I am pleased to have this opportunity to discuss the affairs of Aer Lingus because it permits me to make a comprehensive statement on the problems facing the company, on the Government's role and on the role of the board, management and workforce in resolving these problems.
First, I want to acknowledge the long and distinguished service Cathal Mullan has given the airline over a career of 35 or more years. I would like to wish him every success in the future.
Much has been said in the past few days about the problems besetting Aer Lingus. Some of it has been reasonable, some of it has been inaccurate and some of it has bordered on the hysterical. It is time to reflect in a calm and reasonable manner on the present position of Aer Lingus. This is the only way that the correct response will emerge.
At the outset, I want to say that it is in Ireland's strategic interest to have Aer Lingus as a substantial airline to serve trade, tourism and overall national needs. The relationship between the Government and Aer Lingus has historically been a close one. The airline has been supported by successive Governments since its foundation. It has brought mutual benefits to the employees of Aer Lingus, to the Government and to the people of Ireland. Aer Lingus was founded by Seán Lemass and it has carried the name of Ireland with distinction to every corner of the world.
The Government has supported Aer Lingus in its expansion and development over the years. This company has been a critical part of our commercial semi-State sector which has been fostered and encouraged to develop by successive Governments. The commercial semi-State sector has played a vital role in the development of our economy since the foundation of the State. It has led the way in economic progress and employment generation.
It would not be correct, however, to paint a utopian picture. The achievements of the commercial semi-State companies should be acknowledged but so too must their shortcomings be recognised and rectified. The important role of commercial semi-State companies is fully acknowledged in the programme for Government which contains a commitment to implement the principles in the Programme for Economic and Social Progress in relation to these companies. In this context, Aer Lingus has been given much greater commercial freedom in recent years to pursue the goals and objectives which have been laid down for the company. This includes freedom to determine fare levels and to pursue new routes.
Successive Governments have nurtured Aer Lingus as the national carrier in its formative years and, subsequently, endorsed the decision to expand into businesses which were not part of the core activity. This expansion was carried out with the blessing of the Governments of the day in a spirit of partnership aimed at the successful development of the company. This strategy proved to be enormously successful with benefits for all those involved in the partnership: the Government, the employees of the airline and the taxpayer.
The Government wants that spirit of partnership, of mutual commitment and co-operation to continue. What must be understood by all those involved, however, is that the context in which that co-operation will continue has fundamentally and irrevocably changed. This is something to which we all will have to adapt.
Adapting to change is rarely easy. The airline industry is now operating in a much changed scenario. These changes can reach right down to local communities and families, causing uncertainty and anxiety. Our task is to confront the challenges of change calmly and resolutely. These challenges are not something which can be resolved overnight. What we must all seek to do together is to set ourselves on the right path. Change is now a reality, not just in the airline industry, but in every business. There is a quantum leap to be negotiated. The whole competitive culture has changed. We are no longer dealing with cyclical or intermittent change; we are dealing with constant change. We must be as fast as the rest in adapting if we are to survive.
Let me elaborate on the fundamental changes which have occurred in the recent past in so far as the air transport industry is concerned. This industry has traditionally been characterised by a high degree of Government intervention, for example, in regulating access to markets, pricing and the number of carriers permitted to operate on routes. In this environment, airlines were not exposed to the full brunt of competitive forces as they exist in other economic or industrial sectors. All this has, however, changed dramatically over the past ten years or so. The air transport industry worldwide has until recently been going through a period of unprecedented growth and structural change. The primary reasons for these developments have been the international trend towards increased leisure time and associated spending; consumer demands for cheaper air travel; Government policies to stimulate tourism and demands for a more competitive industry. As a result of these developments, the trend has been for Governments, to relax controls on access to markets, to level the determination of fares to the commercial judgment of airlines, and to increase competition.
These developments took place largely against the backdrop of a buoyant economic environment, in which the world air transport market grew by an average of 7 per cent annually during the eighties. The Gulf War, and the recessions in US and UK markets, have, of course, more recently curtailed the level of this growth.
In response to the overall trends, the European Commission has pursued since the eighties policies to promote liberalisation in the airline industry. These policies culminated in the creation of a single market in air transport from 1 January this year. This development, which has resulted in the almost complete liberalisation of air services between Ireland, Britain and continental Europe, has profound implications for Aer Lingus and the environment in which it must operate in the future.
Since 1 January any EC national can set up an airline in Ireland or elsewhere in the EC on meeting certain financial and safety criteria; any EC airline can fly on any route within the EC into any Irish or EC airport without any restriction on frequency provided slots are available; Community carriers can now set their own fares without Government control and the right to operate internal services, known as cabotage, in another member state is being phased in over the four years to 1997.
The role of Governments is, therefore, concentrated on ensuring that the market operates in a fair and open manner. For this purpose, safeguards have been put in place to eliminate unfair competition in the market such as abuses of dominant positions, excessively high fares or predatory pricing. Governments no longer have the authority to regulate air transport in favour of their own carriers. They do, however, have the right and, indeed, the obligation to ensure that competition operates in a fair manner as envisaged. I intend to be vigilant in ensuring that the national and international competitive conditions in which Irish carriers operate are conducted in a fair and equitable manner.
European carriers have reacted to EC liberalisation and to the effects of the Gulf War and international recession in a predictable manner. They have slimmed down to gain increased efficiency and competiveness in order to survive. A report carried out for Aer Lingus by international consultants, BCG, in 1991 warned that they would need to continue to reduce costs significantly over the succeeding years just to keep pace with their competitors. That was before the major restructuring which has occurred in many European airlines since the effects of the Gulf War and the international recession hit.
This is the climate of continuing change which we must now all strive to manage on the basis of a partnership approach. Everyone involved in this partnership must be prepared to take on their responsibilities. Standing off or non-co-operation will only make the situation worse. That is the reality. The Government, for its part, will not shirk its responsibilities. It is the shareholder of Aer Lingus on behalf of the Irish people. It has a commitment to national development. The Government also has a wider responsibility to the taxpayer. Any investment on behalf of the taxpayer can only be considered if and when a prospectus for recovery is in place and where visible and convincing action is evident to suggest that recovery is under way and a new course is being set which confirms a viable future for Aer Lingus.
The Programme for Government sets out the Government's objectives and the role which our commercial semi-State companies are expected to play in achieving those objectives. This includes commercial freedom and the discipline and responsibility inherent in this of giving value for money. In the case of Aer Lingus, the Programme for Government states that we will ensure the commercial future of our national airline in the context of our overall air transport policy.
There are many demands on the Exchequer. The social partnership which has existed since 1987 has been a positive force for consensus in our society. Who would have thought that the mammoth difficulties which we faced in the national finances at that time could have been brought so effectively under control in such a relatively short space of time. This was achieved by the recognition and pursuit of common objectives which have brought about a viable future for the economy. We did not bury our heads in the sand and hope the problems would miraculously disappear. Of course, many problems remain but we have turned the corner in a spirit of co-operation and common endeavour.
In a sense, the problems facing Aer Lingus represent a microcosm of the problems at a national level to which I have just referred. They can be resolved in the same spirit of mutual co-operation.
Semi-State companies have traditionally been vehicles for national growth. They have helped to provide the critical mass which has helped to spawn other economic activity in the private sector. This has very much been the case with Aer Lingus which has been the catalyst for the development of our national aviation industry.
The constraints on the Exchequer finances are more obvious now than ever before. Because of these constraints and the climate of constant change in which they must operate, new ways must be found for semi-State companies to meet their goals and to fulfil their national role. They must reposition themselves to fit the new environment and they must be given free rein in so far as possible to achieve this.
We cannot indulge in stop-gap measures. This would not provide a secure future for anybody in Aer Lingus. The recovery strategy has to be for real. There are major problems but with new and committed approaches by all concerned they need not be insurmountable. This is the only way to ensure that the legitimate concerns of every stakeholder in Aer Lingus are met.
Without being defeatist, it is important not to underestimate the scale of the financial difficulties facing Aer Lingus. The core business, Air Transport, excluding once off items, will lose over £40 million this year resulting in losses for the fourth consecutive year. The air transport operation is incurring losses even before interest charges. In addition, the group debt is currently in excess of £500 million with an annual interest bill in the region of £50 million.
In the past, Aer Lingus has been able to absorb losses on its air transport operations with profits from its ancillary activities. This is no longer the case. Businesses such as the hotels are pro-cyclical with the airline business and their results have also been hard hit by the recession. Group losses in the current year will be of an unprecedented level.
In addition to the ongoing losses, Aer Lingus is burdened with a major overhang of debt resulting mainly from rapid fleet replacement over recent years. This expansion was undertaken on the understanding that there would be no Government equity or State guarantees to meet the substantial costs involved. Detailed justifications were provided by Aer Lingus to the Government in response to queries raised at the time of the acquisitions. At the end of the day, it is a commercial decision for Aer Lingus to take. That is why semi-State companies were set up in the first instance.
Looking to the future, there remains the requirement to replace the transatlantic fleet which will have to be addressed by the executive chairman and his board, in conjunction with the work force.
Accordingly, it is clear that the present financial situation cannot continue and that a radical restructuring is necessary. What is required is not only the implementation of measures to reverse the losses but also to achieve a substantial reduction in the level of Aer Lingus's debt. In a situation where even the non-core activities of Aer Lingus are facing substantial competitive problems, priorities will have to be clearly established.
Accordingly, in determining the necessary action to resolve Aer Lingus' difficulties, it is essential to focus on what is the primary national strategic interest. This is clearly to have a substantial Irish Airline to serve our trade and tourism needs. As an Island nation on the periphery of Europe, access transport in the form of shipping and air services is without question of vital importance to Ireland.
It is a matter for management and the unions to come together in the first instance to determine the priorities for the group. The objectives clearly must be to do everything humanly possible internally to reverse losses and to reduce the debt burden. How this is to be achieved will become apparent from the partnership approach of which I have already spoken. When this is agreed I hope that it will allow the Government to respond in a positive way to the solutions brought forward.
I must emphasise, however, that there can be no painless solutions. The problems which beset Aer Lingus will not be wished away. Difficult decisions will have to be taken, this problem must be dealt with quickly and with determination to turn the company around.
The role of EC competition law and State aid regulations are very pertinent in this regard and, I believe, may not be fully understood. The European Commission may decide in certain cases that aid may be granted to individual airlines which have serious financial difficulties provided certain conditions are met. One of these conditions is that the aid must form part of a programme, to be approved by the Commission, to restore the airline's financial health so that it can, within a reasonably short period, operate viably without further State aid. In other words, the financial assistance must be an integral part of a restructuring programme to restore the financial viability and competitiveness of the airline.
This aspect of restructuring constituted one of the reasons the Commission accepted the State aid given by their respective Governments to both Sabena and Iberia. Both cases involved a major restructuring programme.
The Commission also noted that the investment by the State would not increase the capacity offered by Sabena. On the contrary, the restructuring of Sabena'a network towards profitable routes would initially lead to a reduction of capacity. The Commission also laid down as one of its conditions of approval that the Belgian Government must abstain from granting any further aid to Sabena.
It might be argued that the provision of capital to Aer Lingus would constitute a normal commercial transaction between the owner of the air carrier and the company and would not, therefore, constitute State aid. The Commission has decided that in order to assess specific cases, it would evaluate whether a private investor under comparable conditions would have taken a similar decision — in other words, the market economy investor principle.
In the present circumstances, if Aer Lingus were to produce a prospectus, without taking any corrective action, it is obvious that a private investor would not take up equity in the company.
Even when the necessary remedial action has been taken by Aer Lingus, the economics of the airline business will remain very difficult. For this reason, it is essential that the group's airline related businesses such as TEAM Aer Lingus and Airmotive produce adequate profits. They must be geared to the highest international standards. Their role is vital in underpinning the future of the airline itself.
TEAM Aer Lingus and Airmotive are operating in an extremely and increasingly competitive international environment. They must be totally stand-alone businesses which can prosper in their own right. They cannot be immune from scrutiny of their cost base at least as rigorous as that which the airline itself must undergo. Their objective must be to ensure that they are leaner and fitter than their competitors.
Last Tuesday evening in this House, I announced the appointment of Mr. Bernie Cahill as Executive Chairman of Aer Lingus. I indicated in one part of that statement that the executive chairman had been given absolute discretion in terms of increasing yields, disposing of assets not essential to the core business and in achieving savings on the company's cost base. I regret that this statement has been misunderstood in some quarters and used out of context, perhaps deliberately, in others. I would like to set the record straight.
In the first instance, I want to make it clear that there is no question of the Government washing its hands of Aer Lingus. The executive chairman has freedom to develop the new framework to ensure the company is restored to viability. This includes measures to increase yields, dispose of assets not essential to the core business and to achieve savings on the company's cost base. I expect that he will leave no stone unturned in this task. I also expect that he will carry out the task in the spirit of partnership of which I have already spoken. This involves the management and the unions coming together, as I have stated, to develop priorities for the group.
I have instructed the executive chairman that Aer Lingus is to maintain a significant presence on the transatlantic routes in the context of the existing policy on the Shannon stopover.
Obviously, the executive chairman will be subject to the normal board procedures and requirements under the Companies Acts and Aer Lingus's own articles of association. He will also, of course, be keeping in touch with me on the progress he is making, particularly with regard to important strategic issues. In addition, the normal established procedures of liaison with my Department, and the Department of Finance guidelines for semi-State companies, will continue to apply.
I want to emphasise that a partnership approach is essential. The executive chairman shares my view of this. He will be liaising with representatives of the employees, and with other interests, to explain the new framework to be developed to ensure the company is restored to viability.
I must again emphasise that decisions taken by management and the commitment of the workforce to the necessary action must be evident before the Government can commit itself to the overall level of support which it can offer.
The qualitative decisions which are taken in discussions between the management and the unions will greatly influence the Government's attitude towards the degree of support it can provide for Aer Lingus. There is a need for imagination and flexibility on both sides. No options should be ruled out for consideration. The Government will be receptive to innovative ideas.
The scope for marketing alliances and joint ventures should be fully explored. The workforce can and should contribute fully to this process through an open communication of ideas. Its workforce has always been Aer Lingus' greatest asset. I want to acknowledge and express my appreciation of the sacrifices which they have already made. In the nature of things, as they stand, further improvements in the operational performance of the company will be called for. It is the only way to secure a long term future for the company. Most major European airlines have already gone through the pain of restructuring. I believe that the workforce of Aer Lingus will respond to this major challenge that confronts us and will not go away.
The Government is committed to an Aer Lingus which can play a key role in the future development of Irish aviation and in the Irish economy. To enable it to fulfil this role, strenuous efforts are now called for from the management and workforce. When this is evident, it will have the full support of the Government in so far as it can contribute. Decision time is now. Let us not contemplate failure, with courage and determination we can succeed.
