Chairman, for the benefit of the committee I thought it might be useful to provide some background to the aviation industry in general, remind members of the background to the crisis in Aer Lingus and discuss briefly the developments in Aer Lingus since the tragic events of 11 September 2001. I thank the committee for the opportunity to address it. With my colleagues I hope to be in a position to answer any questions the committee may have.
Globally the airline industry has experienced a very difficult trading environment over the past two years. The air transport industry worldwide was in decline before the tragic events of 11 September 2001 in the United States. In 2001, world airlines incurred operating losses in the order of $11 billion. In 2002 the preliminary estimates predict operating losses in the order of $10 billion. However, some airlines thrived during this period, proving that it is possible to prosper in adverse circumstances if the business model is right. The single characteristic marking out those airlines that did well from those that did not is the focus on maintaining a low cost base.
Aer Lingus also showed signs of decline prior to 11 September 2001. In 2000, Aer Lingus made an operating profit of almost €80 million and was planning for profit in 2001. However, by July 2001, a combination of factors turned that operating profit into a forecast loss of €44 million. Following the tragic events of 11 September, that forecast loss was adjusted to €80 million if no remedial action was taken.
Although the airline was in decline prior to the impact of the terror attacks in the US on 11 September, the industry was changed fundamentally by those tragic events and changed forever. Aer Lingus had to change urgently and radically or it would have gone out of business. Household names in the European airline industry such as Sabena and Swissair disappeared almost overnight.
A radical survival plan was prepared by management, approved by the board of Aer Lingus, agreed with the staff interests and implemented with great speed. The main points of the survival plan included: a cost reduction programme of almost €190 million, a reduction in staff numbers of over 2,000, a pay freeze and radical changes in work practices.
Credit must go to the staff in Aer Lingus for the speed and determination with which the survival plan was agreed and implemented. I pay tribute to all staff for their contribution to the remarkable turnaround achieved in such a short period.
In the wake of the downturn in market conditions and the events of 11 September 2001, it is clear that the aviation industry has changed fundamentally. It is equally clear that the key to a sustainable and profitable business model in that changed environment is aggressive and relentless cost management. From the outset we made it clear that the survival plan was the beginning and not the end of change for Aer Lingus. During 2002 we began to move beyond survival to continue to reduce our cost base, significantly cut our business and leisure fares and opened a series of popular, direct routes out of and into Ireland. Based on this performance we are confident of exceeding our most recent operating profit forecast made in August of €45 million.
Some of the highlights of our performance during the past year include the implementation of our survival plan, the achievement of our cost reduction target of €190 million as set out in the survival plan and a further €130 million tranche of cost reduction announced in June 2002 of which €90 million has already been achieved. Our cost base continues to be out of line with our competitors so further ongoing cost reduction programmes will be necessary in 2003 and beyond. There was a major reduction in economy and business fares with over three million cheap fares being made available in 2002, economy and business fares were reduced by up to 60%.
The success of aerlingus.com now accounts for over 40% of total bookings through this channel, an improvement from 2% in November 2001. We have reduced distribution costs from €163 in 2001 to a predicted €79 million in the current year. We have achieved greater efficiencies through the introduction of nine new routes in 2002 with no additional aircraft or staff resources and more new routes have been announced for 2003. The bottom line is that our cash position was significantly stronger at the end of 2002 compared to the end of 2001 and we have returned to profit, a full year ahead of target in the survival plan.
The outlook for 2003 is that the industry will continue to be in a very difficult trading environment. Air Transport World, one of the most respected industry publications is predicting an operating loss for the industry of almost$5 billion. We are confident we can make further progress but only if we continue to reduce our cost base aggressively and relentlessly and to press forward with our programme of change for the airline. In 2003 the business environment will continue to be dominated by intense competition, economic weakness in key economies and the threat of war in Iraq. Our immediate objective is to build on the progress of the past year and to continue with the strategy of lower costs and lower fares. We will also develop more new routes and grow the Aer Lingus expanding base of satisfied customers both in Ireland and internationally.
I avail of this opportunity to highlight a number of key strategic issues that will form the backdrop to our future performance. The ongoing imperative for cost reduction and the difficult and uncertain international business environment form the background against which business decisions will be made in the current year. We are targeting structural changes in our cost base arising from a fundamental review of our fleet. The objective is to significantly simplify our fleet structure. Complexity involving multiple aircraft types and sizes drives extra costs and operational inflexibility. Aggressive profit targets have been set for the business over the next two years that will see the airline generating significant double-digit returns at the end of this period. We regard this as the minimum necessary for viability and to enable us to develop the business.
Aer Lingus supports the policy of developing low-cost facilities at Dublin Airport both through the temporary Pier D facility and through the building of a second terminal in competition with Aer Rianta. Aer Lingus plans to continue to add new routes based on these expansion plans and the lower costs brought about by competition between the airport terminals would greatly facilitate this growth.
There is enormous potential for the development of further US gateways. Irish-based airlines are currently restricted to just four gateways - New York, Boston, Chicago and Los Angeles - under the US-Ireland bilateral agreement. Aer Lingus would open a number of further gateways in the US if this situation were to change with major benefits to Irish business and Irish tourism. This could lead to a doubling of transatlantic visitors to Ireland within a short timescale.
With virtually all airlines reducing the cost of air travel for the customer it is imperative that other elements of the supply chain reduce their costs to facilitate future growth. This will be a major factor in continuing to grow the tourism market into Ireland.
In summary, the Aer Lingus business performance in terms of profitability and cash has improved significantly over the past year. This performance has been based on a relentless and aggressive reduction in our cost base and market stimulation through greatly reduced business and leisure fares. We have passed the benefit of the cost reduction back to our customers in the form of lower fares. There is no room for complacency. Our cost base continues to be out of line with that of our competitors. We must deliver further significant cost reductions in the year ahead and beyond to ensure the long-term viability of the airline.