Oireachtas Joint and Select Committees
Tuesday, 17 February 2015
Joint Oireachtas Committee on Transport and Communications
Proposed Sale of Aer Lingus: (Resumed) Aer Lingus and Stobart Air
5:00 pm
John O'Mahony (Mayo, Fine Gael)
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Apologies have been received from Deputies Helen McEntee and Seán Kenny. Today's meeting is an engagement with Aer Lingus and Stobart Air, operators of Aer Lingus Regional, on the possible take-over of Aer Lingus by the international consolidated airlines group, IAG, and to hear from Aer Lingus and Stobart Air, Aer Lingus Regional, their views on the take-over bid by IAG and the likely repercussions in terms of the company's future development.
On behalf of the committee, I welcome from Aer Lingus Mr. Colm Barrington, chairman, and Mr. Stephen Kavanagh, the new chief executive, and Mr. Eduard van Wyk, Goldman Sachs. I also welcome from Stobart Air, Aer Lingus Regional, Mr. Sean Brogan, chief executive, and Mr. Peter O'Mara, business development director. Having already heard from unions, chambers of commerce, IBEC and Mr. Willie Walsh of IAG on the take-over bid, we will now hear from representatives of Aer Lingus and Stobart Air, Aer Lingus regional, on their views on the bid.
I wish draw to witnesses' attention to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by the Chairman to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter to only qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I also wish to advise them that any submissions or opening statements they make to the committee will be published on the committee's website after the meeting. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I call Mr. Barrington of Aer Lingus to make his opening statement.
Mr. Colm Barrington:
I thank the Chairman and the joint committee for inviting the Aer Lingus team to attend this meeting to discuss the proposed IAG offer to acquire Aer Lingus. We really welcome the opportunity to set out our views on this very important issue.
I will start by stating our position very clearly. My own and the Aer Lingus board's strongly held view is that a combination of Aer Lingus with IAG has a compelling strategic rationale and will deliver significant benefits to Aer Lingus, Aer Lingus's employees, Aer Lingus's customers and Ireland. The board has concluded, based on advice from our financial advisers, that the price of €2.55 per share should be recommended to shareholders.
In recent weeks, we have listened carefully to the public debate regarding IAG's proposal. During this period we have had further detailed discussions with representatives of IAG and the Aer Lingus board now has a greater understanding of IAG's intentions for the future of Aer Lingus and the proposed commitments IAG is prepared to make in regard to Aer Lingus to the Irish Government.
These discussions have further confirmed that it is clearly in IAG's interest to continue to grow Aer Lingus within the IAG group. Aer Lingus being part of IAG represents a hugely positive opportunity for Aer Lingus and Ireland. This deal is about accelerated growth.
This deal is about accelerated growth. It provides real prospects for growth in Aer Lingus, the economy, global connectivity, international trade, tourism and employment. I am surprised it can be represented in any other way. It is on the basis of these understandings that I and the Aer Lingus board give our strong support to the proposed transaction. The Aer Lingus team met last week with the Minister for Transport, Tourism and Sport, Deputy Paschal Donohoe, and the interdepartmental group established by the Minister. We set out the board's view on the benefits of the proposed deal. I will summarise these meetings regarding the benefits of IAG's proposal and key commercial drivers. The proposal is viewed by the board as compelling and a significantly positive opportunity for Aer Lingus, its employees, its customers and Ireland. Aer Lingus as part of IAG will enhance Ireland's position as a natural hub linking Europe and North America. Ireland's location as the westernmost point in Europe makes it a natural gateway to connect the combined populations of Europe and North America. Aer Lingus believes IAG's proposal can enable Ireland to become a central hub for European traffic across the Atlantic, resulting in better utilisation of the infrastructure investment in Irish airports.
The market between Europe and North America is about 75 million people per annum. Increasing our share of this traffic, which is currently at 2%, to even 4 or 5% would mean bringing an additional 1 to 2 million passengers per year through Ireland, which would have huge positive benefits for Aer Lingus and its employees and for Irish airports and their employees and a myriad of ancillary support services. With Aer Lingus as part of the IAG group, there would potential for the planned growth in transatlantic traffic to be significantly accelerated, with new US destinations added to its network. There is an immediate prospect of accelerating our plans to open two new destinations in North America, one on the east coast and one on the west coast.
Aer Lingus as part of IAG will deliver employment growth. Initial transatlantic traffic and destination growth will create significant numbers of new jobs in Ireland. The new routes would require the acquisition of two more long-range aircraft and would provide at least two hundred direct and highly skilled jobs in Aer Lingus. A multiple of this number would be employed in support services in the general economy and in the tourism sector. Being part of IAG will enhance Aer Lingus's European growth. Aer Lingus short-haul services, including the Dublin, Cork and Shannon to London Heathrow routes, will directly benefit from the sales and marketing activity conducted on its behalf by British Airways, Iberia, Vueling and the Oneworld partner sales forces. This will strengthen the positions of the Cork and Shannon to Heathrow routes and provide additional visitor traffic to the southern and mid-west regions and the rest of the country. Irish tourism will also benefit from greater exposure to the frequent flyer programme of Oneworld members, particularly British Airways and American Airlines.
Expected benefits to Aer Lingus's Atlantic and European network, if Aer Lingus were part of IAG, include better connectivity to and from Ireland. Being part of IAG will also allow greater access to a global cargo network. Aer Lingus's cargo business will benefit from the global network reach and sales channels of IAG cargo business. The cargo network enhancement is expected to deliver significant benefits and additional options to Irish businesses, particularly the pharmaceutical sector.
Aer Lingus as part of IAG will be a separate operating business and the Aer Lingus brand will continue and flourish. Aer Lingus has confirmed IAG's intentions to preserve Aer Lingus as a separately operating business within the group, with its own brand, management, head office and operations. Willie Walsh confirmed this strongly and publicly to this committee last week.
It is the strong view of the Aer Lingus board that the prospect of Aer Lingus being part of IAG has compelling, strategic and commercial logic for Aer Lingus. It would have significantly positive benefits for Aer Lingus and for Ireland, and the board is strongly supportive of the Government's two-airline policy. Following a combination with IAG, Aer Lingus will have more attractive growth options that will significantly benefit Aer Lingus as a company, its employees, its customers, the tourism sector, Irish business and industry and the airports where Aer Lingus operates.
We are fully aware of concerns expressed by political parties. Aer Lingus is willing to meet individual parties in order to clarify our position further. We believe this is a very good opportunity for Aer Lingus and Ireland. I hope we can give it the collective support it needs and deserves.
John O'Mahony (Mayo, Fine Gael)
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I thank Mr. Barrington. We will move to Mr. Brogan.
Mr. Sean Brogan:
I thank the Chairman and members for the invitation. I will start by introducing Stobart Air, formerly Aer Arann. Stobart Air is a franchise flying specialist flying for three airlines: Aer Lingus, Flybe and CityJet. We employ 430 people, an increase of 100 in the past four years. Our airline is all about high frequency, regional connectivity and feeding passengers into onward air journeys. The Aer Lingus-Stobart Air partnership, which we operate under the Aer Lingus Regional banner, is proof of what can be achieved when a small airline partners with a larger one. The partnership started in 2010 and now operates 25 routes to and from 18 airports across Ireland, the UK and France. Aer Lingus Regional has increased its annual passenger numbers from 855,000 to 1.3 million in 2014, a 53% increase in just over four years. In the coming weeks we will fly our five millionth passenger. Aer Lingus Regional now contributes 12% of Aer Lingus overall passengers. The partnership is testament to the commercial relationship between our airlines. We have extended our contract to 2022. It is also testament to how far we have come from the brink of bankruptcy just over four years ago. We have broadened our route network, invested €150 million in new aircraft, increased our passenger numbers and added to our workforce. The returns from our partnership are evident when you consider how Aer Lingus Regional feeds passengers to the Aer Lingus transatlantic route. The combination of Aer Lingus, Aer Lingus Regional and the US immigration pre-clearance in Ireland is a massive advantage that no other country enjoys. Last year approximately 100,000 of our passengers arrived at Dublin, completed US pre-clearance and boarded an Aer Lingus transatlantic service to the US, or they arrived from one of Aer Lingus's North American services and boarded our aircraft to Dublin to connect onward. The advantages this offers consumers are significant. People can save up to two hours on a journey. Passengers also avoid the hassle of more queues on arrival at US airports. Nearly 100,000 transatlantic connections in 2014 is an 80% increase in just four years. It is a core part of our business. It delivers the passengers Aer Lingus needs to expand its North American network. Aer Lingus and Aer Lingus Regional will continue to increase transatlantic business. It is our belief that if IAG takes over Aer Lingus this growth could be achieved faster and on a larger scale. From a UK perspective, how can we get UK-originating passengers to choose Dublin instead of London, Paris or Amsterdam when travelling to the US? Last year, 4.3 million people travelled to London Heathrow from Aberdeen, Edinburgh, Glasgow, Leeds Bradford, Manchester and Newcastle.
These are all cities that Aer Lingus currently serves. Of these, at least 1.2 million passengers connected at Heathrow to other, mainly US, destinations. I will discuss Newcastle specifically. In 2014, Aer Lingus Regional carried 9,000 Newcastle passengers to or from the US through Dublin. A further 300,000 passengers from Newcastle used Heathrow, not Dublin, as their connecting point. These are passengers that Aer Lingus should win. As part of IAG, Aer Lingus can win them. Being part of a global airline family would fast-track the realisation of this opportunity. This would help our airline to expand, meaning more aircraft and more jobs. Aer Lingus would benefit from the passenger increase, as would Irish airports. The overall economy would also benefit, particularly from more inbound US tourists.
Consumers want choice and convenience, particularly when it comes to air traffic. Consumers like the convenience of one website visit, one click to book, one check-in, straight through from start to finish on their journey. An Aer Lingus alliance with IAG would realise these benefits for Irish consumers. To drive and survive, airlines must constantly seek out and secure new opportunities. Stobart Air believes that the IAG offer is such an opportunity. The partnership of Stobart Air with a larger airline has enabled it to grow and has delivered significant consumer and employment benefits to the economy. I believe the same can be replicated on an even larger scale if Aer Lingus joins forces with IAG. That is why Stobart Air is backing the IAG bid for Aer Lingus.
John O'Mahony (Mayo, Fine Gael)
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I thank Mr. Brogan. Both Mr. Barrington and Mr. Brogan have said in their presentations that a successful IAG bid to take over Aer Lingus would have a positive outcome. Mr. Barrington referred to 200 new jobs based on new transatlantic traffic; last week Mr. Walsh suggested 500 new jobs. Could Mr. Barrington comment on this figure? The important issues are jobs, connectivity, and growth. If the IAG bid to take over Aer Lingus is not successful, is there still a possibility of growth? Are there any disadvantages to a successful bid by IAG to take over Aer Lingus? Will the growth be limited to Dublin Airport? What about growth in Shannon, Cork, and the regional airports? Coming from the west of Ireland, I have a particular interest in Ireland West Airport Knock. Mr. Kavanagh has been instrumental in organising a transatlantic flight to and from Knock, which will begin in summer 2015. If the IAG bid is successful, is it more likely that this service will be expanded into seasonal charter flights?
Mr. Colm Barrington:
I will start with the 200 new jobs. I was specifically referring to the prospect of Aer Lingus operating services to two new destinations, one on both the east and west coast of the United States. Those two new destinations would require one more aircraft each and that would mean approximately 100 new jobs per aircraft. Over the next five years, between now and 2020, we could see the more than 500 direct jobs that Mr. Walsh referred to last week. Aer Lingus could increase its current transatlantic fleet from 10 aircraft to close to 20 aircraft, and if those targets were achieved more than 500 jobs would be created in total. I believe Mr. Walsh was referring to what IAG might add to the two new services proposed by Aer Lingus. Would Mr. Kavanagh discuss the possibility of growth if the IAG bid to take over Aer Lingus is unsuccessful?
Mr. Stephen Kavanagh:
Aer Lingus believes that opportunities are growing to serve Europe and compete for traffic between Europe and North America. Having had discussions with representatives of IAG and, indeed, listened to their contribution to the Joint Committee on Transport and Communications, it is apparent that IAG shares the same view as to the value of these opportunities; hence the proposal. What is the opportunity? Aer Lingus carried 1.3 million customers across the Atlantic last year and one in three of those customers was travelling between Europe and North America. That additional business provided Aer Lingus with the ability to grow and sustain the frequency of existing services between Dublin or Shannon and North America. Without that access to Europe and North American traffic, Aer Lingus would not be able to sustain the existing shape of the Aer Lingus transatlantic service.
That traffic also has a positive contribution to our short-haul network. Simply put, if a passenger is travelling between Boston and Paris, Aer Lingus carries them to Dublin on the Atlantic aircraft. It supports our connectivity to the UK and Europe and complements the natural demand between Ireland and the UK and Europe. Aer Lingus sees this on a standalone basis as something that will allow it to grow into the future. It will be challenging. It is not without risk, given the scale of Aer Lingus and the shocks that are a feature of the aviation business. However, it is a strategy that, as one can see from our financial results in recent years, has worked. Aer Lingus believes that the geographic advantages that Ireland delivers in this regard are central to the proposition. Rather than viewing Ireland's remote island status on the western periphery of Europe as a disadvantage, in this particular instance it is a key advantage. It is an advantage from the customer's perspective because the time to traverse the Atlantic through Dublin is faster. From an airline's perspective, the quicker the journey, the lower the cost. The geography gives us natural economic advantages in serving the market. The State has made the appropriate investments in terms of airport infrastructure. The customs and border patrol facilities at Shannon Airport and Dublin Airport give Aer Lingus an added advantage.
What is the additional opportunity with regard to IAG? It is, in essence, scale. Aer Lingus by itself will fight for its place in the market. It has done so for close to 80 years and it will continue to do so. What IAG brings to Aer Lingus is the ability to join forces; particularly in the Atlantic joint business, to have four airlines selling Aer Lingus seats as if they were their own allows Aer Lingus to compete. It allows Aer Lingus to have more confidence in terms of the number of customers it can reach. It allows Aer Lingus to have more confidence in terms of the costs to those customers because of the economies of scale. Ultimately, it de-risks expansion for Aer Lingus. The approach of four airlines selling jointly will accelerate opportunities that it would otherwise be challenging for Aer Lingus to exploit on its own. This is a fast-track approach.
The positives from an Aer Lingus perspective are not just to do with the Atlantic. As I referenced earlier, those passengers have to be flown from the UK and Europe, hence the partnership with Stobart Air. One hundred thousand customers use Stobart Air services. More than 300,000 customers use Aer Lingus mainline transatlantic services from Dublin and Shannon. Those services will be positively impacted not just by the incremental flow across the Atlantic but, further, by membership of the Oneworld alliance, as proposed by IAG, because in that instance there would be 15 global airlines selling seats to Shannon and Cork and Dublin. So Aer Lingus sees the benefits in terms of the opportunity for accelerated growth. In the absence of such a deal, the challenges will remain but there will be fewer opportunities and higher risks. That scenario has direct implications for the confidence with which investment can be made.
Those are the circumstances under which we have no hesitation in recommending the proposal on the basis that it would be positive for Aer Lingus shareholders, for employees, for all stakeholders and ultimately for Ireland Inc. in terms of utilising the geographical advantages and retaining that economic opportunity within this economy.
John O'Mahony (Mayo, Fine Gael)
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What about the growth in Dublin vis-à-visgrowth in the regions, including the regional airports?
Mr. Stephen Kavanagh:
The growth will flow to all elements of the Aer Lingus network. In simple terms, if I can use the Shannon-Heathrow example, simply having British Airways selling Shannon as the destination in the London market is a positive for the sustainability of the Shannon-Heathrow route. If British Airways is supplemented by the ability of all Oneworld members to sell seats on behalf of Aer Lingus between London and Shannon, there are no circumstances, from our analysis, on the basis of having more potential customers in a more cost-effective manner, under which the viability of the network is in any way compromised or less benefited than in the IAG proposal. That is across the network. It is about having an ability to reach more potential customers more cost-effectively. Those benefits will flow across existing routes, as well as creating the opportunity for accelerated growth.
Mr. Sean Brogan:
The only thing I would add is our experience with regard to access to a larger platform. Four years ago we became involved in Aer Lingus through Aer Lingus Regional. It has increased our passenger numbers by 50%. Aer Lingus is a global brand. It has given us access to a global market. The IAG proposal would further enhance our access to consumers. A big part of our business is in transatlantic travel from the UK. There is opportunity in airports we service from Aberdeen to Edinburgh to Glasgow and right down through the UK. We are taking passengers who select Aer Lingus, as opposed to the IAG platform, which would offer much greater exposure. I put that down to the fact that since we formed the alliance with Aer Lingus, we have created 100 jobs. That is on a much smaller scale. Since we found ourselves on the brink of bankruptcy, we have not made any redundancies. That is directly attributable to the fact that we have become part of a larger group.
John O'Mahony (Mayo, Fine Gael)
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I omitted to congratulate Mr. Kavanagh on his recent appointment as CEO. I wish him well in that.
There are a couple of things I want to pick up on, but I will apply the rules to myself as well. Before I hand over to Deputy Dooley, as the lead spokesman for Fianna Fáil, the lead spokespersons will have three minutes to ask questions, there will be a brief response and the spokespersons will be allowed back in for a minute. For the efficient running of this meeting, I do not want it to be back and over, so that we can get the maximum benefit from it and that I will be able to get everybody in.
Timmy Dooley (Clare, Fianna Fail)
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I thank the witnesses for the presentations and also congratulate Mr. Kavanagh. I will be as quick as possible, because there are quite a few questions. To clarify the issue that was raised regarding 200 versus 500 jobs, my understanding was that when Mr. Walsh was asked what he intended to bring to Aer Lingus, he said the contribution would be in terms of sales and supporting the efforts of Aer Lingus Regional to support its strategy, which was to deploy or to put on the fleet one wide-bodied aircraft per year for the next five years. That is at variance with what Mr. Barrington has said, but maybe he can clarify that.
I listened with interest to what Mr. Barrington had to say. He twice reminded us that this was the right strategic decision from a commercial point of view for Aer Lingus, for its employees, for its customers and for Ireland. The only thing he has left out from that is the shareholders. I would have thought that, as chairperson of the company, his primary objective was to work in the interest of the shareholders. I am not sure where he stands on that. He might help us to understand. There has been some media comment about the directors of the company and how they, together with some senior management, will share in a €30 million pot, some kind of bonus disbursal, as a result of the sale. Maybe he could talk to us about that. I would have liked to see before us today some of the independent directors on his board and be able to interact with them. I would also have liked to see the directors appointed by the State, who, while they have a fiduciary duty to the company, also have a mandate from the Government to look at the broader regional aspects to the company's overall strategic direction. Maybe Mr. Barrington can comment to some extent on that.
If this deal goes through, will there be an independent Aer Lingus board? Mr. Kavanagh talked about management, head office, etc. Will there be a board? What has been going on in Aer Lingus? Has there been long-term strategic planning or have the directors been working towards this day? Has Aer Lingus been courting IAG or somebody in IAG's league? Has it always been, in recent years, just about getting to a point at which the directors dispose of the airline, get their exit strategy and get to share that €30 million pot? I see a level of confusion between what the witnesses are telling me and what Willie Walsh tells me is their long-term strategy. If Mr. Brogan's interaction with them has been so successful, why have we not heard of Aer Lingus developing its own growth strategy as a relatively small independent operator? My understanding was that there was an alliance with another airline about being able to buy aircraft relatively competitively. If there was a long-term strategy, could it not have been achieved through a strategic link-up with IAG, rather than a capitulation or a sell-out? Could Aer Lingus not have attempted to paddle its own canoe, to develop a strategic alliance whereby all the benefits that have been mentioned would still be there and would flow to the benefit of the company, the employees, the shareholders, and more importantly, this island nation?
Mr. Colm Barrington:
I will deal with some of those questions and perhaps Mr. Kavanagh might deal with some others. In terms of the numbers of aircraft, Mr. Walsh gave the figure of five aircraft between now and 2020, I understand. We think we can do better than that. That is why I mentioned the two that we can accelerate, plus what he mentioned, so I think we can do a bit better than that. We do not need to agree with him on everything - he does not own us yet.
In terms of the shareholding and the €30 million, I do not know where that figure came from. I can only assume that somebody went to the Aer Lingus annual report and added up some long-term incentive plan awards that could potentially go to executives, some of which expired and are not available to executives, and others of which are based on the performance of the company in 2015, 2016 and 2017 and would only vest if performance targets were reached in those years. That is not a relevant figure and I do not know where it came from.
Independent directors-----
Timmy Dooley (Clare, Fianna Fail)
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Before Mr. Barrington moves on to that point-----
John O'Mahony (Mayo, Fine Gael)
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I will allow Deputy Dooley back, but if we are going back and over we will not get anywhere.
Mr. Colm Barrington:
In terms of independent directors, we came because we were invited. I am an independent director. I am the chairman of the company, but I am an independent director. I am sure the State-nominated directors would be prepared to turn up if the Chairman wished to have them. As regards the board, we do not know for sure yet, but the other IAG airlines each have their own independent boards working within the IAG group, so I can only assume that structure would apply to Aer Lingus also.
I have written down "shareholder". I cannot remember what that question was. Does Mr. Kavanagh want to talk about the strategic plan-----
Timmy Dooley (Clare, Fianna Fail)
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I will tell Mr. Barrington what it was. His primary responsibility is to the shareholders. He had mentioned every other category of stakeholder.
Mr. Colm Barrington:
If Deputy Dooley goes back to our presentation, the third paragraph stated that the board concluded based on advice from our financial advisors that the price of €2.55 per share should be recommended to shareholders.
We dealt with that issue up front. For the purposes of this committee, however, we focused on non-shareholder issues because we understood these were the issues in which members were interested.
John O'Mahony (Mayo, Fine Gael)
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Does Mr. Barrington have copies of his presentation for circulation to members?
Sean Barrett (Independent)
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We need hard copies because the verbal contributions made this week and last week are not good enough.
Sean Barrett (Independent)
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We should have them now.
John O'Mahony (Mayo, Fine Gael)
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It would be helpful if they were provided in the course of the meeting.
Mr. Stephen Kavanagh:
The business has been built on a deliberate strategy, particularly in the past five years. We have focused on connecting Ireland to the world, as we describe it, maintaining cost discipline and competing for customers who wish to travel to and from the island. We have deliberately targeted this opportunity because of our natural advantages. We have competed between Europe and North America, hence the deliberate partnership and co-operation with our colleagues in Stobart Air and some of the arrangements we have made with partner airlines in North America to give us access to the US and Canadian markets and European hinterland. This strategy has been successful and has allowed Aer Lingus to become the fastest growing transatlantic airline in the past three years. While this growth came off a low base relative to others, it has fuelled the company's overall growth.
We diagnosed that the next logical step would be to engage in a deeper level of co-operation with a stronger partner. We did not get the opportunity to negotiate or to engage on that basis because a stronger partner evaluated the same opportunity and made the proposal we are discussing. As I stated, IAG and Aer Lingus recognise the value and opportunity of the proposal from a business perspective. In terms of timing, the IAG proposal came at the same time as Aer Lingus started to develop a recommendation to the board that the natural progression for the company was to deepen co-operation with a stronger partner.
Timmy Dooley (Clare, Fianna Fail)
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Mr. Barrington may not have information available on the shareholding held by each member of the board. It would be helpful if we would provide this information to the joint committee in due course to assist members in their deliberations.
Timmy Dooley (Clare, Fianna Fail)
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That is fine.
I am astonished by Mr. Barrington's statement that he is not sure whether Aer Lingus would have its own board after an amalgamation. It is amazing that the decision was taken to recommend the proposed amalgamation on the basis that it would be of benefit to Ireland, Aer Lingus customers and the economy as a whole, without having first clarified this fundamental issue to ensure the company would not be fully integrated into IAG. It is revealing that the board did not even establish the position in this regard before it made its recommendation.
Mr. Brogan spoke about how important it was for Stobart Air and Aer Lingus to come together. I put it to him that in coming together with Aer Lingus, Stobart Air redeployed assets when it suited and moved the aircraft it had in Shannon Airport to a more a profitable operation. I assume this was done to secure a public service liability funded route from Donegal. While acquiring this PSO route may be good for the company and its shareholders and may deliver increased profit, Mr. Brogan will be aware that the move was made at a time of significant growth in passenger numbers on Stobart Air's routes in Shannon Airport. He failed to provide data for the period from September to December 2014, which would show that growth was continuing. I ask him to circulate this information to allow members to evaluate it. If, as has been suggested, Aer Lingus relinquishes control, it will eliminate its capacity to deal with issues of regional importance.
Mr. Colm Barrington:
The point is that the Government, through its 25% shareholding, does not have control of Aer Lingus, which acts as an independent commercial organisation. Shannon and Cork airports do not have guarantees of anything right now. Last week, Mr. Walsh gave a five-year guarantee of connectivity in respect of services from Shannon and Cork airports to Heathrow. Under this deal, the Shannon-Heathrow route would enjoy a significantly stronger guarantee that it currently enjoys. Mr. Kavanagh may wish to comment.
Timmy Dooley (Clare, Fianna Fail)
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For how long will that be the case?
Mr. Stephen Kavanagh:
That is the basis of the proposal. IAG has also confirmed that the Aer Lingus brand will be retained. The brand is of value. We are at risk of underestimating the fact that IAG sees a valuable enterprise here. The State and Aer Lingus employees established a highly viable business over many years. What we have here is an ability to accelerate the growth available to that business for the benefit of all.
Mr. Sean Brogan:
To address Deputy Dooley's point on Shannon Airport, it needs to be understood that regardless of what happens and what is being discussed today, I have a commercial business to operate and will operate it by taking the right commercial decisions at the right time. I worked with the management team in Shannon Airport for more than 18 months and we gave Shannon an opportunity. It is essential when operating airlines, especially regional airlines, to operate more than a single aircraft, as was the case in Shannon. We committed a second aircraft to Shannon on the understanding that the commercial viability was not there. I needed to add capacity to grow Shannon as a base and did this with the co-operation of the team in Shannon. At the same time, however, a number of the routes I was operating out of Shannon came under heavy competition, as Deputy Dooley will be aware. I will make the right commercial decision at the time in order that my company continues its growth in job numbers to 430 and in passenger numbers.
Timmy Dooley (Clare, Fianna Fail)
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In fairness to Mr. Brogan, he answered my question. The only comment I will make in response is that we should not be under any illusions about the IAG proposal because Mr. Walsh will do exactly the same, notwithstanding any guarantees Mr. Brogan or Mr. Barrington may be given in the meantime. One would not expect Mr. Walsh to do anything else. Mr. Brogan's response has been helpful.
Brian Walsh (Galway West, Independent)
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I thank the witnesses for their presentations. The evidence they and Mr. Walsh presented to the joint committee has provided a compelling argument in favour of the view that the proposed deal would be good for Aer Lingus and Ireland. Having said that, there are concerns about access and potential job losses in Aer Lingus.
The Chairman raised some of the questions I had proposed to ask. If the deal does not proceed, is there a danger that Aer Lingus will have put all of its eggs in one basket? Does it have a growth strategy of its own and, if so, what is it? Would Aer Lingus, as a stand-alone company, survive another significant downturn in the aviation industry similar to that which occurred a decade ago? Considerable consolidation has taken place in the meantime. Could Aer Lingus survive another downturn in aviation?
Are the witnesses concerned about the prospect of job losses among Aer Lingus staff? Mr. Walsh indicated that a certain amount of duplication of roles would result in some job losses? Is Mr. Barrington in a position to quantify the number of job losses that might arise? Is it a significant number?
Reference was made to the potential for growth in long-haul services owing to the pre-clearance facility in Dublin and Shannon airports.
What is preventing Aer Lingus from investing there at the moment? Am I missing something? Is there a restriction? Mr. Barrington mentioned the potential for 2 million passengers to pass through Dublin and Shannon airports to the US. What is stopping Aer Lingus from availing of those opportunities now?
Much was said at last week's meeting about the slots and the five year cast iron guarantee that IAG will give. What is Mr. Barrington's view on the slots? In the absence of the deal proceeding, has Aer Lingus an imminent plan for them? Can the company provide a similar guarantee to IAG for Shannon and Cork airports?
We have an airport in Galway which is in a dormant state. Arising out of the investment and the capital that might arrive as a result of the investment, does Mr. Brogan envisage opportunities for Stobart Air to enhance its services from regional airports around the country? Would he be prepared to look at Galway airport again?
Mr. Stephen Kavanagh:
I will address our pre and post strategy. We are not invalidating our current strategy. The issue is the balance of opportunity, which will be increased, and risk, which will decrease. That balance of opportunity and risk determines investment. Both parties have a common view as to the level of the opportunity but our capacity to exploit that opportunity is reduced independently than it would be as part of IAG. That is the just the reality of the position. The committee should not take the view that we do not believe that we have a robust business that is capable of generating returns for shareholders and stakeholders. That is not the stated position. We are encouraged by the level of increased opportunity, which will generate incremental jobs. That is an inevitability and they will be more sustainable as a result because they will be built on stronger foundations. They will be high end, direct jobs ranging from pilots and cabin crew to engineers. They will not just be incremental as there will be more promotion opportunities for colleagues are working in the enterprise.
Aer Lingus can realistically survive. It has realistically survived thus far, although it is more challenged than ever because of the global nature of competition. We serve the island and if we can continue to have that mindset, we will be increasingly vulnerable because that is a constrained market in terms of opportunity. The opportunity for us is to compete and bring to the Europe-north America marketplace what we have been successfully doing for the Irish consumer and for those wishing to visit Ireland for the past 80 years. That it the challenge. The risk appetite is stopping us, and not just our personal risk appetite as we have to generate a return on other people's capital. That return is more difficult to generate than the alternative within IAG but it does not preclude that investment. It is then about the pace of that investment and, ultimately, the sustainability of that investment.
We are comfortable that we can get beyond 2%. On a report in terms of competitive standings in Europe, one will go a long way before one will find 2% and, therefore, in many ways we are not relevant. Once one becomes relevant, one becomes open to competition and to the challenges of what the large consolidated global carriers can do and that leaves us vulnerable. It is a challenge we are up to. We will continue to manage the costs in our business and to invest in the product but, undoubtedly, it is an additional challenge. All this is simply a way of saying that the opportunity that the IAG proposal brings will be accelerated but also more sustainable growth. The greatest protection any slot can have is sustainable profitability of the service provider that utilises it. It is as simple as that. We operate in the market. The slots, as they are currently deployed, make a contribution. Aer Lingus's primary role is to connect Ireland to the world. Connecting Ireland to London is central to our product offering. We are going nowhere on Cork, Shannon and Dublin to Heathrow Airport, but continued investment and competition is the greatest guarantee. The capability of having One World partners and IAG partners selling those routes gives us added confidence that their sustainability can be only improved in that scenario.
Brian Walsh (Galway West, Independent)
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Last week Mr. Walsh referred to administrative job losses in the headquarters in Dublin. Has Mr. Kavanagh put his head around that number? My other question was directed at Mr. Brogan.
Mr. Stephen Kavanagh:
There will be a limited number. It will have a direct impact on those involved but I expect at a minimum that there will be redeployment opportunities within the group. We are talking about significant incremental growth. The jobs may well be in different areas but there will be significant incremental growth. As we sit here, we have an active voluntary severance programme but we are also still actively recruiting pilots, engineers and cabin crew. That is the nature of the airline business. Where people can build careers changes over time. It is about how we respond. Twenty years ago people counted IATA tickets; now it is all transacted via the Internet. Airlines change and adapt but what we are talking about here is a significant increases in employment potential and the significant spin-off in terms of indirect jobs whether that is in airports, service providers or hotels.
The example I put forward for consideration is what the UAE carriers such as Etihad Airways and Emirates Airline have done. Twenty five years ago, nobody had heard of Dubai. One would certainly not have travelled through there. Investment has recognised the geographic advantage of Dubai and the opportunity for the economic spin-off associated with that level of investment. I do not say we will achieve that level of scale but that is the ambition we share.
Mr. Sean Brogan:
Deputy Walsh's question relates to regional airports. The reality is that the investment in our infrastructure over the past few years was a dominant factor, particularly in Galway. At the same time, taking into account Shannon Airport and other regional airports, as Mr. Kavanagh said earlier, the airline business constantly evolves and changes. We are constantly looking at our routes. It is about route profitability and making sure everything makes commercial sense. We never shut the door on any airport. We have not shut the door on any regional airport we operate out of but we need to take in other factors such as-----
Brian Walsh (Galway West, Independent)
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Does Mr. Brogan think the proposed deal will provide opportunities for the regional airports Stobart Air used to serve? Will the investment associated with this deal, if it proceeds, provide opportunities for these airports?
Mr. Sean Brogan:
We will continue to monitor economic change, volume flows and everything else. It is a case of "never say die" in the airline business because it constantly changes but, from a commercial point of view, our airline must make sure that it operates in such a way that it is commercially viable. One must take into consideration infrastructural investment on the island over the past ten years.
Mr. Stephen Kavanagh:
The opportunity here is generated by simply having access to more global consumers, whom we cannot necessarily reach on a stand-alone basis. For example, we have just come through a significant investment period in Shannon Airport where we reinstated year round direct services between the airport and North America.
That challenged Shannon-Heathrow, because the majority of passengers from Shannon through Heathrow are passengers returning to the US across the Atlantic. It challenged it because we were dealing with a zero sum game. We were just moving existing demand from one aircraft to another. The real opportunity here is that we have access to more customers. We have partners who will actively sell Shannon. Rather than having to make those decisions knowing that we will compromise, the objective is to have more demand than we have seats. Ultimately, this is every airline planner's objective and this is what the proposed transaction brings to Aer Lingus. Literally, it brings more customers for existing services, which sustains existing services, but also provides an ability to grow at a far more accelerated rate.
Dessie Ellis (Dublin North West, Sinn Fein)
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I thank the witnesses for their presentations and congratulate Mr. Kavanagh on his appointment. We have heard various opinions from the different groups that have attended this committee, but the overall opinion of people on the street is that Aer Lingus is doing well, passenger numbers are increasing, it is a modern airline and the hotel side and tourism are thriving and steadily and improving. Why then would we look at trying to sell off an airline that seems to be doing well and making progress, albeit at a slow pace? A slow pace is good. Representatives from Stobart have said their business has grown 40% or 50%. What more would one want? Gradual improvement at that rate is steady progress.
What is lacking here is vision. If I were CEO of Aer Lingus, I would be saying that I want to grow the airline on its own, for the shareholders, the State and everyone, and that is what I would be pushing for. Senior executives stand to make money on their shares if Aer Lingus is sold. I see this as a conflict of interest in the context of making a judgment and being objective. In objective terms, they would say they should push ahead and work at growing the airline on a steady basis and open up routes. This is happening and more connectivity is being developed. I believe this is the way Aer Lingus should be going.
In regard to Stobart, what does it stand to gain financially in terms of shares? Earlier we heard Aer Lingus is unsure how much senior executives will get. I find that difficult to believe. I am sure the board has a clear picture of how much each individual and each executive will get. I would love to know how much Stobart stands to get. Are pensions of both Aer Lingus and Stobart members involved in any deal? Are Aer Lingus pensions invested in this? What good is a five-year guarantee when we have a steady business that is making progress?
I found it interesting that Mr. Walsh mentioned the guarantees. In an article in The Guardianlast year or the previous year, he mentioned the main issue was long flights and that the slots in Heathrow were very important in this regard. The 23 Aer Lingus slots are extremely important in the context of expanding business. Is Aer Lingus aware that when the deal was made with the Spanish airline Iberia in 2011, more than 4,500 people were made redundant and even now more of that airline's staff are being laid off? Can we accept the word of an organisation that is laying off people as we speak and that says it will create jobs? We are told there is a possibility of 1,200 jobs being lost immediately.
Mr. Stephen Kavanagh:
To repeat, Aer Lingus is successful by many measures. This is testament to the efforts of many people over a long period. What is under consideration here is an accelerated opportunity, an opportunity that may never be achievable on a stand alone basis. That opportunity and valuation was part of the analysis and consideration of the proposal from IAG and we believe it fairly reflects the valuation and future potential of the business.
On why we would sell off Aer Lingus, I do not see it as a sell-off. We are a plc. What we are recommending is an ability to accelerate the value creation. That is where not just shareholders, but stakeholders, employees and Ireland maintains a benefit. The world does not stop to allow Aer Lingus to grow. We carried 11 million customers in 2014, more than any time in our history, yet we do not make the top 50 carriers worldwide. That is the nature of the business we compete in. Increasingly, the airline business will consolidate. There are significant economies of scale and significant cost benefits from having major fleets and significant revenue benefits from having global reach and partnership. This is something we simply cannot ignore, albeit that - not waving a white flag - we have a solid business based on good fundamentals. What is up for consideration here is the incremental opportunity.
In regard to the comparison or contrast with Iberia, first, I believe IAG sees the value inherent in the Aer Lingus strategy in terms of the opportunity to grow Ireland as a natural hub for transatlantic traffic. Aer Lingus is a profitable business that has gone through many restructurings. When British Airways and Iberia combined, Iberia was a deeply troubled business that needed to be restructured. It is not comparable in any way to what IAG would be investing in if it was to secure Aer Lingus. Aer Lingus is a growth vehicle for IAG. It is a €1.4 billion investment from British Airways and IAG. This is not an investment that will be recouped by redirecting passengers through Heathrow. It is an investment that will be recovered and grown by exploiting the opportunity that exists for Aer Lingus, Dublin, Shannon and Cork to have a larger share of the Europe to North America market.
The inevitability of some back office support functions being lost is indisputable. This is one of the rationales and is why consolidation is such a feature of the industry. However, the opportunity here is the amount of direct employment that will be delivered from the growth, particularly of transatlantic capable aircraft, but also because of the support activities and because of the services provided not only by the airport but the businesses based on it and the spin-off. Simply, having more access to the island generates more inbound tourism. This has a significant indirect positive impact on levels of employment.
We have taken the time to consider deeply the implications of this offer. The board and the executive management team are very conscious of the implications and the interests of stakeholders. We have no hesitation in recommending the offer because we intuitively believe it is positive.
Mr. Colm Barrington:
I wish to make just one comment. I do not know where the figure of 1,200 redundancies in Aer Lingus came from. Somebody issued that figure without any foundation or basis for it. There is no basis whatsoever for it.
We can grow this company slowly - and we can also grow employment and tourism slowly - or we can grow it exponentially, as Mr. Kavanagh has outlined. That would have a huge impact on all aspects of the economy, but particularly on employment. Employment will grow significantly as a result of this transaction.
Mr. Sean Brogan:
Deputy Ellis asked how big we want the business to grow. Two years ago a significant investment was made in Stobart Air by its shareholders. At that time, I made it clear that this was about growing the franchise flying platform and that we would see that platform extend outside Aer Lingus to other airlines. That has happened and we have now started to fly with Flybe and CityJet. The IAG proposal would allow us to continue that expansion but to express it. We will continue to grow. Aer Lingus Regional will only grow so far but Stobart Air will continue to grow and will continue to do so in a managed way. To answer the Deputy's question about how big we want the airline to be, we intend to carry through on the commitments made at the time of the investment. The investment was all about a franchise flying platform.
The second question was whether we stand to gain from this transaction and the answer is that we do. We stand to gain passengers and it is all about passengers. Passengers drive growth, passengers drive fleet and fleet drives jobs. Do we gain from a shareholding perspective, in terms of a bonus or anything else? No, we do not but what we do gain from the transaction is passengers.
Dessie Ellis (Dublin North West, Sinn Fein)
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We have not mentioned the State's shareholding thus far, which is 25.1%. That is significant in terms of the taxpayer because it has a value of approximately €300 million. It is our job to protect that and to put forward our own opinions on the proposal, having listened to all sides. I see an airline that is growing steadily and delivering. That is the way forward. Some people are of the opinion that an airline must make massive leaps forward to be successful. They suggest that smaller airlines must join forces with larger ones because consolidation is the way of the future. I do not necessarily agree with that. I believe that we should be taking steady steps, which we have done over the years. The airline has steadily grown to 11 million passengers. It is not the biggest airline in the world but it is making steady progress. Representatives from the tourism and hotel industries have told us that the airline is successful in that regard.
Eamonn Maloney (Dublin South West, Labour)
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I thank the Chair and will act on his advice by not going back over any of the territory covered by previous speakers. I wish to ask a question about the protection of employment, but before doing so, I thank the witnesses for their presentations. While I may not agree with everything they have said, I respect them for coming before the committee and being both direct and forthright in what they have to say. We cannot accuse the witnesses of not being forthright today.
All of us here will agree that there is a national sentiment around the brand name of Aer Lingus. If one asks people about Aer Lingus, which used to be a State-owned company, most will say that they feel that Aer Lingus belongs to all of us. The reality, of course, is that it does not and we must deal with life as it is. The sentiment is there but sentiment will not provide one's breakfast. There is still an attachment to Aer Lingus on the part of many people. I say all of this in the context of the fact that as legislators we are receiving correspondence about this to the effect that Ireland is an island off an island and if Aer Lingus is sold, we will divorce ourselves from everything in terms of aviation and will lose everything. As I said, that is based on sentiment but it is how people feel.
As a lifelong trade unionist, my big question is about outsourcing, which will have a very big influence on how people on this side of the House will make their decision. We are just crawling our way out of a very bad recession. I admire the witnesses' confidence about the future and we certainly need such confidence. However, I would like them to address the issues of direct employment and security of employment. I am realistic enough to know that there are very few certainties in life but I would like the witnesses to connect the confidence they feel about the future with the fact that there must also be some confidence and security for those who already work in Aer Lingus. In a post-buy out scenario, for example, how will people like us, as legislators, know we have done the right thing and that people who work for Aer Lingus will have job security?
Timmy Dooley (Clare, Fianna Fail)
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I thought Mr. Barrington was going to say that he, too, was a trade unionist.
Mr. Colm Barrington:
-----and spent ten years there before coming back as chairman six and a half years ago. I have great feelings of sentimentality towards Aer Lingus and I feel, as someone who feels that way, that this is the best thing for Aer Lingus. This will give Aer Lingus a solid, really good future. It is very good for the company and for its employees. Mr. Kavanagh has had a long association with Aer Lingus so I will ask him to speak about sentimentality and jobs too.
Mr. Stephen Kavanagh:
I would share the view that sentiment does not get one breakfast but it at least gets one to the table. Any owner of Aer Lingus that ignores the sentimental attachment of its customer base is putting the business at risk and I simply cannot believe that this investment proposition is based on that view. IAG is buying a successful enterprise with a strong brand. Swiss consumers still regularly use Swiss Air, which is owned by Lufthansa. Etihad owns Alitalia, while British Airways itself is owned by IAG. This is a global business. The corporate head office for British Airways is, notionally, in Madrid but that does not stop British consumers from viewing British Airways as the flag carrier. That is where I would see Aer Lingus positioned within the IAG group proposal.
On outsourcing, I do not see it being on the agenda and that has been communicated from IAG. In terms of direct employment of pilots and cabin crew, this will be incremental and will give more opportunities to those already employed. Dublin will be a hub, similar to the rest of the hub operations in IAG. It is the modus operandiof IAG to resource its hub operations because it is as efficient, when one has critical mass and scale, to do it oneself. One gets more control over the quality of service and the guarantee of the mutuality of interests between those delivering the service and those resourcing it. Again, at the Irish bases, the greatest protection is growth and the sustainability of the operation. It is our view that all of those criteria are improved through Aer Lingus's combination with the IAG group.
Tom Fleming (Kerry South, Independent)
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The Aer Lingus Regional contribution of 12% to overall Aer Lingus numbers is certainly impressive. Has there been an increase in the public service obligation, PSO, routes since the takeover by Stobart Air from Aer Lingus to Kerry and Donegal regional airports? Is there potential for additional routes to the UK and the Continent under IAG? What about marketing? Is there marketing in conjunction with regional airports that have the PSO facility? Will the IAG takeover be beneficial to the regional routes in regard to additional promotion and marketing in view of the fact that these are prime tourism regions? Also, there is potential for bringing in more business and job creation into these regions.
Mr. Sean Brogan:
The PSO routes in Kerry and Donegal are operated by Stobart Air contracted by the Department of Transport, Tourism and Sport. We commenced the route to Donegal a couple of weeks ago and the PSO was renewed in Kerry. As an example of the potential that exists, about 18 months ago we started to implement through tickets on the route to Kerry from the United States. This allowed passengers to book a flight from New York to Kerry, albeit with a change in Dublin. The advantage and the uplift was significant.
John O'Mahony (Mayo, Fine Gael)
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A mobile phone has been left on and it is interfering with the sound system.
Mr. Sean Brogan:
The advantage and the uplift as a result of being able to sell the Kerry product in the US was significant and we have reported those numbers. Since the awarding of the PSO route in Donegal, our commercial teams are working with the marketing teams in both airports and engaging with Tourism Ireland and Aer Lingus on the basis that now we have a product that allows people to travel to one airport and depart from another. It is really opening up the western seaboard along the Wild Atlantic Way and it demonstrates huge potential when one can get global reach with a brand like Aer Lingus. Any exposure or advancement on the exposure can only be a good thing for the growth of those routes.
The contract is between Stobart Air and the Department of Transport, Tourism and Sport. We have certain key performance indicators on growth and how we drive traffic through those things. The growth in Kerry in the 18 months after the connection using through ticketing has been significant. We will continue to work with the airports and regions to advance that.
Mr. Stephen Kavanagh:
The State has made an investment to connect Kerry and Donegal to Dublin. The result of the proposal is that the return on the investment will be improved. The more operations that the hub at Dublin can sustain, the greater the connectivity and opportunity to get from Kerry and Donegal to an increasing range of destinations. When we are looking at all stakeholders and all investment the State has made, we are conscious of PSOs and infrastructure such as terminal 2, the additional facility in Shannon and the new terminal in Cork Airport. The State has made investment and this proposal, we believe, increases the return on the investment. It makes future investment more robust in terms of the business case.
Michael McNamara (Clare, Labour)
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What additional facility in Shannon is Mr. Kavanagh talking about?
John O'Mahony (Mayo, Fine Gael)
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Deputy McNamara can contribute later but first we will hear members' contributions, with Deputy Noel Harrington followed by Senators Terry Brennan, Sean Barrett, Eamonn Coghlan and Paschal Mooney.
Noel Harrington (Cork South West, Fine Gael)
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I am looking for further clarification on the testimony. I congratulate Mr. Kavanagh on his appointment and I wish him the best of luck. We have heard a lot of testimony over the past few weeks. Some of it shows that Aer Lingus has been operating under good management and is a profitable and growing company. IAG will benefit from the takeover of Aer Lingus. This is a change in the trend. Iberia was really struggling and would have been a target for a takeover, as I imagine the balance sheet was not very strong. With a strong brand and much potential, it would have been a realistic target for a takeover. Aer Lingus is in a different place and is still growing, albeit at a slower pace than if the IAG takeover occurs.
I link that to the testimony of Mr. Brogan. The relationship that Stobart Air and Aer Lingus Regional has with Aer Lingus has been hugely beneficial to his company. I draw a comparison between that situation and Iberia and IAG. In the case of Aer Lingus, it is completely different as it is a growing company in a takeover. It is not a company on its own and there are codeshares. Perhaps the witnesses can give me an idea of what this means for Aer Lingus if IAG is not in the room. What does the codeshare with Star Alliance and Sky Team bring to Aer Lingus in terms of a global reach for consumers?
Equally, we can talk about the economies of scale that may be beneficial in the case of a takeover by IAG of Aer Lingus. Can we hear about the benefits of the interline agreements with Etihad Airways, JetBlue and United Airlines, particularly in terms of procurement? How will this change and what is the relative benefit of IAG becoming involved? The IAG investment is €1.4 billion. This is the amount of funding on the table. The company will not get it back from the Irish consumer. The money will get a return from European and north American consumers and there will be only a marginal return in this country, based on a relative increase in activity. Perhaps the witnesses will clarify how this will benefit the Irish consumer or the State in terms of an increase and how to link this to Aer Lingus growing on a faster and larger scale and the 6 million people living on this island, north and south.
Terry Brennan (Fine Gael)
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Mr. Kavanagh mentioned the benefit of four airlines jointly selling seats on the same aircraft using a partnership approach. How will the consumer benefit? Let me give my own experience from three weeks ago-----
John O'Mahony (Mayo, Fine Gael)
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The Senator has two minutes.
Terry Brennan (Fine Gael)
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I have been sitting here for the past hour. I was the first person to come to the meeting and I am the second last to speak. That will never happen to me again.
John O'Mahony (Mayo, Fine Gael)
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I clarified at the beginning that questions-----
Terry Brennan (Fine Gael)
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Others have spoken for five or six minutes.
John O'Mahony (Mayo, Fine Gael)
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It is not about time.
Terry Brennan (Fine Gael)
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I have a question that has not been asked by anybody else.
John O'Mahony (Mayo, Fine Gael)
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I will let the Senator ask the question, but I clarified before we started that members should ask questions, rather than make statements.
Terry Brennan (Fine Gael)
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How many members did the Chairman interrupt before me? The answer is not a single one.
John O'Mahony (Mayo, Fine Gael)
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I am running the meeting.
Terry Brennan (Fine Gael)
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I will not fall out with the Chairman.
John O'Mahony (Mayo, Fine Gael)
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I ask the Senator to put his questions as quickly as possible and we will take it from there.
Terry Brennan (Fine Gael)
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I will ask the question. I travel to America every year to visit family on a direct flight to Atlanta, Georgia. When I was booking the flight three weeks ago, my daughter asked whether I would fly with Air France because the ticket would cost €600 less, even though I would be taking the same Delta flight from Dublin to Atlanta. I consider Delta to offer the most direct route to Atlanta and it is the biggest airline flying into that city from Ireland. If IAG takes over Aer Lingus and begins to sell seats for British Airways on the same aircraft to New York, customers should be informed. Perhaps I should be better informed, but I think customers are not being informed. Like Delta, if IAG takes over, it will be looking for higher profits. I apologise for interrupting the Chairman.
John O'Mahony (Mayo, Fine Gael)
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Was that the Senator's question?
Terry Brennan (Fine Gael)
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There is a big saving to me.
Mr. Stephen Kavanagh:
I will address Deputy Noel Harrington's questions. The vagaries of airline pricing would probably take more than two minutes to explain and I do not want to consume too much of the committee's time. I will, however, address Senator Terry Brennan's example.
We believe IAG would benefit. As a publicly listed company, it has to justify its investment to its shareholders and investors. On the basis of our analysis and advice, we believe the €2.55 offer fairly reflects the value it would be acquiring. The State will obtain its own independent advice on whether the offer represents good value in the light of the prospects of Aer Lingus and current trading conditions. I remind the committee that Aer Lingus has been the subject of three hostile takeovers. With a public listed company of its size, that is always going to be a fact of commercial life because there are rational reasons consolidation will continue to be a feature of the industry. We have mutually beneficial relationships with a number of partners. United Airlines gives us access to the domestic US system in return for access to Aer Lingus services across the Atlantic to feed its hub at Heathrow Airport. Through SkyTeam, we have a relationship with KLM that allows us to serve its hub at Amsterdam-Schipol Airport.
John O'Mahony (Mayo, Fine Gael)
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I apologise for interrupting again, but there is a vote in the Seanad. I, therefore, ask Mr. Kavanagh to skip Senator Terry Brennan's question.
Mr. Stephen Kavanagh:
I would like to turn Dublin Airport into the same hub that Atlanta is for Delta. The pricing is just a mistake. KLM, Air France and Delta are part of the same entity. They are supposed to co-ordinate pricing, schedules and customer propositions. Obviously, they were not good at the task in that example. That is why technology and transparency can be very beneficial for the consumer who should always search. This combination gives the Irish consumer more opportunities. By combining with Oneworld, the Irish consumer has immediate one stop access to 387 destinations globally. That is an opportunity Aer Lingus cannot deliver. We cannot fly Senator Terry Brennan from Dublin to Atlanta at a competitive price. If we have a partnership with American Airlines, we can do so. That is the difference. I would prefer him to travel on the services we provide, at least as far as New York or Boston.
Timmy Dooley (Clare, Fianna Fail)
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He should get a job with IAG.
Terry Brennan (Fine Gael)
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Was there a miscommunicatoin between the partners?
Terry Brennan (Fine Gael)
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It is a true example.
Mr. Colm Barrington:
The Senator's point about saving €600 is relevant. Customers are always looking for low fares. Ryanair has prospered in the past 25 years because of low costs and low fares. We do not have the scale to achieve the lowest costs. If Ryanair purchases aircraft, it orders 200 or more and gets the best possible rate from Boeing. If we purchase six or ten aircraft, we do not get the best rate. By combining with the other three airlines in IAG we could bid for 100 aircraft for the group and get a rate that would allow us to compete better with the likes of Ryanair by offering lower fares to customers.
Terry Brennan (Fine Gael)
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Should I be advocating a takeover by IAG?
Eamonn Coghlan (Independent)
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As someone who has travelled across the Atlantic with Aer Lingus six times a year for the past 40 years, I understand the fear factor and the sentimental and emotional ties. However, in the big picture I see plenty of room for accelerated growth and global trade and employment. I would like to clarify why IAG identified Ireland as a natural hub. Would it bring other airlines in the group into Dublin, Shannon and Cork airports? I understand how capacity to the east and west coasts of the United States can be increased out of Ireland. What makes Ireland a natural hub? Is it due to the customs clearance facilities at Dublin and Shannon airports and, if so, how would the increased capacity affect the services currently offered?
It is all about putting bums on seats. Mr. Kavanagh has indicated that Aer Lingus carried 11 million travellers in the last year.
The Department of Transport, Tourism and Sport has indicated that 7 million tourists will come to Ireland this year. Does Mr. Brogan have a forecast for the increases in the numbers of seats and tourists whose feet would be on the streets as a result of this takeover?
Sean Barrett (Independent)
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This is a major issue and producing no documents last week or today is not good enough. I assure the committee that there is a strong economic tradition against this kind of takeover and anti-competitive merger. There are articles on it in the Treaty of Rome and, as such, we have to hear the other side. I have heard a great deal of wishful thinking from the advocates of the takeover and it is a question of "They would say that, wouldn't they?" That is the way these mergers go ahead, but in other jurisdictions they are usually analysed independently. Announcing it several times without documentation and the invocation of Stock Exchange rules prevents us from having a national view. It is our job to determine whether this would be in the broader national interest. The advocates are here but the analysts are not. We have heard claims which do not stand up on the evidence. We need something better to agree to the sale of 25.1% of Aer Lingus than what we have been hearing.
I ask Mr. Brogan if Stobart Air withdrew from Shannon Airport about six weeks ago?
Sean Barrett (Independent)
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How are we supposed to interpret the assertion that Stobart Air is committed to a place when it is six weeks and one day since it withdrew from it? That does not add up.
Mr. Sean Brogan:
I take that as the Senator's question. As I said, we had been working with the team at Shannon for 18 months on the viability of our operation there. We had invested in a second aircraft through the summer, which is why the Senator would have seen some growth there. However, we have to make the right commercial decision to ensure that, as an independent business, the company remains viable. I took the decision and stand by it, but I do not close the door on Shannon Airport. We will continue to monitor the position as the market changes. The Senator should bear in mind that one thing that happened to us at Shannon Airport was that the forces of competition were brought to bear there also. To give an example, one of our busier routes was Shannon to Manchester which became a heavily competed for route. We are a smaller regional operator which has gone through significant change in the past four years. We must ensure we will continue to grow, which we do. I have illustrated what our growth has been. We do this by making the right commercial decision at the relevant time.
Sean Barrett (Independent)
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On 28 November 2014 the Irish Independentstated that under Mr. Brogan's leadership, Stobart Air had also expanded its fleet, with Aer Lingus providing some of the financial backing for new aircraft purchases. Does that mean that Mr. Brogan cannot say anything different from what he has said today? Aer Lingus finances his fleet.
Sean Barrett (Independent)
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Is the Irish Independentarticle wrong?
Sean Barrett (Independent)
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Aer Lingus provided some of the financial backing for Stobart Air's new aircraft purchases.
Mr. Stephen Kavanagh:
Aer Lingus made the investment in the aircraft leasing enterprise. It is not an investment in Stobart Air. It allowed us some control over the assets and we believed it was a good investment proposition. It has given the lessee, Stobart Air, access to new modern aircraft and improved the customer proposition for those carried on the franchise. It is a different proposition than an investment by Aer Lingus in Stobart Air. We invested in the aircraft. It is a leasing business and it just so happens that there is a crossover of shareholders from a Stobart Air perspective, but it was not and is not an investment by Aer Lingus in Stobart Air.
Sean Barrett (Independent)
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There is a quote from the Scottish Government to the effect that there has been an historical imbalance in UK aviation policy that has held back Scottish airports and the development of direct international links. British Airways is the company that did this and Aer Lingus is inviting it in as its partner in Ireland. It is not that company's record in Scotland according to the Government there.
I need all of the documentation on the slots. It seems that in respect of the High Court judgment in London last Thursday, Aer Lingus was stating one thing here and another in the United Kingdom. To quote from the judgment:
Many of the potential competitive effects of the transaction that we considered [that is whether Ryanair should be a partner] would manifest themselves in terms of the absence of an action that might otherwise have been taken by Aer Lingus (for example, Aer Lingus being prevented from combining with another airline [which is what we are talking about today] or from disposing of Heathrow slots in the context of optimizing its route network and timetable).
Was that case made by Aer Lingus in the UK courts? How, otherwise, did their Lordships include it in the judgment? Were we trying to dispose of the slots when we were fighting the Ryanair case in the English courts while promising here on the very same day to retain the Heathrow Airport slots? Which is it?
Mr. Stephen Kavanagh:
I will reference the Scottish example and come back to Deputy Noel Harrington in due course.
IAG has explicitly communicated a three hub strategy for its competition across the Atlantic, that is, Atlantic north and south. It has identified London Heathrow, Madrid and Dublin Airport as the three hubs that are central to IAG competing for a share. The impact on Scotland, the history of British Airways and the competitive dynamic in that marketplace are not matters on which I can comment. What I can say is Scotland is a significant source market for Aer Lingus in transiting passengers between Scotland and North America. I see no reason that would change. In fact, it would improve in terms of our opportunity to compete in that marketplace. Not only would we have British Airways selling Dublin on a neutral basis from Scotland, we would also have American Airlines selling seats to Scotland via Dublin Airport.
The issue for IAG from our analysis is competing for more of a share in the Europe to North America marketplace. It is not a case of simply adding Aer Lingus to the IAG group and leaving it at that. This is about growing the business. It is about passengers choosing part of the product offering by IAG and its Atlantic joint business partner, rather than choosing to travel on United Airlines from Edinburgh. This is about IAG diagnosing that the value proposition from Aer Lingus is capable of being competitive, that there is a growth opportunity and that ultimately two plus two equals five.
On preventing the disposal of slots, I have said the greatest protection slots have is delivering a sustainable economic return. In circumstances where that is not possible, it is, of course, at the discretion of the State to purchase slots or to introduce a PSO to ensure connectivity. Aer Lingus is a commercial enterprise.
As a commercial enterprise, one of the issues with the Ryanair shareholding was that some of the commercial decisions would have been conflicted and restricted. This is not to say Aer Lingus has immediate plans to dispose of slots. As I said, the slots are core to the Aer Lingus customer proposition, given that Ireland-Heathrow is one of the busiest air routes on the globe. It is also core to the British Airways network that Ireland retain its connectivity. Shannon and Cork airports are key source routes for long-haul flow through Heathrow Airport. The basic proposition is that the opportunity is to grow Dublin Airport as a hub. This would benefit Aer Lingus and, ultimately, IAG because IAG would increase its share in the Europe to North America marketplace. That is the economic and financial rationale.
John O'Mahony (Mayo, Fine Gael)
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Is Senator Sean D. Barrett happy with the answer?
Sean Barrett (Independent)
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We would appreciate receiving the documents on which the case was made to convince their Lordships in the UK courts that they were being prevented from selling the slots in the context of optimising the route network and the case Mr. Walsh is making here. It seems they are two completely different cases. We will have to evaluate all aspects of this matter. The contradictions on the slots which we have just heard must be resolved and light will presumably be shed on the matter when the case is appealed to the UK Supreme Court.
Mr. Stephen Kavanagh:
There is no contradiction and, with the documents available, I hope this will become transparent over time.
I will address Deputy Noel Harrington's issue regarding the existing code-share relationships. While they are strong, mutually beneficial relationships, there is not necessarily full alignment of mutual interests. If United Airlines is selling a ticket between Chicago and Dublin, its first commercial instinct is to keep the customer in its own metal. It will, therefore, attempt to direct the customer to Heathrow Airport and on to an Aer Lingus service from there to Dublin. That is the natural conflict in the current code-share relationships. The difference between such a relationship and the one suggested in IAG's proposal is that American Airlines would have an aligned and equivalent economic interest in selling a direct ticket from Chicago to Dublin. While the current partner portfolio has worked very well for Aer Lingus and our partners, the depth of the relationships in terms of the co-ordination of schedules and customer proposition is constrained by regulations. In the absence of an alignment of economic interests, there will always be competing demands between the two parties. While Aer Lingus has strong, sustainable partnerships, we had diagnosed that deeper co-operation would be part of the next phase of our strategic road map, but before we had acted on it, we received IAG's proposal.
Noel Harrington (Cork South West, Fine Gael)
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I also asked about the alliance Aer Lingus had with Etihad and other airlines on issues such as procurement. My point is that it is all about relative gains. While Aer Lingus has alliances that are mutually beneficial, this would be more beneficial. The game is the identification of the gap between the existing relationships and a new one that would emerge with IAG.
Mr. Stephen Kavanagh:
Aer Lingus's relationship with United Airlines is a code-sharing one focused on revenue and maintaining as many customers on our respective networks as possible. However, there are no cost synergies because that would represent a transfer of value and the relationships between the two parties are not deep enough to merit the transfer. Etihad has an equity stake in Aer Lingus on the basis of which Aer Lingus has had access to some procurement benefits. We work closely with our equity partner in Etihad to extract revenue benefits, for example, by having an Aer Lingus code on services to Australia and in procurement. However, the benefits are limited because, given that Etihad owns 4% of Aer Lingus, it would not transfer the full economic benefit. The combination of Aer Lingus as part of purchasing and procurement within Etihad gives Etihad more scale. Although Aer Lingus extracts value from that scale, it is nowhere close to the value that would be delivered by IAG's proposition.
John O'Mahony (Mayo, Fine Gael)
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As there is a vote in the Dáil, we will have to suspend in a few minutes. Did Senator Eamonn Coghlan receive answers?
Mr. Stephen Kavanagh:
The question was why Dublin Airport was a natural hub. While it might sound trite, if one looks up on a spring morning at the contrails in the sky, they are passenger airlines flying from Europe to North America. They are dropping customers in Heathrow Airport, Paris and Amsterdam. Our proposition is that they should drop more customers in Dublin. For Irish consumers, it would give more choice and, potentially, better value because, inevitably, flight prices will decrease over time. The acceleration of growth will mean an acceleration of cost reductions and better value. It is a virtuous circle and Dublin Airport's opportunity to compete. Ireland's geography is our best advantage. It is the shortest crossing, which is the most compelling advantage from a customer and cost perspective because one burns less fuel between Dublin and New York than between London and New York. This natural advantage and the scale of Aer Lingus's operations at Dublin and Shannon airports in terms of our connectivity in Europe give us an ability to compete. What we need is access to the marketplace. In May we will not just be starting a Dublin to Washington route but also 60 routes that touch Washington, for example, Edinburgh-Dublin-Washington or Dublin-Washington-Boise, Idaho. That is the power of a network and growth and capacity at a hub. The quicker one has critical mass the more sustainable one is. This is the key attribute of the proposal.
Eamonn Coghlan (Independent)
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How would American immigration and customs clearance at Dublin and Shannon airports be affected by the increase in numbers Mr. Kavanagh expects?
Mr. Stephen Kavanagh:
We are already seeing capacity constraints and, in some ways, the victims of our own success. As a state, airline and airport, with the support of the DAA, we will have to make entreaties to Washington to fund it. It is a much easier proposition to fund additional resources if there is more volume because the US taxpayer is under the same constraints as the Irish taxpayer in terms of cost-benefit analysis. Simply have more volume through Dublin Airport would cement the business case for customs and border pre-clearance facilties. We are already experiencing some constraints which we believe can be remedied by growth. In the future the US authorities will be open to some financial contribution from the air carriers. This has been the experience in the Middle East. US Customs and Border Protection, CBP, does not have application across Europe because it is too expensive. It can never be replicated at Heathrow Airport because there is a multitude of terminals.
John O'Mahony (Mayo, Fine Gael)
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We have to suspend and return later. We have no choice but to do so.
Those members who wish to ask questions should come back as quickly as possible in order that we can wrap the meeting up as soon as we can.
John O'Mahony (Mayo, Fine Gael)
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We are in public session and Deputy O'Donovan is first.
Patrick O'Donovan (Limerick, Fine Gael)
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While I apologise for being late, I caught most of the presentation on the monitor. The witnesses might forgive me if some of the questions I intend to ask already have been asked. On the presumption the witnesses have watched the joint committee's proceedings up to now in respect of the stakeholders that have appeared before members, I also presume they saw the presentation last week by Mr. Walsh, the chief executive officer of British Airways. Specifically, last week he gave a commitment to Shannon and Cork in respect of the Heathrow slots but did not elaborate on transatlantic flights from the perspective of Shannon Airport. In addition, he was somewhat reluctant to extend what is a five-year commitment beyond that. I seek the witnesses' thoughts in this regard because from the point of view of the joint committee, the greater the commitment members can get, particularly for Shannon and Cork, the more that clarity will enter this debate.
I congratulate Mr. Kavanagh on his appointment. How does he think the decision of Aer Lingus to come out in favour of the offer will be perceived in a region out of which Aer Lingus walked the last time there was talk of such a sale? The bona fides of Aer Lingus in the mid-western region are not great because when the first tranche of shares was sold, Aer Lingus hightailed it out of Shannon Airport at the first opportunity. When the 75% stake was sold, Aer Lingus left Shannon and left a sour taste in the region as a whole. Does Mr. Kavanagh accept there is good reason for people, particularly in the mid-west, to be sceptical of what Aer Lingus now advocates based on previous experiences? In addition, I note from the documentation received that the company's position has received board approval. Mr. Kavanagh should elaborate on this board approval. Was it unanimous? Was there a vote at the board and were there dissenting voices or abstentions on the board? The company has come clean, for want of a better phrase, on how it perceives the offer made by International Consolidated Airlines Group, IAG, to the Government. Perhaps this is an opportunity for Aer Lingus to go the extra mile and throw out the whole lot as regards what were the deliberations within the board that resulted in the board giving its green light to the purchase.
Mr. Stephen Kavanagh:
I will defer to the chairman with regard to the board because I am chief executive-designate and have not been necessarily present at all deliberations. With regard to the Shannon to Heathrow route, let me put on record that the decision to remove service was a function of the level of losses, which were unsustainable. Our position in Aer Lingus is that this unsustainability was reinforced through ill-judged incentives and subsidies that were given to a direct competitor at Shannon, whereby Aer Lingus was in the invidious position of paying full airport services and fees that were being transferred directly across the check-in counters to our direct competitor. That did not work out well for Shannon Airport and we all have moved on in respect of the sustainability of the Shannon to Heathrow operation. Today, that route makes a positive contribution to the Aer Lingus group. We have, with the support of our colleagues in Shannon, restructured the business. We are more efficient. There also is far more transparency in the pricing and incentive regime at Shannon Airport. While it is a little trite to state that times have changed, they have. As I stated earlier, the greatest protection for the air service between Sharon and Heathrow is its profitability. In addition, I believe that IAG has offered some guarantees as to the five-year commitment to maintain those services. For a variety of reasons, I think that is a time limit which is a function of IAG's desire to maintain some commercial control over airport and vendor costs and so on. It simply does not wish to transfer to an airport the security of being able to rely on this forever, thereby removing the commercial dynamic.
Patrick O'Donovan (Limerick, Fine Gael)
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On that basis, would it not make more sense to extend the guarantee to ten or 15 years because one then would have surety from the company's point of view as much as from that of the airport?
Patrick O'Donovan (Limerick, Fine Gael)
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If I was the airport operator, why would I not ask for a deal?
Patrick O'Donovan (Limerick, Fine Gael)
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But is there not a win-win for both the airport and the airline if there is certainty regarding costs and everything into the future?
Patrick O'Donovan (Limerick, Fine Gael)
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Why?
Patrick O'Donovan (Limerick, Fine Gael)
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In terms of the region, is that not what this boils down to? The next time Aer Lingus goes back, the deal will be so onerous for Shannon that it will be unable to live up to the expectation and then the airline will state it is obliged to leave.
John O'Mahony (Mayo, Fine Gael)
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I think the points are well made by both people.
Patrick O'Donovan (Limerick, Fine Gael)
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No, the important point here is that were Mr. Kavanagh the chief executive of British Airways - perhaps he will be some day in the future, given that is the natural progression - he would be negotiating with a Government. Essentially, that is what is going on here over the airwaves. I am sure the officials in the Department of Transport, Tourism and Sport, who at 7.20 p.m. may have nothing better to be doing, are watching these proceedings. Were Mr. Kavanagh negotiating with a Government and trying to buy its stake, would it not make absolute, logical sense for him to put the best possible offer on the table? This is not a run-of-the-mill commercial offer but entails negotiating with the Government which, for a wide range of reasons, has political constraints and everything else out there in the ether. I acknowledge some people, such as those responsible for an bord snip nua and so on, might regard members as glorified county councillors.
There is an objective that the Government has to maintain, but it has been lost. It is in the interests of the airlines, IAG and Aer Lingus, to give the longest possible commitment to two airports that are hanging on a limb, waiting to be cut off.
Mr. Stephen Kavanagh:
I will restate our position. The sustainability of routes is best protected by profitability. In my diagnosis, the ability to renegotiate regularly with suppliers has a greater beneficial impact on profitability than long-term commitments. A long-term commitment is simply ceding too much commercial value and weakens services. Just as our consumers shop around, an airline must be able to shop around for the services provided, including the rates paid at Shannon and Cork Airports. IAG has communicated this as its rationale behind the five-year commitment. I concur with that sentiment in protecting profitability on its routes.
Patrick O'Donovan (Limerick, Fine Gael)
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I read it.
Mr. Colm Barrington:
It stated it had seriously reviewed all aspects of the proposition. Its strong view is that the prospect of Aer Lingus being part of IAG has compelling commercial logic for the airline, significant positive benefits for Ireland and is strongly supportive of the Government’s two airline policy.
Patrick O'Donovan (Limerick, Fine Gael)
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Was that the unanimous view of the board?
Patrick O'Donovan (Limerick, Fine Gael)
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The chairman of the Aer Lingus board might like to consider reverting to the committee on this issue. This is far too important an issue. For example, if the committee arrived at a decision and seven members dissented, it would still be indicated. This is a minority share owned by the Government and we have a right to know what happened.
John O'Mahony (Mayo, Fine Gael)
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Yes, but whatever judgments are made afterwards, they are made on the basis of the information given. The Government will make a decision based on what has been proposed.
Patrick O'Donovan (Limerick, Fine Gael)
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We have an obligation to consider what has been discussed and deliberated on, but we are working in the dark. Aer Lingus would do itself a favour if it came clean and told us the whole truth. It came out of the blue and told us half the story the other day.
John O'Mahony (Mayo, Fine Gael)
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I might think that also. However, Mr. Barrington has to give his position, which he has done.
Patrick O'Donovan (Limerick, Fine Gael)
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It is not unanimous then.
Sean Barrett (Independent)
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It is like the evidence at the banking inquiry which will be the next one. It seems to be short on verdicts, numbers, documents and so forth.
John O'Mahony (Mayo, Fine Gael)
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We want to make a judgment on the information given.
Patrick O'Donovan (Limerick, Fine Gael)
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Does Mr. Barrington accept that from the committee’s point of view he is leaving us in a position where the board of a company, of which the State owns 25%, has made a decision but the committee does not know whether there was dissent, no more than there is dissent among the public, about the bid? Would it not be in the company’s best interests to put in the public domain how it arrived at the decision?
Michael McNamara (Clare, Labour)
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I thank the delegations for their presentations. In a way, the presentations were much clearer than that made by Mr. Willie Walsh last week. It is clear that both Aer Lingus and IAG intend to develop a hub in Ireland. It is equally clear the hub will be based in Dublin Airport. We have two State-owned airport groups, Shannon Airport and the Dublin Airport Authority, DAA. Is it possible to develop two hubs in a small country? Mr. Walsh is of the view that it is not possible. Mr. Kavanagh referred to Switzerland. It is one of the few small countries with two, albeit relatively small, hubs in Geneva and Zürich. They are both connected with the state railway infrastructure. There are many proposals to link Dublin Airport with the rail network, but I have not heard anybody mention Shannon Airport for ten years now. Perhaps one cannot link one without the other because of state aid rules, but that is a different issue. If Dublin Airport becomes a hub which, undoubtedly, would be good news for the airport, could Shannon Airport also become a hub? Could it even survive as a transatlantic destination? Would economies of scale inevitably pull all transatlantic flights from Ireland into Dublin Airport?
Mr. Barrington referred to new Aer Lingus US destinations, one on the east coast and one on the west coast. Will they fly into Dublin Airport or Shannon Airport?
I do not wish to be churlish, but Mr. Barrington has 300,000 shares in Aer Lingus. If the IAG deal goes through, they will be worth €765,000 to him. There is nothing wrong with this, as that is how the corporate world works. However, it is a lot of money. Mr. Barrington’s shareholding pales in comparison to that of the current chief executive. Mr. Christoph Müller received 1.5 million shares. Now that Mr. Kavanagh is about to become chief executive officer, will he receive a similar share offering? Is this standard for chief executive officers? I am asking this question because I would find it very difficult to make a clear-sighted decision if the difference between one or the other was €765,000. I appreciate that the gentlemen concerned have much more business experience than I have, but these are real human emotions and motivations.
Kieran O'Donnell (Limerick City, Fine Gael)
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We are looking after the taxpayers’ interests, namely, the 25.1% shareholding in the airline, as well as national and regional strategic interests. What was the basis for the €2.55 share price? When one looks at the market value of the assets, it strikes me as higher than the €1.36 billion price offer.
What are Aer Lingus’s plans for its Heathrow and transatlantic routes from Shannon Airport? Mr. Kavanagh spoke about the importance of the Heathrow Airport slots. Is it possible that under competition law IAG would be required to divest itself of some of its slots at Dublin Airport, with the overall result that Aer Lingus would lose some slots in this deal? What plans does Stobart Air have for Shannon Airport?
Pat Breen (Clare, Fine Gael)
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Senator Terry Brennan referred to the difference in the price of flights in the SkyTeam arrangement with Air France, KLM and Delta Airlines. Yesterday morning I had a constituent from Ennis in my office. As his son is based in San Francisco, he has used the Dublin-San Francisco service on several occasions and been very pleased with the service. When he was booking flights in May, he searched that service, as well as British Airways direct flights to and from Heathrow Airport, backtracking to Shannon Airport. For a family of five, there was a difference of €2,000 between British Airways and Aer Lingus.
Aer Lingus operates two Boeing 757s on contract from Air Contractors in Shannon Airport. How long is the lease for these two aircraft? While we welcome this good service, what is to stop IAG, if it takes over Aer Lingus, from competing with the Dublin transatlantic service with much lower prices on London Heathrow transatlantic routes to the west coast and mid-west of the United States?
An airline can be blown out of business very quickly, as happened in competition with Ryanair in certain areas. If there is a €2,000 difference, is that not a great excuse to keep getting cheaper flights into Heathrow and backtrack people into Ireland? As a marketing ploy, the transatlantic Aer Lingus service could be easily blown off the map in a strategic way if that was wanted, particularly if just two leased aircraft from air contractors are being used. I want to know how long is the lease on those.
When those two services were launched to Boston and New York, they were supposed to be 365 days a year. We now find they are not because the route is gone from January to March, I think. Why is that the case after the promise we got?
John O'Mahony (Mayo, Fine Gael)
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Deputy Mulherin has two minutes.
Michelle Mulherin (Mayo, Fine Gael)
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That was not my phone, just to clarify. It has no coverage here, it was just a small video. I apologise.
I also apologise that I missed the first part of this meeting, I was at another meeting. I welcome everybody here. We all speak for our own regions and I am from County Mayo. We are all delighted with the first charter flight from New York to Knock. I know Aer Lingus played an important role in that coming about and Mr. Kavanagh in particular was instrumental. In reality, what are the possibilities of us having more transatlantic charter flights, even schedule flights? How feasible is that? Would Mr. Kavanagh consider it? Has he considered it as part of what he has agreed regarding this charter flight? I know the appetite exists. At the meeting last week I mentioned that, when the previous airline operated a transatlantic flight there, the route did not fail - there were other issues with that airline which caused the overall company to run into difficulty. There is a massive appetite for this route and I know so many people who used it and would look forward to using it again.
We are talking about the entire west and north-west area. We have very poor connectivity in terms of roads. If one were to draw a line from Galway up to Louth, there are no motorways, so this is a regional airport of significance. I would like Aer Lingus to expand on that. I know Deputy McNamara talked about the dangers of hubs and what that means for transatlantic traffic from Shannon, but I would like to think there could be further flights out of Knock. Perhaps Mr. Kavanagh could set out the realities of that and give it consideration.
John O'Mahony (Mayo, Fine Gael)
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There are a lot of questions from the four Deputies. Could Mr. Kavanagh take them in order?
Mr. Stephen Kavanagh:
On the issue of the Shannon Dublin hub, based on its demand, I believe Shannon is appropriately served. I do not believe the same level of opportunity exists there because Shannon is not connected to Europe in the way Dublin is, nor will it be. It is simply a fact that the demand for travel to and from Dublin is exponentially greater than the demand for travel to and from Shannon. A hub needs connectivity. The ability to flow passengers through Dublin, and the natural demand through Dublin, is on a different scale.
I do not believe that, as it builds out, Dublin will necessarily compete with or cannibalise Shannon. There is resilient demand in Shannon. The challenge always has been to profitably serve that demand. The Dublin to New York route at peak has seven services a day, while Shannon to New York maintains two services a day in competition. That is demonstrative of the resilience of routes at Shannon where there is demand. The issue is the opportunity for growth and I see access to Oneworld selling access to other parties. Actively selling Aer Lingus capacity neutrally can be only beneficial, but I do not see significant growth opportunities in terms of additional routes and frequencies. It consolidates the opportunity that exists currently.
Regarding the basis of the valuation, I believe both the company and its advisers reviewed all of the assets - that was one of the criteria for valuation - as well as the more traditional valuation metrics, future earnings, past earnings, capital employed, etc. All of the same criteria were used that would be used by the Government advisers in confirming the attractiveness or otherwise of the €2.55 a share valuation. Certainly assets under management was one of the criteria that was evaluated in arriving at the €2.55 a share.
Kieran O'Donnell (Limerick City, Fine Gael)
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This is a point. Aer Lingus has €400 million net cash on its balance sheet at the minute. Based on what we are hearing, the slots are worth at least €400 million plus, and could be worth a lot more. The planes, we are hearing, are worth roughly €650 million. That is approximately €1.45 million. I also suspect the company has a significant property portfolio. To the ordinary person looking in, the breakup value of Aer Lingus is clearly higher than the €2.55 a share that is being offered. Rather than giving a general answer, Mr. Kavanagh needs to address this and be a little more specific. Ultimately, he is representing the shareholders of Aer Lingus. We represent the ordinary people whose taxpayers' money is involved in the 25.1% stake in Aer Lingus. Mr. Kavanagh might give a little more detail in regard to how the valuation was reached. He might make reference to the valuation I have just put forward.
Kieran O'Donnell (Limerick City, Fine Gael)
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Are the figures I have just quoted correct or incorrect?
Kieran O'Donnell (Limerick City, Fine Gael)
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What would Mr. Kavanagh anticipate the slots are worth? In terms of what we are reading in the media, €400 million appears to be the valuation. What does the witness think the 23 slots are worth?
Mr. Stephen Kavanagh:
I am not in a position to put an estimate in front of the committee, but I would make reference to a number of historic transactions which would give an indication. The issue with slots at Heathrow and their valuation is that the valuation is critically dependent on the time of the slot. Early-morning arrivals, because they have the potential to serve, for example, inbound flights from the United States, are significantly more valuable than slots in the middle of the day or late evening. There are a number of time periods within the day at Heathrow where there is essentially no transactional value.
Kieran O'Donnell (Limerick City, Fine Gael)
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There must have been a value put on the slots. Are they being valued at significantly less than €400 million?
Kieran O'Donnell (Limerick City, Fine Gael)
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And the 600----
John O'Mahony (Mayo, Fine Gael)
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Deputy, I want to give everyone the same access here.
Mr. Colm Barrington:
If I may make one more point, when people add up all the slots, the fleet, the cash, they forget the 4,000 employees. One cannot break up a company and let go 4,000 employees without cost. That would be a significant cost if the company were to be broken up. The whole picture has to be taken into account to work out valuation from that point of view. The valuation we came up with took into account all of those matters into. We looked at it every which way we could and the €2.55 a share is, in the board's view, a good valuation for the company.
Kieran O'Donnell (Limerick City, Fine Gael)
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IAG has also come out and said it will result in job losses. In terms of the employees, we are also looking at that in terms of our fiduciary duties as----
Kieran O'Donnell (Limerick City, Fine Gael)
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Chairman, there were other questions I had asked.
John O'Mahony (Mayo, Fine Gael)
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I know but I want to give time to the others as well.
Kieran O'Donnell (Limerick City, Fine Gael)
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There are similar questions there as well.
John O'Mahony (Mayo, Fine Gael)
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I just do not want a continual debate across the floor now.
Kieran O'Donnell (Limerick City, Fine Gael)
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I do not want a debate, but I asked about the plans for Shannon both in terms of Heathrow and transatlantic routes, and also for a comment on the fact that we are reading reports that under competition rules, the likelihood is that Aer Lingus will be required to sell some of the slots it already has on the Dublin to Heathrow route.
That would result in a loss of the slots to Ireland Inc.
Mr. Stephen Kavanagh:
Aer Lingus's plan for Shannon Airport is to maintain existing operations. We do not see a significant growth opportunity at Shannon Airport in maintaining the status quo. We have launched a number of leisure routes from the airport which complement the direct service to Heathrow Airport. Thus far, the expansion of transatlantic services has delivered on expectations.
Kieran O'Donnell (Limerick City, Fine Gael)
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Given the facts that Dublin Airport is under pressure in terms of pre-clearance facilities and that Shannon Airport has extra capacity, do the delegates not view this as providing opportunities?
Kieran O'Donnell (Limerick City, Fine Gael)
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My final point is on competition and the slots.
John O'Mahony (Mayo, Fine Gael)
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No, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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I will finish on this point.
Kieran O'Donnell (Limerick City, Fine Gael)
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Would Mr. Kavanagh worry about losing slots?
John O'Mahony (Mayo, Fine Gael)
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May we, please, move on?
Mr. Stephen Kavanagh:
Turning to Deputy Pat Breen's comments, the current arrangement with ACL is for four years. After we entered a commitment, it was to prove that this vehicle was capable of delivering a sustainable profit and, thus, a sustainable service.
I will make a correction. We never committed to providing a year-round, 365-day service to Boston and New York. We signed a commercial arrangement with the Shannon Airport Authority that clearly stated the Shannon-New York service would be a nine-month one, with no service in the traditionally heavy loss-making and seasonally weakest first quarter. Nevertheless, the Shannon-Boston route would be serviced on a 12-month basis. We have fully met our commitments to the airport and communication at the time. Be it a miscommunication or otherwise, we never committed to providing a year-round, twice daily service; rather, we committed to maintaining a year-round service.
The price of flights in this context could be expected and the consumer has more opportunities and choices. It is the value proposition that will convert the consumer. If one loses price competitiveness in an intensely competitive marketplace, one will lose traffic. For example, Shannon Airport's customers have choices with United Airlines and Delta Airlines. There is demand for services from the airport. We should have confidence that there is a natural market between Shannon Airport and North America. If British Airways or any other enterprise attempts to direct that traffic, competition will fill the vacuum. That is what we see on a daily basis. Across the world there are few monopolies in air transportation. It is becoming transparent and in airlines' interests to maximise revenue, but there is always choice for consumers.
Turning to the issue of Dublin Airport and pricing, I will use the San Francisco example. If a consumer can find a cheaper route via Heathrow Airport, please let him or her make that choice. We are operating a Dublin-San Francisco route. Just as there are cheaper ways, in some instances, of getting to San Francisco from Dublin than with Aer Lingus, there are also cheaper ways of getting from Paris to San Francisco, some of which involve Aer Lingus, than using Air France's direct service. That is the nature of competition.
Pat Breen (Clare, Fine Gael)
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I am talking about competition between Aer Lingus and IAG. One may buy a cheaper ticket on the Shannon-Heathrow-New York route than with Aer Lingus on the Shannon-New York route.
Pat Breen (Clare, Fine Gael)
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It would be more inconvenient to fly via London, but many consumers do so on the basis of the price. That could blow Aer Lingus's service out of the water and it could be done right away.
Pat Breen (Clare, Fine Gael)
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Mr. Kavanagh has still not addressed my point about the Shannon-New York flight not being full. As someone mentioned, it is all about load factors.
Pat Breen (Clare, Fine Gael)
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That is what I meant.
Pat Breen (Clare, Fine Gael)
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The airline will not make a profit unless it fills aircraft.
Pat Breen (Clare, Fine Gael)
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Airlines fill them from the front. That is how they make a profit.
Michael McNamara (Clare, Labour)
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What does "metal-neutral basis" mean?
Mr. Stephen Kavanagh:
All of the carriers, as part of the Atlantic joint business arrangement, sell one another's capacity on a neutral basis as if it is their own. It is a revenue sharing arrangement. It is what happens between Finnair, British Airways and Iberia, United Airlines, Air Canada and Lufthansa, and Delta Airlines, KLM and Air France. That is why I referenced the tension there might be if Air France were to undercut the price of a Delta Airlines seat. What we are discussing is access to greater market opportunities. This means that the Shannon-New York route has greater potential to be sustainably profitable in the context of IAG's proposal than on a stand-alone basis. There would be more people with a vested interest in generating revenue on it.
Michael McNamara (Clare, Labour)
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Would it still not be Aer Lingus's decision to put all of its eggs in one basket? Mr. Kavanagh stated Iberia, Finnair and British Airways would sell Aer Lingus flights.
Michael McNamara (Clare, Labour)
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Surely it would make more commercial sense to sell Aer Lingus flights into Dublin Airport, with a second Aer Lingus flight to, for example, Krakow. One could service what is the second largest Polish city or Warsaw from where one could fly to Chicago via Dublin.
Mr. Stephen Kavanagh:
That is what we do. The change in this construct is that it is a joint business. The Aer Lingus Chicago-Dublin-Krakow and Chicago-Dublin-Warsaw services are part of the Atlantic joint business. The revenue is shared among the four carriers that are members of the entity. That revenue is pro ratain terms of production. It gives Aer Lingus access to a greater market reach and potentially more revenue. In simple terms, our economic interests are aligned with those of all of the other members of the alliance.
Michael McNamara (Clare, Labour)
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My question was on Shannon Airport facing competition based on economy of scale, but Mr. Kavanagh is talking about driving growth through Dublin Airport. The more growth Aer Lingus can generate at Dublin Airport, presumably the greater the economies of scale and the more money one can make. The best Mr. Kavanagh can say about Shannon Airport is that Aer Lingus is willing to maintain the status quo, but one cannot maintain the status quoin a market, as one is either increasing or decreasing share or winning or losing customers. If Aer Lingus is growing at Dublin Airport and has no intention of growing at Shannon Airport, is it not inevitable that Shannon Airport will lose out to Dublin Airport?
My second question was specific to the two new transatlantic routes being proposed to the east and west coasts. Mr. Kavanagh did not say where they would fly into. Will he clarify the position?
Mr. Stephen Kavanagh:
Yes. Aer Lingus does not generate markets. There is a demand between Shannon Airport and the rest of the world and we serve that demand. We are confident that we have a competitive product that is relevant in the marketplace and will remain so, as Dublin Airport grows. There is a natural demand for a direct service between Shannon Airport and North America. That service is constrained because it is a zero sum game. I cited the example of the additional services from Shannon Airport across the Atlantic compromising load factors and revenue generation on the Shannon-Heathrow route.
Pat Breen (Clare, Fine Gael)
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My question was on price differences. How often have we seen Aer Lingus flights to Dublin Airport being much cheaper than flights to Shannon Airport? That will happen over time. What about the scenario in which IAG would have control of both Aer Lingus and British Airways?
If somebody wanted to reduce the number of passengers coming into Shannon he or she could continue to offer cheap flights through Dublin or Heathrow while keeping the Shannon prices high. Does Mr. Kavanagh know what I am trying to say? He must, or he would not be CEO of Aer Lingus.
Pat Breen (Clare, Fine Gael)
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If Aer Lingus did not want to renew its lease with the contractors would that not give it an excuse?
Mr. Stephen Kavanagh:
We are in business to sustain profitability in the airline business and profitability is assisted by growth. There is a natural demand for services between Shannon and North America and the best way to serve that part of the world is directly. If Aer Lingus decided to exit the Shannon-New York service or tried to redirect traffic through Heathrow with British Airways, it would be difficult as it is an intensely competitive marketplace. Both of the other main, immunised joint venture transatlantic service providers are represented in Shannon, one of which is United Airlines.
Pat Breen (Clare, Fine Gael)
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They are exceptions. With the exception of United Airlines they are seasonal providers.
Pat Breen (Clare, Fine Gael)
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We are still talking about the price and that is what matters to the consumer.
Pat Breen (Clare, Fine Gael)
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Not in a regionally balanced way.
John O'Mahony (Mayo, Fine Gael)
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I am not sure where this debate is leading.
Pat Breen (Clare, Fine Gael)
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If one wants to downgrade services, pricing is the best way to do it of all the options.
Mr. Stephen Kavanagh:
We have an alignment of interests in making sure that as many people as possible visit the island of Ireland. If consumers wish to choose a roundabout way of getting to Shannon because they save money which they can then spend locally in hotels and restaurants, I do not see that as a reason to protect direct service. One can grow the number of visitors to Shannon without necessarily having more direct services from Shannon. As I said earlier, it is a zero sum game. Cheaper access has the potential to encourage more people to use the service to and from Ireland.
Michael McNamara (Clare, Labour)
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There were two or three specific questions. One was the question of the two transatlantic flights, one going to the east coast and one to the west coast. Where are they going? Can I have a simple answer? Is it Dublin, Shannon, Belfast or Cork?
Mr. Colm Barrington:
We have already announced our initiative for 2015 to increase our services to San Francisco to a daily basis and to start operating to Washington DC. We have not announced the new service for 2016 and we do not want to give away a competitive advantage by doing so at this point.
Michael McNamara (Clare, Labour)
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To which airport are the 2015 flights going?
Michael McNamara (Clare, Labour)
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Can Mr. Kavanagh answer my question about his share options?
Michael McNamara (Clare, Labour)
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What is the picture specifically relating to Mr. Kavanagh's position as CEO?
Michael McNamara (Clare, Labour)
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So there will not be an option to sell shares in the event of this proposed deal going through. I am not talking about shares Mr. Kavanagh already holds. I ask whether, as CEO, he has an option to sell shares if this deal goes through.
Michael McNamara (Clare, Labour)
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Is it a deal similar to that which Mr. Christoph Mueller has? It is not a confidential matter - it states in the annual report that he has 1.5 million shares.
Michael McNamara (Clare, Labour)
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I am not.
Mr. Colm Barrington:
The figure showing 1.5 million shares for Mr. Christoph Mueller is also incorrect. Those were shares which he was granted when he joined the company as an incentive to bring him from his previous employer. The company had to hit certain targets and at least 500,000 of the shares lapsed when the company did not manage to hit those targets.
Michael McNamara (Clare, Labour)
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There were, however, incentivisation shares additional to the 1.5 million he received when he took over, bringing the figure to well in excess of 1.5 million. That is all in the annual report.
Michael McNamara (Clare, Labour)
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In any event he is not here so I will not pursue the question of his shareholding.
Mr. Colm Barrington:
Shareholders like non-executive directors to own shares in the company as it produces a commonality of interests. I have bought my 300,000 shares over the past six years. At times the prospects for the company did not look great and I bought them sometimes against the strong advice of my wife. I invested my own, after-tax euro to buy those shares. If this deal happens I will make some money out of them, which I will be very happy with, but I made a risk investment at the time. I have ensured that it did not influence my thinking about this transaction in any way. We held a full board meeting and some of us did not involve ourselves in the discussion of the transaction in question.
Michael McNamara (Clare, Labour)
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I thank Mr. Barrington for his frankness.
John O'Mahony (Mayo, Fine Gael)
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Can Mr. Kavanagh answer Deputy Mulherin's question?
Mr. Stephen Kavanagh:
Quite a few influential people arrive on the charter from New York so hopefully their prayers will be of assistance. We enjoy working with the team at Knock airport and we were very interested in the opportunity to test the market for a service from New York. The basic proposition is that we are in business to grow the business. If demand between the US or Canada and Knock can be demonstrated we are open to servicing it. I think, however, that any such demand would be on a fairly low scale and would be primarily seasonal, as was the case with the previous operator.
Our preference for a charter in this instance would be for somebody else to share some of the revenue risk. In the case of a charter, a number of travel agents or committed parties commit to taking blocks of seats - a far less risky proposition than an airline independently attempting to sell 177 seats itself. It is a market test and we will learn some things. The scale from which we have benefited as a result of growth in the past number of years, including the addition of the Boeing 757 to our fleet to complement the wide-body A330s, gives us a greater capacity to trial and compete for business of this kind. Let us see how it goes. It was peak summer, it involved competing for very scarce aircraft resources and it won. We are cautiously optimistic that it can be repeated. It is a seasonal opportunity, though, and not even close to being a daily one, but it could deliver a service to Knock airport that did not previously exist. We are here to grow the level of opportunity for Aer Lingus and, by default, for all the regions of Ireland.
Michelle Mulherin (Mayo, Fine Gael)
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Could Mr. Kavanagh envisage a once-a-week service?
Michelle Mulherin (Mayo, Fine Gael)
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Can Mr. Kavanagh describe who he considers would be the interested parties in the area? This charter flight is fantastic and is very well received. He has data from the previous airline, he knows his business and he has been dealing with the management in Knock airport. Who are the interested parties that he wants to see at the table?
Mr. Stephen Kavanagh:
People who will share the revenue risk. The previous operator had a different business model and it made its commercial decisions. As I said, the commercial risk for us is much reduced if it a charter flight and the airline does not have the sole responsibility of selling all the seats. That is analogous to what tour operators and travel agents did in the past where they block-booked seats to the Mediterranean destinations. It increases the confidence of the airlines in terms of their revenue generation. We do not have the level of market intelligence that the team at Knock airport has in terms of those parties that might be interested in flights for pilgrimage groups or for those attending special events. We are quite happy to partner in that regard but we are simply not equipped to take the commercial risk and responsibility of selling seats at Aer Lingus risk, but we are quite happy to have a dialogue with all those parties interested in building air routes between Knock and North America in that context.
Michelle Mulherin (Mayo, Fine Gael)
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In the context of that type of model, Mr. Kavanagh is referring to a tour operator who block-books in advance and sells so many seats and then Aer Lingus has a number of seats it sells. Is that how it works?
John O'Mahony (Mayo, Fine Gael)
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What is the risk in that respect?
Mr. Stephen Kavanagh:
We have the risk of the opportunity foregone because we have to take the aircraft out of service. The Deputy will probably not be delighted to hear that the aircraft is not serving Dublin-JFK that day, it is being taken out of the Dublin-JFK service to operate the Knock-JFK service. That is being done on the basis of the commercial return. We are open to serving-----
John O'Mahony (Mayo, Fine Gael)
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Why is Aer Lingus not taking a risk when there is a gain for it on that particular day?
Michael McNamara (Clare, Labour)
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My colleague, Deputy O'Donnell asked Mr. Brogan about Stobart Air's plans in terms of Shannon. While it has pulled out of Shannon, what plans does it have, or does it envisage all roads leading to Dublin and all flights operating out of Dublin?
Mr. Sean Brogan:
In my earlier answers to the questions about Shannon, I mentioned that we will continue to work with all regional airports. Should the economic climate change for ourselves in terms of the potential to operate, we will go back and talk to them, but we are in constant dialogue with these airports.
Michael McNamara (Clare, Labour)
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All flights will be from Dublin to other regional airports.
Mr. Sean Brogan:
No. We have quite a significant operation out of Cork as well. We are talking about the Aer Lingus regional franchise. It goes back to what I said earlier, namely, that all routes must be profitable. From a commercial point of view, that is why we are in business. In order to continue the success of the Aer Lingus regional franchise, we must continue to make sure that remains the case. However, that does not change the fact that we will continue to work with all the regional airports.
Michael McNamara (Clare, Labour)
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Does Mr. Brogan view Shannon as a regional airport?
John O'Mahony (Mayo, Fine Gael)
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While we are speaking about Knock Airport, Mr. Walsh spoke last week about the importance to IAG of Gatwick Airport. With 70,000 passengers being carried between Knock and Gatwick, is there a possibility that this service could be enhanced? Is it secure under this deal? Profitability would be a factor, but I presume with figures like those it is profitable.
Mr. Stephen Kavanagh:
The Knock-Gatwick service works for Aer Lingus. It operates at a particular time of the day which is not too resource intensive on the aircraft but it fits the demands of the marketplace, but British Airways does not sell it. Aer Lingus is singularly the airline that is selling the seats at both ends of the marketplace. It encapsulates the opportunity. If BA were to begin selling Knock as a destination, that bring us back to the basic point of this proposition, namely, that more people consider Knock as a destination. Gatwick Airport is British Airways second most important hub. It does not serve Dublin, Knock, or Belfast from Gatwick. What Aer Lingus gains is that most powerful player in the UK market with significant loyalty based on a frequent flyer programme, to which Aer Lingus currently does not have access, and a vested interest in selling seats between London and Knock, which does not currently exist. That can only be positive for the sustainability of the air route between Knock and London.
John O'Mahony (Mayo, Fine Gael)
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That is the answer I wanted. I thank Mr. Kavanagh.
Michael Fitzmaurice (Roscommon-South Leitrim, Independent)
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I thank Mr. Kavanagh for his presentation. In terms of all the media attention in terms of whether the sale is on or off, and the board making its decision, when he was before this committee Mr. Walsh said there was the possibility of job losses and that down the road the number of jobs would grow. What do the witnesses believe will be the consequences? If this merger did not go ahead, would there be job losses? Where do they see Aer Lingus going?
Michael Fitzmaurice (Roscommon-South Leitrim, Independent)
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Is that if the merger does not go ahead?
Mr. Stephen Kavanagh:
If I may continue, long-haul aircraft in particular drive significant direct employment. In the event this particular transaction does not complete, Aer Lingus has its own growth programme but the composition of employment in Aer Lingus will continue to change. There are some processes within Aer Lingus that over time no longer had value for the customer, or the process has been replaced by automation or various things. What I can say is that, ultimately, as Aer Lingus grows the level of employment in Aer Lingus will grow but the composition of that employment is dynamic. A growing Aer Lingus in terms of fleet will ultimately require the workforce to accrue. We are a relatively lean airline. We have been through many restructurings in the past 20 years, in stark contrast to many carriers that continue to exist in Europe. That is how we have managed to withstand fierce competition from a very successful local incumbent. There will be job losses but there will be job losses in areas that do not add value to the enterprise. Forgive me for being blunt, but if customers do not value the service, the service does not get produced. Ultimately, however, there will be more employment opportunities created within the business in other areas. That is what growth ultimately delivers. Our proposition is that the growth and the opportunity that can be delivered is much greater under an IAG proposal than on a stand-alone basis but, as I said earlier, that does not invalidate our current business. It is simply an acceleration of an ability to take full advantage of that opportunity.
Michael Fitzmaurice (Roscommon-South Leitrim, Independent)
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I was listening to Mr. Kavanagh on the Knock episode and I do not think he is over enthusiastic about growing a big service in Knock. He basically wants to be guaranteed something but sometimes we have got to take a risk. One speculates to accumulate.
I heard Mr. Brogan say when addressing the members that he was for this merger but the reality is that he is on a contract that has seven years remaining.
Stobart Air has a contract with Aer Lingus that has seven years left to run. I understood Mr. Walsh to say IAG has a regional set-up too. Mr. Brogan mentioned 400 or 450 jobs. What guarantee does Stobart have that he will not turn around in seven years’ time and say he has his own regional service and does not need Stobart?
Mr. Sean Brogan:
The Deputy is correct. We have a contract with Aer Lingus that runs to 2022. I listened to what Mr. Walsh said here last week. He does have his own regional services in various countries throughout Europe. We would regard this as an opportunity. If Aer Lingus is part of IAG I would hope that Stobart could grow the franchise that has been such a success over the past four years as part of the broader group.
Michael Fitzmaurice (Roscommon-South Leitrim, Independent)
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Has Mr. Walsh spoken to Stobart? He might have other plans for the set-up in six or seven years’ time. Is there any fear that Stobart will have to look for alternative places to go?
Mr. Sean Brogan:
Any business constantly has to remain cost competitive. With the combination of the aircraft we operate and the business we run with that, we are as competitive as any other turbo-prop operator in Europe. Should the merger happen I would certainly use that to take advantage of the possibility of expansion, as I would with any other franchise carrier. Since the inception of the franchise agreement with Aer Lingus we have expanded with other airlines, with CityJet and Flybe. We will continue to do that.
Michael McNamara (Clare, Labour)
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I do not wish to take away from Mr. Kavanagh’s happy announcement. He told us he would receive share options, which is standard in the airline business. I congratulate him on that. He is to receive share options that are only triggered by performance at some point in the future but if this deal goes through there will be no Aer Lingus shares traded in the future because it will be taken over by IAG. How will that work? Mr. Kavanagh has explained how he accumulated shares already. That is irrelevant.
Michael McNamara (Clare, Labour)
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Would they be shares in IAG?
Michael McNamara (Clare, Labour)
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Starting from Mr. Kavanagh’s appointment as CEO-----
Michael McNamara (Clare, Labour)
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How can Mr. Kavanagh get options in shares that will not exist if this deal goes through?
Michael McNamara (Clare, Labour)
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It could be to Mr. Kavanagh’s financial detriment. That would tell an interesting story but I am just asking.
Mr. Stephen Kavanagh:
I have certain contractual rights in respect of my employment but that does not necessarily mean that IAG would see me as an appropriate chief executive. I assume that it will and I will attempt to convince it of that but there is nothing triggered by way of an automatic entitlement on the basis of my contract with Aer Lingus.
Mr. Sean Brogan:
I would like to clarify one point for Deputy Fitzmaurice. I talked about what I hoped would be potential expansion to develop in other areas of IAG but he should recall my earlier comments about the growth in the Aer Lingus regional model serving the regional UK airports into Dublin and Cork. We have experienced over 50% growth in the past four years. I expect that under the IAG-Aer Lingus combination there is a lot more opportunity on existing routes too. Where I have multiple services into UK regions I would certainly see more opportunity for that under an IAG-Aer Lingus combination.
John O'Mahony (Mayo, Fine Gael)
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I thank Mr. Barrington, Mr. Kavanagh, Mr. Eduard van Wyk, Mr. Sean Brogan and Mr. Peter O’Mara for appearing before us today at short notice. The invitations went out yesterday. There was some comment earlier about the witnesses not providing presentations in advance but because this is such a live moving show at the moment we wanted to take the opportunity of an early appearance. I would not want people to think the witnesses were holding anything back by not having a presentation. It would be ideal if we could have given advance notice. I thank them also for the forthright way in which they answered the questions.
The committee’s aim was to hear all sides of, and opinions on, this story. We have also invited Mr. Michael O’Leary to come in. We have not yet got a response from him. I am sure he will have interesting things to say. This has been a valuable exercise today. I wish Mr. Kavanagh well in his new post.