I welcome the Minister for Transport, Deputy Brennan. I also welcome the representatives from the Department of Transport, Mr. John Lumsden, Assistant Secretary General; Ms Doreen Keany, principal officer; and Ms Mary Dunney, assistant principal officer.
As members will see on their screens, the Minister wishes to read a statement to the committee after which we will have questions.
As you know, Chairman, there has been much speculation recently about the future of Aer Lingus. I would like to point out that the future of the company has been under consideration for some time. I advised my Cabinet colleagues last March of the state of my deliberations concerning the company's future and also advised that I would be reverting to Government on specific options for the company in the near future.
Those deliberations involved the consideration of reports last year from the chairman of Aer Lingus and an independent corporate finance consultant whom I commissioned to examine the sale options for the company. I was in the process of concluding those deliberations when I was informed about the request from Aer Lingus senior management for consent to develop an investment proposal for the company. This request was firstly communicated verbally to the Secretary General of the Department on 24 June 2004 and in writing to me on 2 July 2004. The consent sought was not given. Furthermore, my Department immediately requested that no further activity would take place regarding any proposal until the matter had been considered from a corporate governance, process and policy perspective. Appropriate legal and financial advice was then sought.
My main concern on receiving this request was to protect the shareholders' interest and to guard at all times against any conflict of interest. In that context, on 3 July last, I announced the appointment of Mr. John Sharman, an existing director, as acting chairman pending the appointment of a replacement for the previous chairman who resigned on 29 May 2004. The acting chairman immediately sought legal advice on the appropriateness of the current corporate governance arrangements in Aer Lingus.
The Department of Transport and the Department of Finance also met the chairman, company secretary and their legal advisers. My Department has continued to liaise closely with the chairman and company secretary on governance arrangements. The acting chairman also called a board meeting on 8 July 2004 at which the governance issues were reviewed. Since then, the chairman has reported to me that there has been no breach of the applicable governance arrangements and there are no activities continuing which could be in breach of the governance procedures.
In addition, the senior management confirmed to me, in writing, on 7 July the verbal commitment already given to the Department that, in the absence of consent, they would do no work in developing an investment proposal for the company.
I briefed the Government fully on this matter at its meeting on 6 July and, as a result, the Government decided to establish a Cabinet sub-committee to examine all the issues involved and report back to the Government as soon as possible; to advise senior management in Aer Lingus that in the interim there was to be no further activity as regards the management request for consent to develop a proposal, until such time as the Government has had time to consider the matter in detail; and that the Government will respond in due course to the request in the context of the Government's ongoing consideration of the ownership issue, which has been under way for several months.
I have informed the acting chairman and senior management of the Government's decision. The Cabinet sub-committee, together with relevant departmental officials, held its first meeting on 14 July 2004. Work will continue in my Department over the coming weeks to assist me in making a comprehensive submission to Government in September. This work will cover all the relevant issues, including those of a strategic and public policy nature and the future needs of the airline, both financially and operationally. The work will also, of course, cover the implications of the management initiative for various transaction mechanisms if a decision is taken to sell the airline. However, while the management initiative gives rise to process issues, it does not affect the fundamental ownership question.
I cannot pre-empt the outcome of the Government's consideration in this matter. However, I strongly believe and the Government accepts that there must be clarity on the ownership issue as soon as possible. In the meantime, it is vital that business planning continues in the normal way for Aer Lingus. There is no doubt that under the current management, and with the support of staff, the airline has made enormous progress in the past two years. When one considers the depth of crisis encountered in 2001, great credit is due to the board, management and staff in turning the airline around. We should also acknowledge the significant growth in the new routes to European destinations, all from within existing resources. This has amounted to over 30 new routes since the events of 11 September 2001, and the airline is to be commended for that good performance. However, notwithstanding the recovery, work must continue in order to ensure the company's ongoing viability, particularly as the competitive situation is becoming more difficult by the day.
The acting chairman and board are charged with ensuring the ongoing orderly management of the business and I have every confidence that this board is fulfilling that role. In that context, the committee will be aware that a new business plan is currently in preparation in Aer Lingus. Indeed, the acting chairman has advised my Department that it will be considered shortly by the board. I understand, also, that management has been briefing representatives of the central representatives council, or CRC, on a confidential basis, as regards the background environment to the plan. While I do not wish to speculate on the contents of this plan or on the decision of the board, my Department is aware, from routine meetings with management over the past year, that the company needs to build on progress made under this survival plan in order to prosper and grow in what is a volatile and cyclical aviation sector.
With falling revenues and a cost base which is still out of line with its competitors, Aer Lingus management has been indicating for some time that further cost cutting and efficiency measures are required. A new plan for the airline is essential for the immediate future, irrespective of any decision on ownership, as the challenging and difficult external environment facing the airline remains the same.
On the future ownership of Aer Lingus, I assure the committee that if the Government decides to embark on a sale of all or part of Aer Lingus, I will consult the appropriate interests, including unions. In such an eventuality, I will set out for the Oireachtas, in accordance with the provisions of the Aer Lingus Act 2004, the general principles of the proposed sale as well as the basis for the Government's decision and the arguments for and against such a sale.
The Government's wish is that Aer Lingus should continue to make a significant and valuable contribution to the economic and tourism development of the country. Airlines need maximum flexibility to respond to whatever market or other conditions the sector will face in the future. Furthermore, in the interest of the airline's staff and management who have performed so well in turning the company around, it is important the main shareholder clearly signals its intentions regarding ownership and I do not propose to delay that.
The issue of funding for future growth is a major factor for consideration in any decision on ownership. The airline is examining its long-haul fleet requirements and expects to complete a proposal in the matter in the autumn. In the interim, the company has indicated to the Department that if it is to replace and-or extend the existing long-haul fleet and to fund future growth, significant capital expenditure will be required and this will give rise to the issue of access to funding.
While there has been speculation on figures, the company has not yet completed its review and no submission has been received from the airline. It is, therefore, not possible to put an exact figure, although certain figures have been reported by the media, on funding requirements.
I would like to deal with the question of the EU position on investment and state aid. There has been misleading representation in the press recently about my Department's position on the issue. I have spelled out in speeches in both Houses and in replies to parliamentary questions the correct position. Under EU rules, the State can seek to invest as a normal shareholder in Aer Lingus when the company is performing well and profitably. In all likelihood, however, there would be opposition from other airlines alleging state aid and a likely investigation by the European Commission before approval for such an investment would be forthcoming. On the other hand, the State cannot invest under EU state aid rules when the airline is in crisis, even if it was so disposed. The issue of funding, therefore, will be a key aspect that I will deal with in my submission to Government in September.
There are also concerns about strategic issues in the context of the State exiting from ownership of Aer Lingus. Issues raised by committee members during the debate on the Aer Lingus Bill recently relate to the Aer Lingus brand, direct services to and from Ireland and slots at Heathrow. I acknowledge they are of crucial importance. I assure the committee that all these issues will be addressed by me in the context of recommendations to the Cabinet on the future of Aer Lingus.
I thank the Minister for appearing before the committee. He flagged the key issues in the final part of his contribution but he provided no solutions to them. He gave a commitment during the debate on the Aer Lingus Bill in this regard. He also brought a paper to Cabinet in March and a report from the chief executive of the company has been before him for the past 12 months regarding the company's future. Why has there not been a thorough review of these issues? Why have critical questions not been answered? Nothing happened until the management buy-out proposal was made public. Why was action not taken over the past 12 months, despite the publication of a report flagging these issues and highlighting the need to address them?
There is a question mark over the future ownership and direction of the company because the Government has not made a decision and the company's board does not have a full-time chairman. Does the Minister agree the company is being damaged because these questions are hanging over it? When will decisions be taken on the issues that need to be addressed?
I refer to the investment proposal. Everyone accepts Aer Lingus requires significant investment of approximately €1 billion if it is to expand its services and compete for new routes. Is the Government prepared to meet this investment? It is pointless dithering on the issue if the Government is not prepared to do so. Everyone would like the company to develop and it is critically important that a mechanism should be found to put the investment in place.
Connectivity versus price is a key issue. What will be the key target of the Cabinet sub-committee discussions? What is the Minister's objective? Will it examine the issue of connectivity, which is critically important, whether it is to the UK, US or mainland Europe or will he seek the best price? When KLM was sold, connectivity was tied into the sale agreement. When will we get answers? The report has been on the Minister's desk for the past 12 months and there has been no response. This is significantly damaging to the company's future.
I thank Deputy Naughten for his questions. He referred to investment of €1 billion, which has been reported in the media, but that relates to expenditure such as the purchase of aircraft and so on. It does not necessarily relate to investment.
Is the Government prepared to make the investment?
We are not at that point yet. Successive Governments since the early 1990s have taken decisions not to invest as a shareholder in the airline on the basis of its profitability and so that it would be a commercial enterprise. That has been the consistent position of successive Governments. A distinction was made between investing money during a crisis, which has happened on a few occasions, and investing money as an ordinary shareholder on an ongoing basis. If the policy of successive Governments not to invest as a shareholder and EU state aid rules are accepted, it is unlikely the Government or future Governments will invest in the airline as shareholders or during crises. That would be difficult for any Government.
When will a decision be made? Mr. Walsh put a report on the Minister's desk 12 months ago.
The Government will make decisions in September on the matter.
September or September 12 months?
This September.
The Minister stated a verbal approach was made to his Secretary General on 24 June and that was followed by a written proposal. Will he clarify whether approaches, verbal or otherwise, were made by him or his officials to senior management in Aer Lingus or vice versa prior to 24 June?
I refer to the future ownership of Aer Lingus. Presumably the Minister has given this matter a lot of thought over the last year or so. He brought in legislation earlier this year, at which point some of us tried to find out what his thinking was, but it was very difficult. The legislation provided for a change in ownership but he did not specify at that stage what his preferred option was.
There are a number of options. The State could invest, there could be an MBO flotation or we could have a merger with another airline. The Minister should tell us about the consideration he has given to various ownership options and his thinking on those at the moment.
What are the Minister's views on State investment? People seem to be queuing up to take a share of the company - senior management, pilots and other interests - so clearly it has a very bright future. If it is a good investment for the private sector then it must be a good investment for the State sector. Has the Minister given any serious consideration to State investment in a company which seems to have a very bright future and considerable potential for developing new business?
Also, to what extent has the Minister considered the current MBO before him? What are the capital requirement implications of that proposal over the next ten years? What are the implications for jobs in the company? There have been rumours about these matters in the media and the Minister should clarify the implications in those areas. Finally, there is a deficit of almost €200 million in the Aer Lingus pension fund and there has been considerable foot-dragging in dealing with this matter within the company. Will the Minister outline his intentions for the future of the pension fund?
As I stated in my introductory remarks, this request was first communicated to the Secretary General of the Department on 24 June. That was the first time, to my knowledge, that the Department was informed.
Were there any other approaches in either direction?
Not that I know of. This request was first communicated to the Secretary General on 24 June, the first date on which we became aware of the interest. The Deputy asked what mechanisms one would use if one decided to sell shares and we have been down this road. Three years ago the Government decided to float shares on the exchange but we pulled back from that. Even before 11 September 2001 the market was not in good condition and the Government decided to pull back from the flotation, although it had been agreed. Much preliminary work has been done on the mechanisms.
Those mechanisms are fairly well known. An IPO is possible, where the shares are put on the public exchange in the manner of Telecom Éireann. That is one option and it has pluses and minuses. Another mechanism is to place some shares with institutions either directly or by way of a tender process or by way of a negotiated process. Either way it would have to be hugely transparent. Those institutions could stay in for a while or could include, as part of the conditions, a provision that they would exit after a certain length of time. Part or full sale to institutions and flotation on the public exchange are some mechanisms. Other mechanisms include trade sales, such as sale to other airlines, and finally there is an MBO option. Most, if not all, MBOs require substantial outside financial backing, so in one way that is a hybrid, in that an MBO must be led by management with the backing of institutions.
There are pluses and minuses with each of these options which I can rehearse if the committee wants me to come back on.
Does the Minister have a preference?
I do not. Members asked if the State would invest in the airline if it had a bright future. The State is in the airline business for strategic reasons. We are not in the airline business to gain commercial profits for the State. That is why we have many State companies - we are there for strategic reasons. The airline has a bright future but we should be acutely conscious that there are serious issues here. The entire aviation industry is highly cyclical and we should remind ourselves that one can build profits very quickly but that pressures can come back on a company after building up those profits. Competition can become very steep and one can end up in a cycle of prices and profit very easily. If one looks back on 30 or 40 years in most airlines one finds that that is precisely what has happened. Some survive those crises and others have gone out of business. It is true that most airlines in the world are losing money, so we need to watch that very carefully.
We have been through a couple of crises in Aer Lingus and on each occasion we have pulled back from the brink, putting money into the airline. There has been a lot of pain for everyone involved. It is not a matter of saying, "Well, if it is going to be profitable we should invest in it because we can take funds out of it as profit." We need to make our minds up on broader, strategic issues such as branding, slots, Shannon and the strategic requirement for an airline to be in State hands or otherwise. I would be against acting on the narrow basis of whether the airline makes a profit. That is too narrow an assessment.
Deputy Shortall asked what I was doing about the MBO, but there was no MBO before me. What I got from senior management was a request to make a proposal; they did not make a proposal but were seeking my approval to make one, which, as the Deputy knows, I declined. Regarding jobs, the board is hoping to sign off on a business plan and I presume that will deal with the issue of jobs going forward. Also, the airline has informed me that further cost reductions are required at the airline. The management will be able to assist the Deputy by outlining those reductions when they appear here.
And capital requirements?
At present the company is well able to operate from its resources. The chief executive will come before the committee soon and will be in a better position to answer this question. If Aer Lingus stood still I understand it has sufficient resources to do so. If it wishes to move to a lower cost structure it will need more aircraft because it will need to carry more people. If the airline opts for a low cost structure on long-haul and transatlantic flights it will need to invest in that kind of fleet. The airline has informed us that it has information from up to 20 airports in the US which are interested in having Aer Lingus working with them. Assuming the airline went in that direction, rather than standing still, then figures of €800 million to €1 billion have been mentioned, but I have not been given those figures officially by the company. Perhaps its management could give the committee a more accurate figure. These are the figures I have seen but management may have a more accurate figure.
On pensions, the scheme is actuarially reviewed every three years. Ultimately it is a matter for the members to meet their obligations. I understand the latest report states there is sufficient in the fund to meet the obligations. There is no deficit, but perhaps the management will clarify this further.
The last actuarial report indicated a deficit of €243 million.
I will check that in a few moments. The latest report states there is enough in the fund to meet fully the obligations. I will try to double check that during the course of the meeting.
The Minister will not be surprised to hear that I have a natural predisposition towards grave reservations on the privatisation of what I consider to be a major national strategic resource. In the context of the Eircom debacle - I am not referring to the share price - as it currently stands, this major national strategic resource has basically gone into private hands, to say nothing of the diminution of service, if that was possible, since it was in State hands. In light of the Eircom experience, the scuttling of Irish Shipping some years ago and the privatisation of rail services in both the UK and New Zealand, I note there is no reference in the Minister's contribution to the strategic importance of a State airline to an island nation without a land bridge to any of our markets. I would be interested to hear the Minister's views on this aspect.
I notice that in the Minister's script of almost 12 pages, there is a mere three and a half lines regarding consultation with the unions. The unions in Aer Lingus have been through a very difficult period. They are stakeholders, not just morally but legally. The Minister has not just moral obligations, but legal obligations through Sustaining Progress to have in-depth discussions with the unions on any proposals. I will be interested to hear his plans on that aspect of the process.
On the point made by my colleague, Deputy Shortall, on the pensions deficit, I am slightly intrigued by the Minister's answer. Whatever about the current situation regarding commitments, and a capacity to deliver on these commitments from the existing funds, we are all aware of a very long-standing historical problem, not just in Aer Lingus, but in the aviation business in general in Ireland, including Aer Rianta, where there is a long-standing deficit in the pensions area. Over the years, employees made considerable sacrifices with a view to keeping the national airline and the national airports authority afloat at times when there was a far higher level of public spiritedness around the semi-State sector. These employees now find themselves carrying the can for their public-mindedness and the sacrifices they made at the time. If there is to be a significant capital injection into the national airline, in whatever form or from whatever source, consideration should be given to these retired employees, who literally put their hands in their pockets at a time when it was necessary to do so, to present us with the marketable and viable entity we have today.
I thank Deputy Glennon for his comments. I am aware of his views in this matter, which he has expressed strongly on many occasions. His support for Aer Lingus is well known. Government policy on privatisation is that it should be examined on a case by case basis. We must examine what is good for the country, shareholders, workers, the sector and what the future trend is in the industry internationally because, while we are an island physically, we are not an island commercially or economically. Austrian Airlines is now 37% private, British Airways 100% private, Finn Air 40% private, Air France 46% private, Iberia 100% private, Lufthansa 90% private, Lux Air is approximately 60% private, Olympic Airways, Greece, is 100% public, SAS 50% private, Swiss Air 67% private and Air Portugal 100% public. There are different trends among our competitors around the world. We must examine privatisation on a case by case basis. In this instance, it is a case of deciding what is good for Aer Lingus, the country and the strategic issues involved. We must do the right thing by Aer Lingus and bring some certainty to the situation as soon as possible.
I have had battles on many occasions in this committee and on the floor of the House. We should not sell Aer Lingus for ideological reasons, but neither should we keep it for ideological reasons. I am always taken with one of these positions being ideological and the other not being ideological - they are both equally ideological. We should examine the matter in a hard-nosed practical way and decide what will give the country the best possible airline. The figures I have quoted will indicate the different models that exist.
The Deputy asked me to ensure we consult with the unions. There was full consultation the last time we did the IPO with the CRC. That led to a situation where the unions were fully briefed on the last flotation and understood the Government's position. I will give an undertaking that the unions will be fully consulted again in the event of a Government to dispose of shares in the airline. In recent days I agreed to a special request to meet SIPTU in regard to this issue.
On the retired aviation staff fund, officials have met on a number of occasions. I asked the chief executive to meet them, which he did. It is a difficult issue to resolve, but we will continue to examine it to see if we can be of help.
Is there a deficit in the fund and what is its extent?
I am talking about the meeting with RASA. I answered the question earlier about the deficit in the fund.
The Minister said there was no problem with the pension fund.
The Minister told the Deputy earlier that the advice he had at the moment is that there is no deficit in regard to the fund. He said he would check this out and, if the answer was different, he would come back to the Deputy. I do not think there is a need to return to the same issue.
I understand it is a difficult issue.
I am referring to retired workers, which is a separate issue.
The issue I raised related to existing pensions being drawn rather than a deficit in the current funding for future liabilities. There is a long-standing issue with the retired aviation staff association, to which the Minister referred.
The Minister will refer back to the Deputy on the matter.
Members of management may have more information on the matter when they come before the committee shortly.
The last paragraph on page 7 of the Minister's speech states that with falling revenues and a cost base which is still out of line with its competitors, management have been indicating for some time that further cost cutting and efficiency measures are required. Does the Minister think that if this was a private concern management would wait for so long for a decision?
Given the current fortunes of Aer Lingus and the precarious nature of the business, is it not time for the dead hand of Government to be removed from Aer Lingus? This should not be seen as an issue of strategic national interest. Given that ten or 12 airports in America are willing to speak to Aer Lingus, it is unlikely if we sell the airline that people are going to have to learn to swim in order to get out of this island. It is more likely, if we remove the dead hand of Government, that we will have a vibrant Aer Lingus in the future with less liability to the State.
Can the Minister give one or two strategic reasons the Government should remain involved and increase its investment in the company?
I could speculate as to what might have happened to Aer Lingus if someone else had owned it but that would not get us very far. We all agree that management has done a superb job. I am sure Senator Morrissey would acknowledge that. The management of Aer Lingus will have exact figures but I am told more than €300 million of costs have been taken out since 11 September 2001 and more than 2,000 people have left the airline voluntarily since then, leaving approximately 4,000 employees at present. It is fair to acknowledge the enormous costs that have been taken out of the airline and the extent to which it has been knocked into shape. It is a matter of speculation as to whether the ownership helped or hindered matters in that regard. In certain cases, State ownership, provided it is enlightened, highly commercial and non-interfering, can be as useful as private ownership. However, it must be enlightened, commercial and non-interfering and very often it is not.
Quick decision making is vital in an industry which has such a cyclical nature. The Minister acknowledges Aer Lingus's falling revenues and the fact that its cost base is still out of line with its competitors. The Government is involved in the company. If Aer Lingus were a private company, would its owner be saying this or would he be doing something about it?
I accept that when the Government is the owner of an industry the process is more complicated. The Government has a greater duty to explain and consult and to involve the workers. It must deal with issues which an autocratic private ownership might cut through in less time. One can argue about the best model for the country and its future but that must be decided on a case by case basis. I can see companies which should be in private ownership and others which should be in public ownership. I favour a pragmatic and practical approach taking decisions on a case by case basis and leaving philosophies outside the door. That is what I plan to do with Aer Lingus. I will take a hard nosed and practical approach. I will look at what competitors are doing and at the cycle, talk to staff and look at the fabulous ambitions of the management to grow the airline in new routes and new places. Having looked at all of that, I will decide what is best for the company in the future. It is important that we do that quickly in order that certainty is brought to the issue.
I welcome the Minister's setting out the facts and his recognition of the strategic interests and issues which arise with regard to changes in the ownership of Aer Lingus. I even welcome his statement regarding Shannon and his recognition that Shannon is a strategic issue in his deliberations. I take issue with my friend and colleague, Senator Morrissey, who looks at the ownership question as a profit and loss matter. The importance of Shannon Airport in the continued development is critical. If the Government is serious about balanced regional development the airline must be retained in some kind of public ownership in whatever model emerges. How does the Minister see the future ownership of Aer Lingus and how does it tie in with Government policy on balanced regional development? The Government's remit is wider than mere retention of jobs in the airline. It includes the support and retention of jobs in the wider community and in industries and organisations which are dependent on direct air connectivity, both transatlantic and within the European market. That is one of the most critical elements to be considered.
There has been considerable comment on corporate governance and on the conflicting interests of the individuals involved in the proposed management buy-out. Can the Minister give us further information on his advice on that matter?
I agree with Senator Dooley that Shannon Airport is critical. Aer Lingus is very important for Shannon Airport but Shannon Airport is very important for Aer Lingus. It is only when two such bodies are in a win-win situation that the arrangement will work. Aer Lingus needs Shannon. It has a substantial amount of business in the mid-west, particularly from the United States, and there is increasing potential for flights from Shannon to destinations in the UK and the EU. It is an important airport for Aer Lingus. However, Aer Lingus will have to work out with Shannon how it can best support the airport in the future and the role Aer Lingus will play.
I have made known to the board of Aer Lingus on a number of occasions my determination that Aer Lingus is clear about its thinking on Shannon. I have made clear the Government's view that balanced regional development demands that Aer Lingus have a clear plan for its involvement in Shannon Airport, whether transatlantic, European or cross-channel. I constantly urge Aer Lingus to lay out those plans to Shannon Airport and to work with the airport on developing them.
I have made my views on the question of conflict of interest clear. I have a letter from the acting chairperson stating that, following legal and financial advice and a special board meeting, the acting chairman and the board were satisfied that full procedures were in place to ensure correct corporate governance and no conflict of interest. Senior management who approached the Department behaved totally properly. They contacted the Department of Transport and sought agreement to work up a proposal, which I declined. Once I had declined agreement, they stopped developing any such proposal. They behaved impeccably, fully complied with corporate governance procedures and with the law and behaved totally ethically in informing me and in carrying out the Government's immediate instruction not to develop any further proposal until the Government had made a decision. I am satisfied that the board is now on top of corporate governance procedures.
I do not wish to speculate. However, in the event of the Government taking a decision and an MBO involvement, there are tried and trusted Chinese wall-type corporate governance procedures - Senator Ross is more familiar with them than I - which are put in place in plcs all over the world when management seeks to make bids. We will insist on that. Whatever we do will be open and transparent and everybody will be able to follow it step by step. No secret deals will be done, nor will there be any boardroom handshakes on a deal. I am determined that everything will be done openly so the public can follow it piece of paper by piece of paper.
With regard to the ownership of Aer Lingus, if the State no longer has a stake in the airline, it will not be possible to maintain the provision of connectivity to the regions, particularly the mid-west region where balanced regional development is of critical importance. Will the Minister consider retaining some ownership in the airline to ensure the State will remain a stakeholder and have a say? I acknowledge the Minister has recognised the issue and has mentioned the importance of continuing to raise it with the airline. The period of time after any change is the greatest concern to me and others. In an environment where the State may divest itself completely of the airline, it will no longer have the capacity to direct it on the Government's stated policy of balanced regional development.
Some countries have taken the view they should hold on to minority stakes, but many have not and have exited fully. We will examine that option. If the Government decides it should recommend an exit, we will examine whether holding a minority stake is practical.
Does the Minister envisage any other mechanism whereby he could ensure connectivity would continue to the regions to support stated Government policy? Are there other mechanisms other than the retention of shares? This is particularly relevant with regard to the open skies issue which is also of critical importance to the regions.
We could, for example, have shareholders' agreements or set out conditions in any sale. However, making those stick after a sale is difficult. It is hard to exit and retain control. Anybody in business will say it is difficult to do both. There are variations of the different mechanisms, for example, shareholders' agreements and golden shares. The EU-US open skies agreement and the Ireland-US bilateral agreement are mechanisms that are still available and do not just affect Aer Lingus but all airlines. We will examine those mechanisms in the context of the strategic issues on which the Government will need to be satisfied.
I am sure the chief executive of Aer Lingus will confirm that since I became Minister for Transport I have not asked the company to go on or off a route or to perform any service. I have not interfered with the airline in my two years as Minister. I have not told it not to let people go. Under my stewardship it has let go over 2,000 people and the CEO will confirm that I never picked up the telephone or wrote to him and asked him not to take that action. My point is that the reason we are here complimenting the Aer Lingus management is because it was allowed the freedom to do its job, which it did well. The company is now presenting us with options we would not have had if we had kept our fingers in the pie on a day to day basis and if the Department had been on to it not to let jobs go or to put flights on to Cork or Shannon. If I had interfered, we would not be sitting here with these healthy numbers in front of us.
No matter who owns Aer Lingus and no matter which routes are flown, any artificial arrangements we set up will not last. They may last a while but they will not survive irrespective of whether the company is State or privately owned. It may take a few years but any artificial arrangements will crumble. To put it bluntly, the airline's success to date is a result of strong talented management and of the Government standing back and allowing the managers to manage it rather than telling it where to fly.
I believe there is a conflict of interest with regard to the chief executive, but the Minister has replied on that matter.
The Minister said that he told Mr. Willie Walsh that he should join the queue. Has the Minister received expressions of interest from other people interested in buying the company and are there proposals from other interest groups in this regard? He also said that Aer Lingus needs Shannon. I wonder if this is the real world because I do not believe Aer Lingus has an iota of interest in Shannon Airport. The statistics speak for themselves. Shannon Airport lost most after the events of 11 September 2001. It does not have a direct transatlantic service to New York. The Minister spoke about developing a continental service, but Shannon has no continental service with Aer Lingus. On 27 February Aer Lingus sought to reduce the workforce in Shannon Airport by half. How can the Minister say then that Aer Lingus has an interest in the airport? Five months later only four staff members have left. It was an ill-thought out plan.
The Minister said he believed Aer Lingus should concentrate on viable profits. However, although third-party handling produced a profitable income in Shannon Airport, when Lufthansa cargo operators pleaded with Aer Lingus to handle its service it said "No" despite the fact it would produce a profit of €200,000 a month. Yet, the Minister tells us Aer Lingus needs Shannon.
The 24-hour service which existed throughout the lifetime of Shannon Airport, where airlines from Dublin, Cork, England or America etc. that ran into trouble were directed to Shannon, is now threatened as Aer Lingus management proposes to end the service. How can the Minister say therefore that Aer Lingus needs Shannon? The Minister must learn to live in the real world and know that staff in Shannon do not know whether they are coming or going. They have been ringing my office to know what the future holds or what commitment Aer Lingus has made to the future of Shannon.
The business plan for Aer Lingus is to be prepared on 26 July. Has the Minister instructed Aer Lingus to include Shannon in the business plan? The Minister knows that Mr. Willie Walsh is not interested in Shannon but only interested in consolidating his business in Dublin. If the Minister presides over and allows this to happen, he will be known as the modern day Cromwell for plundering our assets.
The Minister appointed a new board for Shannon Airport but if we are to have balanced regional development, I urge him to ensure Mr. Walsh includes Shannon in the Aer Lingus business plan. I believe Mr. Walsh has no business plan for Shannon on his agenda.
I will get a chance to ask Mr. Walsh the question shortly.
You are the Minister.
I thought the questions were more appropriate to Mr. Walsh but I did not wish to interfere.
My view is that Mr. Walsh, the management and the board are interested in Shannon. I stand over my statement that Shannon is important for Aer Lingus which can do real business from Shannon. There has already been talk of low-cost transatlantic flights, which would also serve Shannon, and of more low-cost EU and UK business. Aer Lingus has shown its interest in Shannon Airport for many years. It is for the chief executive to say, but I believe its upcoming business plan will deal with Shannon Airport. The committee may wish to ask him that question.
On the question of joining the queue, the pilots' group is the only other group that has indicated a broad interest but no proposal has been submitted. The pilots have broadly indicated their interest in a shared ownership or a transaction. It is also well known that many financial institutions in the country would be interested in investing in Aer Lingus as part of a broader portfolio but I have not received any proposals. I have no proposals from anybody to buy a single share in the airline. What I have received are one or two expressions of interest which I detect from the request to make a proposal from the management and from the pilots' group.
Does the Minister honestly believe that Aer Lingus is interested in Shannon Airport, considering what I read out?
The chief executive is present and he will explain the company's plans for Shannon Airport. My policy view is that Aer Lingus can do a lot of business out of Shannon. I have asked the company to do the best it can in broad policy terms for Shannon Airport and to use it as much as possible. The company is doing that. In order for the company to continue to do that in the future it must sit down and work that out with the airport. I want to see Aer Lingus fully committed to Shannon Airport and I have made that clear to the board on many occasions.
I was asked a question about pensions and I have a note about it which I will read:
I am advised that the last actuarial valuation was carried out on 31 March 2003 and the scheme satisfied the minimum funding standard included in the Pensions Act 1990. The next full actuarial valuation is due on 31 March 2006 but interim assessment of the ability of the scheme to pay pensions increases will take place at the end of March in each of the intervening years.
Is it necessary for me to deny that I have anything to do with Cromwell? I will deny it for the record.
Aer Lingus is already a vibrant company. The PDs and Senator Morrissey are trying to suggest it is not. It recorded profits of €83 million last year and is on target to achieve profits this year. The Minister has admitted it is in quite a healthy state in terms of passenger numbers. What are the Minister's views on the sale of Eircom? Would he regard it as a good deal in hindsight?
The sale of Eircom has nothing to do with the sale of Aer Lingus.
It does.
If the Senator wishes to put a question, he should ask about Aer Lingus and not about Eircom. I will not allow the Minister to answer that question because it is not relevant.
It is relevant. If the Chairman allows me to finish, he will find out. It is fair to say that mistakes were made in respect of Eircom. The question is whether lessons have been learned because it has serious implications for the privatisation of Aer Lingus.
Has the Senator a question on Aer Lingus?
That is one question I would like answered. People are not happy with the sale of Eircom. Will a full-time chairman be appointed to the board of Aer Lingus? This is a cause of concern. Approximately 2,500 staff have left Aer Lingus in the recent past. The Minister admitted that he had no hand, act or part in that decision. There are reports that there will be further job losses when the new business plan is announced at the end of this month. What stance will the Minister take if this is the case and the business plan recommends a loss of one third of the workforce? Will the Minister stand idly by or will he act as an arbitrator?
The 320 workers who have left the company in recent months will not be entitled to shares as agreed in the survival plan even though they have made contributions. Is the Minister aware of their case and what are his plans to rectify that situation?
If Aer Lingus is privatised, can transatlantic flights be guaranteed? If they cannot be guaranteed Shannon Airport will be wiped out. The Minister has indicated there is a difficulty in setting preconditions. The Minister and the Government have a role in guaranteeing a minimum level of service. What is the delay in additional or new shares being issued to employees under the ESOP arrangement? As far as I am aware, everything is ready to go and I wonder why there is a delay.
Will the Minister give careful consideration to a proposal for a management-employee buy-out or is that regarded as a non-runner? Team Aer Lingus is now called FLS and has plans for redundancies——
That has nothing to do with Aer Lingus. FLS is a separate company.
Will those workers be allowed to go back into Aer Lingus as they were originally Aer Lingus employees?
That is a question for Aer Lingus.
A full-time chairman will be appointed in the next couple of weeks. The policy and strategy is to retain the maximum number of sustainable jobs at the airline, consistent with the size of the airline and the maintenance of competitiveness. The State would wish job numbers to be maintained to the maximum number possible but consistent with the commercial situation.
On the question of the delay in the ESOP, 5% of the shares were given over some years ago. The remaining 9.9% portion was to be in return for the completion of the survival plan. That survival plan is largely complete. The remaining 9.9% will be transferred as soon as the chief executive, as is required under the deal, is satisfied that the survival plan has been fully delivered on and signs a letter to that effect. I understand he is not too far away from that decision.
In the company's 2003 report, he indicated that the survival plan was fully implemented.
His signature to a letter stating he is satisfied that the cost savings of the plan have been delivered is required in order to trigger the transfer of the 9.9% shares. On the question about transatlantic services, the Senator suggested that there would be no service if the airline was not in State ownership. Aer Lingus makes a profit on the transatlantic service. That route will be served, irrespective of whether the airline is State owned, by both Dublin and Shannon Airports because it is profitable to do so. It is not regarded as a social service; it makes money for the airline. On the question of a management-employee buy-out, I have ruled nothing out in the structure or mechanism to be used if the Government were to take that decision.
I wish to make an observation before I ask a question. We are here, presumably because of the management buy-out, the MBO; that is the only reason the committee is meeting today. Would the Minister agree that an MBO at this time is indicative of a massive frustration in the management, because the airline is still in State ownership? There would not be any necessity for a management buy-out if the airline were not in State ownership. If there was complete satisfaction with State ownership, presumably at this stage the management would have sat back and not made this bid.
Why have we taken so long to get to this stage? The Minister is talking about examining matters which should have been examined a long time ago. Why has the Government not decided, once and for all, whether it wants to own Aer Lingus? One cannot use the events of 11 September 2001 as an excuse, or talk about various profits, in that regard. The Government should decide, as the Minister for Finance decided in respect of the State banks, whether it should have any involvement in airports and airlines as commercial businesses.
If the Government decides to get out of the airline business, as I suspect it has done although it has not said so, we should consider the issue of timing. The Minister said that it is a volatile business. If that is the case, why is the Government not taking Mr. Walsh's arm off? Why does the Minister not point out that we are making €80 million at the moment, but we want to get out of the airline business? Aer Lingus will make a loss in the future because it has made a cumulative loss over the past 12 years. The Government should state that it wants to sell and that it will sell. Why is there a delay? If a fundamental decision has been taken to get out, we should sell the airline without further delay. I would like an answer to two questions, the fundamental question and the timing question.
Have there been any differences between the Minister and the Taoiseach on this issue? Has the delay been caused by the Minister pushing for privatisation of one sort or another, while the Taoiseach is unwilling to proceed with it? Aer Lingus has come into profit, as the Minister foresaw, but the Taoiseach is unwilling to sell it because he continues to regard it as what the Minister has described as a "strategic asset".
In his presentation to the committee today, the Minister said there is undoubtedly a need for cost-cutting, according to the plan. Can the Minister tell us what he means by "cost-cutting"? Is it a euphemism for laying off more workers? Does the Minister feel there is a need to reduce costs, compared with our international competitors? What sort of price does the Government put on the airline? Is a figure of approximately €800 million too high?
The Senator asked a number of questions. It is important to remind the committee that the Government decided a few days before the end of 1999 to sell the airline.
I do not wish to interrupt, but I know that. The Minister's comments seemed to indicate that the decision is being revised.
We have turned from that road and we are now going down a similar road.
Precisely.
The only problem is that we are in reverse.
The Government decided to sell all the shares in the airline to the public about four and a half years ago. The sale was cancelled, for the reasons I mentioned earlier, in the summer of 2001, before the events of 11 September of that year. The level of confidence in the airline business was shattered after 11 September 2001. The sale of Aer Lingus has not returned to the agenda in the intervening three years for many reasons. We concentrated on a number of issues, principally the survival plan. The airline showed losses of €50 million in 2001 and we had to try to deal with the consequences. It is not true that nothing happened for three years and we are suddenly revisiting the matter now, having dithered in the interim. Following the events of 11 September 2001, there were losses at the airline and significant volatility in the airline sector. Huge cycles were swinging all over the place during the three years in question. Everybody said we would be daft to try to sell an airline in such circumstances.
I know, but the fundamental decision to sell it was taken in 1999. Has the Government rowed back and reversed its decision, or is it still on the 1999 course but cannot sell it for the right price for other reasons?
I am a member of a Cabinet sub-committee of five Ministers, appointed by the Government to make a proposal to the Cabinet in September on whether to sell the airline.
We are in an area of uncertainty. Is it the case that the 1999 decision does not stand?
It does not necessarily stand.
It is not "operative", as Mr. Nixon used to say.
Not necessarily. It would not have been practical to sell the airline during the three years in question, because of losses, the events of 11 September 2002 and the international state of the industry. It was not on the Government agenda for those reasons. I do not believe it would have been on the agenda if a Government of any other colour had been in place. It would not have been on the agenda of any Government in that period. When the survival plan kicked in, the management and staff turned the airline around and we got better results. We have profits again, all of a sudden, and we have taken 2,000 people out of the airline. We are now in a position to re-examine the matter. The industry seems to have settled down and become less turbulent. Investors in institutions are coming back to Governments to say that airline stocks and investments are once more of interest. Nobody was saying that for most of the three-year period after the last decision was taken. We will make a new decision in September. The Government wants to revisit the decision.
What does that mean?
It means that instead of continuing with the policy that was decided on a few years ago, the five Ministers and their officials will examine the options and issues and make a recommendation to the Government in September. I will certainly push for a decision to be made in September. I hope we will be in a position to make an announcement, get on with whatever we have to do and ensure that we bring certainty to the airline. I will be honest by saying that the Government took the view that it wished to revisit the decision. Senator Ross asked me if it is carrying on the initial decision or going back to first base. It decided to revisit the initial decision. Its next decision will be made in September.
It could be a U-turn.
Anything is possible.
Correct.
It is not safe to do a U-turn in an airline.
I call Deputy Seán Ryan.
I would like to discuss one or two other issues. Senator Ross rightly said that timing is a big issue. We will have to get the timing right. He asked me if cost-cutting was a euphemism for laying off staff. I suggest that the chief executive can deal with that issue.
I also asked about the differences between the Taoiseach and the Minister on this issue.
He comes from the north side and I come from the south side.
So you are at one?
Apart from that. He chairs the Cabinet sub-committee. We will see how we go with it.
Is the Minister saying that he could not disagree with his point of view?
I am not sure that is relevant.
I try not to disagree with the Taoiseach.
I am pleased to have the opportunity to pose a number of questions this afternoon. Although I have a clear idea of where the Minister wants us to go, I would like to ascertain where we are going.
The Minister indicated earlier that he is prepared to meet SIPTU to discuss the possibility of a management buy-out. I understood that he had declined to do so, however. Can he clarify the situation? Will he meet the unions to discuss the implications of the management buy-out before a decision is taken by the Cabinet? I ask the Minister to make a specific commitment in that regard.
The Minister has given the impression this afternoon that he is examining this matter from a strategic position. He stated that he does not want ideology to be part of the debate as he prefers to consider the best interests of the country. He has an open mind in that regard. Has the Minister not previously stated that he favours privatising Aer Lingus? If so, how can he be objective and have an open mind on this issue? Has the chief executive officer, Mr. Walsh, or his former chairman recommended to the Minister that the Government should proceed with privatisation of Aer Lingus, in whatever form? I would like confirmation on that point.
It is interesting to hear contributors asking why decisions were taken in the 1990s, especially 1997 and thereafter, in regard to the sale of Aer Lingus and why it did not proceed. Like the Minister, as a public representative for the area, I went through the Cahill plan and the reorganisation after 11 September 2001. Even if the Minister wished to sell the airline at that time, nobody would have been interested. Aer Lingus is now the envy of airline carriers in Europe and America. The newspaper, USA Today, stated that Aer Lingus has not only survived the shark infested north Atlantic, the challenge of Ryanair and the perilous months after the events of 11 September 2001, it has also rang up a net profit of €85 million against nearly impossible odds and against the American big six who are looking at this in amazement in the context of what Aer Lingus has achieved.
Does the Minister accept it would not be surprising for all the sharks out there - the investors who want to make a quick buck - to knock on everybody's doors to try to provide the finance they believe the chief executive and perhaps some board members of Aer Lingus may feel is required in the near future? Does he not further accept that the same vultures were there when the privatisation of Telecom Éireann was mooted in the 1990s? We have to be objective in regard to where we are going and how we will get there.
Did the chief executive officer of Aer Lingus ever bring to the attention of the Minister that, given the profits made in the past two years, Aer Lingus has the resources to provide the capital required for additional aircraft? I am delighted the Minister clarified the matter in that context. The so-called privateers have taken the line that there is no money available from the EU. In the context of some media reports I regret that this is also the line emanating from the Department. The Department of Transport said: "Privatisation would allow the company to raise more funds for investment." It went on to state: "Aer Lingus is a national airline and if it could stay in State ownership it would, but the Government cannot put any more money into it under EU legislation." A Department spokesman said that if Aer Lingus wants to expand they would have to find investment somewhere.
This concurs with the so-called privateers and the economists who want to put across a certain slant. I was utterly appalled recently to hear a senior journalist on "Morning Ireland" say Aer Lingus is not allowed secure funding from the Government. I am pleased the Minister has clarified that point. If Ryanair wanted to increase its airline capacity——
Will the Deputy put his question. There has been a ten minute preamble but the Deputy has not asked a question.
If Ryanair wanted to get capital to purchase extra aircraft——
That is Mr. O'Leary's problem, it is not the Minister's problem.
No, it is not. Would the Government or Aer Lingus object to it going out and getting money? In his statement, the Minister said that under EU rules the State can seek to invest as a normal shareholder in Aer Lingus when the company is performing well and making profits, which it is at the moment, but that in all likelihood, however, there would be opposition from other airlines. When the Government invests in Aer Lingus, which it is entitled to do, Ryanair and other companies object. The Minister has stated that if we are to invest in Aer Lingus, which is allowable, we also have to take cognisance of the fact that somebody else may object. Will he clarify the position once and for all?
I wish to refer to the pension fund which has been underfunded over the years. In regard to the ESOP, is the Minister saying that as far as he is concerned, 9.9% can be paid out? Is he aware of the implications of a further delay for people who will retire or take early retirement before this is signed off?
The Deputy asked me if I would meet SIPTU. I have agreed and I wrote to the union in recent days to confirm that I will do so.
Does the Minister mean before a decision is taken by Cabinet?
Yes, before the Government takes a decision.
Will that meeting take place before the summer break?
I do not know, but it will be as soon as both sides can arrange it. I will not delay it. We will get on with it as soon as we can.
Deputy Seán Ryan also asked about the meeting with the chief executive and the former chairman and whether they brought to my attention that they were interested in outside investors, as he described it, at that time. I said in the Dáil on a number of occasions at the time that they were clearly of the view that an outside investment process was the best way forward for the airline.
I was also asked whether the chief executive had confirmed to me that there were sufficient funds. He confirmed that the resources certainly exist to replace the short haul fleet and that it could be funded from internal resources fairly satisfactorily. It is fairly clear that the airline would not have the resources to replace and expand the long-haul fleet on the scale on which it wishes to do so.
On the point about EU funds and Ryanair, I tried to clarify in my opening remarks that if the Government decided to invest in the airline as an ordinary shareholder, it could do so. The Deputy is correct in this regard. We signalled that this would be quite likely to be challenged. Any time the Government puts funds into a company that operates in competition with the private sector, it is almost certainly challenged by the private sector. It would be incumbent on the Government to show clearly that the investment was an ordinary shareholder investment as opposed to any form of subsidy or support or a rescue of a company.
Would it actually occur——
I was correct to signal in my remarks that the State is allowed invest in the airline but I was also correct that this could be challenged. There is a world of difference between investing in a company and being involved in any subsidy, support or rescue thereof.
It would not be questionable on the basis of the private investor principle.
The law is quite clear. I am confirming that one is allowed to invest.
The challenge would be spurious.
There must be proof.
It would not be difficult to prove it was spurious.
One would have to look at all the facts at the time. The Commission would look closely at all the circumstances of the investment. The Government of which I am a member and that of which the Deputies questioning me were members decided they would not invest in the airline in the ordinary way according to the rational investor principle, for very good reasons - they had other uses for their funds. The health and education services and other services had to be run.
The situation in the company is entirely different.
If a Government has choices to make, should it buy shares in an airline? Both the current Government and that in which the Labour Party was involved concluded they would not do so. The Deputies will obviously understand that the EU rules on state aid are quite clear. The ongoing case involving Alitalia is obviously being monitored closely by the international aviation community to see how the Commission will react to it. I believe it has concluded that some loan was involved, and perhaps some leeway is being granted in that regard.
On the ESOP, I clarified that the 9.9% can be transferred as soon as the chief executive is satisfied. Whatever value one puts on the airline, in terms of hundreds of millions of euro, 14.9% amounts to a considerable sum and I suspect many will calculate 14.9% of the value of the airline and conclude this is what the staff are to receive.
I know I should not say this as Deputy Shortall will probably gobble me up, butwhen one hands over 15% of the shares to the workforce, it is regarded as other than privatisation.
In this case it is the payback for the pay cuts suffered under the survival plan.
The taxpayer owned the company.
It is a payback for past suffering. Let us be clear that it has nothing to do with the future.
What about the taxpayers' payback?
Under the survival plan, the increases were forgone.
Deputy Shortall should acknowledge——
Work practices changed dramatically.
I think Deputy Shortall is on the wrong end of this one. She might as well stop while she is ahead.
She should acknowledge that when the taxpayers give 15% of a company to the workforce, it amounts to €70 million, €80 million or €100 million. This is real taxpayers' money.
What did the workforce give?
What did the taxpayers give?
I asked what the workforce gave.
I am not objecting to this.
It gave a lot and turned the company around.
Let the Minister conclude.
I note there is a lot of money involved, which belongs to the taxpayer, and that it is very generous of the taxpayer to do much of this kind of work.
That concludes this discussion. I thank the Minister for his frank replies to the questions and also Mr. Lumsden, Ms Keaney and Ms Dunning for assisting him.
: I welcome Mr. Willie Walsh, chief executive officer of Aer Lingus, and his colleagues Mr. Brian Dunne, chief financial officer, and Mr. Seamus Kearney, chief operations officer. Mr. Walsh will not present an opening statement and is looking forward to answering members' questions.
I am.
I ask members to be direct in their questioning and to avoid preambles in order to expedite committee business.
I congratulate Mr. Walsh and the Aer Lingus staff for the tremendous job they have done in transforming the company. However, I have a number of questions for Mr. Walsh. The key issue, which was raised by many speakers today, is that of connectivity, which is critical to the future of Aer Lingus both for the State and the consumer. Under any proposed privatisation, partial sale or management buy out of the company, how will connectivity be protected in the future, including the issue of the slots at Heathrow Airport, which are of strategic national importance? There is public concern that the Government may sell Aer Lingus in the short term without considering the long-term impact of such a sale on issues like connectivity.
With regard to the Aer Lingus management group's proposal to the Minister for Transport for a management buy out, how does the group envisage its ability to service the debt associated with this buy out while simultaneously providing the proposed investment of up to €1 billion into the future? The management group has suggested the development of low cost flights to the United States that would necessitate a significant investment. In the case of Eircom, for example, the resources were not available for the ongoing development of the infrastructure. Does the delegation consider that this will be an issue with regard to its proposals for Aer Lingus?
The management group proposes a plan for the development of Aer Lingus as a low-cost transatlantic carrier. Would such a development be based on the existence of one hub - which seems to be the focus of development for many existing low-cost airlines - from which all services are organised? Will the dual gateway status which Ireland enjoys impact on the future potential development of a hub?
Perhaps Mr. Walsh might also speak about the proposals that the delegation presented to the Minister for Transport one year ago with regard to the future ownership of Aer Lingus. Has the new proposal for a management buy out come about because of the delegation's frustration that the Minister has not made a decision on this matter? Has this Government indecision had a detrimental impact on the company in the short term and into the future?
I shall begin by addressing the activity of the senior management group, which has been described in the media as a proposed management buy out, and describe the background and time frame involved. This may help answer some of the questions which members put to the Minister for Transport earlier. It is important to clarify that the management group, which consists of Mr. Dunne, Mr. Kearney and I, has not made any proposal and is not in the process of doing so. We contacted the Secretary General of the Department of Transport on 18 June to request a meeting and it took place on 24 June. I advised the Secretary General at this meeting that the management group wished to seek consent to develop a proposal and made it clear that no work had been done in this regard and would not be done without such consent. I also pointed out to the Secretary General that I was acting under legal advice, which informed me that consent could be refused. I made it clear, therefore, that the management group was seeking consent and fully acknowledged that consent could be refused.
I had a number of subsequent telephone conversations with the Secretary General and presented a document to her on 30 June that set out the assessment of the strategic options as the management group had seen them in September 2003. I shall make this five-page document available to the committee members. It comprises a brief update on the industry and the company, an outline of the management group's proposal, and a description of the main issues that had been considered in our previous document that was presented to the Minister for Transport at a meeting on 16 September 2003. This latter document was produced in response to the Minister's request for a consideration of the various options available to Aer Lingus and this input was made in the context of the long-standing Government policy to reduce its ownership interest in the company. The view at that stage was that the private sector investment process should be initiated without delay, as presented in the statement issued on 16 September. The document of 30 June noted that no action had taken place in this regard over the previous nine months.
When I attended the meeting of the Joint Committee on Transport of 14 April, I indicated that the management group considered the operating environment to be brutally competitive and that significant additional low-cost competition had developed on a number of Aer Lingus's established routes. We also pointed to the failure of several airlines including Jetmagic. There have been more failures since then, including Jetgreen and Duo, and Skynet is experiencing serious problems. The significant fuel price increases have had a major impact on all airlines and we believe that more airlines will fail in the coming months. Aer Lingus is fortunate to be in a strong position and, as predicted, our average fares are significantly reduced and are likely to continue to be further reduced. The industry had seen profit warnings in the preceding months from the two major low-cost airlines, Ryanair and EasyJet, when we spoke to the committee in April. EasyJet had issued two profit warnings at that stage.
Unfortunately, there was limited progress on the EU-US open skies negotiations and on bilateral discussions between Ireland and the US. Against that background the company continues to perform well - the business is profitable and the balance sheet continues to strengthen. It is acknowledged, however, as we mentioned at previous committee meetings, that our revenue base continues to be unsustainable. Our average fares are too high and need to fall further. We are committed to reducing them. The airline will introduce new pricing structures in the coming months which will be of major benefit to the Irish consumer and to tourism in Ireland. While we have significantly reduced our cost base since 2001, it remains out of line with those of our major competitors. It is no secret that further substantial cost reduction is required which will involve comprehensive evaluations of everything we do and a review of all activities and the structures within the airline.
At the meeting last April we made it clear that funding of the short haul replacement fleet, namely, 17 Airbus A320 aircraft, could be completed from internal resources but we could give no comfort on funding additional aircraft to facilitate expansion on the short haul or any replacement or increase in our long haul fleet which would require capital expenditure, possibly in excess of €1 billion. We understand, and it was reiterated today, the Government will not provide that funding. The assistant secretary of the Department of Transport said the same at the last committee meeting.
On 24 June I told the secretary general of the Department of Transport that we regard an immediate move to private sector ownership as being in the best interests of Aer Lingus. That is true both for the competitive environment in which we operate and the change likely to be forthcoming, and the need for access to funding for growth and expansion. It was incumbent on us to be proactive on the ownership issue. We said we were seeking consent, that we would take no action and do no work unless consent was granted, and we would facilitate and co-operate fully with any process put in place. We emphasised that other proposals would emerge as a result of our initiative and we committed to co-operate fully with any process. I continued to make clear in all my conversations with the secretary general that a move to private ownership is in the best interests of the company.
The Minister indicated that was our first approach, the Department had made no previous contact with us and we had not made contact with it. The first and only contact was on 24 June. Several telephone conversations followed and I submitted a document to the Secretary General on 30 June and wrote a letter to the Minister on 2 July, a copy of which I will make available to the committee. Briefly, it states that I advised the Secretary General on 24 June of the intention of the members of the Aer Lingus management team, namely, Brian Dunne, Seamus Kearney and myself, to develop an investment proposal for the company, and requested consent to do so.
On 30 June 2004, we submitted a document, entitled Management Proposal to the Department, which we are furnishing to the committee, outlining the background to, and reasons for, this request. Acting on legal advice that the board of the company should be advised of this request, we provided the company secretary, Mr. Greg O'Sullivan, with copies of the management proposal on 2 July for circulation to the board members. I also called each board member that day to advise him or her of the request. I assured the Minister that we would fully comply with any corporate governance procedure put in place and said we were confident that an attractive proposal could be developed and financed if he granted his consent.
On 7 July, following the Cabinet meeting on 6 July, the three of us wrote again to the Minister and referred to the letter of 2 July, advising the Secretary General of the intention of the members of the management team to request consent to develop an investment proposal for the company. In the letter we recalled that we had submitted the document, Management Proposal, to the Department on 30 June 2004, outlining the background to, and reasons for, this request. We added that contrary to public comments on the previous day to the effect that we sought an exclusive deal or arrangement, the document submitted on 30 June stated that we fully expected other proposals would emerge and we committed to support and co-operate fully with any investment process. As the request had not been granted the letter reconfirmed my commitment to the Secretary General at our meeting on 24 June and in subsequent conversations that in the absence of consent we would do no work in developing an investment proposal for the company.
That remains our position. I wish to clarify this because I do not have an answer to the Deputy's question about a proposal as we have not developed any proposal and will not do so unless and until consent is granted. The Minister said he is satisfied that we have acted correctly at all times. We have at all times acted in the best interests of Aer Lingus and have made it clear that we will not engage in any activity unless we receive consent to do so. That is why no proposal has been produced, or is being or will be developed until consent is granted. That has been our position since the beginning of this process and will remain so. I apologise for being somewhat long-winded in answering the first part of the question but it is important to clarify the point. I will make these letters available to the committee so that members may consider them.
We are pleased that there is a debate about connectivity. If one looks at our track record over the past two years, one will see that the management team has focused on establishing greater connectivity from Ireland to points in continental European destinations and that it has actively sought a change to the existing bilateral agreement that would facilitate major expansion on the transatlantic routes. Yesterday I found an Aer Lingus timetable for summer 2001 and the only destinations we served in continental Europe at that time were Amsterdam, Brussels, Dusseldorf, Frankfurt, Madrid, Milan, Munich, Paris, Rome and Stockholm. Today's route network shows that our focus is to expand direct services out of Ireland to enable people to avail of direct flights from Ireland. Most of those are from Dublin although we have significantly expanded the range of destinations served out of Cork. We will evaluate any route from any Irish airport we believe can be profitable. We have more than doubled, even close to trebled, the size of our network in the past two and a half years. That is, and continues to be, the focus of this management team.
While Heathrow slots are very important because we have consolidated all our London operations there, we want to serve the Irish consumer and inbound tourism by providing direct services rather than maintaining the very restricted route network that existed prior to 2001 whereby access to Ireland was almost dependent on connectivity over hubs such as Heathrow, Amsterdam and Paris. It is our stated desire, clearly evidenced by all we have done since 2001, to develop direct connectivity into Ireland rather than rely on indirect connectivity.
We find it somewhat frustrating that the management team has sought changes in the bilateral agreement to allow us to expand direct services into the United States rather than requiring both inbound and outbound business and tourism to be served over indirect destinations such as Heathrow, Amsterdam and Paris. Our desire - our actions speak loudly in this regard - is to provide direct services from Ireland.
I would argue that Aer Lingus is already the cheapest low-cost carrier on transatlantic routes. However, we acknowledge that further action is required on fare structures. In my opening comments, I stated that there will be more developments in this area in the coming months. It is our intention to continue to reduce our average fares, not only on European routes, which has been the focus of our attention over the past two years, but also on transatlantic ones. On the issue of single or multiple hubs, the low-cost model is based on multiple hubs. The Ryanair and EasyJet models are dependent on multiple hubs, which is the most efficient way of operating. Members will be excused for confusing the low-cost model with the traditional network model proposed and supported by many of the established mainline carriers which hub over their main bases. This is best exemplified by British Airways hubbing over Heathrow Airport, Air France over Paris-Charles De Gaulle Airport, KLM over Amsterdam Airport and Lufthansa over Frankfurt Airport. That is not a low-cost model but a high-cost one which Aer Lingus is moving away from. The model that Aer Lingus is now embracing is the low-cost one that is dependent on opening up efficient hubs and operating from multiple bases to ensure the most effective operational efficiencies rather than having major peaks in terms of operation, such as starting first in the morning and repeating at lunch time. It is our intention to continue developing the low-cost model based on a multiple hub scenario.
The document produced by me and the chairman of the board for the Minister on 16 September 2003 was presented in the context of the Government decision to reduce its shareholding in Aer Lingus. It clearly stated that a move on private investment must take place without delay and that we believed such a process would be successful. This should be considered in the context that since the request for consent was made by the management team, much interest has been expressed in the Aer Lingus story. I have no doubt that a move to the private sector would be a successful development for Aer Lingus.
I welcome Mr. Walsh and his senior management colleagues. The industry update in the presentation contains a grim forecast for the airline industry. Senators Ross and Morrissey, with other commentators, predict the imminent demise of Aer Lingus and argue for the Government to pull out fast before it collapses. Carrying this through to its logical conclusion, it indicates that senior management is very foolish in proposing a management buy-out proposal. However, I would not think for one moment that senior management is very foolish. Many games are being played by right wing media commentators and politicians.
Hear, hear
Aer Lingus is a successful company and all members have heaped praise on management and staff for turning the company around in recent years. Thankfully, now it has a bright future. If it did not and if the prospects were not good for it, presumably Mr. Walsh, the pilots and private interests would not be taking such a risk on it. Let us stop this talk about the likelihood of the company going down the tubes as it is not likely to happen. Mr. Walsh would certainly not be interested in getting involved if it was likely to happen.
As chief executive of the company, but also as a person who is developing a management buy-out proposal, what future does Mr. Walsh see for Aer Lingus? What vision does he have in mind for the company? What type of business does he see the company developing? To what extent is he thinking of developing the transatlantic business? Is that the future rather than the current dependence on the European routes? What future does he see for the company in terms of the numbers of employees that will be required in the future? Media reports on the management buy-out business plan claim it will shed a significant number of jobs. That does not sit with the expansion proposals that management have. If Mr. Walsh intends to increase the size of the fleet and expand the business, surely he would not be thinking of shedding significant numbers of jobs. Will Mr. Walsh tell me how this adds up? What is the company's capital requirement over the next ten years based on the business expansion proposals in the plan?
If there is a business case for the future development of the company, why does Mr. Walsh believe that the best option in terms of ownership is a management buy-out? There are several different options for ownership. The flotation option was not considered by the Government. There is the other option, which has been successful, of State ownership. There is also the possibility of a merger. As chief executive of the company and considering he will want to develop the business in line with its business plan, why does Mr. Walsh believe that the best option is a management buy-out? Why has Mr. Walsh not signed off on the ESOP and resolved the problem with the pensions? Does he accept that there is a big hole in the pension fund? The Minister for Transport indicated that there was no problem in this regard. However, while the pension fund is all right now, if pensions are to increase in line with the consumer price index there will be a deficit of almost €200 million. Why has this not been sorted out and when will it be sorted?
Deputy Shortall's first question was well-structured to get me to comment on the proposed business plan, but naturally I will not because the business plan will be presented to the board at the next board meeting on 26 July. However, I will comment on some issues raised.
The type of business we see for Aer Lingus has been clearly indicated over the past two years. Our business model is a move away from the traditional Aer Lingus one. We see that consumer demand is for low fares, particularly on short haul inter-European flights - I would describe a short haul flight as anything up to six hours. The overriding factor is a demand for value for money and low fares. We have embraced that model and we intend to continue to do so. We recognise that while making significant progress in reducing our fares to date, we need to continue to do so. It is hugely beneficial to Irish consumers.
The Irish consumer is probably best positioned because of the competition in the Irish airline industry. The model will be around low fares. I think that model has been applied to short haul travel and we believe it can equally be applied to long-haul travel. We do not subscribe to the idea that it is a completely different style of business. There are some differences but we can apply to long-haul business many of the lessons we have learned on our short haul operations. That applies not only to the existing transatlantic operations. We would like to expand our operations there if the bilateral agreement changes and expands equally to other destinations to provide greater direct services to Ireland.
I cannot supply the capital requirements figure for the ten-year period but the figure envisaged over the period of the plan we are developing, which extends to the end of 2007, is in excess of €600 million. That is what we believe is necessary for us to spend to take us to the end of 2007. That capital expenditure requirement does not fully address the issue of our long-haul fleets. The replacement or expansion of those fleets would take place after the period of the plan, probably in 2008 and 2009. The plan puts in place steps to address that issue but does not include the capital expenditure involved. It addresses the capital expenditure for the existing short haul fleet and allows for limited expansion of that fleet, which we envisage will take place in 2007. Previously, the plan was envisaged up to the end of 2006 and we have now extended it to the end of 2007, when we foresee a requirement for some additional short haul aircraft. Regarding the capital expenditure figure mentioned, we have not looked beyond 2007.
I am not saying that an MBO or managed buy-out is the best option. As is clear from the document provided, we believe that a move to private sector ownership is in the best interests of Aer Lingus and we are seeking consent to develop one. The Deputy is right to highlight that. In seeking consent to develop one it may be that when we go to do that we would see that the MBO is not a viable option. We have not already decided on that. We have asked for consent to develop it but we have done no work in terms of its development. We fully recognise that in making that request for consent, such consent can be granted only in the context of a completely open and transparent process. The Minister outlined that when he spoke earlier.
Could the witness accept consent to develop a privatisation proposal?
That is exactly what we sought consent to do. There has been confusion about this which is why I wanted to make it clear in the document that we were seeking consent to develop an investment proposal for the company. It is not stated that we were seeking specific consent to develop an MBO. Clearly that could have been one of the issues we would have looked at but all we sought was consent to investigate those issues. We stated in the document which we produced for the Minister on 16 September and in the document we presented to the Secretary General on 30 June that we believe that to be in the best interests of Aer Lingus.
Some confusion surrounds the ESOT. The agreement to transfer an additional 9.9% shareholding in the company to the ESOT requires me to sign off and confirm to the Minister for Transport and the Minister for Finance that I am fully satisfied that two agreements are being fully complied with. The Deputy mentioned them earlier. I have written to the Minister to say I am fully satisfied the "pay foregone" agreement is fully complied with and that the transformation agreements have also been fully complied with. Prior to writing the letter to the Ministers I highlighted the only two outstanding issues yet to be finalised. Accordingly I cannot write to the Minister to say I am satisfied there is full compliance when I know there remain two outstanding issues.
One of these has been the subject of arbitration. We were seeking agreement for it to be finalised by reference to binding arbitration in the Labour Court. I am not sure if we have had a formal response to that. The second issue was also to be the subject of arbitration. Unfortunately, the union involved pulled out of the arbitration process just prior to that. Once these two outstanding issues have been resolved I can write to the Ministers to say I am satisfied these issues have been fully complied with, and I am hopeful that can be done. We have tried to do it by agreement with the unions involved. One of the issues involves SIPTU while the other involves IMPACT. As soon as those issues are resolved, or as soon as there is clarity and certainty around them being resolved, I will be happy to sign the letters as I am required to do. Clearly I cannot sign a letter which transfers a 9.9% shareholding in the company to the ESOT when I know there are two items outstanding and while I am awaiting a response from the unions involved.
I will ask Mr. Brian Dunne, chief financial officer of Aer Lingus, to address the specifics of the pension scheme.
The pension scheme commonly referred to as the Aer Lingus pension scheme is a multi-employer scheme comprising members and past members of Aer Rianta, Aer Lingus, FLS, Airmotive and some other companies. Current Aer Lingus employees make up about a quarter, or 26%, of the total membership of the scheme so it is not an exclusively Aer Lingus scheme. As per the Pensions Act, the scheme is a defined benefits scheme but there are particular rules within the scheme whereby the contribution rates are set for the employers and the members. As the Minister said, there is a triennial actuarial valuation. The last such valuation was carried out on 31 March 2003. My understanding from the trustee report on the scheme is that the result to that point was an excess of assets over liabilities of €155 million. In actuarial terms therefore the scheme is not in deficit but in surplus to a figure of €155 million, amounting to 10% of the actuarial value of the scheme liabilities, without making allowance for future pension increases.
Under the Pensions (Amendment) Act 2002 the scheme's ongoing ability to provide annual pension increases in line with inflation is now submitted to an annual review of the funding standard of the scheme. My understanding is that the last funding review, completed in March 2003, allowed for the payment in full of the annual pension increases in accordance with inflation. Effectively the last full actuarial evaluation as of 31 March 2003 showed a surplus of €155 million. At the last checkpoint in accordance with the Pensions (Amendment) Act 2002 it was confirmed in the opinion of the actuary that the scheme continued to meet the minimum funding standard and on that basis pension increases in line with inflation were provided at the time. The scheme is not in deficit and it is important to realise it is not an Aer Lingus scheme but a multi-employer scheme.
I am aware of that. Does that mean that newspaper comment on that matter recently has been wrong, specifically the comment in The Sunday Business Post last week?
It was incorrect.
I welcome Mr. Walsh and his colleagues and congratulate them again. It is their third or possibly fourth time to appear before the committee and thankfully all who spoke have once again in their opening comments congratulated them. They are to be congratulated on the continued good work at Aer Lingus. I note that the chairman has become rather lenient in the number of questions he is allowing, but my questions will have short answers and I will probably go over my quota.
One question may seem trivial or even irrelevant. I have asked this question of Mr. Walsh on each of his previous visits and will ask him again today. What is the percentage of Aer Lingus business done on the Internet? I know rapid strides were made in that area. When Mr. Walsh first attended, the figure was approximately a quarter of the volume done by Aer Lingus's main competitor. Purely out of personal curiosity, I would like to know the current figure.
Regarding the pensions deficit, I accept the response Mr. Dunne has just given to my colleague, Deputy Shortall. However, I ask for his comments regarding the historic situation with the Retired Aviation Staff Association and the issue that it has had for many years, well in advance of any current issues that there may be. There is an issue. The witness was present when the Minister responded to it and I would be interested in his reaction. I do not wish to get into the minutiae of a business plan, but the witness can probably answer this without doing so.
Are there plans for long-haul non-Atlantic business? Regarding the consultation process with the unions, at what stage does the witness envisage full and comprehensive consultation taking place with employees? I have forgotten my last question.
It was obviously irrelevant.
The percentage of sales on the Internet is currently 56% of total sales. In the context of sales within Ireland, it is in excess of 75%. In our home market, more than 75% of sales are now through the Internet. That is a great credit to everyone in Aer Lingus who has worked on that project. I am also pleased to advise the committee and the Deputy that they will see further developments in our Internet site in the coming months, which I firmly believe will be very well received by our customers and will help increase further the percentage of sales through the Internet. It has been one of Aer Lingus's significant successes in recent years and it does great credit to all the people who worked on it. I am pleased there is scope for further improvement on that position. I will ask Mr. Dunne to address the pensions issue in a moment.
Regarding the long-haul proposals for the period of the plan, we have identified potential additional destinations other than transatlantic ones, but we do not anticipate expanding into those markets during the period of the plan. It is very much an issue linked directly to potential change in the bilateral situation with the United States. That is really the key to unlocking potential for expansion, not only into the US but into other markets. We have identified several potential markets that we could serve. It is a factor that influences our decision regarding the long-haul fleet evaluation that is currently ongoing and the discussions that we are having with Boeing and Airbus to ensure that we have aircraft capable of serving not only existing destinations but potential new ones that we have identified. It is very much our intention to expand to destinations other than transatlantic ones, but it will not feature in our business plan. However, the business plan will clearly be a dynamic development, changing after the document is produced and if an opportunity presented itself before 2007 we would move to take advantage of it.
Regarding the consultations we have had with the unions, to date they have taken place with a sub-group of our central representative council. We are calling it the joint business review group. I briefed the committee on that last time I was here. Those consultations are subject to confidentiality agreements and I believe that they have been extensive. We had a meeting this morning and are due to meet again by Friday at the latest. That level of consultation does not constitute formal consultation with individual trade union bodies so we recognise that there is a responsibility to consult the central representative council, and that is currently ongoing. After the approval of the business plan, there will be a requirement to have full and more detailed consultation with the specific trade unions, in the main, SIPTU and IMPACT. Clearly, that will take place over the coming weeks and months.
I will ask Mr. Dunne to address the pensions issue.
Retired staff are, like all others, members of the scheme. The general scheme has 13,000 members. There is no separate scheme for retired staff. Pensions payable from the scheme, in accordance with scheme rules, are based on final retiring salary. The Aer Lingus obligation during the course of employment is to make the set contributions in accordance with the rules of the scheme. If there is early retirement, the pensions must be funded at that point. Clearly, over the past few years, we have fully complied with our obligations and fully funded our contributions, either on an ongoing basis or in the case of early retirement. I understand from meetings that the chief executive and I have had with RASA that it would like a way of increasing the payment to certain pensioners unilaterally. I do not believe that it has a formal proposal as to how that could be achieved, given that all members of the scheme must be treated equally, on the basis of payments and final retiring salary. I do not believe that there is a formal proposal as to how an enhancement might be achieved, what the nature of the enhancement might be or how it might be applied to specific individuals. I am not aware of any firm proposal at this point.
However, from the point of view of Aer Lingus, recognising that it is a multi-employer scheme and that there is a pool of assets to fund liabilities, we have complied in full and funded in full our annual pension contributions. We have also funded in full strains that the actuary has indicated in the early retirement programme. As far as we are concerned, we have met in full all our obligations to the scheme.
I remember my earlier question. I accept that Aer Lingus has met its legal obligations as such. I take it that the witnesses are aware of the issue to which the Minister also referred as the subject of ongoing discussion. Does Aer Lingus currently have an objection in principle to dealing with that outstanding issue? Will it apply strict commercial criteria to its current obligations and not go beyond that?
What are "strict commercial criteria"?
Aer Lingus is open to operate on strict commercial criteria. Has that been communicated to RASA?
Absolutely.
I remember my previous question. I am slightly perplexed and would like to ask Mr. Walsh at what stage he feels a conflict of interest will arise on the part of senior management. Taken to an extreme, his presence here today represents a conflict of interest regarding the day-to-day operation of the airline, in that his attendance arises from his presentation to the Minister at the end of last month. He is shaking his head, but I would like to give him the opportunity of stating the potential for a conflict of interest in the current situation.
I state most clearly that it is my firm view - and I am sure that I speak for my colleagues - that no conflict of interest has existed, no conflict of interest exists and if one were recognised, appropriate action would be taken to address it. At all times we have acted completely above board. One could criticise us for doing so and asking for consent to develop a proposal. However, at all times we have acted completely openly and have done nothing wrong. We have taken legal advice regarding our responsibilities. We have satisfied ourselves very clearly, as has the board and the Minister, that no conflict of interest has existed or exists now. I am very clear that at all times my colleagues and I have acted in the best interests of Aer Lingus. Our motivation since my appointment as chief executive and since my colleagues have taken up their positions has been to ensure that Aer Lingus is a successful, vibrant, profitable, viable entity, and that continues to be our focus today. We made it clear that nothing would be done without consent or without everyone being aware of what was going on.
We also made it clear we would comply fully with governance procedures considered appropriate to ensure issues of conflict of interest did not arise, and I guarantee that this remains the case. We will not do anything unless consent is granted. We have done nothing and we will do nothing.
Absolutely no implication to the contrary was intended in my question. The Minister for Transport, Deputy Brennan, spoke extremely highly of the professional manner in which the entire affair had been handled. It is important that Mr. Walsh has had the opportunity to place that on record.
I believe something needs to be clarified. It is important that everyone, Mr. Walsh, his colleagues and the Department, is happy that everything is transparent and 100% above board. It is important that the public is reassured about this so that any future dealings by the Department, as clarified by the Minister, and the executives of Aer Lingus are seen to be above board.
I join my colleagues in welcoming Mr. Walsh and his team here again and compliment him on his continued success, as we have done on many occasions. The question I have follows on from what Deputy Glennon has said. Would it not have been more prudent of the management team to step aside while an aggressive approach to the development of this project is being pursued? Does Mr. Walsh not see that there is a perception of a conflict of interest, while on the one hand a business plan is being developed? I am not for one moment questioning the integrity of the witnesses. They are three individuals of the highest integrity, as has been demonstrated at all times. Their statement is clear as regards that. I believe, however, there is a perception in this regard - unfortunately in politics to a large extent perception becomes reality - that at a time when a business plan is being developed for the future of the company the witnesses have a stated desire to be involved in or be allowed to develop an MBO. I accept the assurances that this has not been developed in any way. However, I am concerned that it allows a perception to be developed.
On the transfer of the shares to the ESOT, we spoke about this in the past. Everybody is referring to the letter of 26 May where two particular elements which have not been achieved in terms of the survival plan of 2001 are detailed, as regards cabin crew and loaders at Dublin Airport. My understanding is that if the survival plan is taken as a whole, considerable savings far greater than envisaged have been made. Are the witnesses not nit-picking as regards these issues when savings far greater than envisaged have been achieved? On the one hand they are making life difficult for the employees as regards these two issues. What way are workers to be compensated for the considerable savings they have made in the other areas? The issue here is——
Will Senator Dooley put his question?
How is the issue to be resolved in the case of people who are leaving the company now and will not be in a position to reap the benefits from the difficulties they have experienced and the sacrifices made? Because of the way the trust is set up in terms of the ESOT they will not be in a position to gain in terms of the considerable sacrifices Deputy Shortall talked about earlier. There are also issues involving the shedding of workers at Shannon which we have talked about in the past. Again, there is a perception in the minds of workers, which I do not accept, dating back to a discussion here previously where Mr. Walsh admitted that for strategic reasons the company was largely moving away from the ground handling services at Shannon Airport. It was not so much a costing issue, but it was strategic. That would be of concern to many people because of the belief that he is creating a product that would be more saleable to future investors. That is where this whole conflict comes into play. It does not convey any sense of confidence either to the workers in the mid-west or the people who live there, who do not believe that Aer Lingus will have a strategic role in the region in the future. They do not believe the company has the best interests of the region at heart. If this analysis is not correct, perhaps Mr. Walsh will comment to that effect.
He said private ownership was the best option. As a chief executive officer, would he not accept that if there is a business plan for the future and the shareholder is prepared to provide him with the finance to develop that plan in line with the scheduled capital expenditure, should it matter to him or should he have a stated option on where the money is coming from or who is the investor? It seems that it should not. However, Mr. Walsh might have a different opinion. I would like to know why he believes private ownership is the better option. Some of the other points I had are repetitive. I might come back to him with supplementary questions if that is all right. I want to state at the outset that the issue I raised as regards the conflict of interest is something I believe that he has been very direct about in terms of his own position.
I think this has been well clarified, both by the Minister and Mr. Walsh. I do not believe there is need to revisit it. Mr. Walsh might deal with the other questions.
I have raised a couple of issues where I believe the perception may be greater than the reality. However, I would like to hear the team's comments.
In all fairness, Mr. Walsh and the Minister both clarified the position at a very early stage and I believe there is no need to revisit that. He might answer the other questions.
As regards the transfer of shares to the ESOT, I would consider it a breach of my duty to sign off on something that I know was not implemented. I would not be prepared to do so. I have been upfront as regards the requirements. I take that responsibility seriously. There are two outstanding issues - I do not believe I am nit-picking - there is an issue of equity with other staff who have delivered in full, and it is only fair that these issues are addressed and resolved. I hope that they can be. My objective in writing the letter to the Ministers was to highlight the fact that there were only two issues outstanding and that I was fully satisfied as regards all other matters.
Senator Dooley raised an interesting question as regards the shareholder. To a large degree I agree with what he says. The problem is that it is clear we have a shareholder which has indicated that when times are bad and we may need access to money, we are not going to get it. When times are good and we may want access to money we are not going to get it. The shareholder is on record as saying the Government will not invest money in Aer Lingus. I fully accept and the Minister has clarified that the Government is in a position to invest, under the market investor principle. I believe, however, that if the Government decided to go ahead with an investment in Aer Lingus, that would be scrutinised. This would lead to having our business torn apart by other interests. I am not sure it would be in the best interests of Aer Lingus.
I am opposed to the payment of State aid. I oppose what is happening in Alitalia It is wrong that Alitalia is given a bank guarantee. This should not happen, regardless of the conditions associated with it. The best interests for Aer Lingus is to have clarity around funding whenever it is required. I give the example of Lufthansa, which recently raised €752 million through a rights issue. That clearly is a fantastic option to have available to an organisation. The only access we would have to funding at the moment is through funds we generate internally - that means we have to be very much focused on our profitability - or through debt. Equity would be a much cheaper source of funding. I would love to have that option available.
It would be better for Aer Lingus to have clarity around this issue. It is critical for us. However, I recognise that the State is allowed to invest in Aer Lingus. It is not a simple issue. It would be subject to ratification and investigation. That investigation, as we know from previous events, would be very detailed and would open the business to scrutiny. There would be an opportunity for competitors to pore over detailed sensitive commercial information. I do not believe that is in our best interests. For that reason I believe that access to private equity is in the best interests of Aer Lingus.
Has Mr. Walsh given any thought to considering his position in terms of developing his plan in an aggressive manner outside the company? Might that be a prudent approach to take?
While I have addressed this matter clearly, I reiterate that we will do nothing without consent. I have no hesitation in saying no conflict of interest exists. I will not be standing aside.
The matter has been clarified. As I must leave, I propose Deputy Glennon takes the Chair.
Deputy Glennon took the Chair.
I will not consider the national issues as Mr. Walsh has answered on many of them, particularly in regard to the ESOP and the conflict of interest. The Minister told me that Aer Lingus needs Shannon. While Mr. Walsh cannot answer on the business plan which will be published on 26 July next, does Aer Lingus need Shannon? What commitment would Mr. Walsh give to the regions in the context of a privatised Aer Lingus?
Flight EI 111 now flies from Dublin and Mr. Walsh did not provide the load factor figures which he was supposed to provide in this regard. In addition, there is no continental service from Shannon Airport. With regard to this downgrading of services at Shannon, it is clear Aer Lingus is going down the low cost route that Ryanair has taken. Has Mr. Walsh considered marketing the regions, including Shannon, in continental Europe?
Aer Lingus got rid of third party handling despite the fact that it was profitable. Will Mr. Walsh reconsider this decision? Aer Lingus management at Shannon proposes to do away with 24-hour cover, which was of significant benefit to the region in terms of hotel business when flights were diverted from Cork and Dublin. Why is this option being considered? Mr. Walsh often stated that Shannon has a much more expensive cost base than Dublin. Will he explain why this is so?
In 2003, we carried 446,015 passengers from Shannon on transatlantic services compared to 657,684 passengers from Dublin, the split of passengers being 60% from Dublin and 40% from Shannon. The figure of 446,015 compares to other long-haul markets on which previous speakers asked me to comment. For example, for Singapore, Sydney and Johannesburg, we estimate a market of 63,000, 55,000 and 47,000 passengers respectively. To put this into context, the Shannon market is a huge one and, therefore, we will definitely serve it. We have identified that a market exists at Shannon, we intend to serve that market and we have grown that market. We are committed to it because it makes commercial and financial sense to us.
As I said the last time I addressed the committee, our commitment is to ensure that we operate profitable routes. The market in Shannon is more seasonal than that of Dublin, with the vast majority of passengers travelling between the months of May and August, although there is year-round traffic. The way we have served this profitably is to originate and terminate flights in Dublin, travelling through Shannon, to supplement the lower loads available directly from Shannon with traffic from Dublin. In doing so, we experienced significant growth of 19% in passenger numbers on the transatlantic route last year. This year, to the end of June, we have continued to experience a growth in our transatlantic passenger numbers, which are up by 11% overall, comprising growth in Dublin of 15% and 5% in Shannon. The market continues to grow. The transatlantic operations are profitable with fares significantly lower than in the past and our intention is to continue to lower the fares.
Our commercial activity is focused on providing services where our customers want to go. The market which exists at Shannon is sizeable, although I believe the figure is somewhat inflated by the fact that services exist there. If there were services from Dublin only and it was decided to open a market into Shannon, it would be more difficult to grow the market. However, the market is sizeable and is one we intend to service.
This is not the case with other carriers. Aer Lingus is criticised in regard to Shannon. It needs to go on record that Aer Lingus has maintained and grown services at Shannon while other carriers have stated that they do not wish to serve it and only do so because of the bilateral requirement to do so. We are on record as saying we intend to serve that market and to do so profitably. That is the commitment I express to Shannon. I ask Mr. Seamus Kearney to address other specific questions.
With regard to Deputy Pat Breen's questions, third party handling at Shannon was inherently unprofitable. As part of the consultation exercise with local staff representatives, we opened the books on that decision to an independent financial expert nominated by SIPTU, who concurred that this business was inherently unprofitable to the tune of almost €2 million per annum. We were very keen for this exercise to take place. When it demonstrated that this is an inherently unprofitable business, we decided to exit from third party handling at Shannon. In line with that decision, there is now no need to have 24-hour cover at Shannon Airport to resource flights we do not handle. It would not make sense to have staff on duty when no flights we deal with are entering or leaving. Both decisions emanate from a commercially based decision that third party handling was inherently unprofitable.
With respect to the question on the privatisation of Aer Lingus, the commitment remains the same. I am pleased to confirm and it is important to record that the Minister has given us instructions to manage Aer Lingus in a commercial fashion and has at no time during his term as Minister attempted to interfere with any of the commercial decisions made. The commitment I expressed today is one that holds regardless of the ownership of Aer Lingus. Our focus is on operating profitable routes, not on serving unprofitable routes for public service reasons because there is no future in that, as has been seen. Our future is solely dependent on our ability to generate profits and cash from the business to enable us to reinvest to allow the business to expand and prosper.
We will continue to focus on expanding services into and out of Ireland. I assure the committee that the focus of the business plan which will be presented to the board of Aer Lingus is on increasing passenger numbers, route networks and profitability over the period of the plan.
Regarding third party handling, to where does Aer Lingus intend to divert airlines?
In terms of our operations, we can organise either Dublin or Shannon depending on the timing. However, the provision of 24-hour cover is a matter for Aer Rianta, not for the airline.
It is important to highlight the difference between diversions caused by technical failures and those necessitated by commercial considerations. In the case of the former, the requirement under law is that a diversion must be taken to the closest airport, rather than the closest airport which has Aer Lingus staff. That could be Shannon, Cork, Belfast or an airline in the United Kingdom. With regard to diversions necessitated by weather conditions, the 24-hour cover which used to exist was minimal and we must consider the appropriateness of different airports. From time to time, if such action does not interfere with the safe operation of the aircraft, the aircraft diverting is sent to different airports to ensure an even allocation of the workload.
I ask all speakers to be conscious of the time as there are four remaining members who wish to speak.
I suggest that the delegation members should attempt to answer in a tighter and more efficient manner.
I compliment Mr. Walsh and his colleagues on the work they are doing although it could be said that that is what they are paid to do. The management group is before the committee today because of its request to the Minister for Transport to undertake a management buy-out proposal. The delegation cannot reveal the contents of that proposal but will it outline the changes in practice it would implement to improve services for its customers and for the State if it had full control for the next five years? The Minister alluded to several airlines which are in part-private ownership and perhaps the delegation will outline the situation internationally with regard to other state airlines. Are such airlines up for sale, how are they being managed and how is their state funding allocated?
Some people will argue that the Aer Lingus brand as we have known it for several decades may be adversely affected by the low cost model which is being developed for the company with some attendant reduction in services. Do Aer Lingus's customers care or mind whether it is a State airline or a privately-owned one as long as they are getting value for money? Is the brand as important as it used to be or are people more concerned with low fares and better value?
Mr. Walsh reassured Deputy Breen that Aer Lingus is committed to Shannon Airport. However, the bilateral and open skies agreements may come undone over the next five years. What is the company's commitment to the provision of daily services on the Shannon-New York and Shannon-Boston routes? Will the delegation give that commitment or is it within the horizon over the next five years if the management group attains full control?
I like to think I am in full control.
Based on what the Minister said today, I do not think that Mr. Walsh is.
I accept that. The management group would not do anything differently and my colleagues and I are driven by the commercial requirements of the airline. Senator Morrissey has asked some important questions. There is a lot of debate about the issue of the Aer Lingus brand. I am not a marketing professional and my background is operational so the Senator is perhaps addressing that question to the wrong person. The brand is important to Aer Lingus and the shamrock is a fundamental element of that brand, and I reassure the committee that this will continue to be the case in the future. The difference in approach in recent years has revolved around tactical advertising of our website, www.aerlingus.com, as a sales channel rather than a brand. The brand continues to be Aer Lingus as represented by the shamrock symbol.
I believe that Aer Lingus's customers are pleased with the changes the company has made to its fares and our passenger statistics indicate that we are doing something right. Record numbers of passengers are travelling with Aer Lingus, load factors are higher then ever before and fares are lower than at any time in the past. In common with all airlines, I accept that there are times when Aer Lingus does not meet its customers' expectations. However, I believe that those expectations are being met with regard to the most critical and overriding issue, which is price, and we intend to continue lowering fares.
The market for Shannon Airport is sizeable though seasonal. Aer Lingus operates more than one flight to New York and Boston at certain periods of the year. I believe that flights will continue on a year-round basis but in the context of flights that originate and terminate at Dublin Airport.
What might the management group do differently if it were in full control?
I do not believe we would do anything differently but there are issues of which we must be conscious. We would like to open bases outside Ireland but that would require investment. I believe such a move would be the correct one for the business but we do not envisage its implementation during the period of the plan.
I return to the last point raised by Senator Morrissey, who seems to be trying to create the impression that prices would tumble after privatisation. In reality, however, the opposite can occur post-privatisation and prices have already fallen substantially under the current system, which has experienced significant success. Mr. Walsh spoke about opening up other markets. Can this occur under the current system or is there a restriction on investment? Has Mr. Walsh made any approach to the Government on this matter and has any such request been rejected?
With regard to the ESOT, can Mr. Walsh confirm that the unions have not yet received a reply from him regarding their letter of a month ago in which they signalled their intention to go to the Labour Court? There has been speculation about a perceived public cynicism with regard to a conflict of interest. It is fair to say that the management group will make personal gains from a buy-out and this is the cause of public cynicism, particularly in view of the Eircom debacle.
I believe that Mr. Walsh's preference is for the open skies agreement rather than the bilateral agreement. Will he confirm this preference and outline the benefits of the former for the travelling public?
Fare prices are driven by the market, that is, the consumer, and I do not believe that the downward trend in fares over the past few years will be reversed. If it is, customers will speak with their feet and go elsewhere. It is a highly competitive market which is being driven to a large degree, as I do not mind admitting, by aggressive pricing from carriers such as Ryanair. One must acknowledge that such carriers have changed the aviation industry for the better.
Other markets can be developed under the current system; it is not a matter of State versus private ownership. With regard to the ESOT, there was correspondence and discussion with one of the parties about going to the Labour Court on a binding basis. However, the management's proposal that the issue go the Labour Court for binding arbitration was not accepted. I am pleased to say that we must deal with the facts and I do not hesitate to state that the facts indicate that the management group has always acted in the best interests of Aer Lingus. We will continue to do so and to be completely open and upfront in all our business.
I favour an open skies policy as it would allow Aer Lingus greater freedom to operate in the market where we currently operate under restrictive bilateral agreements which are not in the interests of the consumer. They limit choice and force Irish consumers and tourists to travel indirectly into Ireland rather than being able to access direct flights. Existing bilateral agreements do not allow Aer Lingus to provide these services. The agreements are anti-competitive and anti-consumer. The consumer will benefit significantly from an open skies policy.
I urge management to issue the additional shares to staff as soon as possible as that would be in everybody's interests.
If the Minister for Transport does not interfere with the operation of Aer Lingus and management is allowed a free hand in the running of the company, what is management's principal reason for wanting to privatise? Does it believe that Aer Lingus should not be part of the State sector? If that is the case, which I suspect it is, where does it see the obstacles to State ownership? Delegates have explained the issue of funding in that the company needs €1 billion and management is unsure where this will come from if not from the State. However, are there other obstacles? Shannon may be a difficult problem. Would there be State interference in cost-cutting? Would that be difficult to achieve if Aer Lingus is part of the State sector? Does the delegation anticipate political resistance to further cost-cutting and to Aer Lingus becoming a more commercial organisation?
Aviation is a profitable business this year, although it was not so in the preceding 12 years. I would like to hear the delegates' comments on whether it is a cyclical business. Deputy Shortall does not seem to believe it is.
I will address the Senator's last question first. It is a cyclical business. However, carriers such as Ryanair and Southwest in the United States have proven the right business model can make a company profitable through the cycles. That has not been the case for the traditional airline model which has accepted low profitability and the cyclical nature of the business. We question whether we can be profitable through good times and bad. Unless we address our cost base, we will not be profitable. There is no guarantee of profitability in the future. The profitability of Aer Lingus to date has occurred on the back of aggressive cost reductions within the airline. Although we achieved record margins of 9.3% last year and are trading in line with expectations for operating profits of approximately €95 million in the current year, these give no guarantee of future success. Our revenue will be under pressure because of what we wish to achieve and the competition we face. It will continue to decline. We can only be profitable if we continue to reduce our cost base.
There is scope for further significant cost reduction within the airline. We continue to do business in a different way. I compliment all Aer Lingus staff; it is a credit to them that we can have this debate. However, past performance is no guarantee of future success. It is clear to us that unless we address our cost structure we will not be profitable going forward. We will return to losses. We must address this issue. This management team is not prepared to stand back and accept that losses will occur, nor should any management team do so. We will take action regardless of the ownership of Aer Lingus. The business plan will be presented irrespective of the debate surrounding ownership. Aggressive cost cutting will happen.
On the question of whether there will be political interference, members of this committee are in a better position to answer that. Political interference creates an added dimension to everything we do. We have already spent three and a half hours here. That time could have been spent doing other things.
If Aer Lingus was not in the State sector, the delegates would not need to be here.
I am pleased to be here. However, there are additional responsibilities. The Minister outlined these in his responses to the committee's questions. These make our business and the way in which we address these issues more complex. They slow matters down, although we like to think that we operate at a fast pace. That pace is somewhat slower than it would be if we were in private ownership although we would not do anything differently if we were. The business plan we are producing is right for Aer Lingus, irrespective of the ownership issue.
I welcome Mr. Walsh, Mr. Dunne and Mr. Kearney. On the issue of consent, did Mr. Walsh say there was no plan, figures or costs before the consent letter was written? Does management have ideological baggage or a problem with semi-State companies being part of a modern vibrant economy? There are people, such as Senator Ross, who believe the private sector is good and the public sector and semi-State bodies are bad. That is not the real world. However, I would like the opinion of the Aer Lingus management team.
On a point of order, I cannot allow that comment. It is not true. If Deputy McGrath wishes to say so, that is okay. If he wants a row, that is also okay. However, the comment is totally untrue.
We live in a democracy. That would be the Senator's consistent view although I accept his explanation.
I am interested in companies that are efficient and modern and look after their staff. Would the delegation agree with this concept regarding the management of a company?
Did any of the management team meet the Minister for Transport before September 2003? One of the delegation used the phrase "in the best interest of Aer Lingus". Many of us would be concerned about the strategic position of Aer Lingus as a company in an island economy in terms of our economic development. People are concerned about handing over the brand of Aer Lingus, which is a national asset. Many feel that the brand is part of Ireland, its development and economy and are loathe to give it away.
On the issue of the low-cost model, delegates have spoken about aggressive cost-cutting. Is this code for major staff reductions? Are there significant cuts involved? Will the company take short cuts in safety and public safety? People have genuine concerns about this.
That is outrageous.
People are greatly concerned about the issue of public safety.
That statement is calculated to create disquiet. It is not backed up by any evidence.
People have concerns when they hear the phrase "cost-cutting".
They have no concerns whatsoever. It is an outrageously irresponsible statement.
I represent Dublin North-Central and people are concerned.
I ask Deputy McGrath to withdraw the comment.
My question relates to people's concerns when they hear about cost-cutting.
I know that. I ask him to withdraw the implication that there were questions regarding the safety of Aer Lingus.
These are the questions that people ask me. There was no implication.
I ask the Deputy to withdraw the comment implying there are doubts about the safety of the airline.
People have raised concerns.
The Deputy is the only person to ever raise such a concern. It is outrageous.
I withdraw the implication. I live in the real world and I listen to constituents and taxpayers when they raise issues and concerns.
According to its company update, Aer Lingus continues to perform well and is profitable and the balance sheet continues to be strengthened. If I were in a private company which produced this update, I would be happy. I accept one must look at developing one's market and examining costs. If I was in a private company, I would be of the view that this update represents a sound base and constitutes a good school report. I am concerned about why people are obsessed by private sector ownership. That is the reason I raised this question.
With regard to the broader issue——
We have a long-standing practice in this committee that members are entitled to ask three questions, and some leniency has been allowed in that respect.
I accept that.
The leniency allowed can only extend so far.
I am near concluding. My second last question concerns fuel prices. Mr. Walsh said that the fuel prices have increased dramatically from a historic average of $245 per tonne to as high a price as $400 per tonne. Over what timescale did that price increase occur? That represents a major cost for the company and it is a major price increase. I accept this is a major issue in Mr. Walsh's plan. My final question relates to——
Some of us have been here for three and a half hours, yet the Deputy has been given more time than we have.
: —the conflict of interest issue. This issue was raised with Deputies and I would like to hear a broader response to it.
Many of those questions have been dealt with and I ask Mr. Walsh to treat them accordingly.
I will do that. There is no conflict of interest; there never was one and there will not be one. Fuel prices have increased significantly over the past 12 to 18 months. It is a significant aspect of our cost base, representing about 14% of it. We are fortunate in that we have good hedging policies in place that have protected us from the extremes of the spot market. That is a credit to the work that has been done within the financial section of Aer Lingus. While the price of fuel has gone up, we are not paying those prices because we bought forward, so to speak, significant elements of our fuel requirements for the current year and for 2005.
I have worked in Aer Lingus for 25 years and, therefore, in a semi-State company. My idea is that Aer Lingus would be an efficient, modern, profitable and viable airline business. I am committed to achieving that regardless of ownership. I have made it clear that we will do what is right for the business. I am clear, equally, that it is in the best interests of Aer Lingus that we have access to equity, and that can be best achieved through private investment in Aer Lingus.
Aggressive cost-cutting is the order of the day. It is not a code word for anything other than aggressive cost-cutting on every aspect of our cost base. I pointed out to the committee previously that of the €344 million savings we achieved to date since 2001, less than 20% of them have been achieved through direct staff related costs while 80% of them have been achieved through non-staff related areas. Our focus is on all aspects of the cost base.
To suggest we would ever do anything to take short-cuts in regard to safety is outrageous. I am the accountable manager in Aer Lingus and my background is operational. I flew as a pilot for 18 years. My operations and everything I do have been instilled with a requirement to ensure that everything we do is safe, and that will not change. Nothing we are doing will ever impact on the safety of our operation. We would never do that.
In regard to the strategic value of Aer Lingus to the State, that issue was answered in October 2001 when Aer Lingus was facing bankruptcy and we were told we were on our own. The Government was powerless to do anything about that. If it were not for the actions taken by the management and staff of Aer Lingus, the company would have gone out of business at the end of 2001. If that had happened, I am sure the gap that would have been left by our demise would have been filled by other carriers. We operate in a competitive business. If we disappeared out of the market, any of our business, because we are profitable, would be replaced. The strategic interest question was answered back then. If it was a critical issue at that time, there would have been no question about Aer Lingus being allowed to go out of business. I am clear in my mind about that. When I took over as CEO of Aer Lingus on 19 October 2001, I was told we were on our own. We had to take whatever action was necessary to save the airline, and great credit is due to everyone in Aer Lingus that we have done that.
Prior to meeting the Minister on 16 September, the chairman and I met him in June 2003, although I cannot recall the exact date. I may have met him once prior to that. The Minister attended a board meeting in October 2002. It was at the meeting in June 2003 that he requested that we revert to him in September 2003, which we did. The Minister attended an Aer Lingus board meeting in October 2002. I may have had one other meeting with him, although I cannot recall that at this stage. Those were the formal meetings I had with the Minister.
Everything I have heard this afternoon links in with a statement I issued on 5 July when I believed the purpose of this exercise was to try to pressurise the Government to make a decision on the privatisation of the airline. It is clear from this discussion that there is full commitment from the management team to the privatisation of Aer Lingus, and the sooner the better, and that on the basis of a previous commitment in this regard, the Minister is of the same view.
Did Mr. Walsh sound out the financial institutions on an evaluation on Aer Lingus? What is its current valuation? When Mr. Walsh was told that the company was on its own, does he accept that was in the context that support was not and would not be available from the Government because at that stage Aer Lingus was seen to be in free-fall? I compliment Mr. Walsh, his team and everyone in Aer Lingus on turning the company around. The company's performance, having moved from the position of a loss of €38 million in 2001 to that of a profit of €85 million last year, is the envy of everyone in the aviation industry. What is the company's projected profit for this year?
When Mr. Walsh appeared before this committee on an earlier occasion, he indicated that he had plans to out-source the catering service and ground handling service in particular. Is that still his view in terms of the future development of the company?
I have a concern about how the company might develop in the context of Ireland as an island economy. It is all very fine where the motive of a company is solely that of profit, but if Aer Lingus was privatised tomorrow and venture capitalists invested in it and having made a profit withdrew their investment after five years, would Mr. Walsh accept that, in the context of no control mechanism being in place and there being no concern for the greater good of the economy in terms of regional development or tourism, the new management of the company could say that it was moving its operation out of Ireland? Will Mr. Walsh accept that Ryanair is currently one of the most successful companies? What guarantee is there, other than solely underpinning the profit motive, that Ryanair will not move its operations completely out of Ireland? What guarantee in that regard can Mr. Walsh give to the people of Ireland and the workers of Aer Lingus who have put so much into the company?
After privatisation, any management team could come along in three years time and, as we have seen in Telecom, move off in another direction with huge profits. The company could be sold off and what will this island economy be left with? I want to see an efficient Aer Lingus that will continue to provide the type of service it has done since its inception. Does Mr. Walsh accept that there could be an alternative plan to the privatisation model he and his team think is the most objective approach? There are people who feel that one does not necessarily have to privatise the airline.
As regards the plan that runs until 2007, what provisions are envisaged? It was stated earlier that a minimum of €600 million would be required for capital investment in that plan. How many additional new aircraft would be required to expand the business? It would be easy for people in the short term to put an inflated figure on what was required, knowing that the Government is not in a position to do it. This must be examined in the context of the plan, which I have not seen and neither have the Aer Lingus workers. I am concerned that, as the Minister said earlier, we are looking at this in an objective manner. It seems we have now arrived at a situation where, irrespective of alternatives, Aer Lingus management sees the privatisation model as the only option.
We have not taken any sounding about the value of Aer Lingus so I have no idea. We are not engaged in any activity. We have made a commitment that we would not, so we have not done anything and I cannot answer the Deputy's question.
There was a statement in the newspapers that Mr. Walsh had done so.
I am on the record here, and have been very clear in every conversation I have had with the Department of Transport, that at the outset I gave a commitment that without consent we would not do anything. That remains my position. Nothing has been done nor will we do anything. I assure the Deputy that we have not done anything.
I shall take Mr. Walsh's word.
I share the Deputy's views on Aer Lingus. We are fully committed to managing Aer Lingus to ensure that it is efficient, profitable and has a viable future. That is what we are focused on and that continues to be so. I am pleased to say that we continue to operate in line with our expectation, set out at the beginning of the year, that we would make an operating profit of about €95 million in the current year. That was the target we set for the year and we are continuing in line with that. Despite everything that has happened in the industry, including fuel price changes, we are still trading in line with that so it is likely to be in or around €95 million.
The capital requirement I have outlined, which is approximately €622 million, is to fund the short haul fleet replacement that has been approved by the shareholder. This has already been evaluated and examined in detail. It comprises the purchase of seven A320 aircraft, approximately five additional short haul A320 aircraft to be purchased during the period of the plan, and pre-delivery payments on some long-haul replacements for the existing long-haul fleet.
To put it in context, a long-haul aircraft would cost in excess of €100 million, while one engine for a long-haul aircraft would cost in excess of $20 million. These are very expensive assets so €622 million, in the context of the fleet replacement programme that is ongoing, is not a large figure. There is total visibility regarding that capital expenditure requirement. A significant element of that concerns capital expenditure to which we are already committed, but we have not paid out yet because we have not taken delivery of the aircraft at this stage. I am not sure but I think all the other questions may have been answered.
Mr. Walsh has been positive in his forthright contribution. I have a supplementary question. In the unlikely event the Government decided to retain the company as it is or look at alternative strategies, is Mr. Walsh committed to Aer Lingus?
I am delighted to say that I have worked in Aer Lingus for 25 years. I have always been committed to Aer Lingus and I remain committed to the company. Everything I have done has been done in the best interests of Aer Lingus.
Mr. Walsh spoke a lot about the Ryanair model and he is attempting to move closer to that. I wonder, however, if there is a market in this country for two Ryanair-type airlines. As Ryanair gets closer to the no-frills airline model - where it is now talking about charging for baggage and so on - does Mr. Walsh believe there is a market for a low-frills airline? Apart from my political views on the matter, many people find aspects of the Ryanair operation to be objectionable, including the lack of comfort. I am not suggesting that Aer Lingus should revert to serving dinners on London flights, however. Many Irish people are uncomfortable with the Ryanair operation and there is a distaste for the way in which workers are treated by the outfit.
Price is not the only consideration. Everybody welcomes the fact that Mr. Walsh has brought down fares, which are fairly well pitched at the moment. Many people are prepared to pay the extra €20 or €30 for an Aer Lingus ticket, partly because of the attachment to flying with the national flag-carrier and partly because of the company's traditional ethos, the friendliness of the staff and the nicer aspect of flying with Aer Lingus as opposed to Ryanair.
I must ask Deputy Shortall to refrain from mentioning specific entities in their absence.
I do not think any of this is in dispute. How much market research has Aer Lingus done on that?
In fairness, they observe protocols well themselves.
Personally, I think it is a mistake to try to get down to the level of Ryanair. I know about efficiencies, but there is a market for something better than Ryanair. Earlier, when I asked Mr. Walsh about the MBO, he made an incredible statement, that he did not seek approval to develop an MBO proposal.
We sought consent to develop an investment proposal.
Yes, exactly, that is what I am saying. That is quite a revelation. It is an extraordinary statement. I was trying to remember who had said that this was an MBO. My recollection is that the story was from the Department. I wonder how Mr. Walsh feels about the fact that it was portrayed as an MBO. Why has he not taken the opportunity to clarify the situation since then?
Mr. Walsh says in this proposal: "We are fully satisfied that an immediate change in ownership is in the best interests of the company." He has already said he does not think the necessary investment will be forthcoming from the State. Is that his only concern? We do not know who the Minister for Transport will be in September, and now that the Minister for Finance, Deputy McCreevy, is off the pitch, we do not know what the ideological persuasion of the new Cabinet will be. If there was interest in the State investing in the company, would that be agreeable to Mr. Walsh? Is his only concern that the investment would not be available or does he have other concerns about State ownership?
I agree with the Deputy's comments on the airline model. We benchmark ourselves against Ryanair's cost base. We offer a much better service and we are not attempting what that company produces. Our advertising is based on low fares, way better. That is fundamentally what we believe in terms of the business model we provide and that is exactly as the Deputy outlined. It is our intention to continue with that but I am not afraid of acknowledging the contribution Ryanair has made.
There is a great deal of scope for us to develop our business model. Our fares are not appropriate and there is scope for us to reduce our fares. When the details of our business plan are revealed with the aggressive growth we anticipate, it will be clear to everybody that growth can only be underpinned if we provide customers with attractive pricing and it is our intention to do so. We are not trying to replicate Ryanair. We have a different business model. There are fewer differences than there used to be but they are appropriate differences and we will continue to do that.
The documents we presented speak for themselves. I am pleased the Deputy asked why we did not comment. We gave a commitment that we would not and I heard the Deputy refer in one interview she did to loudspeaker diplomacy. The only people absent from all the discussions that have taken place are the management team. We have not contributed at any time or in any way to the public debate around that.
That is a significant misrepresentation of the facts which Mr. Walsh should have corrected.
We gave a commitment and we believe in honouring our commitments. We said we would not do so and we did not do so. I am pleased to have been presented with the opportunity to clarify all these issues in this forum. We were delighted the committee invited us to attend because we felt this was an appropriate forum to express our views clearly on the record. I thank the committee for that opportunity. However, we have not engaged in the debate. There have been times when we wanted to but because we gave a commitment not to do so, we honoured it.
I am also pleased to have circulated copies of the documents we put forward to committee members because they set out the reasons behind our actions. That should clarify in the minds of committee members why we have done what we have done. I assure the Deputy we are at all times motivated by what we believe is in the best interests of Aer Lingus and we will continue to take action in the best interest of the company.
What about the ownership issue?
I do not have ideological issues in this regard. I have reviewed and understood where we stand today and I have considered what our shareholder has said not only in regard to investment in the company but also, for example, on dividend policy. It is not just a case of putting money in but seeking to take money out and understanding the requirements of our business to invest to ensure we can expand and can continue to reduce our unit costs. We have reduced our unit costs by approximately 35%. We expect during the period of the plan to reduce such costs by a further 35%. That is the scale of cost reduction and unit cost base that is necessary to ensure we can be relevant in the consumer's mind. I agree completely with the Deputy that price is not the only consideration but it is an important consideration when people are examining options.
Is Mr. Walsh saying State ownership is an impediment to reducing the cost base?
The absence of investment is an impediment and the Government is on record as saying it will not invest. The issue is whether it is prepared to, not whether it can. The Government has been clear on this. I cannot answer whether that will change. That was the view expressed by representatives of the Department of Transport the last time we met the committee in April.
I refer to media speculation on potential partners in the MBO. The media were able to name one financial institution with Japanese origins and facilities in England and outline other information on the proposal. Was that totally idle speculation?
There is absolutely no basis for that. There has been no contact, directly or indirectly.
Has an attempt been made to contact Mr. Walsh or his group?
No, not to the best of my knowledge. I would recall such a contact. The first I heard about that was from the media. There has been no contact. We gave a commitment that nothing would happen and we have honoured that commitment. The first I heard of that name was through media speculation.
On behalf of the committee, I thank Mr. Walsh, Mr. Kearney and Mr. Dunne for such an informative meeting. I am sorry we detained them so late. I also thank the staff of the secretariat and the Debates Office staff as we have kept them later than normal.
