Committee Reports > List of Committees > Joint > 1980 > Committee on Commercial State-Sponsored Bodies > Report No. 14 - Aer Lingus, Teoranta and Aerlínte Éireann, Teoranta

APPENDIX I

PRINCIPAL MEMORANDUM FROM AER LINGUS

Contents

January 1980

TABLE OF ATTACHMENTS

SECTION 1 INTRODUCTION

1.1 Aer Lingus/Aerlinte Éireann

Aer Lingus Teoranta (‘Aer Lingus’) and its sister company, Aerlinte Eireann Teoranta (‘Aerlinte’) operate the national airlines of Ireland. Apart from Directors’ qualifying shares, the Irish Government owns the entire share capital of both companies. Aer Lingus operates air services within Ireland and between Ireland, the United Kingdom and the Continent of Europe. Aerlinte operates services between Ireland and North America. Aer Lingus was incorporated on May 22 1936 as a private limited liability company and became a public limited liability company on July 27 1967. Aerlinte was incorporated as a private limited liability company on February 26 1947 and became a public limited liability company on July 27 1967.

While separate legal entities, the two companies share a common management and six of the seven Directors in each company are common to both companies. The airlines use the common name ‘Aer Lingus’ for marketing purposes worldwide.

1.2 Issued, Authorised and Loan Capital

The authorised share capital of Aer Lingus is £36,500,000 made up of 21,500,000 ordinary shares and 15,000,000 preferred ordinary shares of £1 each. In the case of the ordinary shares a total of 21,393,003 shares has been issued, all of which, apart from a small number of qualifying shares, are held by the Minister for Finance. All preferred ordinary shares have been issued and are held by Aerlinte Eireann. Loan capital at March 31 1979 was £41,166,000.

The authorised share capital of Aerlinte Eireann is £20,000,000 divided into 10,000,000 ‘A’ shares of £1 each and 10,000,000 ‘B’ shares of £1 each. All of the ‘B’ shares and 7,217,042 of the ‘A’ shares have been issued and with the exception of a small number of qualifying ‘A’ shares are held by the Minister for Finance. In addition, the Minister for Finance has invested £5,000,000 in the form of non repayable interest-bearing capital. Loan capital at the end of March 1979 was £42,927,000.

The separate figures for the two companies cannot be added together to provide a total because of an investment of £15,000,000 in Aer Lingus by Aerlinte Eireann and a loan by Aer Lingus to Aerlinte Eireann (£12,000,000 on March 31 1979). When this inter-company investment and loan are netted out, the total investment by the State in the two companies combined amounts to £43,610,045 (of which £5,000,000 is interest-bearing) and the net loan capital on March 31 1979 stood at £72,093,000.

1.3 Function and Objectives

Some ten years ago Aer Lingus published a statement of its function and its objectives. This statement was as follows:

Function

To provide and develop an air transport service which will be safe, efficient, reliable and profitable. In carrying out this function our objectives will be—

Standards

To achieve standards of excellence in our operation and to provide a high and distinctive quality of personal service to our customers in all our activities.

Profitability

To earn a profit which will provide a realistic return on capital employed, relative to air transport experience. This is essential so that we may survive in our competitive environment and expand in our primary role as an air transport operator, while providing stable productive employment for our staff.

Growth

To pursue maximum growth in air transport insofar as our profit position will allow us. To grow in activities related to air transport and in such other activities as may be desirable for reasons of markets, profit plans and the effective use of our resources.

Community Benefit

As an international airline we will seek to contribute to all the communities we serve. Particular objectives related to Ireland will include—

National Development: As a contribution to economic development, to provide a high standard of transport to the community, for passenger and cargo, at lowest possible cost;

Tourism: To engage in tourist promotion to Ireland to the limit of our ability, directly and in co-operation with others, and at a standard that will earn international respect;

Employment: While providing steady productive employment, to afford maximum opportunity for the personal development of our staff and to expand that employment as the growth of our activities permits, striving continually for the highest standard in staff relations;

Balance of Payments: So to order our affairs as to maximise our earnings from abroad;

Educational, Social and Cultural: To contribute to the enrichment of the community in its educational, social and cultural affairs;

Since this statement was first published, it has been reviewed on a number of occasions with a view to considering whether any changes in either the function or the objectives of the airline were required. However, on each occasion it was decided that the statement was still adequate and appropriate for the airline in spite of changing circumstances.

SECTION 2 HISTORICAL BACKGROUND

2.1 Aer Lingus up to 1970

On May 27 1936 Aer Lingus inaugurated its first route from Dublin to Bristol, operating from Baldonnel Military Aerodrome. Later in 1936 the Bristol service was extended to London. This route, as well as seasonal services to Liverpool and the Isle of Man which were subsequently opened, comprised the company’s route network until the outbreak of war in 1939.

During World War II Aer Lingus’s operations were confined to a service between Dublin and Liverpool. Immediately after the war agreement was reached between the British and Irish Governments, whereby Aer Lingus was charged with the responsibility of developing air services between Britain and Ireland. This arrangement continued until 1956 at which time British European Airways entered the Irish routes.

Routes to Paris and Amsterdam were opened after the end of the war and through the 1950s other Continental routes were added as the Aer Lingus fleet expanded.

In 1958 two routes from Dublin through Shannon to New York and Boston were inaugurated. The service started with leased Super Constellation aircraft. In 1959 three Boeing 720 jet aircraft were ordered and the first of these went into service on the Atlantic in December 1960. These were later replaced by the larger Boeing jets 707-348C. Two new routes to Chicago and Montreal were opened in May 1966.

The 1960s were a period of rapid growth and development for the airline. The Transatlantic services proved extremely successful and the heavy promotional investment by Aer Lingus in the United States and Canada led to very rapid growth from these important tourist markets. Two Boeing 747 aircraft were ordered in 1966 to come into service in 1971. On the short-haul routes, Aer Lingus introduced its first short-haul jet, the BAC One Eleven in 1965 and at the end of the decade had become an all-jet airline with the introduction of the Boeing 737 to replace the Vickers Viscount. New continental destinations were opened up and the foundations laid for what was planned to be a period of continuing growth and development.

2.2 Aer Lingus in the 1970s

The expectations of the national airline were not fully realised in the 1970s. External factors, notably the impact of Northern Ireland violence on our tourist industry, the cut-throat price-war on the North Atlantic, inflation of fuel and payroll costs and economic downturns in our major markets proved to be major negative influences on our business. However, in spite of these problems the decade saw Aer Lingus making considerable progress.

In the financial year 1969-70 Aer Lingus carried less than 1½m. passengers. In 1979-80 this figure has increased to approximately 2½m. Annual turnover expanded from £33m. to £225m. during the decade and by 1979-80 approximately 40% of the turnover was coming from ancillary activities, most of which were non-existent ten years earlier. Staff employed directly by Aer Lingus rose from 5,500 to 6,800 but the acquisition and subsequent growth of subsidiary companies led to a total staff strength of over 13,000 (of whom about 8,000 work outside Ireland). Direct services to Continental Europe were expanded considerably, reflecting the growth achieved in both tourist and business traffic.

The highlights for Aer Lingus in the 1970s were as follows:

1970-1973

The first years of the decade saw serious problems for the national airline, with the violence in Northern Ireland causing a serious set-back to Irish tourism. Passenger numbers on the North Atlantic routes reached a record 296,000 in 1971-72 but fell from that level in each succeeding year up to 1975-76 when 198,000 passengers were carried. Cross Channel traffic also suffered from Northern Ireland violence and the only bright feature of the passenger traffic in the early years of the decade was the start of a period of prolonged growth on the Continental European routes.

Another serious problem which started during this period was the price war on the North Atlantic routes which had been so profitable in the 1960s. U.S. Government policies led to a glut of aircraft capacity and price-cutting after the wind-down of the Vietnam war. This started a financial disaster which has continued virtually unchecked on these routes throughout the 1970s. For other European airlines, the North Atlantic losses could be and were offset against profits on other long-haul profitable routes to Africa and the Far East. In Aer Lingus other solutions had to be found.

In anticipation of some of the problems of the industry, the foundations were laid for a diversification policy between 1970 and 1972. Government approval was received in 1972 for the airline to invest in external activities which would be ancillary to the main business of carrying passengers and freight. This approval was contingent upon its being financed totally by the airline with any related borrowings being arranged outside the country. The rationale behind this development was to use Aer Lingus resources and expertise to earn profits from ancillary activities to underpin the poor economics of the air transport business. The major ancillary investments of this period were in the London Tara Hotel and the Guinness Peat Group.

However, the overall problems were such that the airline lost over £2m. in each of the two years 1971-72 and 1972-73. It began, however, to fight its way back into profitability and in 1973-74 showed a profit of £1.2m.

1974-1976

Just as Aer Lingus appeared to be emerging into relatively calmer waters, the fuel crisis of late 1973 and the world-wide economic recession in 1974-75 struck. The effects of these, together with continuing violence in Northern Ireland and very high rates of inflation in Ireland, combined to generate the worst-ever financial crisis in the history of the airline. In each of the two years 1974-75 and 1975-76 the airline lost over £5m. There were additional ‘currency losses’ on foreign loans arising from the devaluation of the pound against the dollar.

During these difficult years, a programme to restore the financial health of the airline was set in motion for air transport and for ancillary activities.

At this time, the airline’s markets were suffering from economic depression and the emphasis was placed on reducing unit costs in order to maintain our competitiveness. Employment within the airline shrank as a result. However, by late 1975 it was clear that the worst of the recession was behind us and a policy of growth to be stimulated by a major increase in promotional expenditure was set in train for 1976.

Ancillary activities were very actively promoted in this period. At a time when the rest of the airline was contracting, the maintenance and overhaul department was expanded and a successful marketing programme was undertaken to sell engineering and other skills within the technical division to foreign airlines. By 1977 gross revenues from this part of our business had risen to £17m. At the same time, while the London Tara, after a difficult start, was reaching profitability, the largest single diversification activity was set under way when in January 1976 Aer Lingus acquired the operation of the Dunfey Hotel chain in the United States, comprising a total of fourteen leased and seven managed hotels, totalling some 6,000 hotel bedrooms throughout the U.S.A. A joint venture was started with the Guinness Peat Group (a company in which Aer Lingus had acquired a 9% holding in 1973) leading to the establishment of Guinness Peat Aviation. This company, operating from Shannon and specialising in aircraft leasing and broking, became profitable immediately and has acquired a major standing worldwide. A number of other businesses were set up and developed during this period.

1977—1979

Following on from the measures taken by the airline, a continuing improvement in the financial picture now materialised, although the problems of the North Atlantic still continued. The airline made a net profit (after depreciation, tax and interest) of £0.1m. in 1976-77, £4.6m. in 1977-78 and £4.0m. in 1978-79.

The results in the latter two years were affected by the first major strike in the airline’s history which reduced the net profit by approximately £1½m. in 1977-78 and £3½m. in 1978-79.

This improved performance, however, concealed considerable variations in the performance of different sectors of the total operation. The Atlantic service continued to lose money and, as a result, air transportation in 1978-79 showed an operating loss of just under £3m. (Had it not been for the strike air transportation would have had approximately a break-even result in that year.) However, profits before interest from selling aviationrelated services totalled £7.6m. in 1978-79, profits before interest from hotels, leisure and catering activities totalled £3.3m. in the same year and financial and computer services division returned a profit before interest of just over £1m. It was clear that the original decision to invest in external activities had been more than justified but it was also clear that serious problems remained on the air transport side of Aer Lingus’s business, particularly on the North Atlantic routes. Further expansion of the airline’s ancillary activities took place during the 1977-79 period, particularly in the hotel and maintenance sections.

A very important development for Aer Lingus was the decision by the Government in December 1978 to increase its equity investment in Aer Lingus from £28m. to £43m. This badly needed injection of capital enabled the airline to proceed with its plans for the early part of the 1980s.

During the course of 1979, the problems of air transportation became more acute. Firstly, 1979 was a disappointing tourist season, seriously affected by the postal strike and the petrol shortage. More seriously, from a long-term viewpoint, fuel prices rose at an alarming rate. At the start of the decade the Aer Lingus fuel bill was approximately £2½m. annually. In 1978-79 it had risen to £17m. In 1979-80 it is estimated to exceed £30m. and preliminary assessments suggest a likely figure well in excess of £40m. for 1980-81.

Although 1979-80 is likely to show a reasonable profit for Aer Lingus, nevertheless the difficulties posed for us and for the airline industry in general by the current and prospective level of fuel costs will be considerable in the years ahead.

SECTION 3 AER LINGUS ROLE IN THE COMMUNITY

3.1 The importance of air services to Ireland

For obvious geographical reasons, Ireland is particularly dependent on air transport for its links with the outside world. To develop its trade and tourism links with other countries, an efficient, reasonably-priced network of air services is required year-round. Such services must cater for the tourist business both into and out of Ireland. This business is highly seasonal and very dependent on the availability of cheap promotional fares. In addition, however, the provision of year-round scheduled services for both passengers and freight is critical for the development of Irish industry and the promotional efforts of the IDA and CTT. Aer Lingus plays the major role in providing the range of services required in that it carries some 70% of all air passengers in and out of Ireland and some 95% of all air freight. In all, 32 airports outside of Ireland are served by Aer Lingus with regular scheduled service and 26 other airports are served with charter flights. All the major air services into and out of Ireland have been pioneered by Aer Lingus; competition has tended to appear only after the costly market development work had been completed by Aer Lingus.

3.2 Tourism Promotion

The role of Aer Lingus in promoting tourism is of particular importance for the Irish economy. Aer Lingus has for many years played a leading part in developing the tourist market through its own promotional efforts and in close collaboration with Bord Failte. At present there are 38 sales offices abroad and the airline’s overseas sales related costs are £13.5m. annually.

3.3 Fares Policy

The Aer Lingus marketing policy has been to encourage a wide range of promotional discount fares and to seek to compensate for the resultant loss in revenue by higher load factors. Between 75% and 80% of all airline seats sold by Aer Lingus in Ireland are at discount or charter prices. In addition, on its European routes, the Aer Lingus average rate per mile, even for the higher ‘normal fare’, is 25% less than the average for European carriers as a whole. The frequently criticised Dublin-London normal far is in fact one of the lowest fares in rate per mile available internationally in Europe. To compensate for the lower revenue per seat, the Aer Lingus policy has been to fill a higher percentage of its seats and consistently has achieved higher load factors than its competitors both on long-haul and short-haul services. In this manner, it endeavours to satisfy the objective of providing the community with a high standard of transport at lowest possible cost.

Aer Lingus has also been concerned to provide a wide variety of services and to develop Cork and Shannon operations, even where they may not at the outset be commercially viable. The survival of such services depends on a certain element of cross-subsidy from higher density routes.

3.4 Social Return

In addition to the benefits accruing to the community from the provision of air services, Aer Lingus makes a significant social return to the Irish community—

• Over 5000 people are employed by Aer Lingus in Ireland.

• Aer Lingus is Ireland’s single biggest export company, earning 75% or approximately £160m. per annum of its revenue abroad.

• Aer Lingus is Ireland’s strongest business link with the Third World through its widespread and increasing involvement with developing nations, particularly in Africa.

• Aer Lingus has acted and continues to act as a source of high technology for the community.

• Aer Lingus is particularly active in the sponsorship of educational and cultural activities in Ireland (Young Scientists’ Exhibition, Slógadh, Irish Management Business Game).

SECTION 4 MAJOR ISSUES FOR AER LINGUS TODAY

4.1 Economics of Air Transportion for Aer Lingus

Some fifteen months ago Aer Lingus made a series of presentations to members of the Oireachtas outlining development plans for the 1980s. Since then, the doubling of fuel prices and the slowdown of economic growth have seriously worsened the prospects for the aviation industry, particularly in the early 1980s.

Quite apart from the industry problems, the economics of air transportation into and out of Ireland on a year-round basis are at best marginally economical even in favourable conditions. Our high dependence on tourism means that the bulk of our traffic avails of discounted fares and travels mostly in the peak six months of the year, leaving a very unhealthy peak/valley ratio. This affects the year-round productivity of staff and equipment. The low utilisation of equipment has been offset for a number of years by developing a winter leasing programme. This continues to be successful but the market becomes increasingly competitive every year. Our home market is smaller than that of any other major European airline and most of our business has to be earned in highly competitive markets abroad, with consequentially higher sales promotional costs. In addition, the continuing violence in Northern Ireland has had a considerable dampening effect on the growth of tourism throughout the past decade and is likely to continue to have this effect.

Apart from the North Atlantic operation, the Aer Lingus route structure represents an extremely short-haul operation; in fact we have the shortest average stage length among European scheduled airlines. This, in turn, means that the standing charges and airport charges are disproportionately burdensome. Also, the fuel consumed per passenger mile is high because of the high incidence of take-offs and landings and the aircraft utilisation is reduced because of increased ground time.

As already outlined, the Aer Lingus policy in the face of these difficulties has been to endeavour to operate the air services into and out of Ireland without losing money and earn profits needed for future development through its ancillary activities. Increased fuel prices of the magnitude experienced in 1979 and likely economic recession in major markets abroad will make this task a formidable one in the early years of the 1980s. (See attached paper by the Director General of the International Air Transport Association as Attachment 11). In particular, the future of marginally profitable routes will have to be kept under continuing critical review.

4.2 North Atlantic

The problems of uneconomic air services for Ireland are most acute in the case of the North Atlantic. With U.S. Government policies of encouraging cut-throat competition with the aim of achieving a higher market share for U.S. airlines, the Atlantic has proved a financial graveyard for all carriers through the 1970s. IATA estimates that the loss incurred by scheduled carriers on the North Atlantic during the past ten years has been approximately £4,000m. Many supplemental carriers, specialising in charter services, have been forced out of business during the same period. The two major U.S. carriers who were serving Ireland in the early 1970s, Pan American and TWA, have both pulled off the Irish route and Air Canada has also withdrawn its services for the present.

Although the overall picture for air transport between the United States and Europe has been bleak for some time, the Irish routes suffer some particular disadvantages of their own. They have the lowest average fares in terms of distance; the highest level of discount fares because of the almost exclusively tourist nature of the business; the most acute seasonality of any North Atlantic route and the unique extra cost of the dual Shannon and Dublin stops. These dual Irish terminals mean that on each Atlantic round trip Aer Lingus has three European stops with the associated landing, handling and time on ground costs, together with very much higher fuel consumption. The North Atlantic operation has been under continual review during the 1970s and various measures have been taken at different times to improve its economics. The past twelve months, however, have seen a sharp reversal of improvements achieved since 1976, principally due to increased fuel prices which have had the effect of rendering the B.707 very uneconomical with its relatively high fuel consumption. Further policy changes for this part of our operation are discussed further in Section 5.3.

4.3 Competition

International competition has always been a feature of Aer Lingus’s affairs. In 1979 Aer Lingus competed with twenty-eight foreign based airlines into and out of Ireland and out-sold them all by over 2 to 1. Such competitive pressures are likely to increase in the 1980s.

Aer Lingus has no difficulty in facing up to this competition but is concerned that it should be neither predatory nor discriminatory. Our views on predatory competition stem from our experience on the North Atlantic where during many years airlines have ‘dumped’ surplus capacity on the Irish market following marginal pricing policies. The offenders were generally U.S. airlines with no long-term commitment to serving Ireland and most of them have now abandoned the Irish market totally. A new variant of this problem has been apparent in recent months with new U.S. entrants buying their way into the market at proposed fare levels which demonstrably do not recover full costs.

The other form of competition to which Aer Lingus objects is that which focuses on selective parts of the network. Public utilities, whether air transport, ground transport, telecommunications or electricity services, are potentially vulnerable to selective competition from private enterprise on the more profitable segments of a total network. Such utilities need protection from such discriminatory competition as otherwise there is a risk that private enterprise will take only the more profitable segments of the operation and leave the less attractive sections to public enterprise.

Subject to these important qualifications, Aer Lingus welcomes an era of increased competition. Indeed, our main objection to a recent Memorandum on Air Transportation issued by the European Commission has been its failure to follow fully the logic of allowing greater access to routes by new carriers. The proposals of the Commission restrict such opportunities to what are called third and fourth freedom operators (i.e. airlines operating on routes into and out of their own country). In such a regime, Aer Lingus could be faced with increased competition into and out of Ireland but would not have any opportunity to develop new routes other than those into and out of Ireland. Our attitude in this regard is best exemplified by the services which Aer Lingus developed over the years between Manchester and points in Continental Europe. The right to continue such operations was withdrawn in the 1970s. In a less regulated environment Aer Lingus will be seeking opportunities for access to some of the more profitable European routes from which we are at present excluded.

4.4 Industrial Relations

The industrial relations record of Aer Lingus has been good over the years, both in comparison with other large organisations in Ireland and also compared with major airlines abroad. During its forty-four years, Aer Lingus has suffered only one major strike, namely the clerical strike between March and May 1978. Even during the course of this strike more than half of the company employees remained at work and some 75% of all services continued to operate.

Notwithstanding this good record, Aer Lingus is also affected by some of the major industrial relations issues in the community. Notable among these is the issue of relativities between different groups within the airline. One of the consequences of the clerical strike of 1978 has been to make it more difficult to move towards a better co-ordinated negotiating structure. In accordance with the provisions in the current National Understanding, we have had discussions recently with the Irish Congress of Trade Unions to enlist their support and assistance in bringing together different union groupings within the organisation.

Progress has been disappointingly slow on the development of formal structures below Board level within the organisation to give greater meaning to employee involvement and employee representation. A study group was set up at the suggestion of the airline some years ago but inter union difficulties have frustrated its progress. Lack of progress on this front has delayed the implementation of the election of employees to the Board but some progress is now being made on this matter.

Looking ahead into the 1980s it is clear that the airline will need to operate with low unit costs and with considerable flexibility throughout the organisation if it is to compete effectively on the international scene in a very difficult trading climate with intense foreign competition. The main thrust of our continuing discussions with unions and staff representatives throughout the airline is to achieve these objectives.

4.5 Ancillary Activities

In the period from April 1973 to March 1979 revenue and profit from ancillary activities has grown at annual rates of 50% and 33% respectively. By any standards this represents spectacular growth. Some of the investments have been extremely successful; others have yet to prove themselves. Taking the portfolio as a whole, however, the airline’s diversification policy has achieved its aim of improving the financial position of the group. Despite difficulties for the transport business even greater than those foreseen in the late 1960s, Aer Lingus has weathered the problems of the 1970s to become one of Ireland’s largest companies, making significant contributions to the balance of payments and to national economic growth and development. Without the push for diversification, the group’s financial position would have deteriorated to an extent where, on normal financial criteria, it would not have been able to meet its basic public service objective in regard to the provision of comprehensive air services.

The airline’s policy, therefore, is to continue to expand vigorously the ancillary businesses. In pursuit of this policy, we have adopted a two-fold strategy, firstly to encourage our most successful businesses to develop and grow and secondly to plan for investment in new business sectors.

The main contributors to profits have been as follows—

1 Maintenance and Overhaul Services

This has been the largest single contributor to profitability. The work is carried out mainly at Dublin Airport but also at Shannon and at Stansted in the UK, through a subsidiary company, Aviation Traders. The growth of this sector of the airline’s business will be enhanced by the recent decision to proceed with the development of Airmotive Ireland Ltd, a company which when fully operational will have a fixed asset investment of £15m. and will employ approximately 600 people at its plant at Rathcoole, Co.Dublin. The airline plans to pursue every opportunity for further development in this area, including the making of substantial additional investments. It is, of course, imperative for the airline to continue to be cost competitive and to have good industrial relations. In this context the high rate of inflation in Ireland is a particular disadvantage.

2 Passenger and Cargo Handling

These activities are carried out at Dublin, Shannon, Cork, London, New York, Boston and Chicago. Every opportunity to expand the airline’s influence as a major traffic handler at these airports and others will be pursued. The growth of these businesses is, however, inhibited by intensive competition and by the restrictive policies pursued by many airport authorities.

3 Hotel Operations

With over 9,000 hotel bedrooms under Aer Lingus control, the company is by any standards a major hotel operator. In the UK, the London Tara Hotel continues to increase its business and improve its profitability and the airline has recently acquired the Hotel Commodore in Paris. In the United States, Aer Lingus’s subsidiary, Dunfey Hotel Corporation, has expanded rapidly since it was acquired in 1976. This expansion has mainly come about through management contracts, accompanied by relatively small minority equity investments. This policy will be continued, as will every other reasonable opportunity to expand in an area where Aer Lingus has now clearly proved itself.

4 Aircraft Brokerage and Leasing

Guinness Peat Aviation and its related companies represent one of the most profitable investments ever made by the airline. There is no intrinsic limit to further expansion if the present strategy continues to be successful.

As well as expanding the existing successful enterprises, it is also the airline’s policy to seek out new investment opportunities. As was the case in the initial phase of the diversification programme, new investments may not make immediate contributions to profits. However, it is essential to make such investments so as to lay a secure foundation for the success of the airline for the 1980s and onwards. It would not be prudent to rely only on those business sectors which currently have satisfactory earnings. There is a danger in too much reliance on a small number of businesses and profit growth of the kind experienced in recent years cannot be expected to continue indefinitely.

SECTION 5 FUTURE PROSPECTS*

ATTACHMENT 1

Aer Lingus/Aerlinte Passenger Growth 1969/70-1978/79

Revenue Passengers carried—all services:

ATTACHMENT 2

Aer Lingus/Aerlinte Cargo Growth 1969/70-1978/79 (Cargo & Mail)

Total—all services (short tons)

ATTACHMENT 3

Financial Results 1969/70-1978/79

ATTACHMENT 4

Assets and Financing (March 31, 1979)

ATTACHMENT 5

Capital Structure 1961-1979

IR£000s

ATTACHMENT 6

Ancillary Activities

Revenue & Profit Growth:

ATTACHMENT 7

Breakdown of Profits by Sector in 1978/79

ATTACHMENT 8

Fleet Growth

ATTACHMENT 9

Staff as at 1 January 1980

ATTACHMENT 10

Ancillary Activities

Business Links Overseas

Senior Management Teams

Engineering/Technical Teams

ATTACHMENT 11

Article by Knut Hammarskjold, Director General, International Air Transport Association, as reported in Journal of Commerce (International Edition) December 3, 1979

The problems facing the airline industry as it gears up for the 80s can broadly be grouped under two headings—financial and regulatory.

On the financial side, the airlines are fighting a running battle with cost factors largely beyond their control. The key elements here are the staggering increase in fuel prices and the pervasive effect of steep inflationary pressures. Whereas 1978 had seemed quite promising, forecasts now look much less optimistic.

The world economic situation is expected to be characterized by very sluggish expansion, combined with continuing high inflation and recurring turbulence in the foreign exchange markets. This will have a negative impact on international trade levels and, very possibly, could bring about a relative decrease in the standard of living in the industrialized nations. This, in turn, could mean discretionary incomes being affected in real terms.

It has become starkly obvious that fuel availability and cost will decisively affect the future course of the industry.

But I confess that I can see no ready solution to the problem of further increases in fuel costs and the possibility of serious supply shortages at some time in the future.

The airlines are going to be operating in a very tough competitive environment in the future. They know that:

—The industry cannot expect to control its rising costs merely through increases in productivity—the sort of productivity which comes from newer, bigger, more cost efficient aircraft.

—Its plans have been blown off course by a fuel bill which is $2.4 billion higher this year than originally thought.

—There is an increasingly complex situation, route by route, in terms of impact of extra fuel costs, and the ability to translate fuel cost increases into tariff increases.

—The fuel crisis of 1979 is not a temporary phenomenon, and aviation fuel can be expected to become an ever more expensive commodity.

—Forecast net operating profits of 1% or less of revenue will not be anything near enough to generate sufficient funds from within, or by borrowing, to finance new equipment.

The industry’s collective economic situation did get a little better in 1978/1979 with earnings before taxation of 2.4% of revenue, which compares with only 1.7% in 1977/1978.

But this earning level is still far below what is needed to service equity capital, to pay taxes and to generate funds needed to replace aircraft and the other capital assets.

And at the very time that the airlines are grappling with these issues, a big new uncertainty has appeared in terms of pressures to change the very framework within which international aviation operates. Workable competition, which is the basic principle involved, implies a dedication to the concept of internationally agreed, common sense principles, and it requires acceptance by everyone for this to be possible. We are living in a time of considerable activity on the regulatory front and, at present, we are hearing a cacophony of divergent voices, rather than a broad worldwide consensus.

In Europe, there has been considerable debate on the need for lower fares and more liberal approaches to market entry. The European Commission has turned its attention to the development of a new and more liberal European aviation policy, moderated by emphasis on common sense and gradualism. In the United Kingdom, there is yet another review of civil aviation policy, this too characterized by proposals for new low fares in the U.K. and European markets, but also by warnings against foreign antitrust hegemony.

In the Middle East and Africa, there are on-going discussions about the regulatory environment. In the Far East, there has been a stormy debate about the position of the ASEAN carriers in the context of the Australian ICAP fares on routes to and from Europe, though agreement has now been reached to assure the ASEAN airlines a share of this market.

But the main preoccupation on the regulatory front has been without doubt the U.S. Civil Aeronautics Board’s “show cause order”. The order which questions continuing antitrust exemption under American law for IATA tariff coordination activities appeared originally as an ill-defined threat hanging over the industry like a storm cloud. I am happy to say that the true dimensions of the threat have now become clearer and narrower.

Spontaneous and massive protests by foreign governments around the world to the U.S. State Department and by foreign carriers to the board itself have had their effect, to the point where the scope of the show cause order now covers only air transportation to and from the U.S.A. The board held legislative hearings in October after “regional consultations” in Bogota, Brussels and Nairobi where foreign governments had again strongly emphasized the unilateral action on the part of the U.S.A. was unacceptable.

During the hearing phase, I believe the board came to recognize the political realities which make the show cause order a potentially self-defeating vehicle for advancing even the CAB’s own policy, let alone getting any sympathy for U.S. aims generally. The board must now weigh its own economic and philosophical predilections against the reality of the interdependance of the many elements that constitute the global aviation system, and of what that means for U.S. foreign relations.

The CAB has to allow international aviation to operate without unnecessary disruption and in a climate where the many aviation and trade partners of the U.S.A. have no cause for grievance and possible retaliatory action. Thus, I look now to the U.S. government to accept the call for a multilateral review from which an agreed international air transport policy can emerge.

Beyond this, we are concerned about recent CAB discriminatory practice in determining whether or not to approve international fare increases. On the fares front, the board— despite its stated concern with economics—has been extremely arbitrary in its approvals, worrying more about the nature of the underlying bilateral agreement than the economics of the route in question.

The North Atlantic remains the most worrisome traffic region, the passenger services failed yet again to bring in a worthwhile return. All this despite efforts by the U.S. regulatory authorities to stimulate traffic through its policy of liberal bilaterals and refusal to authorize certain fare increases.

The philosophy has not worked out in practice. During the first eight months of 1979, the U.S. carriers scheduled traffic went up 20%, only to be paralleled by a spectacular drop in charter traffic of 26%. This resulted in overall market growth between the U.S.A. and Europe of only about 9.7% over the first eight months of 1978. This is neither a startling nor even unusual growth for the route.

* This section of the Memorandum is not being published at the request of Aer Lingus.

* Note: For 1978/79 the figure used is that for average capital employed. For all other years the figure used relates to investment at year end.

* This figure differs from the total of operating revenues shown in Attachment 3 because inter-group transactions have been eliminated above.