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APPENDIX 2SUPPLEMENTARY MEMORANDUM FROM AER LINGUSCONTENTS
23 April 1980 1 EMPLOYMENT AND PRODUCTIVITY*The first part of their table** shows the percentage of total staff in each of 6 categories. One of these categories is headed ‘Ticketing/Sales and Promotion’, and a further category is headed ‘Other’. The category ‘Ticketing/Sales and Promotion’ shows 40.8% of Aer Lingus staff under this heading against 23.6% for Austrian, 23.9% for Finnair, 12% for TAP and 31.2% for B.CAL. These figures are based on information in the IATA Statistics publication entitled World Air Transport Statistics 1978. There is a number of errors in the construction of the table used by the Joint Committee. First of all the 40.8% given as ‘Ticketing/Sales and Promotion’ for Aer Lingus is, in fact, a combination of the ‘Ticketing/Sales and Promotion’ and ‘Traffic Handling’ figures published by IATA. This has resulted in the addition to our 838 Ticketing/Sales and Promotion staff of a further 1,760 Traffic Handling staff. In the case of Austrian Airlines the figure of 23.6% quoted is, in fact, the proper Ticketing/Sales and Promotion percentage as recorded in IATA statistics. In the case of Finnair, however, they have, again, used an incorrect figure of 23.9% when the Ticketing/Sales and Promotion figures should be 13%. In the case of TAP the 12% shown for Ticketing/Sales and Promotion is correct, but in the case of B.CAL the figure of 31.2% includes Traffic Handling, and the Ticketing/Sales and Promotion figure proper is 14.7%. The Ticketing/Sales and Promotion figures restated, therefore, directly from the IATA publication would read as follows:
Traffic Handling figures extracted and shown separately for the carriers would then read as follows:
Finally the ‘Other’ figures need correcting in the light of the changes necessary to the previous figures. The Austrian Airlines figure of 42.6% should be 28%; the Finnair figure of 23.7% is really a transposition from the sum of their Ticketing/Sales and Promotion and Traffic Handling and should, in fact, read 23.9% or the figure originally shown under Ticketing/Sales and Promotion; the TAP figure 48.7% should read 36.8%; and the B.CAL figure of 25.9% should read 32.2%. A new tabulation of ‘Other’ therefore, would read as follows:
On this basis the Aer Lingus figures show themselves to be out of line under the ‘Traffic Handling’ head. This reflects the very high volume of business transacted by Aer Lingus on behalf of other carriers in Dublin, Shannon, London, New York, Boston and Chicago. It is a matter of policy that the Company has developed these businesses which are quite profitable. On the other hand one of the carriers with whom our figure is compared buys in 62% of its Traffic Handling and another of the carriers buys in 55% of its Traffic handling. (Figures of proportion bought in by the other two carriers are not available). Attention should be drawn to the fact that the IATA table from which these figures have been derived contains the following warning “caution should be exercised when comparing individual airline figures as they can be affected by differences in airline organisations and practices, for example, with regard to subcontracted work (maintenance, handling, catering, etc.)”. We have some information on the extent to which the carriers with which we are being compared contract out work on the one hand and take in work on the other—both of these items affecting the crude productivity measures. Details may not be disclosed of individual carriers figures as we have got them in confidence. However, the figures may be given themselves— Proportion of Service Bought In
Figures for other two carriers not available.
The difference between the Aer Lingus figures and those of the two carriers shown distorts the gross productivity comparison in favour of the other two carriers. In regard to the matter of performing services for sale outwards to other carriers, Aer Lingus has a much higher proportion of its staff and services devoted to this than other airlines generally. Again, we have comparative figures for the same two carriers mentioned above— Work Performed for Third Parties as a Percentage of the Total Cost of the Service
Figures for fourth carrier not available.
The very much higher level of third party work performed by Aer Lingus distorts the productivity comparison in favour of the other carriers. In addition to changes arising from different organisations and practices, there are other important differences which need to be taken account of. For example, the number of staff shown for Aer Lingus is 6,363. This was the number at 31 December 1978. However, we already had recruited substantial numbers of staff for the following year’s operation at this time. The number of staff on our books on average during the year 1978 was very substantially lower at 5,988. However, beyond that it is important to exclude staff whose function within the company is not related to producing ATKs for Aer Lingus at all. This includes the staff involved in Ancillary Activities and Production Department; in Traffic Handling in Ireland, Britain and North America; in Catering Services and Airline Marketing; in Simulator Training and in Ancillary Activities Head Office staff. If these are excluded the average number of staff involved in the air transport side of our own business, that is to say the people involved in producing ATKs in Aer Lingus, amounted to 4,534 in the year 1978. The production per head for this number of staff is 113,000 ATKs which compares with the figures for the other four carriers involved at 105,000, 127,000, 110,000 and 155,000. A further step is necessary, however, in order to get a more meaningful measurement of the comparative productivity of the staffs concerned. It was already argued at the meeting last week that the ATK was about as poor a measure of some of the functions, such as Ticketing and Sales, as one could reasonably find. What was more appropriate was a measure of the actual sales, rather than the production since a substantial part of the staff in the airline are involved in the selling and servicing of actual traffic rather than producing the basic ATKs themselves. In Aer Lingus if we take the figures already discussed, we have 27.6% involved in Traffic Handling; 13.2% involved in Ticketing and Sales; and 10.3% involved as cabin staff. These three added together amount to just over 51%, and they are the categories of staff whose work is related to passengers and freight rather than to production of tonne kilometres. A comparison of productivity, based on RTKs, shows the capacity sold per head rather than produced per head. Such a comparison shows Aer Lingus with 74,000 RTKs per head compared to the other four carriers with, respectively, 47,000, 69,000, 52,000 and 88,000. This shows that Aer Lingus which had a 65.7% load factor in 1978, which compares with a load factor of 44.5%, 55.4%, 48.4% and 59.3% for the other carriers, had a significantly higher productivity than the other carriers. In summary, our view is that Aer Lingus productivity is not out of line with other airlines generally and not out of line with the four carriers selected for comparison with us, in particular. In relation to the operating revenue per employee expressed in thousands of dollars, the figures quoted in the Joint Committee’s document were as follows:
The Aer Lingus figures are calculated from the information published on page 34 of our Annual Report for the year 1978/79. The figures on that page relate only and are so described, as relating only to air transportation. Other carriers revenues include various other forms of income and to make the figures comparable it is necessary for our figures to include the other revenues by the airline. This means that the combined Aer Lingus/Aerlinte figure of £113.766m. used in the Joint Committee’s document should, in fact, be increased to £141.2m. for 1977. For 1977 the figure should increase from a figure of £100.286m. to £122.5m. Converted into dollars and divided by the average number of employees in Aer Lingus during the year this gives us an operating revenue per employee in 1977 of $37,000 and in 1978 of $45,000. These figures compare very favourably with the other four carriers with the exception of Austrian Airlines. In the case of Austrian, however, they have an extraordinary high fare structure and their network shows a yield per revenue tonne kilometre almost twice the European average.
The increase of 833 staff from 31/3/78 to 31/3/80 has occurred for two reasons. The first is that in March 1978 there was an under-recruitment because of the clerical strike which amounted to about 150 staff. Since then there has been an increase of 235 in Aviation Related ancillary activity mainly maintenance contract work due to expansion of work in that area. The balance of 448 is accounted for by a larger fleet and an increase in output of 25%. 2 CAPITAL STRUCTUREThe capital structure of a company is a representation of its strength or weakness. Since we are a commercial organisation, it is important that we should have a capital structure which reflects this. A weak capital structure weakens our borrowing base and in addition causes a continuing cash strain through high interest payments on larger borrowings. Over the past four years our interest payments have been in the £3½m—£4½m level. In the year just ended 31 March last, our interest bill amounted to more than £7m. In the current year we expect interest to cost us £8½m. In the case of last year and this year, about £1.7m of the total arises from the financing of the purchase of some of the Dunfey hotels which were previously leased. The airline’s financial advisors have consistently argued that the proportion of debt in our capital structure should not be higher than 50%. In arriving at this view, account has been taken of the volatile nature of the airline industry as a whole, the difficulties attaching to air transportation to and from Ireland, with a very high proportion of non-business traffic, and, in particular, the continuing losses on the North Atlantic. At the moment these problems are compounded by uncertainties on the fuel front and by recession conditions. Recent experience in the international capital markets has made bankers cautious in viewing country risks. Lenders are increasingly keen to ensure that a company is capable of servicing debt from its own resources and the Government guarantee is seen very much as a last resort. Furthermore, much of our borrowing is now on an un-secured basis and it is imperative that Aer Lingus retain the confidence of its lenders by being able to demonstrate the continued support of our shareholders. In brief, the airline cannot represent itself as a commercial organisation unless it properly capitalised. At the present time, for reasons already explained, its capital is substantially below the level that is appropriate for this business. This is a severe disadvantage for any company to have to operate under and a continuation of this situation could give rise in due course to the necessity for abandoning the concept of Aer Lingus being a commercial company. At that stage, the airline would be drifting into very dangerous territory in which the profit motive would be greatly diminished and the spectre of a subsidised air transport system would be appearing with all the dangerous and undesirable features that it would bring with it. At the end of March 1980 the airline’s equity amounted to £42.3m. while debt was £90.6m giving us a debt/equity ratio of 68/32. An addition to our equity of £20m. would give us an equity of £62.3m. and a debt of £70.6m or a debt/equity ratio of 53/47. This would represent an enormous strengthening of the capital structure of the company and would put us in a much improved position in the financial market. 3 NORTH ATLANTIC PROFITABILITY1. Over the ten year period 1970-1979 all scheduled passenger operations taken together recorded the following losses: (a) $775 million on operating account, before interest, dividends and taxes (b) $4,480 million after interest and taxes. 2. All indications on charter operators are that they fared equally badly. Of the original “Big Six” US carriers only three (Transamerica, World, Capital) are left. Universal and ONA went into liquidation and Saturn merged with Transamerica. The mortality rate among the smaller European operators has also been high, with some spectacular casualties like Atlantis (Germany). Others, like Martinair (Holland), have simply abandoned the North Atlantic market. Many scheduled carriers who operated substantial charter programmes at the beginning of the decade, like PanAm and British Caledonian, are now out of the North Atlantic charter market completely. 3. The 1979 figures for US scheduled carriers demonstrate that the much acclaimed “commercial freedom” which followed the sabotage of the IATA system by the US has not improved matters. On the contrary the trend is a deteriorating one. For the year 1979 the operating result (before interest, taxes and dividends) of the US carriers North Atlantic scheduled services was a deficit of $16 million, a disimprovement of over £90 million in 1978. Net US carrier profit/loss figures for the North Atlantic region are not published but, clearly, both 1978 and 1979 were heavy lossmaking years. Judging by the results for the final quarter of 1979 the US carriers North Atlantic finances continue to worsen. Operating losses for that quarter alone amounted to over $55 million, four times the 1978 figure. 4. New US scheduled carriers on the Atlantic appear to be doing still worse. Transamerica have admitted to making a loss on their North Atlantic services in 1979 in spite of recording an 86% load factor. Northwest, also planning service to Ireland, lost $21 million (operating account) on their Atlantic routes in 1979. World dropped out of the North Atlantic market entirely due to a strike in mid-1979 and have not resumed since the strike was settled early this year. 5. European carriers do not usually publish financial results for North Atlantic services in isolation. Almost without exception, however, the commentary accompanying their reports on system wide financial results has referred to continued losses on the North Atlantic. Figures submitted by ECAC on the occasion of the most recent tripartite talks with the US and Canadian administrations show that thirteen of the fourteen European flag carriers recorded an operating loss (before allowance for taxes or interest) on scheduled passenger services in 1979. The exception—British Airways—barely broke even. The operating losses were generally in the 5% to 15% range and showed a marked unfavourable trend. If allowance is made for capital charges the net losses are correspondingly greater. FARE COMPARISON TABLE—BASED ON FARES FROM 1 APRIL 1980
SHORTHAUL EUROPEAN FARES (NORMAL ECONOMY)—MARCH 1980
* See also Appendix 3. ** Table prepared by Committee’s Consultants. * Available for Saturday/Sunday travel only. *3 Interline, Reservation and Refund Restrictions apply. |
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