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JOINT COMMITTEE ON TRANSPORT debate -
Wednesday, 21 Apr 2004

Aer Lingus: Presentations.

I welcome from Aer Lingus Mr. Willie Walsh, chief executive, and Mr. Brian Dunne, chief financial officer, and from the Department of Transport Mr. John Lumsden, assistant secretary, Ms Doreen Keany, principal officer, and Ms Mary Dunning, assistant principal officer.

I draw our guests' attention to the fact that members of the committee have absolute privilege but that the same privilege does not apply 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. Perhaps Mr. Lumsden will make his opening statement and I will then ask Mr. Walsh to comment.

Mr. John Lumsden

On behalf of the Department of Transport I welcome the opportunity to update the committee on the current position regarding Aer Lingus, particularly in respect of the Aer Lingus Act 2004 and the ongoing deliberations on the future options for the company.

As the committee will be aware, the Aer Lingus Bill was enacted on 7 April 2004, having passed all stages in the Oireachtas. The purpose of this Act is to give effect to the employee share ownership plan agreed by the Government and the Aer Lingus unions and to provide a legal framework to facilitate any private sector investment process in Aer Lingus in the event that the Government embarks on such a process. The Act also includes an enabling provision for the establishment of new pension schemes by Aer Lingus and for amendments in relation to the appointment of directors, including worker directors. Specifically regarding the ESOP, existing legislation only allows for the distribution of up to 5% of the share capital of Aer Lingus for the benefit of staff. The new legislation allows for the allocation of the additional 9.9% shareholding to staff as agreed following negotiations on the survival plan in 2001.

In a sense, the Act marks the closing of a very traumatic period in the airline's history. With its enactment, the Government is fulfilling its commitment in respect of the increased employee shareholding in exchange for full implementation of the survival plan. That plan has led to the turnaround in Aer Lingus's finances, with the company returning to profitability in 2002, one year ahead of target, with an operating profit of €63.8 million, compared to a loss of €52.1 million in 2001. For 2003, the company recorded an operating profit of €83 million which was achieved against a tough background, including the war in Iraq and the SARS scare.

On the operational side and despite the difficulties of the past two years, Aer Lingus has introduced services on around 15 new routes, all from greater efficiencies in the utilisation of existing aircraft and staff resources. For 2004, new services have already been introduced on six new European routes with a further three to commence in May. This brings the current number of destinations served by Aer Lingus 45. This ability to respond flexibly and rapidly to new opportunities is a reflection of the developing new culture in the organisation which is essential to allow Aer Lingus to compete and grow.

In addition, Aer Lingus is currently upgrading and standardising its European fleet. The airline will transition to a single short haul fleet aircraft for its European operations with the acquisition of 17 Airbus A320 aircraft, of which seven will be bought and ten will be leased. The new aircraft will be on stream by end 2005, maintaining the short haul fleet at 27 but with increased capacity and operational flexibility arising from the larger aircraft and lower unit costs. The overall transaction involves the sale of aircraft as well as the return of leased aircraft. This investment will be funded from internal resources. The company has also commenced a review of its long haul fleet, which is expected to be completed later this year.

The board, management and staff are to be commended for their commitment in achieving this remarkable recovery. They have transformed the airline into a lower cost, flexible, efficient business offering low fares with a quality service, which makes profits. As a result, the airline is better placed to withstand competitive pressures, economic and other external shocks, which can impact severely on the volatile, cyclical aviation sector. Aer Lingus is one of the few airlines making a profit.

There are, however, serious challenges ahead. The ongoing financial difficulties of airlines across Europe and the US, coupled with our experience domestically over the years, all point to the highly competitive and constantly challenging nature of the aviation sector. They demonstrate the need for Aer Lingus to remain constantly vigilant to market forces and to remain focused on the competitiveness of its product. This means continuing efforts to reduce costs across the network, in all sections and locations.

A further challenge is the need constantly to be alert to the changing nature of the aviation industry. Significant change has taken place in the past ten years, particularly in Europe. Further and ongoing change is inevitable. In the near future change may be driven by developments in the EU-US "open skies" talks. The Minister is concerned that, in this constantly changing and challenging environment, Aer Lingus should have the full range of tools, including maximum funding flexibility, to plan effectively so that it can profitably develop its brand and respond quickly and effectively to the sectoral changes and other pressures and developments.

In light of the continuing turnaround in the company's finances and the continually changing environment, last July the Minister asked the chairman to examine and report back to him on the future options for the company. At a meeting on 16 September 2003, the chairman furnished his report to the Minister in which it was indicated that the private sector investment process should be initiated without delay. The context of the company's report and conclusion was the background to Government decisions over the last number of years relating to private sector investment in the company. The Minister also commissioned an independent corporate finance consultant to examine the sale options for Aer Lingus, taking account of the Aer Lingus report. He has supported the sale process mechanism proposed in the chairm an's report.

However, let me make it perfectly clear that no decision has been taken by Government regarding the future of Aer Lingus. The Minister has, however, recently advised his colleagues of the current state of his deliberations concerning the future of Aer Lingus and, in particular, his concerns relating to maintaining the status quo. He also advised that he would revert to Government on specific options for the company in the near future.

The Minister has stressed on a number of occasions that it would be remiss of him not to examine all the options for the future of Aer Lingus given the nature of the sector and the history of the airline. Aer Lingus has had two major crises in the past ten years during which it was on the brink of collapse. The Minister does not wish to see a third such crisis arise, nor does anybody else.

A key issue to be considered in looking at future options is the Government and EU position on further equity injections in Aer Lingus. The State cannot invest under EU rules when the airline is in crisis and it would be difficult to justify injecting scarce Exchequer funds into a profitable company when there are many other competing and more deserving priorities that depend on State resources.

The Minister has emphasised on previous occasions that it is the Government's wish that Aer Lingus should continue to make a significant and valuable contribution to the economic and tourism development of the country. To do this, it must be able to compete successfully, operate profitably and have access to a variety of funding sources to facilitate growth. The issue for consideration by Government is whether Aer Lingus can do this better in private or public ownership and whether there are vital strategic matters that would influence that choice. The Minister considers, therefore, that it is timely to examine all the options and reach a conclusion. Ongoing uncertainty about the future is not in the best interests of the airline. Clarity is required so that management and staff can concentrate on developing and growing the airline, taking account of whatever ownership conditions exist.

Furthermore, examining future options now is a better choice than doing so when the next downturn or crisis forces such an examination. The Minister and the Department are aware of concerns about strategic issues in the context of the State exiting from ownership of Aer Lingus. These concerns relate to the Aer Lingus brand, slots at Heathrow Airport, north Atlantic services, the commitment of new owners of Aer Lingus to regional development in Ireland and similar strategic issues. The Minister has assured Members that all these issues will be addressed by him in the context of recommendations to Government on the future of the airline.

I understood the statement that was circulated came from Aer Lingus, not the Department. My understanding is that Mr. Lumsden is before the committee to discuss aviation matters, not only Aer Lingus. Is that the case?

I am surprised the entire submission was devoted to Aer Lingus.

Mr. Lumsden

I apologise if the Department has, in any way, misinterpreted the letter of invitation it received.

The letter referred to Aer Lingus.

Mr. Lumsden

Perhaps it would help if I read the letter. It states, "It should be briefed on the issue of how aviation is handled, specifically in the context of the recently passed Aer Lingus Bill 2004, and the impact the planned privatisation of the company will have." It points out that Mr. Willie Walsh of Aer Lingus is also invited, etc. I must apologise if the Department has misunderstood, through its contacts with the committee, what the subject of this discussion would be. We are here to facilitate the committee on any aviation issue. If the submission is too specific, I apologise, but that is what I thought we were asked to do.

Perhaps we placed too much emphasis on Aer Lingus in the letter. I am sorry about that.

Mr. Willie Walsh

I do not have an opening statement but my colleague, Brian Dunne, and I will be happy to answer questions from members.

Perhaps we will begin with Aer Lingus and then move on to other aviation matters. On the last occasion Aer Lingus representatives appeared before the committee, other members and I congratulated management and staff on the turnaround the company had achieved and the achievement of a significant profit last year. That is to be welcomed and everybody involved should be congratulated but I would like to ask Mr. Walsh about the way forward.

The Department of Transport and the media in commenting on the Aer Lingus business plan noted there would be significant job losses in the coming years. I refer to the phrase "aggressive cost cutting measures" and how jobs will be affected in Aer Lingus this year and over the next two or three years. Since January 2002 almost 3,000 employees have been removed from the payroll and significant savings have been achieved. Savings of €130 million are expected this year. Will Mr. Walsh outline what that means for staff? What meetings have been held with staff representatives about the implications of the business plan for this year?

I welcome the opportunity to question departmental and Aer Lingus officials. My first questions relate to Mr. Lumsden's submission. Will the legislation be ready by the end of June, as the Minister said? Will the issues with the unions be resolved? I understand the PCW report is to be made available to the unions. Will the committee get a copy of that report?

Has the Department costed the second terminal at Dublin as viable? Specifically on the break-up of Aer Rianta, the overall company had a good reputation for loans for capital projects. Will it be able to secure loans on that record? If the company is broken up, will the three airports, which need a lot of capital investment, be able to secure loans as individual airports and boards of management? We can put this in the context of the PCW report; those bodies will have no track record.

Mr. Lumsden

To address Deputy Shortall's point, we have recently received requests for meetings from Aer Lingus staff and we will of course be meeting them. The Department meets the CRC of Aer Lingus on any occasions when such meetings are sought, as that is clearly a communication link we want to sustain. When past Government decisions were taken on the future of the airline - which subsequently were not implemented, for various reason - it was always inevitable and right that during such processes there were intensive meetings and negotiations with the trade unions representing Aer Lingus staff. I anticipate clearly that any Government decision to initiate a process for Aer Lingus will rightly involve consultation with staff representatives.

There were references to pursuing further cost reductions and the implications for jobs. The Department view is that it wishes to see the maximum number of sustainable jobs the airline can provide. As I said, it is greatly to the credit of the board of management and staff that they produced the turnaround they did and that jobs in Aer Lingus are more secure than they were some years ago. However, the Department shares the perspective of the airline, that the success of that turnaround does not mean the search for continuing efficiency should not go on. The Department's message to Aer Lingus, which is constantly conveyed, is that it should keep itself as efficient, cost-effective and profitable as it can, as that is the way in which the airline maximises its contribution to the Irish economy by providing services to the public and, not least, maximises the number of sustainable jobs in the airline. As the airline goes forward, regardless of how ownership may change, that will continue to be the message from the Department about management of the airline.

Deputy Breen asked about Aer Rianta. The Minister made clear that it remains his objective to enact legislation to implement the Government decision of last July before the Dáil rises this summer. That is his intention. There are many steps that have to be taken to do so and the Deputy referred to consulting the trade unions. The Minister and the Taoiseach are on the record as stating there will be consultation with the unions as part of that implementation process. In particular a mechanism will be employed to inform the employees of key financial data and projections on Cork, Dublin and Shannon going forward. That commitment is an essential part of the process and getting a response from the unions.

When will that happen?

Mr. Lumsden

It will happen very shortly but I cannot give a specific date. It is being acted upon.

Aer Rianta workers were brought to the brink twice and just pulled back because of promises of information being made available. If the Minister intends that the legislation will be passed by the summer it does not allow much time for the unions to examine that information. What is the delay in doing so?

Mr. Lumsden

It is not so much a delay as wanting to ensure the commitment is met in the most effective way. We want the information to be as complete and accurate as we can make it and as soon as we can follow through on that commitment we will do so. The Deputy is right in saying that the timetable being followed by the Minister means that time will be short in fulfilling the commitments to consultation with the unions. Nonetheless there ought to be a mechanism of that kind.

There is a difficulty——

Other speakers are offering.

Mr. Lumsden

The second terminal was mentioned by Deputy Pat Breen. Very recently the Minister said he favoured the concept of a competing terminal provided and operated by the private sector in Dublin Airport, but he also indicated that he intends to implement the Government decision on restructuring Aer Rianta and then rapidly to bring proposals to Government for decision. There is no Government decision at present on the terminal issue, though the Minister favours the proposal. He has said he wants to move on this as quickly as he can.

The separation of Dublin from Shannon and Cork is not a move the Department considers will lead to any inability of those airports, as commercial companies, in borrowing in the normal commercial way. The Minister said as part of the original Government decision in the case of Cork and Shannon that opening debts, which could be attributed to them by Aer Rianta, would not be put on the balance sheets of those companies. As the companies move forward in the normal way there will be a need for debt finance, as every commercial company requires. The Department would not see a problem in that context.

Mr. Walsh

Aggressive cost-cutting measures is a term I have used consistently since taking over as chief executive in 2001. Since then the airline successfully reduced its cost base by €344 million, a 30% reduction in the cost base. Of that €344 million reduction, €67 million was achieved in reductions in staff costs. Staff costs have amounted to approximately 19.5% of the total cost reduction programme to date. It is important to highlight that over 80% of the reduction was achieved in non-staff related areas.

There is no specific cost reduction target set by the airline for 2004; the airline achieved cost reductions of 89.5 million in 2003, while staff costs increased that year by €12.4 million. Staff numbers in the airline have reduced by 2,500 since 2001. Staff employed in the airline decreased by 369 in 2003. So far in 2004, staff numbers have reduced by approximately 230.

The airline is in the process of developing a business plan to take us through to the end of 2006. The plan is in the draft stage and will be presented to the board no earlier than the board meeting, which will take place towards the end of May. As part of the development of the plan, I have met with the central representative council. There was a meeting on Monday this week to discuss the formation of a joint business review group, which would be a subset of the central representative council, operating under rules of confidentiality, which would enable the staff representatives to have an input into the plan. We hope to meet next Tuesday to finalise these arrangements and agree terms of reference for the joint business review group.

I stated to the representatives that I would welcome an input from them into the formation of the plan. I have requested that it should operate in a pro-active fashion rather than solely operating in a manner that reacts to the proposals put forward by the management in the form of the business plan. I expect to engage in consultation with the staff representatives in the coming weeks and months around the business plan for the airline to take us through to the end of 2006.

Progress to date has been demonstrated to be on the back of aggressive cost reduction targets, including a 30% reduction in the cost base in a two year period, which is very significant. It is clear that the average fares will continue to decrease as a result of market pressure, but primarily as a result of action being taken by the airline to reduce fares and to honour the commitment made to our customers to transform Aer Lingus into a low fares airline, offering a quality service.

Our revenue base is expected to decrease over the period of the plan on the back of reducing yields. In order to achieve the profitability targets set for the airline - the medium-term target is an operating margin of 15%, which was first communicated in June 2002 - we must continue to take aggressive and relentless action around our cost base. This will mean action on all aspects of our cost base. We have set no specific targets for the current year and there are no specific targets for the business plan as it is just in draft format. I assure the Deputy that we will consult with the staff representatives in the coming weeks and months on the specific details of the business plan.

I will initially direct my question to Mr. Lumsden and deal later with Aer Lingus matters.

In formulating policy, particularly in regard to Aer Lingus and other areas dealing with the break-up of Aer Rianta and the "open skies" policy, is any consideration given to balanced regional development? Obviously I am wearing my local hat with regard to the development of the mid-west region. Based on discussions that have taken place with other State agencies, particularly the IDA, there is a clear recognition of the importance of a vibrant airport in the mid-west region, with transatlantic links and links into Europe. I am somewhat concerned, even in the presentation in regard to Aer Lingus, that the focus appears to be on profitability. In my view, Aer Lingus is still a State company and, given that regional development is a plank of Government policy, including the decentralisation policy, I would expect part of the policy to recognise the importance of providing access to the region. There is a concentration of business development and population in the east coast and there is clearly a policy to move this to the regions, particularly to the west and mid-west. It does not appear that much consideration is being given to regional development. This has also been identified in the document produced in regard to Aer Lingus.

I would like to deal later with some Aer Rianta issues. Since we began with a statement on Aer Lingus, I would like to address that issue first. I will return later to Aer Rianta and other aviation matters.

I welcome Mr. Walsh and Mr. Lumsden whose report I have read carefully. I wish to direct my comments and questions to Mr. Walsh, specifically because we are talking bluntly about a completely separate corporate and capital structure for Aer Lingus. I would like to hear Mr. Walsh's clear and detailed assessment of the aviation environment in which Aer Lingus operates. We are all aware of its cyclical nature, competitive pressures and the way the aviation industry and environment have changed radically in the past 20 or 30 years, not just in Europe but across the globe.

I would like to hear Mr. Walsh's assessment of why in the current aviation environment he needs to change his capital structure. What are his capital and treasury requirements? No doubt we will be presented at some stage with proposals to alter the capital structure. Therefore, I would like to hear beforehand about the changing environment which might justify such a change. On the previous occasion, I complimented Mr. Walsh on his efforts to turn around the company, specifically in dealing with costs, and I continue to compliment him on it.

I represent a constituency in the mid-west, Limerick. There is a perception that Mr. Walsh's focus is not on Shannon Airport. What are his plans for operating out of Shannon Airport in light of the proposed changes in the structure of Aer Rianta? I might have questions subsequently on the Aer Rianta issue. I would like Mr. Walsh to be very clear in regard to the questions I have asked.

Mr. Lumsden

Senator Dooley asked about balanced regional development. He is correct to point to the importance of this subject within policy-making generally. There are a number of strands to how aviation policy responds to balanced regional development. The Government's decision to restructure the State-owned airports into three separate State-owned airports is a direct response to the concern that Shannon Airport would be better placed as a separate State-owned airport to respond and develop its own region as an airport than within the Aer Rianta structure. This is a view the Government has taken. One of the drivers of the policy would be the concern to enable Shannon and Cork to maximise their future contribution to their regions in the interest of balanced regional development. Shannon, in particular, has an important role to play in the wider national spatial strategy which clearly identifies the Shannon-Limerick axis as an important potential counterweight to the Dublin region. The central issue of the national spatial strategy is the provision more economic counterweights to the Dublin region. The separation of Shannon with a high calibre board, its own dedicated management and the best possible start to its independent existence is a very important component of aviation's responce to balanced regional development.

The Department has always understood from Aer Lingus that the airline's north Atlantic and general services through Shannon have been and will remain an important feature of Aer Lingus's future planning. The Department would be grateful to hear that and highly supportive of it.

My earlier comments about the message the Department conveys to Aer Lingus about its overall need to remain cost competitive and efficient is driven by the realisation that the more efficient Aer Lingus can be the better it can provide services from Shannon and from other airports in Ireland. The Department does not see a contradiction between encouraging Aer Lingus to be as competitive and as cost effective as it can be and encouraging it to maximise its activities through Shannon Airport.

Would Mr. Lumsden accept that an independent Shannon with no flights will do little to further Government policy, particularly with regard to the open skies? Could Mr. Lumsden address that issue? I accept that the Government decision to break Shannon apart is a positive one, but only within a mix of other measures, particularly the retention of the dual gateway status and the continuing focus by the other State company, Aer Lingus, on providing access to all those points. It is clear from the IDA and other State agencies that it is necessary to have a vibrant base servicing European and transatlantic routes. From time to time we hear hints from the Department indicating that Shannon's future lies in the direction of Europe. That would not be positive. I would like to hear Mr. Lumsden's comments on those points.

Mr. Lumsden

The Department is not suggesting that Shannon's future is exclusively in Europe, the United Kingdom or the United States. We believe Shannon should look to all three markets to maximise the number of flights through Shannon. A separate Shannon which does not have flights would not be helpful to balanced regional development. The thrust of the Department's policies and the Government decision to separate the three airports is driven by the opposite perspective. I note Senator Dooley's comments about the nature of that decision.

Senator Dooley is right when he says many different aspects must be brought together to maximise Shannon's future potential. Separating the airport and giving it the best possible start is only one. We must manage the dual gateway status issue and I will talk about that in a moment. That issue must be managed extremely carefully.

Aer Lingus has a role to play. Because it is a commercial Irish airline and because of its history it is the best placed of the world's airlines to exploit - in the best meaning of that word - Shannon Airport's potential for transatlantic flights.

The Minister has also made it clear that he must combine the best possible set of road and public transport infrastructural developments in order to improve the catchment area of Shannon Airport. There is a range of issues and Senator Dooley is right to draw attention to them.

Negotiations are ongoing between the United States and Europe on open skies between the two continents. The Minister is chairing the Transport Council at present. In March, under his chairmanship, Commissioner de Palacio produced a proposed interim deal. The final deal which the Commissioner was mandated to negotiate is a comprehensive open skies deal between the United States and Europe. It has become apparent that it is not achievable in the short term and will take some years to achieve. However, Commissioner de Palacio has been negotiating with her American counterparts. Member states are not isolated from that process. They participate in the committee which supervises those talks.

In March, the Commissioner brought to the attention of Commissioners a potential plan which would be a significant step towards full open aviation. The Minister and the Commissioner did not think the plan sufficiently balanced between Europe and the United States and she has been asked to come back to the June Transport Council to see if a more balanced interim deal can be arrived at. If such a deal is crafted by June - and it is not certain that it will - and the Commissioner's mandate is for completely open skies, the Minister is concerned that it will be necessary to protect Shannon's transatlantic status as well as the Government can. That is why the Minister has said, in a number of replies to parliamentary questions in recent months, that it is his intention to have direct bilateral negotiations with the United States in order to safeguard Shannon against a potential EU-US deal to end the dual gateway status.

Mr. Walsh

I will address Deputy Power's questions, generally and specifically, and I will also invite Mr. Brian Dunne to make some comments.

An aviation analyst recently described the industry as brutally competitive. That is a good assessment of our present position.

It is like politics.

Mr. Walsh

The industry has undergone major change in recent years. Aer Lingus has responded very well to that change. While the company faced imminent closure in 2001, we carried 6.6 million passengers in 2003 and our target for 2004 is 7 million. We have announced or already opened 13 new routes for 2004 on top of the seven new routes we opened in 2003. We are increasing our capacity at and through Shannon in 2004. It is important to point out that 52% of our passengers originate outside Ireland and more than two thirds of our transatlantic passengers originate in the United States. We have more than doubled the number of our transatlantic passengers in the past ten years and we believe the opportunity exists to double that figure again if Aer Lingus is given access to additional gateways in the United States. We are operating under a very restrictive bilateral arrangement and are restricted to four nominated gateways. Under extra bilateral arrangements we can serve Washington/Baltimore. Nevertheless, the opportunity is real and we would respond immediately to a change in the bilateral agreement to launch additional transatlantic routes which would have significant benefit for tourism and business in Ireland. The industry, going forward, will continue to be brutally competitive. The general assessment is that the current price war is likely to continue during the next 18 to 24 months. We are in agreement with that assessment. It is on that background we will produce our plans for Aer Lingus in the coming years.

Mr. Brian Dunne will address some of the specifics of the questions asked.

My question related directly to how the aviation environment will, during the next number of years, require an alteration of capital and corporate structures. I would like Mr. Walsh to address that question.

Mr. Brian Dunne

Before dealing with that matter, I will add some specifics as regards our market position in terms of the aviation industry. There have been significant changes in the market during the past ten years. It is important to recognise precisely where Aer Lingus stands in the context of the Irish aviation market.

I will first address Aer Lingus in terms of how it relates to London. I will then speak about UK provincial and some continental destinations. These matters are quite relevant to this issue.

With all due respect, I have raised two very specific questions. We do not get an opportunity to raise such questions regularly. It is possible there will be major proposals to change the corporate and capital structure of Aer Lingus. I have raised very specific questions on the justification in that regard. There are two senior executives from Aer Lingus at this meeting from whom I would like an answer to that question. I do not, with all due respect to Mr. Dunne, wish to hear about routes to Europe. I want to hear about the justification for the changes.

Mr. Dunne

I will deal briefly with this matter and will then reply to the Deputy's question. This issue is significant to the other questions.

Aer Lingus captures approximately 30% of the London market out of Ireland. It is not a majority player, rather it is a minority player on the London market. Aer Lingus operates to London-Heathrow while other players operate to multiple airports within London. On the UK provincial routes, our market share is less than 25%. One of our main competitors on the UK provincial routes has a market share in excess of 50%. It is important to recognise that in that market Aer Lingus is, again, a minority player.

Our market share across all continental routes is approximately 50%. It is clear to anybody looking at the media during the past couple of months that competition is increasing quite significantly. Members will have seen advertisements across the board from Ryanair in terms of new routes into Spain, German Wings into Germany and Basic Air into the Netherlands. It is fair to say that the market is very competitive. That is the backdrop to how Aer Lingus is operating in a completely competitive market in which it is but one significant player in the Irish context.

It is in the context of that level of competition in the marketplace that Aer Lingus needs to examine its average fare position. The average fare last year was €83, not far off double the average fare of other players in the market. We must continue with further relentless and aggressive reductions in our cost base if we are to offer fares that are sustainable in the market. An average European fare of €83 is not sustainable.

On funding, in addition to the focus during the past couple of years on cost reduction, Aer Lingus has also focused on improving its balance sheet position. That has been achieved by improvements in its operating performance but also by identifying a series of asset sales and working capital improvements. In that regard, the financial position has been strengthened.

Aer Lingus also initiated a review of fleet requirements in June 2002. The purpose of that review was to identify whether further significant reductions could be achieved in our average unit seat costs by moving to a single fleet type at a time when fairly few players were buying aircraft in the industry. This would have enabled us to eliminate a number of the obvious inefficiencies in having multiple fleet types. That work, which was very intensive and detailed and was conducted over 15 months, came to a conclusion in September 2003. By tailoring the deal to our specific circumstances, we managed to finalise it without recourse to additional equity investment. That deal resulted in Aer Lingus transitioning to a single fleet type for 27 aircraft by end 2005.

It is important to state that the deal involved the acquisition of aircraft, the lease of aircraft and the sale of some existing aircraft. In terms of moving forward, Aer Lingus has no firm plans to add additional aircraft over and above its current fleet. Clearly, any additional aircraft would require significant additional investment. We would need to consider whether we could move beyond the number of aircraft at this point in time. I cannot give any assurance that we can move beyond 27 short haul aircraft without additional equity investment.

We have now initiated a review of our long haul fleet requirements in the context of potential market opportunities on the transatlantic and other long haul destinations which could include places such as the Far East, the Middle East and South Africa. Clearly, any additional market opportunities would require additional aircraft. It is important to recognise that the cost of each long haul aircraft is likely to be well in excess of $100 million.

Aer Lingus has made much progress in terms of improving its financial position. It has also made progress in reaching the end of its evaluation of its European fleet and concluding a carefully tailored and structured deal in that regard. It is clear that the environment in which Aer Lingus is operating is brutally competitive and is becoming more so by the day. Our revenue base is unsustainable and any further expansion - Aer Lingus needs to expand very significantly - will require additional aircraft and funding.

Given the presentation earlier on the Government's position, it is clear that Aer Lingus has no access to extra funding from its existing shareholder. Its actions in terms of running the business have to be driven by the fact that the only funding it can secure is funding generated by driving operating profits and cash from the business.

Up to now, Aer Lingus was able to do so without recourse to other funding.

Mr. Dunne

We have managed to do so in the context of standing still in terms of the number of aircraft we hold.

Mr. Dunne mentioned that if the position regarding the direct flights to 16 different cities in America changed, Aer Lingus would be able to take it up immediately. While Aer Lingus might be able to handle it, would Dublin Airport be able to do so?

And Shannon.

Mr. Walsh

It would be possible to respond to a change in the bilateral by launching a number of new routes in a short period of time. Some of the destinations could be served by our existing fleet. In other words, there is some spare capacity within the existing fleet.

We believe the existing airport infrastructure could cope with some limited expansion. The point, however, is a valid one. If there is to be significant expansion - and I have no doubt Aer Lingus would not be alone in seeking to increase capacity on the transatlantic - we will witness the entry into the market of a number of additional airlines. Airport infrastructures at Dublin and Shannon would need to be addressed in that regard.

Would we not look fairly foolish - I know I will upset some of my colleagues with this comment - if the routes became available but we did not have the capacity to service the airlines, including Aer Lingus, using them?

Mr. Walsh

There is scope within the existing infrastructure. Dublin Airport is not a fully co-ordinated airport. The Commission for Aviation Regulation is undertaking a review on that. A previous review by SH& E, undertaken in 2000 at the request of Aer Rianta, to designate Dublin Airport as a fully co-ordinated airport reached the conclusion that it was not necessary. However, it did identify that at peak times the airport was operating at or near capacity. There is scope to add capacity and the infrastructure can cope with expansion in the short term.

Aer Lingus hopes, without any changes in the US market, to expand to carry 7 million passengers a year. I presume most of the other airlines want to increase their capacity. As most of us are consumers and users of Dublin Airport, we find it difficult to believe, considering what it is like at certain times, that it has the capacity to carry those extra numbers.

Mr. Walsh

I am pleased to say that it does have the capacity. I made the point when addressing the committee previously that we can become more efficient. Look, for example, at what Aer Lingus is doing. One of the ways we are generating additional capacity is through increasing the average size of our aircraft. We are using larger aircraft and the existing slots to transport more people. We are also turning our aircraft around more quickly, thereby freeing up additional capacity on airport stands. This model has been in place with the low-cost carriers for some time. It is clearly more efficient and is being adopted by Aer Lingus. Since December 2003, we have introduced 25 minute turnarounds on a number of our flights and that, in effect, is driving additional capacity availability at the airport. I have no worries in the short term about being able to significantly increase our capacity without——

I am asking about capacity to handle those numbers.

Mr. Walsh

——being constrained by airport capacity. I accept it is possible that if there is a boom in traffic figures or aircraft movements, the airport structure will require change.

The limiting factor at Dublin Airport with regard to long haul activity is the number of airport stands that can cope with wide body aircraft. Only a limited number of wide body stands are available. However, arrangements could be put in place in the short term. We use some already, for example, the use of remote parking or in some cases the aircraft comes on stand, the passengers are deplaned and the aircraft is then towed to a remote stand to facilitate the use of the existing infrastructure. However, this is not ideal.

I do not have concerns about short-term capacity increases. I am confident that if the opportunity is presented to us in the form of a change in the bilateral, we are in a position to respond positively and quickly. That is dependent on the availability of aircraft. We know there are aircraft available in today's market. If, however, the change in the bilateral comes a year or two from now, I cannot guarantee that. A different level of availability may prevail at that time.

It was in this context that Mr. Dunne addressed the capital requirements of the airline and that we accelerated our review of the short haul fleet, given that we were examining it at a time when aircraft manufacturers had few customers. Timing is critical in these matters. We are fortunate that the action we have taken over the past two years has put us in a position whereby we are able to respond to the market opportunity and conclude a transaction on the 17 Airbus A320 aircraft that we will require over the next 18 months and to do that without recourse to any external funding. As Mr. Dunne said, there is no guarantee in these matters. Our assessment is that we will not be in a position to do that if we expand the short haul fleet beyond the 27 aircraft we have targeted or if we add any significant number of additional transatlantic or long haul aircraft to our fleet.

I wrote letters to both Aer Lingus and the Department of Transport but I regret to say that a month later I have not received a reply. However, I will ask my questions again. I am bemused by the use of phrases such as "aggressive cost cutting measures" here. Can Mr. Walsh or Mr. Dunne confirm that 42 pilots who have not flown an aircraft since last November are currently on full pay? What are the costs involved in that? Will they also confirm that Aer Lingus paid in the region of €1.2 million in overtime payments in the last eight months of 2003 and that the projected overtime payment for 2004 is approximately €2.5 million? Why did the pilots not transfer automatically to new aircraft when the BAE 146 aircraft was discontinued last November, or why were conversion courses not provided immediately?

Today we heard that new services are being introduced on six new European routes in 2004. Mr. Dunne referred to 17 new aircraft in the pipeline in the next 18 months and to additional aircraft coming further down the line. Not being facetious, I presume those aircraft need pilots. I cannot understand the logic of Aer Lingus getting rid of pilots or why 42 of them are not flying but on full pay. Do Aer Lingus and Mr. Walsh want those pilots to be let go and then rehired on a contract basis where Aer Lingus would have no liability in terms of pensions? What game is being played?

The families are not being treated fairly. The pilots do not know what is happening. They are out of work six months now and are not happy with how they are being treated. I would like to hear the figures in this regard.

Like Senator Browne, I want to comment on the "aggressive cost cutting". Costs have been dramatically reduced at Aer Lingus over the past number of years. How far does aggressive cost cutting go?

Reference was made to a quality service and low fares. I am interested to hear a definition of quality service. It appears that the way matters are heading, the only difference between Ryanair and Aer Lingus is the destinations to which they fly. We read recently about the elimination of business class on Aer Lingus flights. I am also informed that plans are at an advanced stage to eliminate automatic baggage transfer at destination airports. Will Mr. Walsh comment on that? What does Aer Lingus see as its optimum staff overhead and what is the current ratio of staff per aircraft?

Mr. Walsh

I will address the Senator's questions first. It is correct that at least 42 - I think the number is 46 - pilots have been on full pay and not flying since mid-November 2003. Those pilots were flying the BAE 146 which was removed from service as part of our fleet plan and the business plan to which Mr. Dunne referred. The pilots have been the subject of a dispute. We wanted to put them to work and feel it is unacceptable that people should be paid to stay at home. They refused to agree.

It is also important that of the 46 pilots, only four - despite the issues highlighted and the concern expressed by the Senator - have asked to be retrained. Only that four have asked to attend a training course scheduled to commence on Monday of next week. The remainder of the pilots indicated that they did not wish to do so. That is unacceptable and it clearly demonstrates that we have a surplus of pilots. That surplus of pilots has been generated by Aer Lingus becoming more efficient and it will be exacerbated by the move to a single aircraft type which is clearly much more efficient than operating three individual aircraft types.

I discussed this matter with the committee the last time I attended. We can significantly increase our capacity and the number of destinations without the requirement to recruit or to utilise, indeed, all the pilots we currently employ by becoming much more efficient. That was the underlying basis to the significant capital expenditure associated with the purchase and lease of 17 new airbus A320 aircraft.

The issue must be addressed and we are in the process of doing that. We were in the Labour Court on Monday and Tuesday. I am expecting a recommendation from the Labour Court regarding this issue this morning. I am not aware whether it has been issued yet. I assure the committee that the cost associated with this situation, which is approximately €5 or €6 million per annum, is a cost that must and will be addressed by Aer Lingus because it is clearly not sustainable that we should incur such significant additional cost in the current climate.

If there is a surplus of pilots, why is the company paying out €3 million in overtime? Is it correct that the company expects captains to fly as co-pilots, which is a demotion? Will there not then be a problem as to where the co-pilots go? It is very unfair to state that the pilots are not available to work; they are available to work.

Mr. Walsh

Pilots are not paid overtime. That is a complete misrepresentation of the payment structures that apply to pilots and it has been used to make this issue more emotive. The pilots' pay system is designed to pay a basic pay and what is known as a performance-related pay which is triggered by individual performance when certain thresholds are exceeded. That system is similar to those used in many other airlines. It is in place in Aer Lingus and was agreed in 2001 or 2002 and implemented at the end of February 2003. It is not an overtime system. The system is designed to generate payment. I reject the suggestion. There is no overtime payment.

On a related point, the 42 or 46 pilots are out of pocket on that issue alone. They are on basic pay.

Mr. Walsh

Again, there is no problem——

Mr. Walsh is muddying the waters.

Mr. Walsh

There is no problem there in that the system pays a basic payment and pays a supplementary payment where individuals exceed certain thresholds. It is designed to reward individual hard work. It is not an overtime payment. It was a system that was agreed.

On the issue of captains flying as co-pilots, it is often a feature of the industry that captains operate as co-pilots. That can be on an operational basis from day to day. We have indicated that those captains who are not required as captains, given the change in the fleet structure, will continue to be paid as captains while operating as co-pilots. There is a very clear surplus of pilots within the airline and that surplus has been generated by the efficiencies which the company has introduced in recent years and by the efficiencies——

Will Mr. Walsh——

I ask Mr. Walsh to answer Deputy Glennon's question.

Mr. Walsh

Deputy Glennon's question is very appropriate and one which the company debates internally on a regular basis. It is very clear to Aer Lingus that in the past and probably in common with many other traditional airlines, it has over-promised in terms of its customer service but consistently failed to deliver. What has become clear to us over the past two years, following our own experience and from detailed customer research, is that the customer is demanding certain basic levels of customer service that must be delivered and which we believe are critical to our future success. They relate to issues such as punctuality, which is something to which we pay careful attention, professional and efficient customer service. Our recent investment in self-service check-in facilities at Dublin Airport has been welcomed by our customers because they see it as a very significant customer service feature. We intend to continue to focus on those critical issues.

Probably the most significant issue and one which clearly differentiates Aer Lingus from the traditional no-frill, low cost carrier, is the fact that we do not cancel flights willy-nilly. Aer Lingus makes every effort to transport customers who buy our tickets. We incur significant costs to ensure that we deliver on that promise. There is a difference in the airports we serve; it is not as significant a difference as it was in the past but it is very significant for our customers. We continue to commit ourselves to flying to where the customer wants to go. We are a customer-driven organisation.

Some of the service features provided by Aer Lingus are important, including seat assignment. It is clear from our customer research that our customers value that service and we will continue to provide it. We offer a facility to interline with other airlines and that is an important feature of our business. It is probably less important today than it was in the past, given our success in opening a significant number of additional direct routes out of Ireland. In the past it was almost a requirement for passengers to travel over an intermediate to get to many of the European destinations, but that is not the case today with the 28 new routes which Aer Lingus has opened. Our focus is very much on opening more direct routes out of Ireland, thereby reducing the importance of that interline feature. That feature remains in our service and we continue to evaluate it because there are very significant costs associated with it. We will keep the issue under review. However, Aer Lingus will provide that service to its customers so long as there is a demand for it and if that demand can be justified in terms of its cost.

The elimination of our business class product was a decision driven by customer demand or the lack of customer demand. We evaluated the demand for this service over a 14-month period in which we were able to assess the true demand for the service. Previously, it would be fair to say that for passengers to avail of flexibility with the traditional carriers they were almost forced to travel in business class. Since October 2002, Aer Lingus has fully flexible fares available in economy cabin. It became very clear to us that with the introduction of flexibility and the monitoring of purchasing patterns over a 14-month period, the true underlying demand for that type of service has significantly reduced, to the extent that in 2001 business class represented approximately 13% of our total passenger numbers. In 2003 that figure was 7% and it is expected to be 4% in 2004. The demand for that service has reduced.

It was traditionally viewed that the people travelling in business class were business passengers or corporate customers of Aer Lingus. Most if not all of our corporate clients have introduced economy travel policies since 2001. Those policies are in place and are very effectively monitored. It is in response to the demand from our customers that Aer Lingus has reassessed the provision of that service. The service continues to be provided on a number of limited routes and that will be reviewed at the end of this summer. We will assess it in light of the demand we see for the service during the coming months.

In light of the flexibility that Mr. Walsh has introduced in the fares structure, perhaps he might examine on behalf of a particular niche market - larger-framed passengers - the introduction of flexibility in the amount of space devoted to each seat.

Mr. Walsh

The Deputy's request has been noted.

I am always amused when I hear departmental officials, as well as others such as Mr. Walsh, using words such as "brutally competitive" and "cost cutting". Such notions have been accepted in the private sector - the free world - for generations, but have come to the aviation industry in recent years. One wonders what would have happened and how much we would be paying for our flights if such words had not entered the aviation sector.

I am also amused to hear that some people would like Aer Lingus to be a job creation agency. Aer Lingus has shed jobs and become more cost competitive, but some people want to know when it will start recruiting more staff. It has become more profitable because of job losses.

I wish to look to the future and to address some questions to Mr. Lumsden and Mr. Walsh. Where does Mr. Walsh see Aer Lingus in three to five years? What level of service will it provide at, and operating from, Shannon Airport? I refer to services to America in particular. The Government will have to take strategic decisions in the bilateral agreements, especially in respect of regionalisation. When one examines the importance of Shannon, one sees the importance of US investment there. Some 50% of US investment in this country is based east of an imaginary line between Athlone and Cork, a region in which just one third of the population lives. It is important to have an airline in that area to service that territory.

I would like Mr. Walsh to speak about the future of Aer Lingus, in which the Government is a stakeholder. Is it possible that its future will involve a strategic partner, either in the east or west directions? What does Mr. Walsh think about the prospect of teaming up with British Airways, for example? Can Mr. Walsh and his management team outline the plans, if any, to put in place an incentive plan for the management of Aer Lingus, in the event of privatisation?

Mr. Walsh

I can answer the Senator's final question by saying that I am not aware that any such plans have been proposed or sought. The prospect of such a plan is completely hypothetical.

Was Mr. Walsh looking to Mr. Lumsden?

Mr. Walsh

No. I can go on the record as saying that it is not an issue.

It should be an issue.

Mr. Walsh

We have not looked for such a plan, there has been no consideration of it and it is not in place. I do not expect that such a plan will be put in place.

I was thinking about the prospect that some people might be offered jobs for life, like the pilots.

Mr. Walsh

The future of Shannon Airport is an interesting issue. I spoke about it yesterday with the body that reviewed the output of the tourism review group last year. The split of transatlantic traffic between Dublin and Shannon is approximately 60:40. It is clear that the Shannon market is much more seasonal than the Dublin market. The demand at Shannon is driven by demand from the US to a much greater extent than the demand at Dublin. I said earlier that approximately two thirds of transatlantic passengers originate in the US, but the figure is nearer 80% if Shannon passengers are considered alone.

There is a demand for a service into Shannon, but it is predominantly from people in the US who wish to come to the Shannon and western regions. The demand at Shannon is much more seasonal than it is at Dublin, but it is very real. As the biggest airline at Shannon, Aer Lingus is committed to serving that demand. It is increasing its capacity from Shannon this summer. It has re-introduced a direct service from Shannon to Chicago and I am optimistic that the service will operate. The overall capacity from Shannon has been increased this year. We saw traffic growth in Shannon last year.

What about in three years time?

Mr. Walsh

I want to put it into context. Aer Lingus has demonstrated that it is committed to Shannon. We envisage that there will be demand for services to the US, predominantly to east coast locations such as New York and Boston. Demand is very strong during the summer but it is not as strong during the winter. We will continue to provide daily services to New York and Boston. It is likely that services during the winter will continue as they are at present, with flights originating in Dublin transiting through Shannon to serve New York and Boston. Aer Lingus is committed to serving the demand that exists for such services.

We will operate any service to Shannon that can make a profit. It is most important to recognise that the cost of operating through Shannon is higher than the cost of operating through Dublin. That critical issue must be addressed. We have clearly supported an autonomous and independent board at Shannon for that reason. Such a board will provide a focus on the requirements for the airport. I know that position has been supported by business interests in the region, generally speaking, which is important. I have stated that the cost of operating through Shannon is higher than the cost of operating through Dublin.

Can Mr. Walsh equate the cost per seat of operating through the two locations?

Mr. Walsh

I do not want to give a figure in case I get it wrong, but I will be happy to provide a figure to the members of the committee later this week.

I would like to speak about Aer Rianta's pricing policy at Shannon. Where prices have increased, Aer Rianta has made clear that it is not charging the maximum it could charge under the cap set out by the Commission for Aviation Regulation. It is possible that airport charges at Shannon could significantly increase under the existing regulatory environment, but it would be an extremely negative development. I have criticised Aer Rianta's charging policy at Shannon Airport because it is not an incentive to serve the airport. It is clear that one will not attract new and additional business to the airport if one's pricing is expensive. Someone said yesterday that one will not attract low fares and low-cost operations to an airport that has a regime of high costs and charges. That critical issue must be addressed.

Having spoken to a number of the members of the proposed Shannon Airport board, I am confident that they clearly understand the issues involved. I agree with Mr. Lumsden's statement at the beginning of the meeting that the new board is high-powered and has many quality business individuals who can understand these issues. I believe that the establishment of the new board will be a positive development for the airport.

We are well on the way to cheaper prices.

Flattery will get one everywhere.

Mr. Walsh

The critical issue for Shannon Airport is the cost of operation there. I have to recognise that Aer Lingus's cost of operation at Shannon Airport is higher than it is at Dublin Airport or Cork Airport. We are setting out to address this issue, which has to be the critical feature of any business.

I agree with the committee, as I did on the last occasion on which I spoke at this forum, that we have not invented the idea of cost control. Senator Morrissey was right to suggest that it may have been embraced somewhat later in the aviation industry than in other industries. Having embraced the notion of cost control, Aer Lingus is determined to pursue it. We need to do a great deal more work in terms of our cost structures.

The issue of strategic partners has been examined from time to time. It is fair to say that a good working relationship and bilateral commercial arrangements are in place with British Airways and American Airlines through our membership of the One World Alliance. The relationship with British Airways in particular has probably been less significant as we have developed more direct routes from Ireland. The dependence on Heathrow Airport and on feeding traffic over it is reducing all the time. As we open more direct routes, the need for people to travel over intermediate points is reduced. We have a positive relationship with both of the airlines through our membership of the One World Alliance. This has been the case for some years and I expect it to continue. While it has been positive for Aer Lingus in recent years, its importance is diminishing as we expand our routes directly.

I would be very surprised in the event of a change in the bilateral arrangements if American Airlines failed to enter the market directly rather than allow Aer Lingus to provide all trans-Atlantic services on its behalf. Despite the fact that we have a good relationship with the airline, I have no doubt that if the opportunity presented itself, it would begin to compete with us.

I am astonished to hear Mr. Walsh say Aer Lingus is increasing services from Shannon Airport. I attended a meeting there with my colleagues some time ago and saw the bewilderment on the faces of the airline's workers. One need only consider the circumstances since 11 September 2001 to realise that Shannon is the airport which has suffered most.

Mr. Walsh spoke of 27 new routes to continental Europe, but not one of those services is from Shannon. He spoke of increasing transatlantic business also. Flight EI 111 will fly from Dublin directly in the summer. Obviously, a percentage of passengers will be sold tickets on that flight. Looking at the Aer Lingus website this morning, I saw that seats on EI 111 were cheaper than to travel via Shannon, which constitutes an attraction to fly on that aircraft. Why has the decision to originate EI 111 in Dublin been made?

A few years ago, there were 500 cabin crew based at Shannon Airport whereas there are now 245. Mr. Walsh is now seeking to halve the number of handling crew at the airport also. If Aer Lingus plans to reduce staff, it will reduce services. EI 135 to Boston flew from Shannon Airport seven days per week last year. Why has the service been reduced to five days per week in this year's summer schedule, given the fact that there was over-capacity on the flight most days?

Mr. Walsh mentioned a five-year business plan for Aer Lingus as a whole. Does he have a business plan for Shannon Airport, particularly for the five new transatlantic routes he will seek to open if there is a change in the bilateral agreement? How many of those flights are envisaged for Shannon Airport given the spare capacity of its terminal which can accommodate 5.5 million passengers per annum? The Chairman spoke earlier of capacity at Dublin Airport.

In identifying the five new routes into Ireland, is it not a problem for Aer Lingus that its US competitors will see the same opportunities and identify the same markets? They will offer discount fares also. Aer Lingus is a very small airline when compared to the mega carriers and it does not have many spare aircraft.

Mr. Walsh says costs are higher at Shannon Airport and will furnish the committee with details later. Does he have any plans to open continental services to Shannon Airport? Perhaps the accountant who accompanies him could identify the proportion of Aer Lingus profits derived from transatlantic business. What percentage of Aer Lingus flights involves hubbing, where the company takes passengers from regional English cities to the USA via Dublin Airport? One can buy a flight in sterling from Bristol to the USA via Dublin from the Aer Lingus website.

Is it not the case that the idea of an open-skies policy is being used as a cover to downgrade Shannon Airport significantly? Is this not the real game play under consideration today? Irrespective of the soothing noises Mr. Lumsden and Mr. Walsh are making about the future of Shannon Airport, is it not the case that Aer Lingus wishes to concentrate on Dublin and operate solely on commercial grounds? Is it not also the case that the Department of Transport is more than willing to facilitate the company in doing that? Irrespective of the talk of a new board consisting of high-powered members, Shannon Airport does not have a very bright future if the dual-gateway policy is abandoned and it is cut loose from Dublin.

Mr. Walsh has already stated that a major problem with Shannon Airport involves its charges. Charges have been kept at current levels because Dublin Airport has been subsidising it. The Government seems intent on ending that state of affairs and cutting Shannon loose. How can the charges be brought down in that scenario?

We know from the report of PricewaterhouseCoopers that there are serious questions about the future of Shannon Airport as a stand-alone body. We should be frank about the matter. I would prefer if Mr. Lumsden were not speaking for Aer Lingus and was more frank about the real policy. I recall hearing Mr. Walsh speak on "Morning Ireland" about his plans under an open-skies arrangement to generate new business from Dublin. While that is great, he failed to make any reference to his future plans for Shannon. Certainly, Mr. Walsh's comments today do not indicate grounds for optimism in terms of his vision of the future of Shannon Airport.

Can Mr. Lumsden confirm that Europe is not remotely interested in a private domestic arrangement in Ireland on the dual-gateway policy? That has been established for some time by interests at Shannon Airport. A dual gateway is a minor issue of no consequence to anybody in Europe and there would be no difficulty in maintaining the arrangement. Does Mr. Walsh see any future for Aer Lingus operating from Shannon Airport? Does he consider Aer Lingus as the national carrier to have a role in regional development?

Mr. Walsh speaks about the need to make the company leaner and more competitive, which we all welcome. However, we believe that as national carrier, Aer Lingus has an obligation to have some regard to the need for regional development. Irrespective of the nice comments Mr. Walsh and Mr. Lumsden have made about Shannon and regional development, is it not the case that the way aviation policy is moving, driven by Aer Lingus and, to a very great extent, the Department, there is no real future for the airport? The aviation industry will concentrate on the eastern seaboard more and more.

Is it not the case that Aer Lingus wishes to function as do other airlines by establishing a hub and operating out of one major Irish airport? I would like to hear the comments of Mr. Walsh and Mr. Lumsden on that. If one views the issue from a purely commercial point of view, that makes absolute sense. From a policy perspective and the political interests of the country and the need to maintain a semblance of balance between the east and west coasts, it is not the approach to adopt. We should be frank. We should not pretend to people in the mid-west that anybody considering aviation from a purely commercial perspective is remotely interested in the region.

My second question involves ownership.

The Deputy should ask a direct question.

How will the privatisation of part or all of Aer Lingus assist the capitalisation of the company? It is not the case, as some people have indicated, that the company would receive the money generated from such a sale. It would go into the Minister for Finance's coffers and would be of no benefit to Aer Lingus. Why is the Department proposing this route as opposed to a strategic alliance that would enable the company to get access to capital from other sources, while retaining it in public ownership?

I agree with the Chairman that Aer Lingus may be able to get greater capacity within the company. However, Dublin Airport is close to full capacity and the issue needs to be urgently addressed. Is it not the case that if the current Minster had not put the kibosh on Pier D, a new facility would have opened at the airport this year and solved capacity problems? Why has he held up the possibility of further expansion at Dublin Airport by stopping Pier D?

Mr. Lumsden

The Department does not speak for Aer Lingus. The company speaks for itself and it is a long time since the Department spoke on behalf of Aer Lingus on the issue of aviation or vice versa.

I reject any idea that one part of aviation policy is being used as a cover for doing something else. Aviation policy is not formulated or promulgated in this manner by the Minister or the Department. I hope my answer on that point is sufficiently straightforward.

One can espouse one of two visions for Shannon Airport. As regards the first, maintaining the status quo, representatives of Aer Lingus, a State-owned company which happens to be the airport’s biggest customer, outlined the problems they have with the airport’s costs. That is the status quo option.

The European Union and the United States will do a deal which will result in open skies between the EU and the US. The only question is on the timing. It is not reasonable to characterise the position in Brussels or Washington as one of not caring about what we do as regards the Ireland-US element of such an overarching deal. The Ireland-US market is a significant element in the total US-Europe market. It would be a mistake to believe that Ireland could opt out of an agreement between the United States and Europe aimed at liberalising aviation between the two continents, while also expecting our airlines to benefit from all the advantages such an arrangement would produce. If, for example, all airlines were given equal opportunity to fly from any country to the United States, Aer Lingus would benefit from being able to fly to the US from other European countries. The Deputy is mistaken if she is making such an argument.

That is not my argument.

Mr. Lumsden

The other vision of Shannon Airport's future is the option chosen by the Government, namely, the separation of Shannon and Dublin Airports from Cork Airport. The Deputy referred to subsidies moving between Dublin and Shannon Airports. Clearly a large part of the rationale for the Government's decision is that Shannon Airport requires a new board and new management which does not view the first option as a rational basis to proceed.

I have already outlined all the respects in which the Department's policy, not just on aviation, will be aimed at helping and supporting Shannon Airport. The Minister is pursuing this vision for the reasons I have given, not as a pretext for doing something else.

As Mr. Lumsden is aware, I support the Department's approach on that issue.

Mr. Lumsden

In making these points, I am trying to be straightforward and avoid making soothing noises. The Deputy is correct to draw attention to the problem of capacity at Dublin Airport. The Department regrets that it has not been possible in recent years to develop facilities at the airport more rapidly.

The Minister stopped Pier D.

Mr. Lumsden

I was about to explain the reasons for his decision. The merits or otherwise of the concept of an independent, competing terminal for Dublin Airport, which the Minister intends to bring to Government as soon as possible, have been examined by a panel headed by a former Secretary General of the Department of Finance. One of the points to emerge from the group's report was that the Mullarkey group felt a conflict could potentially arise if, as Aer Rianta wished, Pier D proceeded, and the Government later decided to invite the private sector to build a terminal at the airport.

This issue was referred to in two respects by the Mullarkey panel. In one respect, the question is purely one of location. The site chosen for Pier D conflicts with one of the potential sites identified in the private sector expressions of interest generated for a second terminal. Second, the panel expressed the view that in the event that the Government proceeded to invite the private sector to build and operate another terminal, it could find it difficult to generate market interest if Aer Rianta had already proceeded to develop the next major tranche of investment in Dublin Airport.

I should note, and I do not speak on behalf of Aer Lingus on this matter, that the major airline customers of Dublin Airport have indicated they do not favour Pier D on cost grounds alone. The Department is not making a judgment on the issue, as it is not our place to do so, but we are aware of it and we consider it relevant in the overall scheme.

The Minister has not told Aer Rianta it may not proceed with Pier D, but requested a short breathing space to resolve the issue of the possible development of a second terminal without the threat of conflict arising as a result of a decision on Pier D. He and the Department are trying to resolve issues that require a resolution in order to crystallise the issue.

The project will probably take the guts of four or five years to complete, once the decision to proceed with the construction of a terminal has been made. Even the conservative figures produced by Mr. Walsh envisage that one carrier alone, Aer Lingus, will carry in excess of an additional 2 million passengers over this period. Given that the current terminal will probably grind to a halt in five years' time due to capacity problems, must it not be made a priority?

Mr. Lumsden

The issue of capacity is a source of considerable concern to the Department, not only as regards Pier D but also, as the Chairman correctly pointed out, terminal capacity generally.

Does that include runway capacity?

Mr. Lumsden

Runway capacity is another issue. There is a long-standing proposal for another parallel runway at Dublin Airport. The Department would like these issues decided as soon as possible in order that——

The Department is holding up decisions.

Mr. Lumsden

I regret that is the case with regard to Pier D. The Minister has directed the board of Aer Rianta not to proceed with its development for a short period, during which he will try to resolve the issues I have mentioned because they impinge on Pier D.

Pier D would be open if the Minister had not blocked it.

Will Mr. Walsh respond to Deputy Shortall's questions?

Mr. Walsh

I will address Deputy Pat Breen's questions first. My figures on transatlantic services are from memory and may be wrong. In 2003, 80% of Aer Lingus flights to Boston, 100% of its flights to Baltimore and 52% of its flights to JFK Airport in New York operated through Shannon Airport. None of the company's flights to Los Angeles operated through the airport and no flights to Chicago departed from it, although a number of those operating through Dublin Airport originated in Shannon. With regard to flights to Boston, for example, 80% operate from Shannon Airport, whereas 80% of passengers do not.

The current bilateral creates an artificial scenario. We operate 50% of our flights through Shannon to comply with the bilateral, with which we have complied and always will. To do that and get a balance and also to ensure that we can operate in an efficient manner, it is not the case that 50% of the flights to all our destinations operate from Shannon and 50% from Dublin. It is not as simple as that - it is much more complex. The figure I gave earlier was that 60% of passengers were Dublin passengers and 40% were from Shannon. There is perhaps also some artificiality around that. If a totally open market scenario were to apply, that might change. As we see it at present, the transatlantic situation is very much dictated by the constraints of the bilateral.

What is important to point out, and this is frustrating from an Aer Lingus point of view, is that the American carriers, which are our competitors, have total freedom to serve Ireland from any destination in the United States. There is no constraint on our competitor airlines. It is a crazy situation that we can have competition from any destination in the United States, from any US carrier, and we cannot respond to it. That is not only frustrating, it is unacceptable. We would serve other destinations in the United States, which the carriers that are free to do so are not doing, with the exception of Delta Airlines which operates from Atlanta and US Airways which operates from Philadelphia. They do so, solely on a seasonal basis, and based on concessions in terms of charges which they get from Aer Rianta.

Due to occupancy rates of 94% on flights last year, I understand that they are going to extend their season. Continental has already stated its intention to extend its season into Shannon and Dublin at the end of the year.

Mr. Walsh

I am pleased to hear that, although I very much doubt that US Airways had occupancy rates of 94%. In fact, all the evidence I have seen would contradict that. I am pleased to say that in 2003 Aer Lingus carried a record number of transatlantic passengers when most other airlines operating on transatlantic routes recorded decreases in passenger numbers. Our load factor over the year was 86%, which again is a record, and one that I do not believe any carrier surpassed on transatlantic routes.

We provide year-round transatlantic services from Dublin and Shannon and we are committed to doing so. The carriers in the United States are free to fly into Ireland from any destination, yet they do not. Aer Lingus wants to fly into other destinations to provide access for business and tourism.

On average, prices out of Shannon for Aer Lingus operations in 2003 were 15% lower than Dublin on transatlantic routes. That is a fact. Some 37% of revenue in 2003 came from our transatlantic operations. The profitability contribution is in line with the revenue contribution. In Shannon, our prices are lower than in Dublin and costs are higher. The combination of lower prices and higher costs led to a lower profitability contribution from Shannon. The majority of profitability on transatlantic routes was generated from our Dublin routes.

Plans for the airline to operate continental routes out of Shannon are very clear. We will do so if we have a profitable opportunity. I do not apologise for that. Given where we were in 2001 and given the stark realities of what we faced in the immediate aftermath of the events of 11 September 2001, we have to be focused on commercial activity and profitability. We also have to focus on generating cash resources from our operations. It is important for me to point out, although it may not be a welcome note for those who are representative of the Shannon district, that we have increased our services out of Cork. We added five new continental destinations from Cork. It is not a case of Aer Lingus solely being focused on Dublin, although that is often represented as being the case. We will look at opportunities to serve Dublin, Cork and Shannon but we must be focused on the costs and the profitability of those operations.

We have limited aircraft resources. My colleague, Mr. Dunne, indicated that we have to be very conscious of what we can afford to do from our own resources. That was a significant part of our analysis when looking at the decision to acquire 17 new Airbus A320 aircraft. We had to be conscious of the funding available to us. We do not have access to funding from our shareholder. This point was made at the very beginning and that was the context in which Mr. Dunne set out our future requirements. We do not have the ability to go to our shareholder and ask for funding. We are pragmatic on that issue. It is absolutely clear to everybody.

When we needed money in 2001 to fund rationalisation in order to try to survive, no financing was available to us from our shareholder because of restrictions on EU state aid. We had to sell assets to live through the immediate crisis. We had to sell aircraft to generate cash. We had to sell anything that was surplus to our requirements. We disposed of all assets in an effort to generate cash to fund the ongoing operation of the airline and to fund the rationalisation programme. That is the context in which we operate today and we have to be conscious of that. We are commercially focused. We are clear that in this competitive business we have to maintain that commercial focus; we have to be driven by profitability and we have to be careful that any plans we have can be resourced and funded from internal resources. That is why we have such a significant emphasis on the ongoing requirement to reduce our cost base to ensure that we can continue to be profitable in a situation where fares continue to reduce. They have significantly reduced since 2001 and they will reduce in 2004 and again in 2005.

Mr. Walsh did not answer the question about EI 111.

Mr. Walsh

It was unprofitable.

I know people who regularly have to go through Heathrow to get to the US.

Mr. Walsh

With load factors slightly in excess of 50%, it had the lowest load factors on our transatlantic operation. These are the facts.

Can Mr. Walsh give us the figures? I asked him twice before for them, yet he did not give me them.

Mr. Walsh

I can give them to the Deputy. I reiterate that the load factors on EI 111 which originated and terminated in Shannon were the lowest load factors on our transatlantic operation. It was unprofitable and in order to make the route profitable we commenced and terminated the route in Dublin in order to supplement the local traffic at Shannon with additional traffic at Dublin. That has been successful. It has turned what was an unprofitable operation into profitability.

It was so successful that one cannot get a seat out of Shannon. People are going via Heathrow.

Mr. Walsh

I am delighted to say that with a load factor of 86% on transatlantic routes, it is clear that Aer Lingus is doing something right. Aer Lingus is absolutely clear in its desire to expand transatlantic operations. That is the basis on which I have been campaigning for a change in the bilateral agreement. One cannot expand transatlantic operations under the constraints of the current bilateral agreement. We would be forced to add additional capacity where there is no demand. We have to be conscious of the fact that when we add additional aircraft, we have to utilise those aircraft profitably on a year-round basis, not on a seasonal basis. We do not have the opportunity that a carrier like US Airways has where it can dip into the market during the peak season when there is much higher demand.

There is much higher demand at Shannon during the peak period than during the off-peak period. It would be commercial suicide for Aer Lingus to add capacity to address a peak demand requirement when there is absolutely no demand for that capacity in the off-peak period. As Mr. Dunne stated, we would have aircraft which cost in excess of $100 million and staff sitting idle. If we were to engage in that sort of activity, Aer Lingus would very quickly descend back into a loss-making scenario. We are not prepared to do that. We are focused on the demands we face in terms of the requirement to operate in a commercial and profitable fashion.

The greatest concern evident in the representations made to me concerns the EI 111 flight. I accept and believe it is accepted in the region that it may not be profitable in the off-peak season. However, one needs to operate it successfully and profitably during the summer season. Will the delegation state why it cannot continue to originate from Shannon for a number of months during the year? It would certainly be helpful if this issue could be resolved.

Mr. Lumsden made reference to the policy that the number of jobs in the airline should really be the maximum number sustainable. If this is the policy, what exactly is Mr. Walsh doing in terms of the passenger handling services at Shannon Airport? From dealing with people at local level, I understand that Aer Lingus does not appear to want to tender for some of this business and does not want to take on some of the work available to do it. It seems to be moving away from this stream of business and seems to be suggesting to some of its customers that it is no longer interested.

I know there are market pressures but there is a belief that Aer Lingus should continue with contracts at least until such time that it loses them. There is an expectation that it should tender competitively considering the staff already there. Will Mr. Walsh comment on the belief that if the company were to tender in a more aggressive manner, similar to the manner in which it engages in cost cutting, there would be no need for it to seek voluntary redundancies in the order of about 106 or 107 jobs, which is effectively cutting the workforce in half? This creates the impression that Aer Lingus is not in any way showing a commitment to Shannon. Will Mr. Walsh comment on this also?

In light of what Mr. Lumsden said on the future of Shannon Airport in an open-skies environment, Mr. Walsh referred to the fact that certain commitments to the future of transatlantic services out of Shannon are expected on the basis of Aer Lingus's being an Irish airline or a local airline in the European context. I am not so sure that it would be considered a local airline in a changed environment and if it were privatised in some way. Will the delegation comment on this, as well as the seasonality issue which I have addressed?

Many of my questions have already been addressed. I understand and respect Mr. Walsh's statement that he will not make apologies for making commercial decisions affecting his bottom line. We never want to return to the circumstances in which Aer Lingus was days from going into liquidation. However, as policymakers, Mr. Walsh is effectively our customer and we own Shannon and Dublin Airports. We, as policymakers, need to know from Mr. Walsh why Aer Lingus did not fly one of the 27 new routes, which I welcome wholeheartedly, out of Shannon.

We fly out from Dublin regularly. Dublin Airport is chaotic and beyond capacity. It is a joke that one has to park five miles away, get on a bus and then queue for half an hour to check in one's baggage. One can drive directly to Shannon Airport, park less than 100 yards from the terminal building, enter directly, check in and get on one's plane. If I were in charge of an airline, it would seem to me to make enormous commercial sense to site an airline in such a facility. We could double the number of passengers going through Shannon overnight without difficulty. With all Mr. Walsh's ambitions, he cannot do this in Dublin.

As those who effectively own the airports and who need to formulate policy and generate business, we need to know why the airline, given Shannon Airport's infrastructure and capacity, is not prepared to grow the business out of Shannon. We had Mr. O'Leary before the committee not so long ago and he said he could easily envisage circumstances whereby Shannon Airport would pay airlines certain amounts of euro because each customer entering that airport would not leave unless he or she had spent €20 therein. What must we do to attract the kind of business needed to make Shannon viable?

I have in front of me the transcript of the Minister for Transport's interview on "Five Seven Live" on Tuesday, 16 March, in which he said that the US Secretary of State for Transport had indicated to him that between then and October the American side hoped to complete a treaty. He said he understood from talking to the EU Commissioner that the European side was attempting to do it in a shorter timespan than this, but that October was the timeframe the Americans had in mind. He also stated that the agreement is a two-state agreement.

The Council of Ministers will be asked in June to agree step one, which will deal solely with the ownership of airlines. What specifically is this step about? The second step would be to complete the open skies arrangement by October in line with the American position. This is a much shorter timeframe than the one Mr. Lumsden alluded to when he said a comprehensive open skies arrangement is simply not achievable in the short term. I consider the period between now and October to be very much in the short term.

I have already addressed my question to Mr. Lumsden and maybe it has been forgotten. Given the location of Shannon Airport, its importance to the region and that the Government will be the stakeholder walking away from Aer Lingus in the event of privatisation, what is the importance of looking to America for a strategic partner rather than to British Airways?

Mr. Lumsden

I will deal with both of those questions. We have heard a very straightforward account from Aer Lingus of its attitude and current frustrations over the Ireland-US agreement. As the chief executive made clear, that is a regulatory policy issue, not an airline issue. I have no doubt that, as an airline, Aer Lingus would wish to exploit all the opportunities about which Mr. Walsh has spoken.

The Minister needs to balance that totally legitimate viewpoint with other constraints and issues, particularly that of Shannon Airport and the impact of a change in the current position on that airport. Clearly, the Minister wants to try craft, with the American administration, an outcome such that Ireland's transition towards an open-skies environment will afford to Shannon Airport the best possible conditions that can be generated. The Minister, when instructing his negotiating officials during direct negotiations, will need to establish the balance required between the various issues, including routes for Aer Lingus, and the impact of any sudden end to the existing dual gateway on Shannon as an airport.

My understanding in respect of the current position is that the ultimate EU-US open skies deal, which may or may never arrive, is not under contemplation this year - either in June or October. It would involved, for example, not just access between the continents of Europe and the US, but that carriers from either side would be able freely to fly services inside the other's territory. This is complete open skies policy and is called cabotage in technical terms. The complete deal includes EU airlines being able to fly around the US, not just to and from the US.

The complete deal also includes no restrictions on the ownership of European or American airlines. At present in order to be a European airline, it needs to be 51% owned by European interests. In the US, if a company is to be an American carrier, with all the privileges that go with that in respect of route rights and flights, the company must be 75% owned by US interests. The ultimate deal will remove those restrictions entirely - that is the concept. That will not be crafted this year because the Americans are resisting any move beyond 49%. They have signalled that they are willing in negotiating terms to move the 25% restriction up to 49% but they have indicated they are not prepared to go beyond that this year or to have any cabotage rights within the US for EU carriers.

However, there may be a possibility of an interim deal which would take, for example, the 49% movement and which would allow us to do the best we could to improve access between Europe and the US, even if we could not gain cabotage rights. Those issues the EU and US could not agree on would have to be returned to in later negotiations which would probably take place sometime after the change of administration in the US. In the meantime, is there is a possibility of an interim agreement? That is the June-October reference which the Minister made.

The Commissioner was asked by the last EU Transport Council, with the Minister in the chair, to try to come back to the June Transport Council with a more balanced deal than was under contemplation in March. If she succeeds in doing that, the US would need until October to adjust the ownership restriction from 25% to 49% because it is a legislative restriction in the US and parliamentary time would be required to do that.

I was not present for the discussions between the Minister for Transport and the Secretary of State Minetta, therefore I cannot be absolutely certain of what transpired. I am trying to give my understanding of the position as it applies. The interim deal that may be reached by June would include a provision that the European non-open skies states, namely Ireland, Greece, Portugal and the UK, would be required to step up to open skies. If it were to be crafted in that manner and we had not secured a much more acceptable arrangement for the dual gateway status and how it is to be dealt with, one can clearly see the danger presented by such an interim deal.

It is against that backdrop that the Minister has been speaking publicly about dealing with the US directly. It is in these talks that the balance will have to be struck between the legitimate aspirations of Aer Lingus, the things those aspirations would do for the Irish tourism sector and the very serious and genuine concerns we have about Shannon Airport.

The question was about strategic partners for Aer Lingus. My understanding of the aviation sector is that we have moved beyond the question of strategic partners. Aer Lingus has demonstrated that it can plough a furrow as a small airline. Therefore, the question is not as relevant today as it would have been some years ago in respect of whether we are pointing eastwards or westwards in terms of strategic partnerships. Willie Walsh would have his own view on that.

Mr. Walsh

Mr. Lumsden's is a fair assessment of the situation. Things have moved on. We have found that ourselves in the context of our relationships with American Airlines and British Airways - it has been changing over time. The critical thing for Aer Lingus - and our stated desire - is to open direct routes out of Ireland rather than relying on feeding traffic into a partner. I will ask Mr. Dunne to address some of Senator Dooley's remarks.

Mr. Dunne

In regard to passenger handling at Shannon Airport, the issue is totally independent of our schedule at the airport. Effectively, what we had in Shannon was a significant passenger handling operation which effectively provided services to other airlines. In the past number of years the level of business available has declined and a competing international ground handling operator has entered the market whose cost base is dramatically lower than ours and who is in a position to significantly underbid us in terms of prices.

We carried out a detailed study of our cost base in terms of passenger handling at Shannon Airport and it was clear that the costs were grossly out of line with those in Dublin and Cork. It was clear that it was much more cost effective to limit our handling operations at Shannon and to merely handle our own schedule. That is the endeavour we are on at the minute. That data has been shared with advisers to staff representatives who have evaluated the case and my understanding is that they are satisfied with the position.

Mr. Dunne must have missed the public meeting.

Mr. Dunne

It is a clear cut business evaluation that it is more cost effective for us to handle just our own services.

What about an independent at Shannon?

Mr. Dunne

That is a different matter. We are talking about our own handling operations as distinct from airport charges.

In terms of the model the company uses in Cork, would it not have been possible to get agreement on that model? The costs are similar in terms of grades within the airline - the wages and terms and conditions are standardised. Will Mr. Dunne explain the facts a little further?

Mr. Dunne

To an extent it is a slightly different situation in that the working pattern in Cork is relatively even during the course of the day, whereas in Shannon it is a peaks and troughs working situation. Most flights are gone by 3.30 p.m. and there is very little activity thereafter. Therefore, in terms of the structure and cost base, it was clear that retaining personnel to provide services to other airlines was not attractive.

If Aer Lingus took that approach to other elements of its business, it would not continue at that level either. Did the company not look at the cost structure in order to make it happen?

I have complimented the company in the past and continue to do so in terms of how the airline has been turned around. The company has taken an aggressive approach to cutting costs. Therefore, why did the company not take the same approach to maintaining this good employer in the area. A large number of people are involved in passenger handling.

Mr. Dunne

The unsustainable cost base at Shannon existed despite having taken significant cost reductions over the past two years. Therefore, in the past two years we have made significant changes in terms of our activities in Shannon. We cut the cost. This independent player, which is a ground handling operator across the world, with all the practices and policies which go with that, is in a far superior position to provide that service at a much lower cost than we could.

Aer Lingus is a small airline in a world context and it does not lie down under the might of British Airways or American Airlines. However, it is not clear to me why the company did not try to rationalise the passenger handling element of the business at Shannon Airport.

If nothing else it shows Aer Lingus's lack of commitment to Shannon. That is the perception rather than the fact but it becomes more difficult to build confidence in the airport, in the people who work there and those in the community who want to use the airport regularly. Actions like that might work in a board room but have a significant effect, particularly on the region. That would be understandable if this were a private company but it is not and I refer to my earlier point about Aer Lingus's role in regional development.

Mr. Dunne

We made it clear in our previous contributions that our focus is commercial and we considered this issue as we do all issues, whether in Dublin, Cork, Shannon or outside Ireland, to evaluate the most cost-effective course of action. We tried over the last two years to restructure our operations in Shannon. Given what has happened to the market and competition for ground handling, the best option, although it is not even close, is to proceed on the basis that we are moving forward. That is not to deny that there are issues to consider in the local environment but it is not sustainable for us to continue with a cost structure in Shannon that is significantly out of line with the cost structures in Dublin and Cork.

Did Aer Lingus take a policy decision to withdraw from that business rather than continue to look aggressively at reducing the costs? When did it make the decision that it could not force the costs any lower?

Mr. Dunne

We have reached the point where effectively to retain any third party business would have required a significant level of extra staff. Our policy in Dublin is to provide third party handling services to other airlines where it can be slotted into our existing resources. Our resources there are sufficient only to handle our schedule. We fill in the gaps for other airlines, primarily One World carriers. In Shannon we retained 100 extra people to provide services to other airlines, above those we needed to handle our schedule, which contrasts with the situation in Dublin.

Did Aer Lingus decide to get away from it completely, even though it is necessary to maintain staff to handle its own service? Perhaps with additional staff it could cater for some level of business there. If a third-party operator can come in and be successful and profitable in a region where, unlike Aer Lingus, it has no anchor, I do not see why Aer Lingus could not have continued a profitable ground handling operation. Perhaps Mr. Dunne can provide figures to back up the Aer Lingus case.

Mr. Walsh

I will be happy to do that. We opened the books to the financial advisers and to the staff representatives who have quizzed us on them. I can furnish the figures confidentially. I would not like them to be disclosed but I am happy to talk to members of the committee about that. Our core business is the transport of passengers and cargo, not the provision of ground handling services to other airlines. We have had to shift our focus to define our activity as flying Aer Lingus planes, carrying Aer Lingus passengers and we want to do that successfully. It is very different from providing services to others.

Regarding Deputy Power's interesting question, there are two simple ways in which we could serve Shannon in a profitable and cost-effective manner, accepting that there is a demand for the services we want to supply. One can stimulate demand in certain markets but there must be a demand in place for the service.

Mr. O'Leary can create demand.

Mr. Walsh

Mr. O'Leary can speak for himself. He has successfully generated demand in some places and not in others. Some of the routes that Ryanair launched have proved unsustainable. It has recently cancelled several of its routes. The same market rules apply and one can stimulate some demand. Our problem is that to serve Shannon the aircraft must either be based in Shannon or originate the service from the continental European destination. We have aircraft in Shannon serving Heathrow. It does not make sense to fly empty aircraft from Dublin or Cork to Shannon because that is very expensive. There is no sustainable demand for services between Dublin and Shannon that would justify the provision of that service.

Does the same apply between Shannon and Europe?

Mr. Walsh

To do it in a cost-effective way the aircraft must be based either in Shannon, which eliminates the cost of operating empty aircraft between our Dublin base and Shannon, or have a base outside Ireland. That is how Ryanair operates successfully. It has 11 bases, two in Ireland and nine in the United Kingdom and continental Europe.

What would make it attractive to have a base in future in the new environment in Shannon? Would operators have to pay to come in?

Mr. Walsh

It is not solely an Aer Rianta or Shannon Airport problem. There are costs associated with the way we operate that must also be addressed. An aircraft based in Shannon is competing with an aircraft based in Dublin or Cork. We assess it on the basis of the profitability or the contribution that can be made. The alternative which Aer Lingus must address soon is to open a base outside Ireland so that we can serve Cork and Shannon more effectively than we do now. To do that we need additional aircraft and that requires being able to fund them, which in turn requires generating significant profitability to pay for them. We need to address this.

Shannon needs to have a cost and charging structure that makes it attractive to the carrier to operate there. Following the Charleroi decision it may be unrealistic to say that one should pay airlines to operate there. If it is possible for Aer Rianta to pay one carrier I will demand that it pay Aer Lingus too. If that were a possibility, certainly it would be a factor.

If everybody gains from it I have no particular hangup as to how we do it, so long as we get in airlines such as yours, which is now a low cost airline, and others.

Mr. Walsh

We would not suggest that we are a low cost airline yet. We are a low fares airline certainly. There are still significant elements of our cost base that we need to address and we are determined to do so.

On behalf of the committee I thank you all for taking time out from you busy schedules to come in. It is much appreciated.

The joint committee adjourned at 12.10 p.m. until 12 noon on Wednesday, 5 May 2004.
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