The Bill is essentially an enabling one which will allow the Minister for Finance to increase the State shareholding in the air companies by up to £60 million and to increase from £75 million to £150 million the State guarantee limit for borrowings by the companies. State equity investment in the air companies at the present time is £43.6 million and, subject to passage of the Bill, it is the intention of the Government to subscribe an additional £30 million by way of equity over the next 12 months, £15 million before the end of the present month and the other half before 31 March 1984.
The Bill has to be seen as part of a comprehensive package designed to bring the air companies back to profitability as soon as possible. Action by the airlines themselves and certain cost alleviation payments by the Exchequer are other elements in the overall package. I should perhaps point out that, apart from some timing changes necessitated by the fact that introduction of the Bill was interrupted by the dissolution of the 23rd Dáil, the financial restructuring package is along the same general lines as that announced by my predecessor in July 1982.
lation relating to the air companies last came before the House. Since the Air Companies (Amendment) Bill, 1978, which also provided for an increase in the State's shareholding in the air companies, was discussed, the aviation industry has passed through traumatic times. We have witnessed the demise of such well-known airlines as Laker Airways and Braniff, other major carriers such as PanAm have struggled for survival, while the aviation industry world-wide has recorded losses of unprecedented proportions. The situation is still grim. To put the position of Aer Lingus in its proper perspective, it is interesting to note what Mr. Knut Hammarskjold, Director General of IATA (International Air Transport Association) had to say about the state of the air transport industry in the course of the association's most recent annual general meeting. Mr. Hammarskjold pointed out that preliminary estimates for 1982 indicate that the combined loss for IATA carriers in their international scheduled operations will be more than two billion dollars and that collectively these carriers had lost money every year since 1979.
The main factors causing serious financial problems for the world's airlines have been the severe economic recession, which in recent years has affected the entire western economy and caused a slump in tourism and in travel generally, the effect on airline costs of inflation, fuel cost escalation, high interest rates, volatile currency exchange rates, and general over-capacity, particularly on the North Atlantic, which has led to severe competition for traffic and unremunerative fare structures.
In the year ended 31 March 1982 Aer Lingus returned a net loss of £9.2 million. This followed a net loss of £13.6 million in 1980-81. These figures are in stark contrast to a net profit of over £4 million in 1979-80 and a general record of profits through the Seventies. Indeed, lest the profitable record of Aer Lingus be overshadowed by their current difficulties, I think it only fair to point out that in the 20-year period from 1960 to 1980, Aer Lingus made profits in all years except four. This was a record matched by few national airlines. However, this record could not be maintained due principally to a dramatic deterioration in the economics of the airline's North Atlantic operations.
While the company's North Atlantic service has traditionally been a loss maker, profits from their European air transport operations and more particularly from their ancillary activities, such as aircraft overhaul work, helicopter operations, hotels, computer services etc., have over the years helped to cushion the results of the Aer Lingus/Aerlínte group as a whole. The scale of the 1980-81 losses, coupled with an assessment that 1981-82 would be little better, changed that situation utterly and left the airline facing major problems. At the heart of those problems was the question of continued operation on the Atlantic.
Aerlínte have lost money in each year since 1971 on their North Atlantic operations and accumulated losses on those operations as at 31 March 1982 exceeded £63 million. The problems of the Atlantic have now become endemic and all airlines are suffering from them. Indeed, in the year 1981 total published losses incurred by the airlines on the Atlantic amounted to $400 million and a figure of much the same magnitude is estimated for 1982. Excess capacity and uneconomic pricing have inexorably brought heavy losses in their wake. Governments on both sides of the Atlantic have for some time past recognised the need to bring a degree of stability back into the market and, while some steps have been taken along that road, in a situation of deep world recession and excess aircraft capacity it would be unrealistic to expect an immediate about-turn from the uneconomic pricing policies that have plagued the airline industry in recent years. If anything, the events of 1983, as they are unfolding, suggest that the road to recovery will be a very long haul indeed.
For Aerlínte the problems of an Atlantic operation are particularly acute. The smallness of the market, affecting economies of scale, seasonality, affecting the ability to employ aircraft adequately on a year-round basis, and low average fare, arising from the dominantly tourist as against business nature of the Irish market, are factors which inescapably make the Irish carrier's role especially difficult. Against this background of continuing heavy losses and inherent difficulties in their operation, Aer Lingus concluded, following a review of their strategic position with the help of management consultants, that without some additional State investment they could not maintain Atlantic operations.
The fundamental question, therefore, had to be faced: should Aerlínte continue to provide an Atlantic service or should the presence of the national carrier on the route be terminated? An expert group, comprised of representatives of my Department, the Department of Finance, the Department of Trade, Commerce and Tourism and Aer Lingus addressed that question and the related financial implications. The review group looked at the main factors in the deterioration of Aer Lingus's financial performance, examined the scope for cost reduction measures within the company and reviewed the role of the ancillary activities and their contribution to the company's finances. The group looked in detail at the future of the North Atlantic service, having regard to its contribution to the economy generally.
The review group's examination revealed that in the short-term at least there would be very little difference between the operating loss returned by the airline with their full range of trans-Atlantic and European services and the loss anticipated with North Atlantic services closed down. This situation arises from the fact that, in spite of 1,500 immediate redundancies which would arise with an Atlantic closedown, a large element of costs currently shared between the transatlantic and European operations would remain after an Atlantic closedown, thus pushing up significantly the costs of the European operation, rendering that operation unprofitable.
In the course of their assessment of the value of the airlines's trans-Atlantic operation to the economy generally and the implications of cessation of services by the only carrier on the route with a commitment to providing a service on a year round basis, the review group consulted with representatives of the various agencies concerned, including Aer Rianta, Bord Fáilte, SFADCo, Córas Tráchtála and the IDA. The group found that, apart from the very substantial loss of employment involved — 1,500 jobs — the withdrawal of the Aerlinte service would prove damaging to many sectors of the economy including tourism, trade and commerce. I should, perhaps, mention that this view was generally shared by the agencies consulted by the review group.
While continuation of the North Atlantic operation was not seen by the group as being justified on strictly commercial grounds even though closure would significantly disimprove the economics of the European operation, the group's assessment of the contribution made by the service to tourism, trade, industrial development, Shannon Airport and the Shannon region generally, indicated that a recommendation in favour of termination of the service would be difficult to justify.
It was on the basis of all these considerations that the last Government, in considering the financial position of the air companies in July 1982, concluded that it was essential from a national viewpoint that the airline should continue to provide a scheduled trans-Atlantic service, a decision recently re-affirmed by the present Government, which also accepted the need for further State investment in the air companies.
The immediate problem is that arising from losses in the past the balance sheet of the air companies' consolidated operations bears an unsustainable level of debt relative to State equity. As of March 1982 the ratio of debt to equity was 88:12 and the interest bill in the year 1981-82 was in excess of £12 million. This is an unacceptable position for a company engaged in international commerce.
In examining the need for further investment in the air companies, the Government have had to take into consideration not alone the particularly difficult financial position of the Exchequer but also competing claims for equity investment from other State companies, some of which are also in the transport sector. It is against that background that the Government recently confirmed the former Government's decision to invest £30 million equity in the air companies by 31 March 1984.
The Bill to provide equity is only one part of a thoroughly researched and comprehensive proposal to restore as soon as possible to viability the finances of the national airline. There is no question that losses will be tolerated indefinitely or that there is unlimited Exchequer support available. Action by the airline themselves is, therefore, an essential element in the overall plan to improve their financial performance.
An area in which Aer Lingus have been remarkably successful has been the development of profitable ancillary activities to balance the losses which the company have incurred on their air transport operations. Over the years, operating profits, before interest and tax, from ancillary activities, have grown from £4 million in 1973-74 to over £18 million in 1981-82. In net terms the 1981-82 profit after all charges amounted to some £12 million. The success of Aer Lingus in these ancillary areas of providing services to other airlines, hotel management and financial and computer services, is an example of the dynamism which Government expects from State enterprises. These activities provide profits which have helped to sustain basic transport operations; without them a serious crisis in the airline's finances would have occurred long before now. In addition, they help to provide and sustain significant employment in Ireland.
It is, of course, the essence of commercial risk-taking that some investments may not come up to expectations. The Government, therefore, expect Aer Lingus to keep under continual review all the individual components of their investments with a view to ensuring that they are earning an adequate return. I know that this view is shared by the Board of Aer Lingus. Moreover, in the present circumstances there are limits on the amount of finance which the Exchequer can make available to the airline. In that situation, it is reasonable — and I know that the previous Government were of the same view — that the company should make the maximum contribution which is commercially prudent from their ancillary activities, towards the resolution of their present problems.
I want to emphasise, however, that it is not Government policy that Aer Lingus should disengage from their ancillary activities. It would be a very short-sighted strategy to dismantle the ancillary activities programme and forego the profits that the programme can continue to generate. A continuing, and hopefully growing, flow of profits from an ancillary activities programme, constructed and operated within the constraints of the airline's own resources, can help to ensure that Aer Lingus continue as a self-sufficient airline to discharge their mandate to provide air transport services on cross-channel, European and North Atlantic routes.
Action is also being taken by Aer Lingus with a view to improving efficiency and reducing costs in every aspect of their operations. Undoubted progress is being made on this front, but with the recession continuing and constant pressure of competition, Aer Lingus must be relentless in cutting back expenditure wherever possible. I fully appreciate that such necessary action can, of course, affect certain routes. Indeed, Montreal and Chicago have already had to be dropped from the company's scheduled passenger network. The B707 fleet was retired as its economics disimproved. Operating patterns have had to be modified to realise savings. Substantial savings in fuel consumption are being achieved and new technology is being introduced.
I am aware of the considerable progress which Aer Lingus have made over the past two years in reducing staff numbers. While consultants' reports have made it clear that Aer Lingus are in line with industry norms of productivity for airlines of their size, the financial pressure which they are facing and the drastic measures being taken by their competitors to reduce their unit costs are such that further improvements are clearly necessary. It is clear that our State companies which operate in international markets can only continue to be successful if their unit costs are as low as or lower than those of their competitors. Sustainable jobs of long-term value to the community can only be maintained within a framework of commercial viability. For this reason I strongly support the efforts of Aer Lingus to streamline their operations further by reducing supervisory structures and simplifying work practices. Considerable progress has already been made but Aer Lingus are themselves fully aware of the need to do more to enable them to return to profitability as quickly as possible.
When these various elements — equity investment by the State and the measures being taken by the airline themselves — are combined, the unfortunate fact remains that Aer Lingus will still be in difficulty at least until a much more favourable environment is restored on the Atlantic route. In that situation, and bearing in mind that accumulated losses on Atlantic operations give rise to an interest bill of the order of £7.5 million a year, the Government accept that some temporary support in respect of the commitment to continue Atlantic operations is called for. Payment of £5 million a year for a three-year period between 1983 and 1985 by way of cost alleviation to Aerlinte accordingly forms an integral part of the overall financial re-structuring package. Provision for payment of the first £5 million instalment is included under subhead S. of the Transport Vote in the current year's Estimates. I must stress, however, that this cost alleviation is a temporary measure to help the airline during a period of particular difficulty. As such, it will, I believe, help the airline's finances without interfering with the commercial ethos of their operations.
There is one other aspect of the North Atlantic situation to which I must refer and that is the position in relation to charter traffic from the United States this year. Senators may have seen recent press reports on this subject and I would like to take this opportunity to clear up any misunderstanding which may exist.
Firstly, may I say that the Government welcome US charters and see them as having an important role to play in ensuring that the needs of Irish tourism are adequately served, particularly in the peak season. Any assessment of charter activity must, however, also take account of the basic need to provide the framework for comprehensive, reliable year-round air services at the lowest possible economic prices to meet the growing requirements of trade, commerce and tourism between Ireland and the US. Excessive charter capacity can very easily destabilise the market for scheduled carriers with a commitment to providing year-round services. This can be particularly the case when the charter capacity is provided at what can only be termed opportunistic or indeed predatory fare levels. It is against that background that I have had to examine the position as it was emerging on the charter front this year and take certain decisions which I will now recall for the benefit of the House.
In examining charter programmes submitted in accordance with my Department's charterworthiness rules up to 31 January 1983, I reviewed the overall market situation and concluded that for the New York and Boston gateways, filed programmes, coupled with the services provided by the three scheduled service carriers, would provide ample capacity for the coming summer. I accordingly approved the programmes before me at that time. These programmes provided for a doubling of the number of charter seats that could be offered, as compared with the 1982 level of operations, and for a 50 per cent increase during the peak months June to September. In approving that scale of increase. I am satisfied that there is ample scope for growth in tourist traffic between the US and Ireland in 1983. In that regard, Senators will be aware that Bord Fáilte have set themselves a target of a 5 per cent increase in tourist numbers from the United States this year.
The charter programmes will be operated on PanAm aircraft by Round Tower/Old Country Tours, the largest tour operator in the United States specialising in the Irish market, and by International Weekends, a large Bostonbased tour operator who have brought visitors to Ireland for many years. The approved charter programmes are attractively priced and, taken in conjunction with the extremely keen fares being offered by the three scheduled carriers serving the US-Ireland market, Aer Lingus, Northwest Orient and Transamerica, should go a long way towards helping Bord Fáilte to attain their 1983 target. Indeed, I should also mention that PanAm charter operations played a significant part in the turn-around in Shannon Airport's fortunes last year, and the increased charter activity now authorised should help further to strengthen Shannon's performance during the current year.
I have referred already to the destabilising impact that excessive charter capacity can have on the overall market. Accordingly, when approving the increase in charter activity which I have already described, interested parties, including a number of US airlines and tour operators, were notified that summer 1983 charter programmes beyond those duly filed and approved by me would not be authorised from either New York or Boston into Ireland. That decision. I might add, was taken only after full consultation with the State agencies involved in the promotion of tourism to Ireland, all of whom acknowledged that the decision was necessary in the best interests of Irish tourism and the development of Shannon Airport.
I am satisfied that without this regulatory action, considerable damage could have ensued, damage which would not only have aggravated Aer Lingus' already serious financial problems on the Atlantic, but might also have undermined the commitment of the US carriers to continue providing scheduled services to Ireland.
Some press reports have suggested that my decision also affects charters from Chicago. That is not the case. Charters from Chicago, or indeed any US point outside the gateways of New York and Boston, are not affected by my recent decision.
Before concluding, I should like to say a few words about Aer Lingus' current traffic performance and prospects. Traffic for the year ending 31 March 1983 continues to show the effect of the recession and, for the third year running, cross-channel air traffic is down compared to the previous year. Continental traffic has shown a fall of some 1 per cent. In traffic terms, the Atlantic is the only bouyant sector, with Aer Lingus achieving a growth rate of 3 per cent in 1982. The year ahead is seen by Aer Lingus as another difficult one. In financial terms, and taking account of the various measures to which I have referred during the course of this speech, the position is, however, somewhat more promising with Aer Lingus hopeful of reversing the loss-making results of recent years.
The financial package which is now being put together was developed after an exhaustive analysis of various options by the review group to which I have referred already. I recognise that the package still leaves the airline with a formidable task in endeavouring to return to profitability. Such a return is vital, not only in terms of the next few years, but also so that the airline can begin to face the major question of fleet replacement in the latter half of the eighties. I should like to add that I am grateful to the Opposition for their co-operation in the speedy passing of the legislation through the Dáil and I know the same co-operation will be forthcoming in this House.
I commend the Bill to the House.
