Airlines

Published on February 25th, 2015 | by Jim Lee

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Christoph Mueller leaves Aer Lingus in good shape as he seeks a new challenge with Malaysia Airlines

On 18th July, Aer Lingus announced that a departure date had been mutually agreed between the company and Christoph Mueller its Chief Executive Officer (CEO) which would see him stepping down as CEO and director in May 2015. Mr Mueller was appointed to the Group just over five years ago in July 2009 as CEO and has served as an executive director since September 2009. It has now been confirmed by Malaysian Prime Minister Najib Razak that Khazanah Nasional, Malaysia’s sovereign wealth fund and Malaysia Airlines’ parent company, had appointed Mr Mueller as chief executive-designate. Earlier on 7th November Khazanah Nasional had incorporated Malaysia Airlines Bhd as Malaysia Airlines’ successor holding company. It will act as a vehicle for the migration of Malaysia Airlines’ relevant operations, assets and liabilities. While the airline is reportedly on track with its restructuring programme the decision to delist it from the Bursa Malaysia followed the confirmation of a third quarter net loss of MYR576.11 million (€135.08 million), its worst since late 2011 and up from MYR375.4 million (€88.02 million) in the same period in 2013. For the first nine months of this year, Malaysian Airline System (MAS) has racked up total losses amounting to MYR1.32 billion (€309.51 million) as passenger numbers and average fare yields plummeted following the loss of flight MH370 en route to China and the destruction of flight MH17 over the Ukraine. Trading in the airline’s shares are being suspended with effect from 15th December and is a necessary step as part of a MYR6 billion (€1.41 billion) government-led restructuring.

Christoph MuellerAs the Malaysian Government has emphasised, nothing short of a complete overhaul is required if the aim of turning the airline profitable by 2017 is to be achieved. Mr Mueller will be the first non-Malaysian national ever appointed as CEO for Malaysia Airlines and he is according to a statement “the best candidate to lead the turnaround of the national carrier and to build local succession”. The task “requires absolutely the best aviation management expertise, and in particular, those with a strong track record of turning around national flag carriers” it added. “Other leadership appointments for the new company” have also been made but were not disclosed. Discussions are said to be “ongoing” for Mr. Mueller to assume his new post at a date prior to 1st May 2015, but no earlier than 1st March 2015. His contract as Aer Lingus CEO ends on 1st May 2015. It has been confirmed that he will remain as chairman of An Post to which he was appointed to last year, formally taking up the role in June 2013. His appointment runs until March 2018 and it will be he first time that the chairman of a semi-state company will be based outside Ireland. He is also a board member of Tourism Ireland having been appointed to that board in 2011.

Aer Lingus Chairman, Colm Barrington has already paid tribute to Mr. Mueller’s “excellent service and positive contribution since 2009”. Under his strategic leadership, Aer Lingus has been transformed “into a strong, consistently profitable airline with a clear strategic direction, a resilient business model as a value carrier and an improved cost base” he said. “Christoph has placed Aer Lingus in a position where we can look to the future with confidence and can continue to develop and grow the airline for the benefit of our customers, our employees and our shareholders” he added. While its 18th July statement added that the Aer Lingus Board would “commence a process to select and appoint a new CEO and executive director” there are no indications yet of potential candidates.

An indication of Mr. Mueller’s influence on Aer Lingus’ fortunes was its un-audited interim management statement for the period from 1st July to 30th September 2014, representing the third quarter (Q3) of the Group’s financial year released on 5th November. This is the key quarter of the year in which all the annual profit is made. In summary the transatlantic results were very good; however the short-haul results are more difficult to pin down but were at least reasonable. The following table illustrates the financials with the headline figure being the operating profit before exceptional items which for the quarter was €112.9.1 million, up from €94.9 and for the nine months to end September, was €103.1 million, up from €78.4, with an operating margin 8.4%, up from 7.0%. Details in relation to passenger numbers and load factor, available seat kilometres and passenger revenue are shown in the operating metrics table below.

Aer Lingus operating matrics

In relation to fuel hedging, as of 30th September 2014, Aer Lingus had hedged 88% of its forecast Q4 2014 fuel requirements at an average of US$943 per metric tonne. In addition, 50% of total 2015 fuel requirements were hedged at US$937 per metric tonne. A summary of the quarterly fuel hedging position for the remainder of 2014 and 2015 is:

Aer Lingus fuel hedging

For the full year 2014, the operating profit is expected to be ahead of the 2013 result of €61.1 million (before exceptional costs). Q4 last year had an operating loss of €17.3 million. So for Q4 this year, the loss should be less than €42 million. It is unclear whether this is a conservative target that is expected to be beaten or a provision for heavier losses from the fixed costs of the expanded transatlantic operation and/or the impact of Ryanair capacity growth at Dublin. A full comparison of the 2014 figures compared to the previous year is given in the table below:-

Aer Lingus 2014-13 figures

Aer Lingus future expansion

While there was nothing new about the winter schedule in the interim management statement, it did outline a major transatlantic expansion planned for summer 2015. This is covered in a separate piece in this issue. In relation to short haul, the stated objective at least for the winter is protecting profit not market share and it will price accordingly. Aer Lingus has a strong revenue advantage in the peak, both short-haul and long-haul and they don’t seem interested in providing surplus capacity. For example slot allocations for the winter show that while total seats at Dublin could be up about 7% Aer Lingus flights could be down about 11%.

Aer Lingus A319 EI-EPS (JH)Dublin-Agadir route will continue through next summer and Dublin-Nantes (operated year-round by Ryanair) will be added. Frequencies will be increased mainly on holiday routes from Ireland and on Paris and other key routes which are in demand. Capacity increases are Palma 50%, Stuttgart 25%, Bilbao 20%, Fuerteventura 100%, Bordeaux 20%, Lyon 17%, Venice 12%, Faro 6%, Izmir 55%, Bourgas 25% while Cork-Malaga will also increase. These increases could be achieved by some lease-in, if a suitable opportunity emerges or from the aircraft currently on the Virgin Little Red wet lease. Aer Lingus has commenced the process of re-assessing the deployment of aircraft following the decision by Virgin Atlantic to wind down its ‘Little Red’ operations on a phased basis in 2015. Exit costs associated with the cessation of ‘Little Red’ services are largely mitigated through inbuilt flexibility in contractual arrangements related to these services. While there could be some interest by Aer Lingus in operating Heathrow-Edinburgh if most of the costs were covered by blocked space agreements with other airlines, slots could be an issue.

On the negative side, the Gatwick crew base is due to close at the end of the winter schedule. The on-line timetable shows only four daily flights to Dublin next summer against six currently, the first from Gatwick not departing until 09:25. Ryanair also has similar reductions. At the IAG Capital Markets Day, it was revealed that Aer Lingus has returned 10 Gatwick slot pairs to BA.

There was nothing on Aer Lingus Regional. There was nothing about replacements for the A320/321, the earliest of which date back to winter 1998/99. There is no provision for short-haul aircraft in the capital expenditure figures with an implication of reliance on the leasing markets. It was noted that six additional aircraft became ‘unencumbered’ (i.e. finance leases were completed) during the year. Five of these were in the 12 months to the end of September 2014 with one more in December. There will be some more in 2015.

Positive trade union ballot on IASS proposal first step in resolving pension issue

Aer Lingus Head OfficeAlso on 5th November Aer Lingus confirmed that it had received notification from the Irish Congress of Trade Unions (‘ICTU’) of the result of the ballot conducted amongst affected Aer Lingus employees regarding the proposed solution to address issues arising from the funding deficit in the Irish Airlines (General Employees) Superannuation Scheme (the ‘IASS’). The notification confirmed that the majority of votes were cast in favour of the proposed solution.

The ballot was conducted on an aggregate basis by the SIPTU, IMPACT and TEEU trade unions representing approximately 97% of affected Aer Lingus employees. The UNITE trade union which represents approximately 3% of affected Aer Lingus employees did not participate in the aggregate ballot. 70.27% of the votes cast were in favour of the proposed solution. Aer Lingus welcomed what it described as “this clear result and acknowledges employee support for the proposed solution”. While accepting that the proposed solution is “challenging for all parties” it “nonetheless represents a compromise which is the only viable solution that is capable of acceptance by all sides”.

The statement concluded “subject to the IASS trustee deciding to make the required application to the Pensions Authority, Aer Lingus expects to issue a circular to shareholders in mid-November 2014 setting out the full details of the proposed IASS solution. The circular will include a notice convening an extraordinary general meeting in mid-December 2014 to seek approval from shareholders to make proposed once-off payments totalling €190.7 million relating to the proposed IASS solution. If shareholders approve the proposal, the benefit reductions proposed by the IASS trustee will still need to be approved by the Pensions Authority in order for the proposed IASS solution to be fully implemented”.

While the news of the Aer Lingus vote is obviously welcome, SIPTU has made it made clear that the dispute was still far from resolution amid claims that Aer Lingus and the daa (Dublin Airport Authority) were moving at different speeds towards resolution. Nevertheless, the 70% approval of the pension plan proposals sent the Aer Lingus share price soaring 7%. Ryanair, Aer Lingus’ largest shareholder, has yet to publicly announce whether it would back the deal. “We haven’t made any decision yet. We will consider the EGM proposals and make a decision based on that,” Michael O’Leary told Reuters news agency in a reference to the pension deal. On 18th November Aer Lingus issued a circular convening the Extraordinary General Meeting (‘EGM’) of shareholders to approve the pension deal. The EGM is scheduled for 10th December so the result will be known by the time these words are read.

November traffic figures

On 4th December, Aer Lingus released its traffic statistics for the month of November 2014. As the figures are issued in a tabular form further details can be found in the table and attention is drawn to the notes at the foot of the table which explain the basis on which the figures have been prepared. These figures show a decrease in the number of passengers carried in November, which reflected a planned reduction in its short haul capacity. Short-haul passenger numbers in November were down 7.6% on last year when the 2.2% increase in Aer Lingus Regional traffic, some of which is diverted from the mainline, is taken into account. In fact, even including the Regional traffic, this is the lowest number of short-haul passengers in November since 2007 and short-haul RPKs (including an estimate for Regional) were the lowest since November 2006 (the earliest month for which data is readily available). The average trip length for mainline passengers “lost” since November 2013 was almost 1,300 km (roughly Dublin-Zurich), so the cutback extends to longer European routes as well as cross-channel. There was no change in load factor but Ryanair and easyJet both increased theirs and Aer Lingus was saying its growth on short-haul is to come from load factor rather than capacity.

Dublin Airport data is not yet published, but Ryanair system wide data for November was extremely strong. EasyJet also had a good November. Long haul traffic increased by 28.4% to 104,000 passengers, up from 81,000 in the same month last year.

Compared to the Association of European Airlines (mainly so-called legacy carriers) as a whole, the Aer Lingus passenger load factor was lower on short-haul routes (68.6% v.72.1%) and on North Atlantic routes (76.3% v. 80.9%). AEA short-haul passenger traffic (RPK) in November was up 1.6% (Aer Lingus – 12.4%) and North Atlantic up 5.8% (Aer Lingus up 31.8%).

Aer Lingus November traffic

…..and finally

Mother-of-three Sade Coppens (28) has filed a lawsuit in New York against Aer Lingus for $1 million (€813,935) in the US after her two-carat diamond white-gold engagement ring, worth $9,300 (€7,570), and other valuables including over $10,000 (€8,140) worth of photographic equipment and a Chanel bag were allegedly stolen from her luggage when her bag went missing following a transatlantic flight from New York to Amsterdam via Dublin during the summer. The floral designer is claiming “emotional trauma and distress” after her bag which was approved as carry-on luggage at a check-in desk at John F Kennedy International Airport was deemed “too big” for carry on by gate staff and was put in the cargo hold. According to a statement she submitted to the court, Aer Lingus only offered her $1,682 (€1,369) in compensation, the maximum sum allowable under international rules. Meanwhile another passenger Mr Narkewicz-Laine who alleges he suffered a seizure after being struck on the head by a piece of luggage is suing Aer Lingus in the US state of Illinois and is seeking damages of in excess of $75,000 (€61,045).


About the Author

Jim has had a life-long interest in military matters and aviation. Initially, he fused both of these interests together with a passion for military aviation, initially as a photographer. He has travelled extensively over the years and has been the guest of many European air forces, plus the air forces of the United States, Russia and others throughout the world. His first introduction to journalism coincided with an interest in the civil aviation industry was when he initially wrote for and later edited, ‘Aviation Ireland’, the club magazine of the Aviation Society of Ireland. Jim was a contributor to Flying in Ireland since its inception over 10 years ago and is now a key contributor to this site. He has also contributed items for a number of other aviation magazines and has produced a number of detailed contributions to Government policy documents, most recently the Irish Government’s White Paper on Defence. He is also deeply involved in the local community and voluntary sector and has worked both in local government and central government.



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