The purposes of this Bill are:—
(i) to empower the Minister for Finance to take up additional shares in Aerlínte Éireann Teoranta to the amount of £10 million;
(ii) to empower the Minister for Finance to make further payments for capital purposes to Aerlínte, not exceeding £5 million; and
(iii) to increase to a total of £50 million the limit of money which Aerlínte and Aer Lingus, between them, may borrow under the guarantee of the Minister for Finance.
Since the enactment of the Air Companies Act, 1966 there has been no statutory provision for further investment in the airlines by the State. That statutory provision was replaced by the 1966 Act in the light of a decision reached some years earlier that at that time the Companies could be regarded as having reached a stage where they should be able to finance further normal growth from revenue and commercial borrowing.
This view has had to be modified in the light of a number of new factors. There has been sharp growth in the transatlantic traffic. The pace of technological change leading to the introduction of faster and larger aircraft and intensified international competition have brought about the need for further substantial capital investment in new aircraft and equipment. The air companies in common with other carriers on their routes have to face the effects of the rapid pace of technological change and intensified competition. Once newer and more profitable aircraft types are introduced on a particular route by one airline its competitors have no option but to re-equip themselves in like manner unless they are prepared to accept a declining share of the traffic, reduced profitability and, ultimately, a cut-back in the employment of staff.
The growth in air traffic is expected to continue and the air companies have made forecasts of the traffic they expect to cater for over the next five years. These forecasts show an increase in passenger numbers from 1,372,000 in 1967-68 to 2,163,000 in 1972-73. Over the same period revenue is estimated to increase from £24 million to £46 million. This period will also see the introduction on the Atlantic of the Boeing 747 jets. To maintain this momentum and to secure the forecasted increase in traffic and revenue in this dynamic industry the air companies must acquire the necessary new aircraft and ancillary equipment.
The five year programme for capital re-equipment by Aer Lingus and Aerlínte up to 1973 includes the acquisition of eight Boeing 737 jets for Aer Lingus, one Boeing 320 jet and two Boeing 747 (Jumbo) jets for Aerlínte. The originally estimated cost of these aircraft has escalated and has also been affected by the sterling devaluation of November, 1967. The companies' total capital outlay for the five year period is estimated at £71.5 million. The companies are satisfied that this heavy investment would yield a satisfactory commercial return but the sheer amount involved created serious difficulties for them. They undertook a close study of the financial aspects of the proposals in consultation with three leading international bankers.
They were advised that to service commercial loan capital on this scale would, because of the burden of interest and capital repayments, be beyond the capacity of an airline of their size. Furthermore, if the companies were to rely solely on borrowing and on their own resources, the high proportion of their capital which would then be in the form of loan capital, would tend to worsen future prospects of borrowing. It was considered that the only satisfactory solution was to reshape the capital structures of the companies so as to increase the proportion of equity to loan capital.
This conclusion was reached independently by the companies and by their consultant bankers. The air companies were satisfied that of the total of £71.5 million required, they could, over the five years, find £28.8 million from their own resources, namely depreciation reserves and accumulated profits. They also, considered, with the concurrence of their advisers, that they could prudently borrow a further £28 million. This left the balance of £15 million which the companies proposed should be provided in the form of equity by the State. Following detailed joint study by the companies and by the Departments of Finance and Transport and Power, the Government decided that the Minister for Finance should provide to the companies a further £10 million share capital and a further £5 million in the form of non-repayable interest bearing advances.
The £5 million non-repayable sum is a permanent capital investment but is neither equity nor preference capital. Interest will be a charge against revenue and not profits. It is the intention to require payment of interest at a rate equivalent to the cost of borrowing to the Exchequer. Thus the company will be relieved of the burden of repayment but the Exchequer will have an assurance of interest payments.
The £10 million equity is risk capital and any dividends payable on it must come from profits and be dependent on their being earned. The airlines expect to earn profits which will enable them to pay some dividends on this new equity by 1972-73 but the rate of dividend will, of course, have to be struck each year in the light of the companies' earning position and commercial prospects.
The £15 million is a new capital contribution by the State. The air companies will borrow this sum in the first place from sources not normally available to the Exchequer and this borrowing will be taken over by the Exchequer to finance the new investment. Thus the amount available to finance the Government capital programme will be increased; the companies will secure the long-term capital injection they need and distortion of their balance sheets will be avoided.
The proposed further State capital contributions are an investment in an outstanding growth industry. Apart from any direct return account must be taken of the very substantial indirect return from our investment in the companies which play a key role in the development of tourism, in the provision of highly skilled employment and in the development of technological and management skills. The air companies are one of our major growth businesses whose continued welfare remains a major concern of the Government.
During the past ten years the joint revenue of the air companies has increased from £4.8 million to £24 million, an increase of 400 per cent. Passenger traffic has increased from 515,000 to 1,372,000 an increase of 166 per cent and employment has increased from 2,000 to 5,000 approximately. The companies have been operating profitably for many years but their profits have been re-invested in growth rather than distributed as cash dividends and the State's investment of £13.6 million shows a growth of £4 million as at 31st March, 1968.
The bulk of the profits made by the companies have derived from the transatlantic operations of Aerlínte. Short haul operations of the type carried on by Aer Lingus are everywhere marginally profitable but the Aer Lingus network plays an essential role in our national economy by virtue of its services to tourism, to business and as a feeder to Aerlínte's profitable transatlantic routes.
The value of the airlines to the national economy was recently the subject of a study commissioned by them from distinguished consultants. The study shows that the total return to the community after the most realistic possible estimation of the indirect and social benefits accruing from the activities of the airlines but not susceptible of precise measurement in money terms, is certainly not less than 11 per cent and possibly as much as 26 per cent on the total capital investment.
Some interesting points which emerge from the study were that the airlines earned 70 per cent of their revenue from outside of Ireland while only 45 per cent of their expenditure was incurred outside the country leaving a substantial favourable balance. It was also reckoned that in the absence of our own national airlines up to £1.6 million annually would have left the country by way of fares to foreign carriers. The net contribution of the airlines to our foreign earning was in the order of £6.4 million per annum. The five year programme, the financing of which this Bill deals with, will see the companies expand into a new and greatly increased level of activities.
They will, by Irish standards, be very big business indeed. It would be unwise, however, to believe that either the aviation industry generally or our own airlines will be able to relax after 1973. The pace of technological progress continues to increase. There are prospects of even larger jets than the Boeing 747 and supersonic jets are just around the corner.
Because of the magnitude of the capital outlay which the expansion of the air companies is likely to involve in future years the Government have, therefore, decided to carry out a thorough review of the position before the end of the present programme. The companies are planning to undertake in 1970-71 a review in depth of their capital programmes and commercial prospects and will engage specialised consultants, as necessary, to assist them in doing so. I should avail myself of this opportunity to congratulate the boards and staffs of the air companies on the success the companies have achieved to date. I have every confidence that this success will be maintained and that the companies will reach and surpass the difficult commercial targets which they have set themselves. I consider that the investments we are now making will be put to good use and that they will yield returns both direct and indirect which will be of crucial benefit to our economy. I have, therefore, no hesitation in recommending this Bill for the approval of the House.
