomenal. I do not think that it is sufficiently realised in this country the rapidity of its progress, how this compares with other trans-Atlantic airlines and what a significant share of the trans-Atlantic market this company has. I looked at the figures quite recently and although my recollection is a little uncertain I think I am right in saying that it is the fifth or sixth largest European airline operating across the Atlantic—this is in terms of traffic carried. We are a small country. There are many more countries in Europe bigger than us operating planes across the Atlantic. We have outstripped many larger countries and our airline is carrying a share of the traffic which is far beyond that which might reasonably be considered appropriate to a country of our size. This has been achieved in a short space of time. It is less than 12 years since Aerlínte started operating. The House will recall the history of the company, although it is often presented differently on different sides of the House. Speaking as one who saw it from neither side of the House but from inside the company, I should like to say a couple of words about this which are relevant to the Bill before the House today.
When the company was first proposed in 1946-47 it was proposed at a time when the volume of air traffic across the Atlantic was not such that an Irish airline could do anything other than incur very heavy loss. I was, though young at the time, the official responsible for estimating the amount of traffic and contributing to the estimation of the size of the loss. It was my estimate, and I think this was borne out by the subsequent figures of the traffic across the Atlantic, that it would have carried in its first year 8,500 passengers and the loss would have been, I think, about £1 million and a loss of a million of 1947 pounds is an awful lot more than £1 million today—twice as much in fact.
In current money terms the loss would have been of the order of several million pounds a year, diminishing slowly but continuing as a very substantial loss for six, seven, eight or nine years. I think, and I thought at the time as a member of the staff of the company, that the decision to terminate the service then was wise. I know it is arguable and I do not want to enter any controversy about it because I know that the other side of the House felt disappointment that the project they had launched was cancelled by the inter-Party Government and I do not want to be dogmatic about it. I would only say that there was a very strong case for cancelling it and I think that if, in fact, it had gone ahead, the Irish people over that period of the late forties and early fifties would not have accepted the scale of subsidy that would have been required to keep it going through the lean years until the traffic reached the point at which Aerlínte could operate successfully. I think, moreover, that the decision taken at that time to purchase a fleet of five Constellation aircraft, which was three more than were needed for the Atlantic service and to impose on Aerlínte the burden of operating these aircraft on short haul services for which they were completely uneconomic, which would have added to the subsidy burden of Aer Lingus a very substantial sum also—I think about £300,000 a year extra cost to Aer Lingus for carrying the same number of passengers in less economic aircraft—would have done such damage to Aer Lingus and its reputation that it would have suffered. I know that this is arguable. I know that the other side of the House have a case for saying the service should not have been cancelled.
I should like, however, to put to the House at this point, as somebody who saw it from the inside, that there was a very strong case for the decision taken and I think that if the project had been continued it is not at all impossible that one or other Government would at some point in that period have felt obliged to cancel the service and it would then have been extremely difficult to start it up again. As it was, the service was cancelled and profit was made out of the sale of the aircraft and it was possible then to choose the right moment to re-launch the service and that moment was chosen by the present Government who came back to office in 1957. There had been attempts in 1954 and 1955 to restart it but the time was not propitious. It was not possible to do so although Mr. Lemass was anxious to do so. They chose a good moment, when the volume of traffic across the Atlantic had reached the point at which very quickly Aerlínte would be able to become a profitable company and where the development losses would be on a scale small enough to be tolerable without provoking an outcry from the people who would be unhappy about a continued large subsidy over a period of years.
So, Aerlínte was re-launched at this point. Within a very short period it became profitable and the traffic developed as forecast in the first three years—I had something to do with the forecasting myself. It developed after that time more rapidly than, certainly, I would have foreseen if I had remained in the company and was making the forecast and has since then continued to develop at an astonishing rate throughout almost the whole period of its life after the first couple of years of development—a very short period, indeed, of development and development losses, which compares very favourably with other new trans-Atlantic airlines starting up in the fifties and early sixties. After that short period, it started earning and has since then earned on its capital annually something between ten and 15 per cent return on the capital invested.
I would like to take issue here with Deputy Professor O'Donovan on this point. It is, of course, true that this company and Aerlínte have never paid dividends but this is not to my mind the crucial issue. The question of dividends in a sense obscures the true issue. The true issue is: what does the company earn on its capital and what return is it securing on its turnover every year? By that criterion Aerlínte —and here I have to distinguish it clearly from Aer Lingus—has been a profitable company almost since its inception and has earned a return on capital which any private commercial enterprise would consider to be reasonably satisfactory—ten or 15 per cent on a capital which itself has been selfexpanding because since the initiation of the company the Government have not provided additional capital to Aerlínte although they gave some extra capital to Aer Lingus in that period —and this company, starting off with £7 million capital, has built up, out of its profits and its appreciation funds, assets so that they now are several times as great as at the beginning and has done this out of the accumulated profits.
I think, perhaps, this was tactically unwise. I think, because people do not understand the concept of ploughing back profits and not paying dividends and using the money in this way, that it might have been better if the company had, in fact, from the beginning behaved as a private enterprise firm would have done: paid out dividends to its shareholders, the Government, and the Government would then have handed these dividends back to it as extra capital for its expansion. I think it has been foolish of the company to finance the whole of its extremely rapid expansion—far more rapid expansion than almost any industry that we are used to within this country—I think it was foolish of it, perhaps, to attempt to finance the whole of its expansion out of its own resources at the expense of paying a dividend.
What would have happened with an ordinary private company is that it would, in fact, have paid dividends and from time to time would have gone to its shareholders with rights issues, would have secured from its shareholders additional sums of capital because they would have been so pleased with the return they had been receiving in dividends. If that course had been followed the company would today be in exactly the same position, with the same planes, making the same amount of money, and people would believe of it that it was a profitable concern but, because the other course was adopted, of paying no dividends and ploughing all the profits back, there is a continued belief—reflected, I think, in what Deputy O'Donovan said—that the company is in some way not profitable.
As I said, I distinguish here between Aer Lingus and Aerlínte because in the case of Aer Lingus the company has not earned profits. It has had some losses. It has had a very small return on capital in some years, a negative return in others. Its position is quite distinct from that of Aerlínte. Aerlínte is by any commercial standards a profitable company. When people say it has not paid a return on its capital they are applying to it a criterion they would not apply to a private company. We do not say to ICI, for example, this is not a profitable company because it is not paying fixed interest at seven per cent per year on its capital and making a profit on top of that. People talk of Aerlínte as if it is not profitable because it is not paying fixed interest on the interest-bearing stock and making a profit on top of that again. It is a company financed by equity capital and equity capital earns a high yield—ten to 15 per cent—and this decision, then, is taken not to distribute it but to plough it back—a decision which, I think, has led to a lot of unnecessary misunderstandings.
There are some question which I should like to ask about the Bill before us, arising from this. I think it is not only proper but overdue that the Government should, at this point, expand the equity capital of the company. The Government have, by their unwillingness to do so to date, imposed an undue strain on the company by forcing it to finance the whole of its expansion out of its own profits and depreciation fund and out of external borrowing. Its balance sheet now has a very odd unbalanced look about it. I think the Government have been unfair to the company by not meeting earlier its requirements in this regard. I am glad they are now doing so. It is proper that they should do so. The company's balance sheet must be restored to a more reasonable appearance. The company must be put in a position where its equity capital bears some reasonable relationship to the amount which it has had to borrow—much of it from outside this country.
What is the reason for the different form in which additional capital is given? It seems to me entirely sound that the Government should at this point provide additional equity capital for Aerlínte, as I said, but why do the Government propose to provide £10 million additional equity capital and £5 million in this very peculiar form— in the form of sums which may be required for the purpose of defraying expenditure incurred by Aerlínte which is properly chargeable to capital? It is extraordinarily cumbersome terminology and I think also it is a cumbersome procedure. I am sure there is a reason for this. I am even prepared to believe there is a good reason for it but I am in the position that I do not know the reason. It does seem rather odd that the Minister should introduce this Bill and fail to explain the reason for this peculiar arrangement.
I am also concerned about the subsection of that section in which it is said that the sums paid to Aerlínte under this section shall be on such terms as to interest and other matters as may from time to time be determined by the Minister for Finance but shall not be repayable. This is a non-repayable sum. Therefore, it appears to be a grant, if I understand correctly, which may or may not carry interest. I cannot, offhand, recall another case of this kind—although there is perhaps a somewhat analogous and extremely objectionable case, the case of Nítrigin Éireann, established, as I recall, with a share capital, with a fixed interest-bearing capital, a capital which in fact not only has not been remunerated but for the remuneration of which no provision was made in the balance sheet.
I have been worried and concerned over the years at the fact that the balance sheet of Nítrigin Éireann is one which I should have thought a firm of commercial auditors should not pass. Although the company is required to pay interest to the Exchequer on its capital, not only was no sum fixed but no liability was put into the accounts for the amount which eventually will become due when this amount is fixed. Year after year, the Government have failed to tell the company what it owes. This seems a most negligent way of doing business —to lend money to a concern on the basis that: "I shall be looking for interest some day and I shall tell you some year how much it is that you owe me and, in the meantime, do not bother to mention in the balance sheet that you owe me anything". If anybody did business in that way in the private sector, he would very quickly be in the courts—which is where we cannot get the Government. It seems to me that this is quite an improper way to do business. I have, in fact, criticised elsewhere previously the treatbod ment of Nítrigin Éireann accounts and I shall continue to do so as long as the situation exists.
The situation here is analogous though not quite the same. At least, in this instance, it is said that the Minister shall determine the amount of interest. It is left open as to whether or not interest is to be charged. I think we should be told if interest is to be payable on this and, if so, at what rate. I do not think it should be left to the Minister. I think that when the Exchequer provides money in the form of an interest-bearing loan or investment, as the case may be, either it should be treated as being fixed interest-bearing stock and the amount of interest should be stated or else it should be an equity shareholding on which a dividend may or may not be paid. These are two traditional forms of investment, two traditional forms of providing the funds of a capital nature to a concern.
This new approach here of giving a non-repayable grant, which is not, in fact, a shareholding and on which interest may or may not be paid, does not correspond to anything known in the commercial world. I do not understand the reason for it. I think it introduces unnecessary complications into the system and I do not like the look of it. It seems to me to be bad accounting. I should like the Minister to deal with this point when he is replying. It is, of course, something we can take up further on Committee Stage.
I mentioned earlier that I wanted to say a word about Aer Lingus. I think it is not inappropriate to do so at this point because the Aer Lingus position is connected with Aerlínte. Aer Lingus was run for the first 20 years of its existence as an air line running services between Ireland and Britain and to some degree—and to an increasing degree—to the continent. That was its raison d'être. Its job was to operate as extensive a network as it could as profitably as it could on those routes. When the network was established, something which I think was inevitable happened. Aer Lingus came to be regarded increasingly as a kind of feeder service to the transatlantic route.
The development of Aerlínte very quickly reached the point where the scale of their operations, turnover and, indeed, the capital invested in it equalled or, indeed, exceeded that of Aer Lingus. Increasingly, the Aer Lingus services came to be regarded as feeder services so that, in fact, the decision as to whether a particular Aer Lingus services was operating at a particular time was governed not necessarily by the convenience of the great bulk of the people travelling on such a plane between Ireland and Britain or Ireland and the continent but rather, in some instances, by the consideration whether this would provide a convenient connection with a transatlantic service and would feed people into the transatlantic service or provide a method of distributing them throughout Europe once they had been attracted on to the transatlantic service by the existence of these connecting routes. The effect of this on aer Lingus has been to an extent that I, as an outsider, cannot, of course, now determine but its operations have been somewhat less economic than they might otherwise have been. If the time and the place is determined by the need to feed passengers into the transatlantic service and is not necessarily the timing that suits the people travelling on the local route, then naturally fewer people travel. Of course, more money is being made by the concern as a whole. I am not, in this criticism, necessarily criticising this method of running the company. The purpose is to maximise the profits for the concern, taking Aer Lingus and Aerlínte together, but I think that, so long as the two companies are accounted for separately, some account should be taken of this.
If Aer Lingus is to be required to operate this kind of feeder service at some cost to itself and if the dominant factor or a dominant factor in the determination of its route network, pattern and timetable is to be what suits Aerlínte, and if this has the effect of reducing its revenue and profits, then I think it would be appropriate for Aerlínte to make some payment to Aer Lingus in this respect. I recall, in this connection, that when the service was first started, those of us who were in Aer Lingus were given the task of running Aerlínte as well as Aer Lingus. One of the first things we had to do was to arrange for this mythical connection service between Shannon and Dublin. As the Minister knows, that is regarded as being an internal service operated internally by Aer Lingus. It is just a happy coincidence that the same plane runs to Shannon and to New York and that people do not have to get out at Shannon to board another plane, but, technically, it is of course an Aer Lingus internal connection service which happens to connect with the transatlantic service. This gets over the problem of the agreement with the United States.
I recall that we had a problem of negotiating a charter agreement with ourselves. We had to sit down around a table and decide what was the appropriate fee to charge to Aerlínte for providing this feeder service. I suppose we were biased in favour of Aer Lingus which had been our company for ten or 12 years previously. This new intruder which we also represented perhaps did not command our loyalty to the same degree. Perhaps the contract we signed with ourselves was a little unfair to Aerlínte. I was a little disconcerted when a decision was taken shortly afterwards that the whole administrative work of Aerlínte was to be carried out by Aer Lingus for the remarkable sum of £10,000. This kind of internal accountancy, designed to place the figures of one company in favour of the other, is something which I think is wrong. As long as the two companies are separated, it is the duty of their boards of directors to see that each of them gets a fair deal and that the relationship between them is an arm's length relationship, a separate company with a separate board of directors, as they had at the beginning. I was not happy then and I still am not quite happy that that relationship is preserved. I think Aer Lingus has perhaps had something of a raw deal.
I should like the Minister to consider whether in fact it might be proper for Aerlínte, out of its substantial profits —earned in part at least, perhaps, at the expense of Aer Lingus services, their convenience and their level of profitability—to make some payment to Aer Lingus if, in fact, Aer Lingus services are influenced to the company's detriment in this way. I think it may be that the remarkable imbalance between the profits of the two companies may owe something to this factor. I do not want to overstress it. I have no inside knowledge for the past ten years as to what the position is but I would ask the Minister to have a look at this.
Of course, I do not suggest for a moment that this is the only reason explaining the Aer Lingus financial position. The fact is, as the Minister has said, that the running of the short haul air service is difficult. It is not of its nature profitable and Aer Lingus faces difficulties greater than those that face other airlines operating a similar service. The seasonality of traffic between Ireland and Britain is almost unique in its intensity. One of the last things I did, in fact, it was after I left Aer Lingus, the last study I carried out as a paper to the Institute of Transport, was one on the seasonality of traffic in Aer Lingus. I established, I think, that the peak traffic was eight and a half times the average winter traffic at that time. This is an extraordinary variation. A more normal variation in many parts of the world would be a one-anda-half to one ratio as against eight-and-a-half to one. Certainly as against BEA the seasonality factor is much greater. This is a disadvantage which is almost unique to Aer Lingus.
On top of this the length of the haul is shorter than in the case of BEA or almost any other European airline, a further serious disadvantage. Beyond that again there is the fact that traditionally the service transport fares on routes across the Irish Sea have been very much lower on the rate per mile than the service transport fares across the English Channel which are deflated by the very high port charges at the ports on both sides of the English Channel. As a result Aer Lingus have had to operate a more seasonal network than anybody else, on shorter hauls than anybody else and meeting more acute competition in fares than anybody else. It has required great efficiency on the part of the company to overcome this triple difficulty and to at least break even.
Nevertheless, it is a matter of some concern that in the last couple of years the company's performance has been below its own average, shall we say. It has incurred losses where the profits have been small. If one looks at the figures one can trace this back to the fact that the load factors have fallen below the level that used to be attained. Aer Lingus and Aerlínte have always had this tradition of high load factors. It was something which I must say I myself in the company over 12 years always sought to maintain. Since 1948 when we got rid of the Constellations, since the summer of that year when we set out to re-schedule the routes, when the Constellation aircraft were disposed of on the 6th June, from that time onwards the tradition of the company has always been to gauge the service of the traffic. It has never been a company that has gone in for extravagant policies of laying on extra services in the hope of getting the odd passenger. The company has always aimed at high load factors. It had to do so because of the extreme economic difficulties it faced which could only be overcome by operating in this very efficient way. In the last couple of years the load factors of Aer Lingus have fallen and it seems to me, as an outsider again, I have at this stage no inside knowledge, that the company has not been as efficient in this period on the Aer Lingus side as it might have been. It does seem to me that they have not accurately forecast traffic, that they have made inadequate allowances particularly for the effect of the car ferry service which made inroads of a clearly unexpected nature into the company's traffic. For this reason and, perhaps, because of more short-term and detailed deficiencies in their scheduling the load factors have fallen.
I should like to ask the Minister whether he can offer the House any assurance that the difficulties the company have faced in recent years are, at least in part, temporary. Can he say that with more accurate scheduling of aircraft, more accurate pre-planning, by taking full account now of the effects of the car ferry the company are able, are, perhaps, able even in this financial year, to improve their load factors and their profitability? I see no reason why they should not. I think the company should be in a position this year to recover any mistakes they have made in the last couple of years, to improve their load factors and to become again more profitable, never I am afraid as profitable as the long haul operator, but, nevertheless, more profitable than they have been. I should like to ask the Minister whether he can offer any assurances to this effect.
On the broader picture on which doubts have been raised by other speakers, the Minister himself has raised a doubt as to where the company go in the long run. I would like to think that it would be possible for Aer Lingus and Aerlínte together to continue as an independent Irish airline into the furture and that we would be able to continue to fly the Irish flag across the Atlantic but I have some doubts. Even larger airlines than Aerlínte and Aer Lingus and much larger countries have had to consider whether the scale of investment required for modern fleets of aircraft may not be such as to require co-operation between countries in order to work jointly to achieve economies. There was, indeed, the abortive air union project in Europe in the late fifties and early sixties which may some day be revived. This was an indication that airlines of countries as large as France, Germany and Italy felt the need to come together to share resources for maintenance of aircraft and, perhaps, also to share their capital resources. May it not be that at some stage we may face that? I hope not. I would hate to see the day when we cease to fly our own flag on our own aircraft throughout the world, but undoubtedly the scale of the economic burden now facing us and the fact that the Minister after many years during which he has been able, rightly or wrongly —I think, perhaps, wrongly—to keep away from this House as far as Aerlínte was concerned, not to seek capital for it, now has to come to us for the relatively substantial sum of £15 million, twice the present share capital of the company, may be the beginning of a process which may run beyond our control.
It may well be that as the sums become increasingly enormous and as it becomes increasingly difficult to borrow more than a proportion of these abroad and as it becomes more and more necessary to increase the equity capital of the company beyond the extent to which it can be increased out of profits and depreciation funds that the increasing drain on national resources might force us to reconsider the position of the company. I hope that will not happen. I hope that day will not come. I for my part—and I think I can speak for others on this side of the House—say that we will try to put it off as far as possible but I am glad the Minister is initiating a very deep study into this whole question and that outside consultants may be employed also on this and that we shall get a report going to the roots of the problem which will give us guidance as to where we go as we move from the 1970s into the 1980s, into the period of supersonic aircraft, costing individually, perhaps, tens of millions of pounds. It is necessary for us to have this further look at the position now. I hope what emerges from that will be positive. I hope it will be something that will enable us to continue to have our own airline flying our own flag but we cannot be sure that this will be the case. In the meantime I welcome this Bill but I should like the Minister to explain the reason for treating the £65 million differently and reserve my right to table an amendment to that particular section.
