JOINT COMMITTEE ON TRANSPORT debate -
Tuesday, 14 Jan 2003

Vol. 1 No. 2

Future Developments in Aer Lingus: Presentation.

Chairman

Before I welcome Mr. Walsh and his colleagues, I wish to draw attention to the fact that the members of this committee have absolute privilege. This privilege does not apply to witnesses appearing before the committee. It is generally accepted that witnesses have qualified privilege, but the committee cannot guarantee any level of privilege to witnesses appearing before it. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.

I welcome Mr. Willie Walsh, chief executive officer and his colleagues, Mr. Brian Dunne, chief financial officer, Mr. Séamus Kearney, chief operations officer, and Mr. Dan Loughrey, director of public affairs, to the meeting and thank them for their acceptance of the committee's invitation. I suggest that we invite Mr. Walsh to make his presentation, following which the discussion will be open to members in the form of a question and answer session. Is that agreed? Agreed.

Mr. Willie Walsh

Chairman, for the benefit of the committee I thought it might be useful to provide some background to the aviation industry in general, remind members of the background to the crisis in Aer Lingus and discuss briefly the developments in Aer Lingus since the tragic events of 11 September 2001. I thank the committee for the opportunity to address it. With my colleagues I hope to be in a position to answer any questions the committee may have.

Globally the airline industry has experienced a very difficult trading environment over the past two years. The air transport industry worldwide was in decline before the tragic events of 11 September 2001 in the United States. In 2001, world airlines incurred operating losses in the order of $11 billion. In 2002 the preliminary estimates predict operating losses in the order of $10 billion. However, some airlines thrived during this period, proving that it is possible to prosper in adverse circumstances if the business model is right. The single characteristic marking out those airlines that did well from those that did not is the focus on maintaining a low cost base.

Aer Lingus also showed signs of decline prior to 11 September 2001. In 2000, Aer Lingus made an operating profit of almost €80 million and was planning for profit in 2001. However, by July 2001, a combination of factors turned that operating profit into a forecast loss of €44 million. Following the tragic events of 11 September, that forecast loss was adjusted to €80 million if no remedial action was taken.

Although the airline was in decline prior to the impact of the terror attacks in the US on 11 September, the industry was changed fundamentally by those tragic events and changed forever. Aer Lingus had to change urgently and radically or it would have gone out of business. Household names in the European airline industry such as Sabena and Swissair disappeared almost overnight.

A radical survival plan was prepared by management, approved by the board of Aer Lingus, agreed with the staff interests and implemented with great speed. The main points of the survival plan included: a cost reduction programme of almost €190 million, a reduction in staff numbers of over 2,000, a pay freeze and radical changes in work practices.

Credit must go to the staff in Aer Lingus for the speed and determination with which the survival plan was agreed and implemented. I pay tribute to all staff for their contribution to the remarkable turnaround achieved in such a short period.

In the wake of the downturn in market conditions and the events of 11 September 2001, it is clear that the aviation industry has changed fundamentally. It is equally clear that the key to a sustainable and profitable business model in that changed environment is aggressive and relentless cost management. From the outset we made it clear that the survival plan was the beginning and not the end of change for Aer Lingus. During 2002 we began to move beyond survival to continue to reduce our cost base, significantly cut our business and leisure fares and opened a series of popular, direct routes out of and into Ireland. Based on this performance we are confident of exceeding our most recent operating profit forecast made in August of €45 million.

Some of the highlights of our performance during the past year include the implementation of our survival plan, the achievement of our cost reduction target of €190 million as set out in the survival plan and a further €130 million tranche of cost reduction announced in June 2002 of which €90 million has already been achieved. Our cost base continues to be out of line with our competitors so further ongoing cost reduction programmes will be necessary in 2003 and beyond. There was a major reduction in economy and business fares with over three million cheap fares being made available in 2002, economy and business fares were reduced by up to 60%.

The success of aerlingus.com now accounts for over 40% of total bookings through this channel, an improvement from 2% in November 2001. We have reduced distribution costs from €163 in 2001 to a predicted €79 million in the current year. We have achieved greater efficiencies through the introduction of nine new routes in 2002 with no additional aircraft or staff resources and more new routes have been announced for 2003. The bottom line is that our cash position was significantly stronger at the end of 2002 compared to the end of 2001 and we have returned to profit, a full year ahead of target in the survival plan.

The outlook for 2003 is that the industry will continue to be in a very difficult trading environment. Air Transport World, one of the most respected industry publications is predicting an operating loss for the industry of almost$5 billion. We are confident we can make further progress but only if we continue to reduce our cost base aggressively and relentlessly and to press forward with our programme of change for the airline. In 2003 the business environment will continue to be dominated by intense competition, economic weakness in key economies and the threat of war in Iraq. Our immediate objective is to build on the progress of the past year and to continue with the strategy of lower costs and lower fares. We will also develop more new routes and grow the Aer Lingus expanding base of satisfied customers both in Ireland and internationally.

I avail of this opportunity to highlight a number of key strategic issues that will form the backdrop to our future performance. The ongoing imperative for cost reduction and the difficult and uncertain international business environment form the background against which business decisions will be made in the current year. We are targeting structural changes in our cost base arising from a fundamental review of our fleet. The objective is to significantly simplify our fleet structure. Complexity involving multiple aircraft types and sizes drives extra costs and operational inflexibility. Aggressive profit targets have been set for the business over the next two years that will see the airline generating significant double-digit returns at the end of this period. We regard this as the minimum necessary for viability and to enable us to develop the business.

Aer Lingus supports the policy of developing low-cost facilities at Dublin Airport both through the temporary Pier D facility and through the building of a second terminal in competition with Aer Rianta. Aer Lingus plans to continue to add new routes based on these expansion plans and the lower costs brought about by competition between the airport terminals would greatly facilitate this growth.

There is enormous potential for the development of further US gateways. Irish-based airlines are currently restricted to just four gateways - New York, Boston, Chicago and Los Angeles - under the US-Ireland bilateral agreement. Aer Lingus would open a number of further gateways in the US if this situation were to change with major benefits to Irish business and Irish tourism. This could lead to a doubling of transatlantic visitors to Ireland within a short timescale.

With virtually all airlines reducing the cost of air travel for the customer it is imperative that other elements of the supply chain reduce their costs to facilitate future growth. This will be a major factor in continuing to grow the tourism market into Ireland.

In summary, the Aer Lingus business performance in terms of profitability and cash has improved significantly over the past year. This performance has been based on a relentless and aggressive reduction in our cost base and market stimulation through greatly reduced business and leisure fares. We have passed the benefit of the cost reduction back to our customers in the form of lower fares. There is no room for complacency. Our cost base continues to be out of line with that of our competitors. We must deliver further significant cost reductions in the year ahead and beyond to ensure the long-term viability of the airline.

Chairman

Before I call the first speaker, I wish to ask a few questions, one of which is already known to Mr. Walsh and has been well reported and about which I have spoken with him previously. In the estimate for 2001 there occurred an operating loss of €11 billion. What was the operating loss before September?

Mr. Walsh

The industry operating loss was about €11 billion.

Chairman

A great deal of it occurred after that.

Mr. Walsh

However, it is significant that the US carriers contributed almost €7.9 billion of that operating loss. More than half of that had been incurred prior to 11 September. There are clear signals that the airline industry, particularly in the US, was in difficulty prior to the tragic events of 11 September. Since the terrorist attack on the US there has been a fundamental change in the aviation industry and that has required Aer Lingus and other airlines who believe in long-term viability to make fundamental changes to the way in which we operate.

Chairman

Where do you expect to find cost reductions given that you said the cost base is still out of line with that of our competitors? Could you comment on the change you have made in regard to unaccompanied children because many people have been in contact with many members of the committee and other public representatives about that issue?

Mr. Walsh

In relation to future cost reduction opportunities, Aer Lingus operates a diverse fleet of aircraft. We have four different aircraft types and a number of sub-types and that brings about significant additional costs in terms of operating and inflexibilities from the point of view of change. We believe there is a significant opportunity to reduce our operating costs if we can address the fleet structure and move to rationalising that fleet into a single aircraft type, or possibly two aircraft type, away from the four aircraft type that we have currently. That will probably be the single biggest cost reduction enabler in the near future. We see opportunities, however, for cost reduction in all of our cost fittings. We have made significant inroads into our distribution costs where we have reduced unit costs by more than 60%. We believe there are opportunities to further reduce that and particularly leverage on the success of aerlingus.com, which has been very successful for us. There are cost opportunities in all of our cost headings but particularly so in the area of fleet rationalisation.

In relation to our change in policy with regard to unaccompanied minors, I want to make it clear to the committee that the decision to change our policy in relation to the carriage of unaccompanied minors was not taken lightly and was taken solely on the basis of the security and safety of the people involved. That track record over the past 15 months has shown that where we have an opportunity to reduce cost, we do so and we are not shy about advertising the fact that we have done so. Equally, we have shown that where there is an opportunity or a potential for charging for a service that had previously been provided free of charge, we will do so. This is not one of those cases.

With regard to the carriage of unaccompanied minors, we have reviewed both our practices and arrangements not just at Dublin Airport, and people have tended to focus on the operation of Dublin Airport. We operate to and from 33 airports and we have not been able to satisfy ourselves that we can secure arrangements and procedures at all of those airports that will guarantee the safety and security of these children. That being the case, we are not prepared to do so and unless we can be satisfied that we can guarantee safety and security on 100% of occasions, it is a risk that is too great to take and Aer Lingus is not prepared to put these children at risk. That is the sole reason for our decision. It is not a cost based decision. It is not based on efficiency. It is based on the safety and security of the children we are carrying.

Chairman

Is that based on your experience? This is an issue about which most of us have received telephone calls because it will cause many problems in terms of getting children to their grandparents, partner or whatever. Is this decision based on the experiences of airlines over the past number of years?

Mr. Walsh

The decision is based on a review of our experience, particularly over the past three years. Most people who are discussing this issue look at it in the context of children who want to travel but we have had experiences where we have carried children to our destination and there have not been people at the destination to collect the children. We have had cases where children have been delivered to the airport in taxis and where there have been disputes over who would collect them at the destination. There have been a number of issues that we have experienced over the past number of years and this review came about from increased awareness on the part of parents and guardians of children who ask us questions about our procedures, particularly in the aftermath of security changes at airports since 11 September 2001. We have not been able to satisfy ourselves that we can introduce procedures that are 100% robust and, unless we can do so, it would be irresponsible for Aer Lingus to continue to provide a service that does not provide a 100% guarantee.

We have had experiences where children have been very unhappy about flying or where children have refused to carry out the instructions of the person who is looking after them. Circumstances have arisen where people have not been at the destination airport to collect the child. That is a terrible position for the airline to be in but it is also a terrible position for the child to be in. Our decision to change our procedures in this area has been based solely on the security and safety of the children. It is not a cost issue. If I could satisfy myself that we could do it, I would not hesitate in charging a fee for the service if I believed it was appropriate. I cannot satisfy myself that we can provide this service in a safe manner.

Deputy Glennon

I welcome Mr. Walsh and his colleagues. It is only right, having sat here and welcomed him approximately a year ago shortly after his appointment, that congratulations are offered to him on his performance. A much rosier picture has been presented today than was presented at that time.

I want to ask a number of questions on specific aspects of the presentation. First, I notice the dramatic increase in the use of the website for booking purposes, from 2% a little over a year ago to 40% now. What is the maximum potential of that facility? Is Mr. Walsh happy with the consequent depersonalisation of the service that will arise? The personal service of Aer Lingus has been a hallmark of the company for a long number of years and I have received several comments to the effect that with the emphasis on the use of technology in communicating with the company, which is to do with the age we live in, there is a significant downside to it which is the depersonalisation of the service.

Second, in his presentation, Mr. Walsh mentioned a number of new routes in the future plans. The first three on the list refer specifically to either Dublin or Shannon and then there are four other bullet points. Are they all from Dublin? I thought they might be.

Mr. Walsh

I hope not.

Deputy Glennon

Third, in relation to the development of the US gateways, Mr. Walsh gave the impression that there is work in progress. Could he be a little more specific in terms of the possibility of opening further gateways? Fourth, as so much of Aer Lingus's operations are Dublin based, is Mr. Walsh happy with the level of efficiency of the management of the airport facility, which is obviously a significant overhead for Aer Lingus? Are there potential savings that could accrue from a more efficient operation and management of Dublin Airport?

Deputy Shortall

I welcome Mr. Walsh and the rest of the management team and thank him for his presentation. At the outset I would like to congratulate Mr. Walsh and all the staff in Aer Lingus for the extraordinary turnaround they have achieved in the company in a very short time and for implementing the survival plan in full.

I want to ask Mr. Walsh about the profit forecasts for last year. He said he is confident that the company will exceed the profit forecast of €45 million for 2002. In the survival plan a loss of €27 million was forecast for last year, and granted Mr. Walsh has erred on the right side, but I wonder how he got it wrong in that regard? Why were the estimates out by some €72 million for 2002?

The delegation referred to ongoing cost reduction. Staff numbers at present stand at 4,500 but what is envisaged regarding those numbers this year and next year? Is it expected that those staff numbers will be maintained? From speaking to Aer Lingus staff I know there are huge pressures on them because of the reductions in staff numbers. Many of them feel over stretched. Does Mr. Walsh envisage Aer Lingus being in a position to take on additional staff or will the staff level of 4,500 be maintained?

Recent replies from the Minister indicate the terms of the ESOP have been agreed with union representatives and are to go to ballot shortly. Will the delegation confirm that the ESOP is an element of the survival plan and that its completion and acceptance by the unions will complete the plan? Is it part and parcel of the survival plan? In replies to parliamentary questions the Minister seemed to portray it as an element of perhaps future ownership or other proposals for the company.

Regarding the future of the company, perhaps the delegation can discuss the possibility of a strategic partner or a third party coming in to invest in the company. What are its views on that and on future ownership of the company? Again, in recent replies to parliamentary questions the Minister indicated he will make an announcement on this shortly. We have spoken to the Minister about this and it is hard to find out what he is talking about; can the delegation throw any light on what the Government has in mind regarding the future ownership of the company? I know Aer Lingus management has had many discussions with the Minister in recent weeks and perhaps the delegation can tell us its understanding of the Government plans.

An issue raised in the media in recent days relates to the World Airways jet in Shannon. Aer Lingus previously had it on contract but then cancelled that contract. I understand the jet still carries the Aer Lingus colours, which concerns many citizens of Ireland and staff of the company. Will the delegation consider making an approach to World Airlines to ensure that the colours of Aer Lingus are removed from the jet?

Deputy P. Power

A number of the issues I wanted to raise have been aired by my colleagues. I join previous speakers in welcoming Mr. Walsh and his colleagues. Along with many Limerick business figures I listened to the company's recent presentation to the Limerick Chamber of Commerce, which went down exceptionally well. One person commented to me afterwards that it was a case of "if you can't beat them, join them". People were talking about Ryanair and the fact that a year previously Michael O'Leary of that company had been in town and virtually the same speech could have been given. I say this as a compliment to the delegation but they pointedly did not refer to the other large supplier of air services in Ireland, Ryanair.

In giving a summary of the airline industry in Ireland the delegation makes it very clear that the only way to survive in an ultra competitive environment is through low costs. Even after 11 September, the only airlines to thrive and survive have been low cost airlines. While the business model is simple it is very effective and we implore Aer Lingus to continue on that route. We wish you further success in that regard.

The delegation should expand on the implications of the Irish-US bilateral agreement, particularly the assertion that further highly profitable routes can be developed between Ireland and the US, even though Aer Lingus only has four gateways under the current agreement. Where does Aer Lingus specifically see the potential for profit here? Also, can the delegation elaborate specifically on how that will affect Shannon Airport, which is in the constituency next to mine? That airport affects the economic development of the midwest region greatly. I am interested in the delegation's views on this.

I also seek the delegation's views on how it sees EU policy on open skies developing with the US. How will that affect the bottom line profitability of Aer Lingus?

Mr. Walsh

I will take the questions in the order asked. I thank members for their kind words on our achievements to date. I will pass those on to management and staff in Aer Lingus.

In relation to the Internet and the on line booking engine, this time last year we would have been satisfied had we achieved 15% of our total sales through the Internet. We realised earlier this year that we could quite easily exceed that target and since then we have decided not to set ourselves any ceiling on how much of our sales can be directed through the Internet. I acknowledge that in some ways the Internet depersonalises the process but it does give more power to the person buying the ticket. The Internet provides great transparency and people can look at the prices on aer lingus.com and the prices of our competitors. They do not need to believe me when I say we have reduced our fares or that we have millions of cheap fares available; they can see them.

The potential clearly exists to grow sales well beyond where they are. We are investing in our Internet site because there are some facilities we would like to provide to our customers that we do not provide currently. While the site has performed well it is not nearly operating at a level our customers would expect, so there is potential there. We recognise that it will not be the sole channel for distribution and that there will continue to be other channels for distribution. We have a significant number of people employed in our reservations unit at the airport, so if people want someone to talk to, that facility is available within Aer Lingus. There is also the option of going into a travel agent and booking a flight there. However, our primary sales channel will be the Internet. It has facilitated considerable cost reductions and will facilitate further such reductions. We intend to invest in Internet infrastructure in the current year.

Regarding the new routes, we are looking for opportunities to start new routes from any of our Irish airports. It is not that we are solely looking at Dublin, we are operating to Malaga from Cork and we are looking at other opportunities for European expansion out of Cork. If there is a profitable opportunity for Aer Lingus I guarantee we will chase it. We have a list of destinations we would like to serve but it is clear that we will only do so if it can contribute profitably to the finances of the airline. We are looking for opportunities and we have made it clear to our staff and customers in Cork and Shannon that if there is a profitable opportunity we will take advantage of it. We have met a number of business interests, particularly in Shannon where we have had two very constructive meetings with regional business interests to discuss possible opportunities. We are committed to meeting these groups every three months to discuss opportunities they see and opportunities we have identified with them.

I will link some other questions on the US together. When people discuss the terms of the existing Ireland-US bilateral agreement they tend to focus on the Shannon stop-over issue. What we are doing in highlighting the opportunities here is highlighting some of the other aspects of the agreement. Aer Lingus is the only Irish transatlantic operator at present. However, it is not known to everyone that we are restricted to the nominated gateways of New York, Boston, Chicago and Los Angeles. Under what is known as an extra bilateral agreement, we have agreement to fly to Washington-Baltimore. US carriers are not prohibited in that they can fly from any gateway or airport in the US to Ireland. An example of that is Delta which flies from Atlanta to Shannon and Dublin. Aer Lingus cannot fly from Atlanta into Shannon and Dublin. Another example is US Airways which has announced its intention to fly from Philadelphia to Shannon and Dublin. We met officials from the city and airport of Philadelphia some months ago. We indicated that if it was possible under the bilateral agreement, we would consider Philadelphia as one of the airports.

We are restricted from operating on these routes. If that restriction did not exist, we would be able to move forward with a number of additional gateways along the west coast of the USA, in addition to Los Angeles, some central US gateways and other airports on the east coast which we have identified. We have had some approaches from airports, but we have not had any significant discussions. However, we know from our market research that there are significant markets.

It is important to point out that more than half of the tourists travelling to Ireland from the US travel indirectly through London, Amsterdam, Frankfurt and Paris. It is clear that all the people travelling on those routes do not travel onwards to Ireland. There is a great opportunity to capture a significant additional portion of US tourists who travel to Europe and bring them to Ireland. It is clear from the action we have taken in terms of our pricing that we are competitive and that we operate and provide an excellent service. We comfortably predict that we could double the number of transatlantic passengers within a short time.

Chairman

I presume the American Government will make a decision on that.

Mr. Walsh

Yes. Prior to the open skies issue, it would have been an agreement between the Irish and US Governments. A judgment from the European Court of Justice has suggested that some bilateral agreements may not be legal. It is clear the EU Commission would like to negotiate on behalf of Europe with the US. The American Government and a number of US carriers have expressed the view that the US authorities would like to see the removal of the compulsory Shannon stopover. Aer Lingus sees opportunities in an open skies environment. It will bring more competition to Aer Lingus, but it will also offer more opportunities to Aer Lingus. We do not believe we have anything to fear from competition. We have embraced competition and we have shown we can be competitive. We recognise there are opportunities for us.

It is difficult to know how and when the bilateral agreement will change. However, it is inevitable that it will change. There will be a move to change the status of the existing Ireland US bilateral agreement. The committee's guess about when that will happen is as good as mine. It could take three or five years, but it will happen. We are saying to interested parties that we have an opportunity to look at the potential and to embrace the change, rather than to fear it. We must ensure that Ireland, Aer Lingus and Shannon can benefit from the change, rather than waiting for the change to be forced upon us.

It is opportune that we discuss the potential for growth in the transatlantic market. We are committed to Shannon. There is a strong market in Shannon, although it is not as strong as the market out of Dublin. There is a strong seasonal interest in Shannon, which US Airways has shown. Its commitment to Shannon is solely for the summer. Unlike Aer Lingus, it is not committed to operating in Shannon on a year round basis. We are committed to profitable operations at Shannon. There is a significant market there and we, in Aer Lingus, want to ensure we maximise its potential. We see opportunities for Shannon in the current climate and in the context of a change in the bilateral agreement.

As regards the figures and Deputy Shortall's question about how we managed to get it wrong, we did not get it wrong. There is a simple explanation for the way we managed the change in the figures. As regards our revenue targets for 2002, and what our revenue achievement will be, we will have fallen short of our revenue targets by approximately €10 million to €15 million. However, we have significantly exceeded our cost reduction target. The turnaround in profitability from a projected loss of €27 million to a forecast profit in excess of €45 million has been solely on the basis of the additional cost reduction programme we achieved on top of the targets we set in the survival plan.

The only reason Aer Lingus is profitable and we are talking here today about profits is that we have been more aggressive in terms of our cost reduction target. That is the sole reason for the turnaround in our profitability. We have not achieved the revenue targets we set ourselves, but we have exceeded the cost reduction targets we set. That was the reason we announced the additional €130 million cost reduction target in July because we wanted to return the airline to profitability as soon as possible. It is in everyone's interest, including the staff and the communities at the airports we service, that Aer Lingus is profitable. We have managed to turn the financial performance around as a result of the contribution of the staff and the actions of the management.

As regards staff numbers, the numbers for the airline are approximately 4,500. We supplement those numbers with temporary staff during peak periods. It is our intention to do that in the future as well. We do not envisage nor do we have any plans for additional permanent recruitment into Aer Lingus in the current year. We have not looked at staff projections for 2004, but we are satisfied that we are operating more efficiently than we have in the past. It is essential that we continue to maintain and improve on the efficiencies of our operation if we want to continue to be profitable and to generate profits we can reinvest in the airline to enable us to grow and take advantage of the growth opportunities we see in the coming years.

Deputy Shortall

Does Mr. Walsh envisage any staff reductions during 2003?

Mr. Walsh

Last week we introduced a voluntary severance programme for staff for two reasons. I received a number of requests from staff during the communications programme where I address staff every three months. A number of staff members regretted their decision to stay with the airline, rather than taking the voluntary severance when it was available as part of the survival plan. I have received a number of requests from people who would like to leave the organisation. We have decided to facilitate those individuals and to look at opportunities for further restructuring, which is important. We are not targeting any specific staff reduction in the current year. This is purely and strictly a voluntary severance scheme. I have made it clear that we will not accept the applications of some people who apply if there are areas from which we cannot release people or there are skills we believe are necessary to retain. It is strictly voluntary for us and for staff who would like to leave. I suspect that some people will take advantage of the new scheme, but I do not suspect there will be many. I would be surprised if the figure exceeds 200 people.

As regards the ESOP, it was balloted on by IMPACT. Yesterday SIPTU announced the result of the SIPTU ballot, which was an overwhelming vote in favour of the ESOP. The ESOP was part of discussions held between the shareholder and the union representatives when the survival plan was introduced. Reference to the ESOP is contained in the LRC proposals, issued in November 2001, on work practice changes. There is reference to the ESOP being considered in the context of any of the pay foregone - I refer her to the PPF - so there is a clear link between the ESOP and the survival plan. It has been balloted on and been accepted by the unions in Aer Lingus. I do not know if that answers the question specifically.

As regards the World Airways jet, World Airways was hired by Aer Lingus for a number of years to supplement our transatlantic operation. We required World Airways to paint the aircraft in the Aer Lingus colour scheme and to put the Aer Lingus name and shamrock logo on the aircraft. We cancelled the contract with World Airways in the immediate aftermath of 11 September. That was one of the actions as part of our survival plan. World Airways was required to remove the Aer Lingus logo and name from the aircraft, which the company did. That aircraft is clearly marked with a World Airways logo and name. It is still in the Aer Lingus general colour scheme. We have not had any contact with World Airways and we have no contractual obligation to require it to repaint that aircraft in an all-white livery, but I want to make it clear that the aircraft has absolutely nothing to do with Aer Lingus. It is not an Aer Lingus aircraft. It ceased to operate for Aer Lingus in October 2001 following the cancellation of the agreement that we had with World Airways who operated the aircraft on our behalf. It was Aer Lingus who required World Airways to paint the aircraft in our colours as part of that contract. The aircraft was normally left in the Aer Lingus colours because we used it in successive summers. Rather than have it repainted, the aircraft was left in the Aer Lingus colour scheme.

That is no different to the practice where Aer Lingus has disposed of aircraft. Aircraft tend to be sold with the logo and name removed but they are left in the general colour scheme. One will see ex-Aer Lingus aircraft flying around in the old Aer Lingus livery. It is not unusual to see that with a number of other airlines. I acknowledge the concern that has been expressed, but I can guarantee that Aer Lingus has absolutely no involvement with the aircraft in question. We do not expect to have any involvement with the aircraft in the future, either.

As regards the future of the company and the possibility of a strategic partner or investment, a number of years ago Aer Lingus joined the One World Alliance. That is the only strategic alliance or partner that we have and there is no equity involvement in that alliance. There were proposals from a number of One World carriers at that stage to take an equity investment in Aer Lingus, but that proposal was rejected possibly by the management and certainly by the Government. The Government's decision in relation to investment in Aer Lingus has been quite clear and dates back probably four years at this stage.

The Minister for Public Enterprise in the previous Administration, almost coincidentally with my appointment as chief executive, reaffirmed the Government's position to facilitate third party investment in the airline. That was in October 2001. The Minister for Transport, Deputy Brennan, attended the Aer Lingus board meeting in October 2002 and again reaffirmed that this was the Government's position. We have not had any significant discussions with the Minister since then. He has indicated that he would like to talk to Aer Lingus at some stage in the near future and we are looking forward to discussions with him.

The airline industry tends to go through cycles. Aer Lingus has moved from being profitable into crisis situations on a number of occasions. We have successfully restructured and emerged from those crises, but the mistake we have made is that we tend to relax once there has been some progress as a result of restructuring. My management team, the board and I are committed that we will not make that mistake on this occasion. We recognise that the work we have undertaken in the past 15 months is by no means sufficient to guarantee long-term viability for Aer Lingus. We need to continue making progress and continue with our programme to address our cost base.

It is clear that the airline will require access to equity and capital at some stage if we are to make a further change in terms of our cost base in addressing the fleet. We are committed to some capital expenditure in the coming years and we have made commitments to buy new aircraft. If we are to make significant progress in terms of our cost structure, we believe we will have to address the fleet. That will be expensive and probably goes beyond the level of capital that we can generate internally. The issue for the future ownership of the airline is, therefore, clearly one for the Government. Those in management at Aer Lingus are focused on taking whatever action possible to ensure we can maximise our profit to put us in a position to reinvest in the airline. We await discussions with the Minister in the coming weeks.

Deputy Power referred to my speech at the Limerick Chamber of Commerce. I was pleased with the reception I got there because I felt that some things I said may possibly not have been well received in previous years. Our business model is unique to Aer Lingus. We are addressing the issues we face in Aer Lingus. Many people have compared things we are doing with our main competitor Ryanair. Aer Lingus continues to be committed to giving quality customer service. We believe it is possible to give a quality customer service and offer cheap fares. Our track record over the past year would show that the changes we have made were in the interests of the consumer. We have significantly reduced our fare structures and, going forward, we intend to continue to reduce our fares to the benefit of the customer, business and tourism in Ireland. We are pleased with the progress we have made to date and the reaction of customers, in particular, to the new routes we have started.

It has been a unique business model for Aer Lingus, but it is based on simplicity and the continuing, aggressive and relentless pursuit of cost reduction. That will put us in a position to continue to reduce our fares for the benefit of everybody who is using Aer Lingus. I believe I may have answered most, if not all, of the questions.

Deputy P. Breen

Like the other members, I congratulate Mr. Walsh and his team on achieving the profits for 2002 in nine months. It is not long since Aer Lingus was almost bankrupt and could not even obtain the services of a chief executive. I am delighted, therefore, that we have a chief executive in place at present. As Mr. Walsh pointed out, profits were achieved by shedding 2,000 jobs and radically changing work practices. The loss-making position has been turned around into a profit-making one, with the same number of passengers, approximately 17% less capacity, and 33% fewer staff.

As Mr. Walsh rightly stated, the aviation sector has changed since 11 September 2001. Ryanair was the only company that made a profit before and after that date. While low fares are attractive, Aer Lingus needs to strike a balance when it comes to reasonable, low fares and it does not want to compete with Ryanair - the no frills airline - in this area. In the past, Aer Lingus has been known for its safety, care for passengers and friendliness. We must not lose sight of this and that is where a balance needs to be struck. This is particularly necessary in the interests of tourism and the transatlantic business.

Company policy on not carrying unaccompanied under 12 year-olds was mentioned along with the safety and security issue. Is it not also a resource issue? Before 11 September, parents of those unaccompanied minors could go as far as the gate at which people embark on an aircraft but because of security procedures, Aer Rianta will not allow them to go past passport control and a member of the ground staff must collect the child at that point and take him or her to the aircraft. It is therefore, in one way, a resource issue. Aer Lingus is a member of the One World Alliance. What is the policy of other airlines in that alliance? Do they have the same policy as Aer Lingus? That is an important issue.

Like Deputy Shortall, I wish to ask about job cuts. There is a rumour that Aer Lingus may shed up to 300 jobs in the coming year. Is Aer Lingus considering sourcing out some of the in-house services it provides? I am particularly interested in ground handling facilities and the question of contracting them out. Is that under consideration? Such a proposal would involve job losses. I would not like our national airline to follow the low cost airline model.

The question with regard to a strategic partner for Aer Lingus was answered. As regards new routes planned for 2003, I note the Washington-Baltimore service is one it is planned to bring back. I also note there will be additional Shannon-JFK services. As a Member of the Oireachtas from Clare, I would like more details on that service.

As regards the current bilateral agreement, it was mentioned at the Chamber of Commerce luncheon before Christmas that the company is interested in ending or changing the bilateral agreement. It was suggested that US Airways, which is commencing a new service from Philadelphia, will have an unfair advantage because it will fly in from a hub such as Philadelphia to which Aer Lingus is interested in flying. Aer Lingus is restricted to flying to New York, Chicago, Los Angeles, Boston and Baltimore, to which it will fly under a regional airport promotion. However, the fact extra gateways are not available to Aer Lingus in the US has nothing to do with the one-to-one agreement drawn up some years ago by the then Minister, Deputy Cowen. Deputy Cowen should probably have negotiated for extra gateways when he drew up that bilateral agreement. That is where the problem lies in that extra gateways should have been secured from the American Government.

It was also said that Aer Lingus would provide more gateways if this was changed. Aer Lingus's alliance with American Airlines extends its network into more than 100 cities in the US. Is it not a fact that far from being anti-competitive, the current air agreement gives Aer Lingus the edge in that it has little competition on the routes it services? If there was a free for all, would Aer Lingus be able to compete with other US carriers coming into this country?

I have a few parochial questions and would not like to go back to Clare without asking them. Flight EI 111 was changed in last year's winter schedule and the flight now originates in Dublin with onward connections from Shannon. Aer Lingus carried 22,000 extra passengers this year because it changed that service over the winter. There have been instances in Shannon in recent months where passengers were unable to get on flight EI 111 because it was overbooked. I think the ratio is 75:25 - 75 out of Shannon and 25 out of Dublin. I know the situation will change in March when the service will again commence in Shannon but it is a long way off. I hope this will not happen again in the winter months. The ratio could be 60:40 the next time and gradually it would erode our base.

As regards the website, Aer Lingus has stated that 40% of its bookings are on the website. I have been talking to tourism people and hoteliers in the region and they believe the website is designed to promote one airport rather than all airports. I looked at the website before I came to this meeting and it stated that I had chosen Dublin. That is something which should be looked at. The price of US destinations should be the same for Dublin and Shannon. I looked at a few dates on the website and there was a major difference.

The maintenance hangar in Shannon Airport is under utilised. Has Aer Lingus any plans for potential growth in that area?

Senator Morrissey

Some of the questions I proposed to ask have already been answered. I would like Mr. Walsh to look at the top of page two of his statement. He stated how the aviation industry has changed. It should state how Aer Lingus has changed because the model there is no different to that in existence in every business in Europe, let alone the world or north Dublin. Only commercially fit companies will survive in the future and the key to a sustainable and profitable business model is aggressive and relentless cost management. Aer Lingus has not invented anything as that model has been in existence in the aviation industry for a long time. Its terminology is a little bit loose. If the events of 11 September had not happened, would this delegation be here today? Did Aer Lingus need a shock like that to force it to look at the realities of the marketplace?

Little has been said on how Aer Lingus sees its customer numbers increase over the years. Revenues have not increased but costs have come down. When one looks at the plans for Dublin Airport for the next 25 years, one sees that the figures might double. What business model does the company see as best for its customers, whether by way of a new terminal, a new runway and a service to the airport? Does Aer Lingus see a metro as vital? What type of rail link is vital? How does Aer Lingus see its figures in five years time? While it has survived admirably for the past 12 months in adverse conditions into which we might be heading again, how will it survive for the next two or three years without a partner?

Deputy Ellis

Unlike the previous speaker, I compliment Mr. Walsh and his staff on the way they have turned Aer Lingus around. They are only halfway through the job by their own estimate of what needs to be done.

The Aer Lingus report states that cargo volumes have reduced by 10.5%. Has that had an adverse effect on the overall margins regarding cargo or has anything been done to rescue that? I take it cargo is complementary to the passenger business and that it takes up space in the hold not occupied by baggage.

The fleet comprised 39 aircraft and 4,500 staff in 2001. How does that ratio compare with that of Aer Lingus's competitors, like British Airways, Ryanair and Lufthansa? How does the personnel to planes ratio compare? My understanding is that it is still higher than many of the competitors. I do not say that as a criticism of staffing levels but it is something that will affect the cost base down the road.

Does Aer Lingus offer any complementary concessions to travel agents, particularly in the US? I ask because Aer Lingus advertises one charge to book directly with the company in America but if one goes to some private on-line travel agents one can buy seats for up to $100 cheaper than from Aer Lingus. I do not know if that situation has changed but it sends out an unhealthy message to American travel agents. If certain companies monopolise the market, then others will send their business to other airlines, including those who fly to the UK rather than directly to Ireland. That has been a bone of contention in the past but I do not know if it has been resolved.

Aer Lingus cancelled aircraft leases after 11 September. What was the cost to Aer Lingus of the cancellation of those leases? Has the situation been the same this year and have any penalties been imposed on Aer Lingus regarding cancelled leases? Mr. Walsh intimated that the craft used by the American forces had been on lease. We need to know about this even if there have been no costs to Aer Lingus. What staff to aircraft ratio does the delegation envisage for 2005 or 2006? That would give us an intimation of where the company intends to go. Has the situation in Futura been rectified? There were major problems there in 2001 and I do not know if those have been sorted out. Those problems were mentioned in last year's Aer Lingus report.

Senator Dooley

I welcome the delegation and congratulate them on the work they have done. The committee cannot underestimate the difficulties Aer Lingus has had and recognises the management of change the delegation has succeeded in introducing to an organisation of that size. It deserves a lot of credit for that because it is one thing to identify a successful business model but to manage change in such a large organisation, with such a diverse workforce, deserves a lot of credit. We recognise that.

A number of the issues I wanted to raise have been aired, including parochial issues raised by Deputy Breen. I also come from Clare so I am interested in Shannon but those issues have been reasonably well addressed.

A number of organisations I have been involved with have raised the same point - the lack of capacity on the transatlantic route. US tourism interests referred to this a good deal towards the end of last year. I am a member of the US Business Council with links here and in America and during autumn and Christmas I received representations expressing concerns among US tour operators about capacity on the route. Obviously that would be of concern to us, particularly from the tourism perspective, and the delegation should comment on that.

Regarding the commitment to Shannon, constituents have raised the special offers with me, particularly those on the Chicago route. While those offers are available to passengers travelling from Dublin they are not available to those travelling from Shannon. Obviously we are concerned by that as Shannon sees its catchment area as being north of Limerick and into Galway, Offaly and Laois. If there was an exercise by Aer Lingus to encourage people to travel through Dublin it would not show commitment to Shannon, though I am not accusing the delegation of doing so.

The EI 111 situation has been dealt with and we have also talked about the bilateral arrangement. Is Aer Lingus lobbying the Government about the bilateral situation? It was suggested earlier that it was somewhat remiss of the Minister at the time not to look for a greater number of gateways. I am sure the delegation would agree that that was not the case but that it was a negotiated position which saw Shannon in particular come out relatively well. The delegation might affirm that this is the case.

The delegation alluded to the future ownership of the airline but perhaps it could clarify that further. What is the delegation looking for? I am not sure if it has communicated that to the Minister but it can feel free to talk to us about where it sees ownership of the airline going. We talk to the Minister every now and again. We are obviously concerned by the redundancy issue and that has been dealt with.

The delegation should also address the Aer Rianta issue - what it feels are the important aspects of the future structure of that organisation and how that might affect Aer Lingus. I am not sure if the delegation discussed the additional services it envisages coming out of Shannon but the opening statement referred to Shannon to JFK and other services; I would like to hear about those.

Senator Browne

I concur with previous speakers in congratulating Aer Lingus management and staff on a job well done.

What is the overall age of the air fleet and what are the plans to update it? We need to avoid a scenario such as that in Iarnród Éireann, where there is a lot of old stock. A pay freeze was mentioned but is it true that a pay increase is owed from before? When will that be paid? Regarding staff morale in the company, if the delegation refers to people wanting to get out, will that make things worse for those who are there if they are underresourced, given the significant reduction in numbers in the last few months?

I disagree completely with the delegation regarding unaccompanied minors; I feel this is a cost-cutting measure. I see no evidence to justify this. Can the delegation tell us about attempted abductions or attacks on children that would justify the reduction in this service? Considering the huge numbers of people who are separated and working abroad, people who need to travel, this is a retrograde step. Does that decision need to be approved at ministerial level? Will it set a dangerous precedent for people with disabilities and the elderly, perhaps, who may need extra assistance to get on and off planes? Many people are concerned by this. The delegation said it is not a cost-cutting measure but how much money will be saved by its implementation?

Deputy Healy

Most of the issues have been covered but it has been said that the turnaround is not due to increased revenues but significant additional savings and cost reductions over and above the viability plan. Can we have some specifics regarding the particular areas in which those cost reductions were implemented? I understand Aer Lingus is in favour of at least amending, if not abolishing, the bilateral agreement. Could we have some specifics on Aer Lingus's proposals in regard to the Shannon stop-over and the development of business at Shannon? While the representatives have been fairly specific in some areas, there seems to be a vagueness on the question of staffing.

Deputy Shortall was told there is a possibility of approximately 200 redundancies this year and that additional permanent staff will not be taken on. What is the company's policy on staffing? What I have heard suggests that the company might be considering, for instance, casualisation of staff and the contracting out of services. While management may not have made specific decisions, have there been discussions, either by management or at board level, in regard to these areas? Mr. Walsh said that he has not looked at staffing from 2004 onwards. I find it difficult to understand the vagueness in regard to staffing when he says the future policy of the airline is to be aggressive and relentless in regard to cost management.

I would like Mr. Walsh to comment on whether the company management has considered privatisation, to which I would be totally opposed. To what extent, if any, has Mr. Walsh, his management team or the board of Aer Lingus considered that matter?

Deputy S. Ryan

As a Dublin Deputy, I am pleased the report is so positive. The last time the representatives attended here we did not think we would get to this stage. I compliment Mr. Walsh, his team and all the staff in Aer Lingus on getting to this point. The question now is where we go from here.

It was stated that an ESOP has been agreed by SIPTU. How will that operate in the context of the existing arrangements in Aer Lingus? Linking that in, I have been a little perturbed over the years that we should have chief executives of various State bodies whose philosophy has tended to be to prepare a company for privatisation. I would like to know specifically what is Mr. Walsh's personal view in regard to the viability of Aer Lingus as it stands currently within the State sector, in the context of ESOP? There is a feeling out there that all of the efforts, achievements and sacrifices being made by the staff are solely to facilitate a sell-off of Aer Lingus. I would be interested to know what is the chief executive's personal view is in this regard. In the context of the figures presented, including €6.59 million in 2001, what are the figures for 2002 and what are the predicted figures for 2003? I would like to see the graph going upwards.

In the context of the sacrifices made by all those in Aer Lingus and the increases that have been foregone over the years, what is the policy of the board on meeting the commitments that have been made? It has been stated that it was Mr. Walsh's personal view that neither he nor Aer Lingus consider it necessary to have a second runway at Dublin Airport. Does this relate to the short or long-term and what is the company's view in relation to a second airport to accommodate the greater Dublin area to the west and to the midlands, and how would that link in with Aer Lingus's policy in the future?

Obviously Aer Lingus works with Aer Rianta on a day-to-day basis. When it was suggested to Aer Rianta that it was now the policy of Aer Lingus that there was no need for a second runway, we were told that on no occasion during meetings which took place between Aer Rianta and Aer Lingus, did Aer Lingus ever say there was no need for a second runway which Aer Rianta is currently proposing. Mr. Walsh might clarify that issue.

Mr. Walsh

I will answer some of the questions and I will ask my colleagues to comment on some of them. A question was asked earlier about Aer Rianta and the management of the airport, particularly in regard to costs, which I did not answer. On the development of a second runway at Dublin Airport, neither I nor Aer Lingus support the development of a second runway at this stage. We recognise that a second runway will be required at some stage but we are not satisfied that all alternatives to the development of a second runway have been explored. We believe the existing infrastructure needs to be more efficient before Aer Rianta spends significant millions of euro on additional developments at Dublin Airport. The infrastructure that exists at Dublin Airport can be more efficient and it is in the interests of everyone involved, not just the airport but the airlines, to operate at maximum efficiency so that we can keep down costs and drive them down even further. Until such time as Aer Lingus, and the other airlines - we are not alone in this - can be satisfied that the existing infrastructure is being used to its maximum potential, we do not support the development of an additional runway.

Deputy S. Ryan

In the context of the existing capacity - as an operator, Mr. Walsh will be aware of the capacity of the existing infrastructure - and on the basis of growth, whether at Dublin Airport or some other location, when will there be a need for extra infrastructure?

Mr. Walsh

That is a difficult question to answer. It could be needed within ten years. Going back to what we said earlier, if growth at Dublin Airport is to match the projections that have been outlined, Aer Lingus will need to grow to match the potential. Aer Lingus will need to expand in terms of the aircraft fleet. To do that and to address the problems we have with the existing fleet in terms of the number of different types of aircraft we have, we will need to generate significant profits or have access to capital from some source. A lot of issues need to be looked at.

In the context of Dublin Airport as it is currently structured there are times during the day when it is operating close to peak capacity. However, there are significant periods during the day when it is operating nowhere near the capacity available. In the pricing structures introduced in September 2001 by the Commission for Aviation Regulation, the regulator introduced discounts at certain off-peak periods to try and encourage airlines to spread capacity throughout the day thereby utilising the infrastructure in the best possible way. There is greater scope for that to happen at Dublin Airport. There can be significant growth at Dublin Airport within the confines of the existing infrastructure.

We believe it is important for Aer Lingus, its customers and Aer Rianta that all opportunities for improving efficiency are examined before we embark on a significant capital expenditure programme which will have to be paid for by somebody. Ultimately, the airlines pay for any capital investments made by Aer Rianta. The airlines will have to pay for the new runway. This is a time when all airlines are making strenuous efforts to operate efficiently and I note the comments made by Senator Morrissey who is correct in saying that Aer Lingus has not invented anything. It is just operating now in the way any commercial business would operate in terms of relentless and aggressive control of our costs. At a time when all airlines are doing that it is inappropriate for us to embark on significant capital expenditure programmes that will drive up costs. We are, as our competitors are, trying to drive costs down. Everybody associated with the industry needs to be doing everything possible to keep costs down and to drive them lower than they are currently.

We recognise that at some stage in the future Dublin Airport will need to be developed. We have not discussed this in great detail within the airline but we do not believe that there is a case to be made for the development of a second airport at Dublin. We do not see that as necessary at this stage. We do, however, believe that there is a strong argument for the introduction of competition at Dublin Airport where it applies to the provision of terminal services. We support the decision of the Minister to seek expressions of interest for the development of competing terminals at Dublin Airport. While we as a company are not interested in developing terminal facilities ourselves we have had discussions with three parties who are interested in developing terminal facilities, including Ryanair which would be our single biggest competitor. We believe it has put together credible proposals for the building and creation of a second competing terminal at Dublin Airport.

We have spoken to a group involving the McEvaddys who put together a fantastic proposal for the development of facilities at the west side of the airport and to a party, including Ascon, which has proposals for the development south of the existing runway. We are talking to three interested parties.

We believe competition will be positive. For many years people were critical of Aer Lingus and have recognised that competition has benefited Aer Lingus and the consumer. We are in favour of competition at Dublin Airport. We believe it is in the interests of the consumer. We believe it will help to continue to enable airlines to reduce their prices for the benefit of both tourism and business.

Deputy S. Ryan

Would you support no confidence in Aer Rianta?

Mr. Walsh

I would not say that. I believe there are many excellent people working in Aer Rianta. The people there have made significant progress over the years. It is probably fair to say that when I hear Aer Rianta people say that competition will not work in an airport environment it reminds me of the sort of statements Aer Lingus would have made ten or 15 years ago about competition in the airline industry. We have learned that competition is good, we are in favour of it and we are pro-consumer. We believe that, at a minimum, people should open their minds to the concept of competition. We see benefits in it. We see that the proposals made available to us are credible and we believe that competition is in the interests of the consumer. This is not a vote of no confidence in Aer Rianta. I acknowledge the fantastic work it has done over the years. Things have changed. People should not be afraid of competition in the current climate.

Chairman

Does Aer Lingus not support Aer Rianta in its objection to the new pier?

Mr. Walsh

No, we are supporting and talking to and have had significant discussions with Aer Rianta over the development of a temporary, low cost pier D quick turnaround facility at Dublin Airport.

Chairman

Is that the one Ryanair is objecting to?

Mr. Walsh

Yes.

Chairman

Does Aer Lingus not object to it also?

Mr. Walsh

No, this is where people get confused. There are proposals to develop a temporary facility and there are proposals in Aer Rianta to develop a permanent facility.

Chairman

I have seen drawings of one with a walkway around it.

Mr. Walsh

That is the permanent facility.

Chairman

Does Aer Lingus support that?

Mr. Walsh

No, we do not support the permanent facility.

Chairman

Is that not a vote of no confidence in Aer Rianta?

Mr. Walsh

What we are saying is that we do not support it on the basis of the costs involved because we do not believe it is cost effective. We believe there are alternatives that can be considered. The Chairman mentioned that Aer Lingus has not gone on record as saying it does not agree with the runway but I have certainly gone on record. I made our view clear to people in Aer Rianta. There is a proper structure and forum for these comments to be made. Not only are they made in consultation with Aer Rianta but there is a process overseen by the Commission for Aviation Regulation, and it is a transparent process, where all Aer Lingus views on Aer Rianta and the development of Dublin Airport are available for public inspection. The commission and the commissioner, Bill Prasifka, have made all the submissions available on their website to anybody who wishes to see them. Our record in regard to Aer Rianta is a matter of public record and is available on the commission's website.

Chairman

I know that. Aer Lingus is very much a new company with Mr. Walsh and his colleagues in charge of it, yet they agree with neither of the two biggest things proposed by Aer Rianta at the moment. Most people looking at that would say that Aer Lingus has question marks about the way that Aer Rianta wants to develop Dublin Airport.

Mr. Walsh

In our submissions to the regulator we are critical of the amount of money being spent and of the capital expenditure programme proposed by Aer Rianta because we felt that there was inadequate consultation with the airlines and that the requirements of the airlines were not necessarily taken into account. We must also remember that since the events of 11 September this industry has changed.

Chairman

I agree, and Aer Lingus has changed.

Mr. Walsh

In many ways Aer Lingus has changed for the better. We continue to drive down fares and we intend to take positive action to reduce them. Airport taxes form a significant part of fares. We have fares available at €9 but added taxes are often two or three times the fare we charge. Therefore, the amount of money coming to the airline is often less than one third the amount going to the airport. We have made all the effort to reduce our fares and the airports need to do the same. I am not being critical of Aer Rianta when I say that because it applies to all airports and all airport infrastructures. Our track record in relation to Aer Rianta is a matter of public record, it is available on the aviation regulator's website and I am quite happy to make it available to anyone who wishes to see it.

Deputy P. Power

May I interject because this is a key point in our discussion? Mr. Walsh's comments are extremely helpful and very welcome. I gather he is saying that he does not have to do business with Aer Rianta and that he is quite open and receptive to speaking to Ryanair, the McEvaddy brothers or anyone else, provided that whatever model they propose is best for Aer Lingus. For far too long and not just in Aer Lingus but in a whole range of semi-State organisations, there has been a mindset and a blinkered attitude towards looking at something and they cannot operate outside their traditional operations area. I think that underscores how Mr. Walsh has been successful for the past two years. It is extremely welcome and long may it last.

Deputy S. Ryan

May I say——

Chairman

We must continue because we have a lot of other questions.

Mr. Walsh

Scheduled passenger numbers for 2002 will be of the order of 6.3 million.

Deputy S. Ryan

Have numbers dropped?

Mr. Walsh

Yes, there is a slight drop for 2003. The passenger numbers I am quoting are scheduled passenger numbers. We also carry some charter passengers and the figure in the annual account referred to by the Deputy would have been the scheduled and charter numbers. The scheduled passenger numbers for 2003 are projected to be in the region of seven million.

Deputy S. Ryan

Is that a scheduled or total figure?

Mr. Walsh

Scheduled. We are looking at quite some growth in 2003 over last year. The scheduled passenger numbers in 2002 were very similar, maybe 100,000 less than the scheduled passengers carried in 2001. Scheduled passenger figures are clearly one of the issues that are the prime focus of our attention at the moment. I will ask my colleague, Seamus Kearney, chief operations officer, to comment on some of the specifics in relation to fares, EI 111 and potential development at Shannon in relation to direct services to JFK.

Mr. Seamus Kearney

The routing of the EI 111 this winter represents one of the most significant commercial turnarounds in the business in the past year. In the winter of 2001, Shannon-JFK direct service was our single biggest loss-making route. It operated at a load factor of somewhere in the region of 58% to 59%. This winter we have re-routed that aircraft, starting in Dublin but maintaining the same direct service out of Shannon to JFK. The load factor has increased to an average of about 90%. The additional capacity has been filled primarily by Dublin-based passengers. We have been able to transform a loss-making route into a profit-making one by selling unused capacity last winter to the Dublin market, which has been an outstanding success. This enables a traditionally weak winter service out of Shannon to maintain its direct service by supplementing it with Dublin-based passengers. We are very happy with how it has worked out.

In the context of the summer schedule out of Shannon, there will be two additional direct services from Shannon to JFK this summer. This has been facilitated by the introduction of a seventh aircraft on the transatlantic fleet which will fly five times a week to Baltimore from Dublin-Shannon and twice a week on the Dublin-Shannon-JFK route.

In relation to direct access to the US market, a comment was made that there is no need for Aer Lingus to directly access some markets in the US, that we can serve that through our relationship with American Airlines.

It is a fact which is sometimes overlooked in terms of American tourist traffic into Ireland that nearly 60% of American tourists into Ireland come via another gateway and that represents a significant loss to Aer Lingus and a significant loss to Irish tourism. That is because direct services by British Airways, American Airlines and United Airlines into the UK and in latter times into other European destinations, facilitate the access of American tourists into Ireland so that they spend less time in Ireland and more time in European destinations. Therefore, they do not travel with Aer Lingus. It is absolutely critical that Aer Lingus would get a direct access to these destinations. We have no doubt that significant markets exist for Aer Lingus services to these destinations.

There were some comments in relation to the relative fares of Dublin versus Shannon and I refer to a question asked by Deputy Breen. One of the most vociferous groups in relation to this was the IHF in the Shannon region which issued a press release about our fares from Shannon versus Dublin. I very gratefully accepted the invitation of the chief executive of the IHF, John Power, to address a recent meeting of the council of IHF. At that meeting I outlined our policy in relation to Shannon and Dublin fares, particularly in off-peak times. It is a matter of fact that all Shannon fares are discounted up to 10% to 15% over Dublin fares to facilitate travel into Shannon in traditionally off-peak times. Like anything else, if one tries to book on any Aer Lingus service out of the US on St. Patrick's weekend one will have difficulty in getting seats on any service and that was one of the examples used in the IHF press release. I spent quite a considerable amount of time explaining our policy. That is a matter of record and a matter of fact.

Our lead-in fares to both Shannon and Dublin are all discounted in favour of Shannon. The market particularly in winter is much stronger into Dublin than Shannon. In order for us to fill aircraft to 90% load factors we must sell seats at a discount into Shannon; long may that continue if it continues to fill our aircraft.

Deputy Ellis raised the issue of concessions to travel agents in the US. It is a fact that up to summer 2002 we had an arrangement with a particular tour operator, Scepter Tours, which bought a significant number of seats up-front from Aer Lingus at a commercially viable rate. Such was the nature of its commitment to purchasing these seats that a commercial deal was struck and we took advantage of it.

Deputy Ellis

Arising from that, what would be the loss of having sold them to that grouping rather than having sold them to ordinary travel agents? How much was the difference between each fare?

Mr. Kearney

The specifics of my answer were that up to summer 2002, that arrangement——

Deputy Ellis

Yes. What was the difference?

Mr. Kearney

As our load factors for the majority of last year up to about July were less than what we would have targeted, the effective loss was nil.

Deputy Ellis

But what was the difference per seat between the ordinary fare price and that which was charged for the group block which had been bought?

Mr. Kearney

I could not give you an answer in terms of difference per seat.

Deputy Ellis

Mr. Kearney must know.

Mr. Kearney

Different blocks of seats are sold at different rates and that is why I cannot give the Deputy a precise answer. On average we would discount tour operators to the tune of 4% to 5%.

Deputy Ellis

What rate were they sold at?

Mr. Kearney

Somewhere in the region——

Deputy Ellis

How many dollars each were they sold at?

Mr. Kearney

It is up to the tour operator to decide the rate——

Deputy Ellis

How many dollars each did you sell them for?

Mr. Kearney

I cannot provide an answer in terms of the individual blocks of seats. The discount would be about 4%.

Deputy Ellis

Why is that operator able to give 20% and 30% discounts compared to what is available to other travel agents?

Mr. Kearney

That depends on how he is selling his product; that particular tour operator sells not only "seat only" but also packages.

Deputy Ellis

I am talking about "seat only".

Mr. Kearney

Deputy, he has a block of seats which he sells.

Mr. Walsh

I will give my background in the charter business. I was previously chief executive of Futura. In a situation like this, the risk is transferred from the airline to the tour operator and, from our point of view, the risk has been eliminated. If the tour operator has not sold the seats, he will often sell them at a discount at a later date in an effort to move them - this is standard commercial practice. In the aftermath of the events of 11 September 2001, thousands of seats were available for sale but were not selling. This commercial activity was right for Aer Lingus at the time.

Deputy Ellis

With all due respect, it operated prior to 11 September.

Mr. Walsh

That is correct.

Deputy Ellis

It is fairy talk to suggest that a discount of 4% or 5%, at most, was being given. I have been informed that the discounts were as high as 40%. Nobody can sell flights at a rate that is so reduced in comparison to ordinary operators. We know that the margins for travel agents were either 5% or 10% at the time. How can somebody then allow the price of a $300 flight to be reduced by $50 or $60? It does not make sense.

Mr. Walsh

One of the issues faced by airlines is pricing - it is often looked on as a black art. How can an airline sell seats for free while making huge profits? Members of the committee are aware that seats are often generously reduced in price in an effort to generate publicity. Our biggest competitor makes operating margins in excess of 30%, but it advertises free seats. Airline pricing is not as simple as people would have us believe.

Deputy Ellis

For some.

Mr. Walsh

The decision taken was correct for Aer Lingus at the time, but we have changed since then. As I said earlier, our primary sales channel is now www.aerlingus.com. This addresses the issue the Deputy has outlined.

Deputy Ellis

I think it does. The success of the website has probably helped to contribute to Aer Lingus's improved profits.

Mr. Walsh

Futura's difficult trading year is mentioned in our annual accounts, but Aer Lingus has sold 80% of its shareholding in that company. We have decided to retain a 20% share as a financial investment, but we intend to sell that at some stage in the near future. As we have recognised that the charter business in which Futura operates is very different to scheduled business, we have decided to sell 80% of our shareholding.

My colleague Mr. Brian Dunne will address the issues of the fleet and the cost of returning aircraft during the survival plan.

Mr. Brian Dunne

It is fair to say that Aer Lingus has undertaken a fairly fundamental review of its current fleet structure in recent months. The average age of our fleet at the end of December was approximately eight and a half years and while that is relatively young, some fairly fundamental issues need to be addressed. The fleet structure of Aer Lingus is far too complex and does not represent a base on which we can build and move forward. In recent months, we have examined the fleet structure to see whether there is an opportunity to take advantage of the current aircraft markets to find a solution that will enable us to transform our fleet and will give us a solid base from which to grow. The total cost of the actions we took in the survival plan - cancelling aircraft leases and certain aircraft orders - was about €20 million, as reflected in the accounts for 2001. Some additional measures may arise in relation to our fleet review, but no firm decisions have been taken.

With regard to the ESOP to which Deputy Seán Ryan referred, the current staff shareholding in Aer Lingus is about 4.76%, held by individual employees under the terms of an approved profit-sharing scheme. The new ESOP will involve the establishment of a shareholders' trust - an ESOT. The total employee shareholding in the existing scheme combined with the new one will be 14.9%. The shareholding will probably increase to that level during this year as it is intended to do so by the end of October. There will be a facility for the ESOT to acquire some of the shares held by existing employees and this will probably be done over time. The terms of the transaction are such that the level of shareholding between the existing scheme and the new scheme will not be more than 14.9% at any time. In addition to the 14.9%, there is also an arrangement whereby 10% of the company's profits before exceptional items will accrue to the ESOT from 1 January 2002. The funds in question may be used by the ESOT to buy some of the existing shares.

Mr. Walsh

On the comments made about unaccompanied minors and passengers with disabilities, there is absolutely no cost saving as a result of the changes we have introduced in this regard, which operate in 33 or 34 airports. With the exceptions of Dublin, Cork and Shannon, ground handling activities are provided by external parties and not by Aer Lingus staff. The price of services at those airports will not be affected as a result of the withdrawal of the unaccompanied minor service. We are not saving any money.

Deputy P. Breen

What about Aer Lingus's partners in the One World Alliance?

Mr. Walsh

We consulted all our One World Alliance partners before we took this decision and the publicity around it was first raised through that process. Our partners fully understand the reasons for the decision. It may be inappropriate to discuss specific cases in this forum, but we have had instances of children not wanting to travel, not having people to meet them at their destinations or assaulting staff members or other children. There are specific reasons for the decision, the effect of which we recognise. We have received complaints from parents and guardians about the manner in which children were accompanied, as they felt that alternative procedures should have been followed. It is impossible to satisfy the requirements of all parents and guardians. We did not take the decision lightly, but did so based on our experience of what we have seen and in the interests of children's safety and general security. We cannot give a 100% guarantee in these matters. People may be happy to accept less than a 100% guarantee when they hand over their child to the care of somebody else, but Aer Lingus is not prepared to take such responsibility as it represents too great a risk. Given that we know what we know, it would be wrong to do it.

Deputy Shortall

Is the experience of other airlines different? Is this simply an Irish phenomenon?

Mr. Walsh

One of the differences between Aer Lingus and other airlines is the scale of the operation of accompanying minors that is faced by Aer Lingus. On average, about 150 unaccompanied minors travel with Aer Lingus each day. Other airlines experience nowhere near such levels.

Chairman

It reaches a peak in August.

Mr. Walsh

About 5,000 unaccompanied minors travelled with Aer Lingus in August 2002. Claims have been made against other airlines when parents or guardians felt that their children were not provided with adequate care and attention. My colleague, Mr. Dan Loughrey, highlighted an incident that was referred to in an article published in last weekend's the Sunday World, which shows what can happen in these circumstances.

While I regret that Aer Lingus has been forced to take this action, I guarantee the decision was not taken lightly, nor was it motivated by cost. I have not been shy about seeking publicity for previous actions we took in the name of cost savings. If we were taking this step for that reason or believed it appropriate to charge a fee for providing this service, we would have done so. We considered these options, but ultimately the decision hinged on the question of whether we can provide 100% satisfaction.

A question was asked on cost reductions. I can provide some headings now and submit the detail in writing later. In total, our cost base in 2002 versus 2001 was reduced by about 24%. We have cost headings in about nine or ten major areas. Our fuel costs declined by 29%, while airport charges declined by 14% and en route charges, such as those paid to ATC providers, were reduced by 6%. Aircraft hire, namely fees associated with leasing aircraft, declined by 37%, maintenance charges by 11% and distribution charges by 36%. Direct overheads - the costs associated with the direct operation of the aircraft - fell by 15%, while staff costs declined by 23%, overhead costs by 24% and depreciation charges by 14%. These are our main cost headings.

Members will note that the reductions were achieved across the board, but were not even. The most significant reduction was achieved in distribution costs, the area we are again targeting in 2003 for the single largest reduction. I am happy to provide the figures to the committee.

Deputy Ellis

How does the company's personnel to aircraft ratio compare vis-à-vis its competitors?

Mr. Walsh

That is a good question. When he first asked the question, the Deputy referred specifically to British Airways and Lufthansa. The only relevant benchmark we use is Ryanair. We had 32 operating aircraft in our fleet in 2002, although that figure was 39 aircraft at one stage during the year as some were returned from lease, and we will operate 34 aircraft in 2003. Although our ratio of staff members to aircraft is clearly out of line with that of our competitor, Aer Lingus provides a different type of service which highlights our commitment to providing a quality service as well as cheap fares.

It is clear that the overhead and support structures in Aer Lingus are capable of supporting additional aircraft, which will mean the ratio will improve if and when expansion opportunities arise. This is the critical issue we must address. We have already added nine new routes to our operation without adding additional staff or aircraft and we will add two further aircraft to the fleet this year to facilitate the reintroduction of the Dublin-Shannon to Washington-Baltimore route. An additional Airbus A330 has been added to the fleet and a Boeing 737-400 owned by Aer Lingus, which had been leased out, is returning to the fleet to facilitate the introduction of routes to Bologna, Jersey and Lisbon and to add capacity to a number of the new routes we have started.

It is our intention to take advantage of the revised, slimmed down support structure to grow the operation of Aer Lingus without adding significantly to the staff base. The mistake Aer Lingus made after it implemented the Cahill plan and other successful restructuring processes was to take the foot off the pedal and allow costs to grow out of control as soon as we saw light at the end of the tunnel. We cannot afford to repeat that mistake.

I was asked where I see the company's future. It is clear from everything we have experienced that the Government is either not in a position or not disposed to invest in Aer Lingus. We cannot afford to allow our cost structures to get out of control and must take action to generate sufficient levels of profitability to ensure we can reinvest in aircraft - which are very expensive assets - expand, have a viable future and guarantee the jobs of everybody working in the company who are dependent on Aer Lingus in Dublin, Cork and Shannon airports.

Deputy Ellis

What is the ratio of personnel to aircraft at Ryanair?

Mr. Walsh

Mr. O'Leary will be quick to jump on me if I get the answer wrong.

Deputy Ellis

That is not my intention.

Mr. Walsh

I understand Ryanair operates 44 aircraft, although it has increased its fleet to 50 aircraft, and has approximately 1,600 to 1,700 staff.

Deputy Ellis

Its ratio, therefore, is roughly 50 staff per aircraft.

Mr. Walsh

It is significantly different from that of Aer Lingus.

Deputy P. Breen

How many of the Aer Lingus fleet are Airbus aircraft and how many Boeing? Will Aer Lingus favour Airbus or will orders depend on the price on offer?

Mr. Dunne

We are currently undertaking a complete review of this matter. As such, we are starting from scratch in terms of which company we choose.

Chairman

I thank the witnesses for attending the meeting today. Their contributions have been of huge benefit and, like others, I congratulate them on their achievements. I was not present when they last attended the committee, but I am aware, from reading the report of that meeting, that a very different position then obtained. They have turned around our national carrier, of which we are all very proud. On behalf of the committee, I wish them and their staff well in their efforts to develop the company in the future and in taking the difficult but necessary decisions. We will watch the progress of Aer Lingus with great interest. We hope the company goes from strength to strength and adds as many new destinations as possible in the years ahead. I ask them to submit some details on some of the points we did not reach today.

The joint committee adjourned at 4.40 p.m. sine die.