Martin Cullen (Waterford, Fianna Fail)

I am pleased to have this opportunity to update the Seanad on developments in Aer Lingus. Before I outline the current position relating to Aer Lingus, let me refer briefly to past performance.

Aer Lingus was for many years, and especially in its early days, the main provider of air access between Ireland and the rest of the world. It opened Ireland to the world and, through its efforts, it led the way in selling and promoting Ireland, making it the major tourism destination it is today. While that role is no longer exclusively filled by Aer Lingus, it is still a very important player in providing links to key destinations for business, tourism and trade. This is particularly so on the transatlantic routes. I understand that today there are more than 90 airlines providing services to Ireland. This clearly demonstrates the changes in the market over the years both in terms of overall capacity, range of services and the level of competition.

Aer Lingus has survived a number of major crises in its history and has had a number of survival plans. All resulted in the airline surviving to fight another day, very narrowly in 2001 as the Leader of the House will vividly recall, and in 1981 and 1993 with help from the Exchequer. Survival was only possible through the combined efforts of board, management and staff.

The history of Aer Lingus clearly demonstrates the massive challenges in the sector and the ongoing need to reposition and change in response to these changes. It is imperative that airlines try to anticipate and plan for those changes over which they have some element of control because, as has been clearly demonstrated, there will be many events impacting on performance such as terrorist attacks and global downturns over which airlines have no control.

From an operational point of view, Aer Lingus has been performing well this year in a difficult climate for aviation. However, given that this is a sector where nothing can be taken for granted and a good year can quickly be followed by a disastrous one, it is vital that there is ongoing focus on ensuring the success of the airline.

Globally, the aviation sector is in serious difficulty. Very few airlines are making profits. Aer Lingus is one of the few traditional airlines who will return a profit this year. The US industry is in turmoil with many of its largest airlines either bankrupt or close to it, despite significant Government assistance. In Europe, Olympic, Alitalia and Swiss Air are also in severe financial difficulty. Meanwhile, the competitive pressures grow with the ongoing growth of the low fares model and increasing oil prices. All this clearly demonstrates the myriad challenges facing airlines as they attempt to remain viable.

Turning now to recent events, I want to refer to the resignation of the three senior managers in Aer Lingus — the chief executive, chief operations officer and chief financial officer — which will take effect from May 2005. I have already placed on record my thanks to the three executives, Mr. Walsh, Mr. Kearney and Mr. Dunne, for their work and commitment over the past three years in conjunction with the board and staff. That work has resulted in the profitable and successful airline we see today.

Of course, the chairman and board of Aer Lingus are charged with ensuring the ongoing orderly management of the business and I have every confidence in them fulfilling this role, notwithstanding these resignations. Resignation of top management is nothing new in business, nor is it the first time this happened in Aer Lingus. Clearly, the board will ensure replacements for the top management team are recruited as quickly as possible. It would be preferable if such replacements could take office before next May.

I met the acting chairman, Mr. John Sharman, on 18 November 2004 to discuss this matter and clarify the arrangements for the replacement of the three senior executives. In that context, the board of Aer Lingus at its meeting on Monday last, 29 November 2004, decided to commence the process of recruiting a new chief executive by establishing a sub-committee comprising the chairman and two other non-executive directors which is charged with identifying and recommending to the board the appointment of a replacement chief executive. In addition, all of the three resigning executives confirmed to the board their full commitment to working with the airline to ensure a smooth transition to their replacements.

I make it clear on behalf of the Government that the recent developments will not deflect any of us from the necessary measures that need to be implemented in respect of Aer Lingus at both the operational and strategic levels. By the operational level, I mean that it will certainly be a matter for the board, management and trade unions to work through the implementation of the business plan by direct engagement with staff representatives and, where appropriate, with the assistance of the State's industrial relations machinery. It is therefore vital that the current engagement between management and staff continues to a successful conclusion.

As I stated, it should be clear to all that in the airline business in particular, companies must be continually prepared to adapt to the rapid changes that are now a standard feature of the commercial aviation environment. Simply put, fares are continuing to fall in the aviation market and if the airline is to compete in this marketplace, its costs must also fall.

This business plan, which covers the period 2004-07, was approved by the board of Aer Lingus last July. It is a growth plan and will deliver significant increases in passenger numbers based on average fares continuing to reduce year on year over the period of the plan. However, in order to support lower fares, it also involves a range of cost-cutting measures across the company including approximately 1,300 redundancies over the next three years. Approximately 1,600 staff have expressed interest in the scheme and I understand that, by the end of the year, approximately 500 will have left the company.

Implementation of the plan is crucial so the airline can position itself to respond in a timely manner to changing marketing conditions and to take advantage of future growth opportunities so as to ensure its viability in the future. I understand that in addition to commencing the recruitment process for a new chief executive, the board reiterated the need for the complete and early implementation of the business plan to address competitive pressures and build on progress to date. In addition, it approved a challenging budget for 2005, consistent with the implementation of this plan.

Turning to the strategic issues, I am determined to bring clarity as soon as possible on the key strategic issues which are unresolved at present. These are, essentially, the Government's perspective on the future ownership of the airline and the airline's ability to grow its services across the north Atlantic. This clarity is essential so that the airline has maximum freedom and flexibility to meet the challenges ahead and can grow and prosper into the future, thereby maximising its contribution to the economy. This can be done in terms of the sustainability of jobs in the airline itself and indirectly through the stimulation of the tourism and business sectors of the economy.

It is important, therefore, that the Government clearly outlines its position on the future of Aer Lingus as soon as possible. In this regard, the House will be aware that my predecessor was in the process of finalising his position on the options for the future of the company when advised of a request by senior management in Aer Lingus last June for permission to develop an investment proposal for the company. Consent to that request was not given and the request was subsequently withdrawn on 4 October 2004.

The Government subsequently established a Cabinet sub-committee to examine all the issues relating to the future of Aer Lingus and report back to Government as soon as possible. The Cabinet sub-committee decided that work on future options would continue with advisers, as necessary, and that the result of that work would be considered by the committee. Goldman Sachs was then engaged by my Department to provide advice and assistance regarding the future of Aer Lingus. This report, which was received on 6 October 2004, was considered by the Cabinet sub-committee at its meeting on 22 November following its review by relevant Ministers and Departments. It was recognised at that meeting that decisions on the future ownership should be made before Christmas in the interest of the airline and all its stakeholders. A further meeting of the committee will take place on 9 December 2004.

Prior to any final Government decision, there will be engagement between the Department of Transport and the social partners on the future of the airline. The House will be aware that the Goldman Sachs report was published by my Department on Tuesday last, 23 November 2004, with copies of the report laid in the Oireachtas Library, as well as being made available on my Department's website.

As those who have read the report will be aware, it summarises the global aviation market, the regulatory environment and Aer Lingus's history and current operation. It then moves on to Aer Lingus's funding requirement and capital structure. It identifies as a key issue the availability of capital in order to enable the airline to compete on an equal footing, pursue expansion plans and withstand external shocks. Moreover, Goldman Sachs stated that given the cyclical nature of the industry, access to equity capital is an important mitigant of financial risk. The report goes on to review the status quo, the implications of change with regard to strategic issues and the various ownership structure alternatives under complete or partial divestment.

The issue of funding for future growth is a major factor for consideration in any decision on ownership. As stated, this is clear from the Goldman Sachs report. A major issue for any airline is the upgrading and replacement of aircraft. Aer Lingus is funding the upgrade of its short-haul fleet from within existing resources, but this is of course based on meeting performance and profit targets, as set out in the business plan. In addition, the airline is currently examining its long-haul fleet requirements and expects to complete a proposal in the coming months which will have to be approved by my Department and the Department of Finance. Pending the outcome, the company has confirmed to the Department that the airline will require equity funding to replace the existing long-haul fleet and to support future growth.

I am aware of the arguments in the public arena in favour of the State investing in Aer Lingus and confusion over whether this would be allowed by the EU Commission. I want to clear up any misunderstanding on the subject. Under EU state aid rules, the Government could make a case under the market economy investor principle for an equity investment in Aer Lingus when the company is performing well and making profits. In all likelihood, however, there would be opposition from other airlines alleging state aid and a likely investigation by the European Commission before approval for such an investment would be forthcoming. On the other hand, the State cannot invest under EU state aid rules when the airline is in crisis, even if it was so disposed. Consideration of a State injection would have to take account of other competing demands such as in the areas of health, education and transport.

It is undoubted that concerns exist in regard to strategic issues in the context of the State exiting from ownership of Aer Lingus. These concerns relate to issues such as the Aer Lingus brand, direct services to and from Ireland and the slots at Heathrow. I assure the House that all these issues will be addressed in the context of finalising the Government's position on the future ownership of Aer Lingus.

I am also aware that increasing the commercial opportunities for Aer Lingus in terms of services between Ireland and the US is an important element in the overall strategic future for the airline. Aer Lingus has stated it could double traffic on US routes within a three to five-year period if the market is opened up. Currently, Aer Lingus can only operate scheduled services to five US points under the bilateral agreement, namely, New York, Boston, Chicago, Los Angeles and Baltimore. This restriction, which has been in place for many years, is the response of the US authorities to the requirement in the bilateral agreement that all airlines serve Shannon as often as they serve Dublin.

Addressing this issue involves making adjustments to the bilateral aviation agreement between Ireland and the US. In doing so, we must seek to secure the best outcome for Aer Lingus, our national tourism industry, Shannon Airport and the Shannon region. In particular I am conscious of the fact that the new board of Shannon Airport is now required to produce a business plan for the airport and that clarity on future transatlantic aviation policy would be very helpful to that business planning process. Expanding scheduled services across the Atlantic is of great importance to the growth of Irish airlines and Irish tourism, as well as for inward investment and trade generally.

Negotiations between the EU and the US on an aviation agreement which would bring in open skies across the Atlantic are set to recommence early in the new year. However, it is by no means clear how long these multilateral negotiations will take. In these circumstances, officials from my Department will meet the US authorities in the coming weeks for exploratory discussions.

My focus is on ensuring that Aer Lingus continues to have a viable future with the maximum number of sustainable jobs. It behoves all of us to work together to achieve this objective in this vulnerable and difficult global sector. The Government will endeavour to move forward in consultation with the social partners as soon as possible.