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.