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

MIONTUAIRISC NA FIANAISE

(Minutes of Evidence)

Dé Céadaoin, 16 Aibreán, 1980

Wednesday, 16 April, 1980

AER LINGUS TEORANTA AND AERLÍNTE ÉIREANN TEORANTA

Mr. J. P. Hayes, Chairman; Mr. D. M. Kennedy, Chief Executive & Director; Mr. G. P. Dempsey, Chief Executive-Ancillary Activities; Mr. M. O Riain, Assistant Chief Executive-Commercial and Mr. Neil Gleeson, Assistant Chief Executive-Finance, of Aer Lingus Teoranta and Aerlinte Éireann Teoranta , called and examined.

1. Chairman.—Members of the Committee will ask questions which may be answered by any member of the team. As you are aware, at this session we are not dealing with ancillary activities or tourism. Do you want to make an opening statement?

Mr. Hayes.—I have no statement to make. We made our original submission* and we had you at the airport for some preliminary discussions.

2. Senator Cooney.—Would you deal with the relationship between your companies and the Government in the various ways you mesh?

Mr. Hayes.—We have had very good relationships with successive Governments over the years. As long as I have been Chairman we have kept in touch fairly regularly with the Minister and our executives have regular communications with the Government through various channels. I would like to ask Mr. Kennedy to elaborate on that.

Mr. Kennedy.—Our main point of contact is at executive level with the Department of Transport, and there are fairly regular contacts between myself and the secretary and between various other executives and officials in the Department on an on-going basis. I am not sure if one of the points behind your question was to inquire about the Government controls, or the extent to which Governments influenced decisions or policies within Aer Lingus. There are probably three main headings under which the Government exercise control as a shareholder. The first is on all matters of major policy. If we have a major policy development or change in what we are doing, as a matter of course we would seek Government approval for it. Secondly, there are a number of financial controls, the main one being approval of major capital expenditure. Any individual items of major capital expenditure are, as a matter of course, sent to the Government for approval. We also submit to the Government our projections for capital expenditure on a five year basis and, in detail, 12 months in advance for a particular calendar year. In addition, we have to seek Government approval for any borrowing which we undertake. Those are the main areas of financial control. The third area is one in which the Government are not so much acting as a shareholder but as the regulator of air transport matters. This would be a control exercised on commercial matters, such as aircraft, licensing of operators to operate particular routes, fares which have to be approved at Government level and on the technical side, aircraft operating procedures, maintenance procedures and so on. So far as all the latter categories are concerned, we are the same as any other airline. It is not a particular relationship because we are owned by the State.

3. Senator Cooney.—Do you find Government reaction to your proposals is sufficiently rapid for your requirements?

Mr. Kennedy.—On the whole, yes. Sometimes when major financial matters go to the Department of Finance we find ourselves running into a lot of delays. For example, we had discussions which went on for about three years, between 1975 and 1978, on the airlines capital structure before a proposal eventually went to Government and was approved by the Oireachtas. Even on smaller matters, we tend to run into delays there. In so far as most of our day to day relationship is with the Department of Transport, it is fair to say that we do not have any problems. They respond very rapidly and are conscious of the kind of commercial environment in which we are operating.

4. Senator Cooney.—Do such delays have a prejudicial effect on your operations in terms of your eventual financial results?

Mr. Hayes.—When we were waiting for the couple of years, naturally we suffered the loss in interest charges we had to pay to the people who lent us the money. We would not have suffered that if we had got the money earlier. We understood, too, that it was a question of Government priorities—who was in the queue for £15 million before us. However the three year delay was too much.

5. Deputy W. O’Brien.—Is there a limit to the amount you can borrow each year?

Mr. Kennedy.—No, there is not a formal limit but there is a statutory limit on the total amount of borrowing for which the Government can give a guarantee at any one time, but it is not an annual control.

6. Senator Cooney.—Are you happy now with your capital structure?

Mr. Hayes.—We are not happy with our capital structure because the debt equity ratio is wrong. At the moment 64 per cent of our capital is borrowed. We only have 36 per cent in equity. Naturally, we would much prefer to have it the other way round, or to have it at least 50-50, because interest charges dilute our profits to an extraordinary amount. Last year’s interest charges were about £7 million or £8 million. In other words, if we make £10 million or £11 million in a year, £8 million go to the banks and to the people who lent us money.

7. Senator Cooney.—If the equity structure is improved, would you be happier paying a dividend to the Government rather than interest?

Mr. Hayes.—Yes, that is a very good question. In the ideal situation we would love to make enough money to pay a dividend to the Government, to make sufficient profits to provide for the future and to set money aside for fleet replacements. Unfortunately the ideal situation does not exist. On the Atlantic route we are losing a fair bit of money. We are losing a great deal of our hard won profits to the people who loaned the money.

8. Senator Cooney.—How much would it take roughly in volume terms to redress the ratio?

Mr. Gleeson.—Twenty million pounds would redress the balance now and bring it back to a 50-50 ratio.

9. Senator Cooney.—Would you be happy with 50-50?

Mr. Hayes.—Recently, the British Government reckoned that they would like British Airways to have between 35-65 and 50-50. We would be happy with 50-50.

Mr. Kennedy.—Our bankers have consistently advised us that as a commercial concern and given the kind of business environment within which we are operating, in their judgment the appropriate debt equity ratio should be at most 50-50. I think there are a number of particular facets to our business which would underline that. In the first case, aviation is a marginally profitable business in the best of circumstances anywhere in the world. Secondly, we have a particular problem that the chairman touched on in relation to our Atlantic operation which has been draining our funds during the seventies. At the same time it is a continuation of something which is providing an essential and very important part of the infrastructure of the country. Thirdly, looking ahead into the eighties—we touched on this in our submission—we see a need for very substantial capital expenditures in the course of the decade. We believe a better capital structure would enable us to face, with more confidence, the kind of financing problems which we will have in the eighties.

10. Senator Cooney.—Would the £20 million extra capital be a substitution for some of the existing loans?

Mr. Gleeson.—Yes.

11. Chairman.—In a sense, is it not unrealistic that, even bringing up the ratio to 50-50, you would not have sufficient funds to deal with replacing the fleet and, in any event, the Government will almost certainly have to step in towards the end of the decade to deal with your fleet replacement requirements?

Mr. Kennedy.—We would like to see a situation in which the capital structure was kept in proper condition on an on-going basis—I am not talking about an annual basis. We would like to have a situation in which the airline had a capital structure related to the commercial realities of the business within which it had to operate, and that at times of major capital expenditure—such as major fleet replacement requirements which could come up in the latter part of the decade—there would be some additional equity at that time on the basis of a prospectus which would be put to the Government as shareholder. We do not think it makes good sense for the shareholder not to do anything, to allow the business to get into bad financial shape, to have a bad capital structure and then be faced with an enormous requirement in terms of financial implications at a specific time. We think it better to have a continuing review of the capital structure of the company with the objective of ensuring that it is related to the needs and realities of the business environment within which it operates.

Mr. Hayes.—To put it into context, for a State investment of £43 million, the State now owns a company which has net tangible assets of £120 million.

Mr. Kennedy.—The company have not paid a cash dividend. They put the profits back into the air transport business and enabled it to expand. The State now owns a business which in terms of net asset value, would be worth about £120 million.

12. Deputy W. O’Brien.—For a State investment of £43 million?

Mr. Kennedy.—Yes.

13. Senator Cooney.—Have you made a case for the extra £20 million?

Mr. Hayes.—We are getting around to it. A prudent period of time should have elapsed since we last got money—15 months ago. We started in 1975 last time and got the equity proposed at the end of 1978.

14. Senator Cooney.—There is a lesson in that, is there not?

Mr. Hayes.—I agree.

Mr. Kennedy.—We are starting discussions with the Department of Transport and the Department of Finance about the long-term projections for the airline and our capital needs in the eighties.

15. Senator Cooney.—What carrot have you held out to them to give you the £20 million?

Mr. Kennedy.—We have not got to that stage yet.

16. Chairman.—If you did get it, it really would not help your position very much, given the kind of projections that we have seen and know in regard to the airline business generally. It does not seem that you are going to be able to provide for fleet replacement in any event. Is there much point in getting extra capital?

Mr. Hayes.—Psychologically there is a hell of a point, because it is demotivating for all the people who work for the airline to find out that, although they work very productively and successfully, with a lot of innovation and initiatives over the years, out of a profit of £10 million a year, £6 million, £7 million or £8 million is immediately hived off to the banks.

Mr. Kennedy.—If I understood your question, you were suggesting that the shot might not be on in any event. However that is not our perspective on it. We believe that in spite of the size of our capital expenditure projections and financial needs in the eighties if we are given an adequate capital structure we can realise our projections without any undue call on the State. We want a capital structure related to our needs and if we have that we will be able to meet those requirements.

Mr. Gleeson.—There is a reluctance on the part of the banks to advance money to companies which have a weak capital structure.

17. Senator Cooney.—Are the moneys guaranteed by the Government?

Mr. Kennedy.—A lot of them are but not all.

18. Deputy W. O’Brien.—Are you confined to any particular banks?

Mr. Kennedy.—No.

19. Deputy W. O’Brien.—At least 70 per cent of your income is spent on repaying interest charges. Is that correct?

Mr. Kennedy.—That is correct.

Mr. Gleeson.—While we are not confined to particular banks, there was a strong suggestion that we should borrow abroad. That had particular implications for us because we got involved in very substantial foreign exchange losses as a result of these very heavy borrowings abroad and that helped to dilute our equity quite a lot.

Mr. Hayes.—In 1975 and 1976.

20. Chairman.—If you did not need to have a very big outlay half way through the decade for fleet replacement, on the basis of what you have been doing for the last few years and what you are likely to do for the next five or six years, you could confidently pay your way and make some profit. Even if you got that extra capital, there is no possibility that you would be able to provide the funds to replace your fleet. The depreciation policy at the moment is not going to go any way towards providing funds for a new fleet. Comment?

Mr. Hayes.—If you say that on a global term, you give one impression. If you broke our operation into three sections, we could make another case. The Aer Lingus side of the business is marginally profitable, the ancillary activities side of the business is very profitable, but on the Atlantic route we are losing money. It is incomprehensible to business people when we say that all the airlines are losing hundreds of millions of dollars every year on the Atlantic. There is a school of thought which suggests—and the same school of thought has been suggesting this over the past couple of years and it is wrong—that this cannot continue. Somebody must get business sense and start charging reasonable rates on the Atlantic. If that came about, the ball game would be changed, because then we would have a profitable Aer Lingus, very profitable ancillary activities and a reasonably profitable Atlantic route. So far that has not happened. In the last decade all the airlines in the world have lost $4,000 million on the Atlantic route. We are a little part of that, but that has a huge effect on our profits and our performance every year.

21. Chairman.—The trend is the other way at the moment. Is not the trend in America for even keener competition and less profits?

Mr. Kennedy.—It is difficult to be optimistic in the short-term about the North Atlantic for the reasons that you mention. The trends are adverse and losses are mounting. The losses—this is one of the extraordinary features of the North Atlantic—are very high, and the highest are incurred by some of the new US carriers coming in on to the North Atlantic. The trend is not good but if one stands back from what is happening and takes a reasonably long-term, say five year perspective, it is very unlikely the current trend can continue or that there will not, at some stage during that period, be a sharp reversal of what has happened and a return to sound economic policy on the part of world airlines on the North Atlantic.

22. Deputy Deasy.—To what extent has the Laker operation brought about these losses on the North Atlantic?

Mr. Kennedy.—Not very much. It added another competitive thrust at a particular point in time on the North Atlantic but the North Atlantic carriers were losing money prior to Laker. The bad situation on the North Atlantic goes back to about 1970. In each of the years since then the airlines as a group on the North Atlantic have lost money. The Laker operation commenced in the latter part of 1976 and gave a particular competitive thrust which had its own effect at that time. There are a lot of other factors which have been major contributory factors to the losses on the North Atlantic.

23. Deputy Deasy.—Surely Laker’s reduction of fares and the fact that you and the other airlines had to follow must have had a big bearing on your losses?

Mr. Kennedy.—We never saw ourselves as being very much in a competitive situation vis-à-vis Laker. We had a big reduction in fares prior to Laker’s introduction because at that stage we were engaged in a very tough battle with the US charter airlines from the States. In 1976 we introduced the super-APEX type fares between Ireland and the United States as a competitive response to charters rather than to Laker. Interestingly enough in view of subsequent developments, those fares when filed with the US Government were rejected by them on the grounds that they were unfair competition to their charter airlines. The Irish Government at the time went to the White House and had that over-turned. I am not disagreeing with you in the sense that Laker has been an element but it has been a much more complex scenario over the past ten years than that.

Mr. Hayes.—To put it another way, Laker stopped other people even if they had dreamed of becoming responsible by charging the commercial rate on the Atlantic.

Mr. Kennedy.—The main factor which was responsible for the financial debacle on the Atlantic in the seventies has been US Government policies over the period towards the latter part of the last decade and in 1970-71. It started off with an attempt to find a niche on the North Atlantic for US supplemental carriers, as they were then called, who had prior to then earned most of their money on military charter work out to the Far East. US Government policy at that time wanted to ensure that these carriers continued to operate and were kept in being as part of the US strategic military reserve. That was the thinking behind the US Government policy of pushing these carriers on to the North Atlantic. There have been various strands and threads of US Government policy, but generally adopting a very pro-competitive stance and pushing a higher market share for US carriers. These were the factors motivating their policies during the course of the decade.

24. Deputy Deasy.—What are your current annual losses on the North Atlantic run?

Mr. Kennedy.—Of the order of £6 million to £7 million. That is on the air transport side alone. It does not take into account the credit, if that is the word one could arguably give to the transport operation, from some of the ancillary activities which are carried out, which are related in some way either directly or indirectly to the North Atlantic and which would perhaps change that figure by a couple of million pounds. These would include traffic handling and maintenance and overhaul for other airlines. Even allowing for these it would still be a substantial loss.

25. Deputy Deasy.—On what do you base your optimism for the future?

Mr. Kennedy.—Optimism is putting it too strongly. I am not optimistic about the short-term future. The losses being sustained at present are so large and the consequences are so grave that I believe there will be a return to some form of commerical regime. If we take the Irish routes for example, we have seen in the course of the past few years Pan-America, TWA and Air Canada pulling off these routes because they were faced with exactly the same kind of problems that I have been talking about. Two new carriers are prepared to try their hand at it in the course of 1980. One is North-West, which started operating on the North Atlantic for the first time in 1979 and recorded losses of 20 million dollars on its North Atlantic operation, and the other is Trans-America which was formerly one of the supplemental carriers. It is one of the few supplemental carriers which has survived. A number of them have gone bankrupt. Last year it operated services between New York and Amsterdam at 90 per cent load factors and lost money. I do not believe that kind of thing will continue for ever. In the short-term it is superfically attractive for carriers to buy their way into a market in the way these carriers are doing with almost suicidal fare policies based on marginal pricing but I do not think they can sustain them or that the industry will sustain them indefinitely. In the short-term I am not optimistic.

26. Deputy W. O’Brien.—If you charged a commercial rate on the Atlantic what percentage increase would you envisage?

Mr. Ó Riain.—About 20 per cent on the latest rates which are the rates we are charging in 1980 after taking account of fuel costs which have increased enormously during the last 12-18 months.

Mr. Hayes.—Twenty per cent on current rates.

Mr. Ó Riain.—I should like to add to what our chief executive has been saying. We were talking about competing with charters. It was competition from charters, as he emphasised, that was the real force that was pushing down rates on the Atlantic as a whole on the scheduled carriers. Our competition with the charters was not to keep the business for ourselves or anything crude like that. It was because the load factor in our scheduled services was going down because business was going to charter operators. We knew that if we changed our fare policy we could get more business on our scheduled services. We cut fares but we did it to produce an improved economic result, which is apparent from page 22 of our submission where we state we lost £5 million in 1975-76 on the Atlantic and reduced it to a loss of £2 million in 1977-78. In the last two to three years it has got worse again but we actually improved our position when we were competing with charters. When we brought our loss down to £2 million in 1977-78 the pressure on fares and inflation in costs continued. This was not compensated-for anywhere in the North Atlantic in anybody’s fares, charter or schedule.

27. Deputy Kenneally.—On the point of the 20 per cent increase on the current fare, would that put you in a profitable situation or just a break-even situation?

Mr. Ó Riain.—A break-even situation.

Mr. Hayes.—It would mean a lot, of course.

28. Senator Cooney.—What is the experience of other European Atlantic carriers at the moment?

Mr. Hayes.—Disastrous.

29. Senator Cooney.—How long will these carriers tolerate this situation which is the direct result of American Government policy? Will our Government combine with the Governments in question to negotiate politically with the Americans or are you going to wait and let the market forces adversely affect American competitors? Which do you think will happen?

Mr. Kennedy.—Both political and commercial pressures are there at present. The US Government have been very skilful in negotiating with European Governments one at a time and in some cases have picked them off one at a time and put pressure on them to make concessions in aviation for reasons which have nothing to do with aviation. They have other ways of exerting commercial pressure. They have been quite successful on this. There is a European Government association called ECAC which is a subset of ICAO, the international worldwide body of which all Governments involved in aviation are members. ECAC has consistently over the past ten years been meeting with the United States and with the Canadian authorities on a trilateral basis and attempting to resist the pressures coming from the United States. The degree of unaminity within Europe regrettably has not been very strong. Many European countries have allowed themselves to be picked off in the sense that some of the smaller countries had a lot of pressure put upon them and made concessions to the Americans. This has established a bridgehead in relation to the American traffic flow into Europe. The consequence of all this is that European policy generally has been less co-ordinated and less effective than it might have been. However there is still this Government organisation in Europe which is very concerned about the present situation and which is consistently arguing with the US authorities about what is happening. There will be some pressure from it but being realistic it has not been as effective as it should have been in the past.

The other pressure you referred to is the economic pressure. I do not see carriers such as North West, for example, however much they may be prepared to spend to buy their way into a market, tolerating losses such as 20 million dollars, which they had last year, for very long.

Mr. Hayes.—We thought that last year and the year before that again. Everybody is wondering how everybody else is putting up with losses. They must be wondering how we are too. What we are doing is subsidising the Atlantic with ancillary activities. Somebody else is subsidising it with a different haul. British Airways are probably subsidising it with Far East hauls. They are all juggling. In my optimistic moments I say that it might be fixed and in my pessimistic moments I say that it might never be fixed. One guess is as good as another.

30. Deputy Fitzsimons.—It is said that Laker is interested in coming into Ireland. Would Aer Lingus oppose that?

Mr. Kennedy.—It is said that he is interested in coming into Ireland but he has not demonstrated very much follow through on that alleged interest. Dublin-London—I do not think he has an interest anywhere else—is one of the 600 odd routes for which he applied for approval from the UK authorities and was turned down recently. The Federation of Irish Societies in the UK which have completed a study of air and surface transport between the UK and Ireland got in touch with Laker to find out his interest in the Irish route. In their report they stated that their correspondence went unanswered so I do not think that he has very much interest in the Irish market.

31. Deputy Fitzsimons.—One of the touchy things about the fares situation is that the fare between Dublin and London is something in the region of £100. The fare from London to New York is about £130. Would it not be beneficial to Aer Lingus, especially in peak seasons, to operate some kind of cheaper service or shuttle service where one pays for one’s ticket as one gets on a flight, the same as is done in the States?

Mr. Kennedy.—We operate a lot of fares between Dublin and London. You are not comparing like with like when you talk about a one way fare of £130 with conditions attached to it on the Atlantic and compare it with a round trip fare with no restrictions between Dublin and London. For example there are fares between Dublin and London of the order of £60. These are the Apex type fares which are specially designed for the holiday traveller and the very price sensitive part of the market, and, also inclusive tour based fares. There are fares of the kind that you are talking about available between Dublin and London.

You mentioned shuttle service. A shuttle service is a high cost service. Anywhere it operates it operates at the top end of the fare range. It is a more expensive product for the airlines to provide because in its full form it involves standyby crew and standby aircraft and a less economic use of facilities. It has not caught on anywhere in the world with the exception of New York-Boston, New York-Washington, and, to a lesser extent by British Airways within the United Kingdom. We and British Airways carried out a study on the possible introduction of a shuttle service cross-channel and we concluded that it would be a higher cost operation and would not have any particular advantages for the market place. British Airways were very keen on the idea of shuttle service some years ago but have now significantly altered their stance and are no longer touting it around the world as a great idea.

32. Deputy Fitzsimons.—Is it true to say that a cartel exists between British Airways and Aer Lingus in relation to prices?

Mr. Kennedy.—No.

33. Deputy Fitzsimons.—It is a very popular term at the moment, is it not?

Mr. Kennedy.—It is inaccurately used. A cartel not only controls prices but also controls the level of production. That does not happen in the case of aviation. Airlines control neither the amount of production nor the prices. The prices are Government controlled. World Governments have formally delegated—this goes back to the nineteen forties—to IATA the task of negotiating tariffs but have reserved for themselves the right of approval or disapproval of tariff The IATA fare structure, which is one of the very big areas one could get into, is not a cartel in the sense that it does not control the fares which are charged. It is Governments who control them.

34. Deputy Fitzsimons.—There are reforms going on in IATA at present. How do Aer Lingus feel about that?

Mr. Kennedy.—We are very positive towards it. We believe that IATA was far too rigid and inflexible and was falling apart because airlines could not introduce without difficulty new fares which were related to individual market requirements. We were very anxious for the reforms which have taken place. It is now much more flexible and responsive to market needs and we support that.

Mr. Hayes.—The chief executive is being modest because Aer Lingus, before my time, tried to get these reforms introduced in IATA years before they were actually done.

35. Chairman.—You firmly support IATA. There must be advantages and disadvantages?

Mr. Kennedy.—Yes. It has often been suggested that Aer Lingus might do better not to be restricted by IATA.

36. Chairman.—In spite of its shortcomings do you still think that it is worthy of support?

Mr. Kennedy.—Yes. IATA is more than a tariff negotiating body. It is a trade association covering over 100 airlines in 85 countries around the world. It has numerous facilities which are very beneficial to Aer Lingus, to the aviation industry worldwide and to the traveller. On the technical side, there is an IATA technical committee which does an enormous amount of work with the objective of raising safety standards throughout the world. There is a financial side to IATA—the IATA clearing house. You can buy a round world ticket on an Aer Lingus coupon, and the IATA clearing house facility enables the billing for the various segments of the journey, which might be on 12 or more carriers, to be sorted out without the individual having to do his separate buying with each airline. IATA also do an amount of work ensuring that there is a co-ordinated fare structure and proper facilitation procedures in various countries throughout the world. All that is part of developing a worldwide network of communications. There is no other industry in which there is such extensive worldwide coordination and co-operation for the benefit of the consumer.

The IATA tariff negotiating mechanism has come under criticism and fire. There are a number of advantages for Aer Lingus to stay with it. Effectively, we believe we can influence matters within IATA in our favour to a greater extent than we could outside IATA. If we were not a member of IATA and there was a multilateral tariff negotiating framework to which we were not a party, all the developments would take place for routes other than the routes into and out of Ireland. We would be left at the fag end to try to negotiate what we could and make our filings with different Governments, with no assurance that they would understand our filings and no assurance that our fares could be co-ordinated with the fares of other carriers for the complicated inter-line traffic that exists all round the world.

It is also a valuable source of commercial information to us. We know what is happening within the industry at the tariff level. That is extremely important. If one excludes the North Atlantic as being a special case, we have been able within IATA to develop a wide range of special fares which were tailored to the needs of the Irish market in a way which has been beneficial to the airline and to the tourist industry.

Our approach is a purely pragmatic one. We have no ideological commitment to IATA as such, but we believe on balance that the benefits for a smaller airline, which we are in world terms, of being involved in the world trade association of airlines are quite substantial.

37. Deputy Deasy.—How many members are there in IATA?

Mr. Kennedy.—About 110 I think.

38. Senator Cooney.—To get back to the North Atlantic. You are sustaining heavy losses there, and the outlook is pessimistic, and the losses will probably continue for an unknown length of time. You are sustaining those losses for national and for tourist reasons and you are subsidising them from your ancillary activities. Have you projections to estimate how long you can continue, or what is the maximum level of loss you can soak up on that route? Will there come a point when you will have to say to the Government, “We can only carry on here if we get a special subsidy”? What is your thinking on the future of the North Atlantic route?

Mr. Kennedy.—When I was talking about losses on the North Atlantic I was talking about losses in a proper accounting sense in which there was an allocation of corporate overheads to the Atlantic route, in other words, they bore their share of corporate overheads. One of the difficulties one has in looking at an individual part of one’s operations—this would apply to any business as well as to our business—is that if you cut out something which is unprofitable, unless you can remove all the overheads associated with that operation, you do not necessarily remove all the losses. There is a very substantial sharing of overheads between the European and Atlantic sides of the operation. From each exercise we have done to date, we have concluded that—certainly in the short and even in the medium-term—in financial terms we would be worse off if we decided to close down the entire Atlantic operation, sell off the fleet and make 1,400 or 1,500 people redundant. Our thrust has been to try to reduce the losses on the Atlantic and, as Mr. Ó Riain was saying, we were successful in that for several years until the latest boost in fuel prices set us back again. We are now getting very close to the point where this is not the case. The losses are now such that the correct commercial decision could conceivably be to look at the possibility of pulling off the route. This is obviously not merely an Aer Lingus decision. This is a question which has major national implications and it is something about which we are obviously in close dialogue with the Department and the Government.

Mr. Hayes.—The Committee should be aware of what we have been doing over the past couple of years to try to reduce the losses. In other words, we have not been sitting around wringing our hands saying the Atlantic route is terrible. We have a list of things we have been doing. Mr. Kennedy might like to illustrate that point.

Mr. Kennedy.—In the seventies, we sold off a number of aircraft as we reduced the operation to a more profitable core. We leased out “B747” aircraft which became surplus to our requirements at a time when it was extremely difficult to lease out aircraft. We boosted our load factors from approximately 60 per cent a year at the start of the decade to about 70 per cent at the close of the decade. This was partly through the fare initiatives Mr. Ó Riain was talking about.

In terms of marketing and outselling the competition we have been very aggressive in the market place. For example, when we were competing with TWA on the Dublin/Shannon/New York run, where it was a straight head-to-head competition, we ended up eventually with about 75 per cent of the market share before TWA pulled off it. We had staff cutbacks and redundancies within the United States during the period. We merged many of our sales offices with Bord Fáille offices in the United States to save costs. We sold our Fifth Avenue office. We have done a number of things of that kind.

39. Senator Cooney.—Is there much more you can do?

Mr. Kennedy.—We have now taken a decision to phase out the “B707” aircraft and to concentrate our efforts on the “B747” aircraft which is the most cost effective vehicle. That will not eliminate the losses, but we believe that an operation concentrated primarily, not necessarily exclusively, on New York with “B747s” gives us a better chance of surviving, and we want to exploit that opportunity.

40. Senator Cooney.—What does the stop-over at Shannon cost?

Mr. Kennedy.—We want to stop at Shannon because about 60 per cent of the traffic originates or terminates in Shannon.

41. Senator Cooney.—I will rephrase my question. What do you say about having one point of landing in Ireland?

Mr. Kennedy.—If we had a total flexibility in relation to the operation, we estimate we could save about £700,000 a year in costs.

42. Chairman.—What do you mean by total flexibility?

Mr. Kennedy.—If there were not a mandatory stop at Shannon and if, for example, some supplementary services were permitted to operate directly between Dublin and New York, whether freight or passenger, that would be the size of it.

Mr. Hayes.—I hasten to add supplementary services between Shannon and New York only, or maybe Cork and New York.

43. Deputy Kenneally.—Are you tied up with international agreements? Would you give some information about international agreements?

Mr. Kennedy.—The basic framework goes back to the Chicago Convention, which dates from 1944. Most of the countries interested in aviation post-war were represented at the Chicago Convention. Ireland was represented at it. Out of that convention a number of things were established. First, a permanent Government organisation, ICAO, was set up. Second, certain agreements of a worldwide nature were reached with regard to aircraft licensing procedures which would be adopted between states. The basic freedoms of the air were defined. In other words, the countries involved agreed to allow, on an open basis, overflying of their territories by commercial flights and technical stops—stops for refuelling or maintenance within their countries. Subsequently. there were on a bilateral basis agreements signed between most of the major countries involved in aviation. Those are bilateral treaties which are now in existence. Ireland has treaties with approximately 20 other countries. The form of the treaties varies somewhat. Within Europe they tend to be fairly standard form. Most of the bilateral agreements are virtually identical. The Irish treaty with the United States is a slight anomaly in the sense that it is a very old one. It goes back to 1945 when the main interest was to develop Shannon as a point which the US carriers and aircraft could use for refuelling purposes. As a result of that the US bilateral agreement is a very liberal one in the sense that it gives very considerable concessions to and is weighted heavily in favour of US carriers. They have rights from all cities in the United States into Shannon; they have pick-up rights out of Shannon onwards to virtually any destination they care to choose. There is no reference in the treaty to fair and equal opportunity which is a standard clause in most bilateral agreements. In summary therefore the basic framework is, first, the Chicago Convention and then a series of international treaties negotiated between countries.

44. Deputy Kenneally.—I take it that the Department of Transport makes the agreements. Does your company have any say in it?

Mr. Kennedy.—Yes, we are very closely involved with the Department on such agreements.

45. Deputy Deasy.—Would I be correct in saying that your problems on the North Atlantic are caused by open competition from American charter companies in particular and that your profit-making runs on the other routes, especially to Britain and Europe, are largely due to the fact that it is a closed shop?

Mr. Kennedy.—I disagree with that interpretation.

46. Deputy Deasy.—Who flies the Dublin-London route other than yourselves and British Airways?

Mr. Kennedy.—Only ourselves and British Airways on the Dublin-London route.

47. Deputy Deasy.—Why have not independent operators been given an opportunity to operate on that route?

Mr. Kennedy.—Because the bilateral treaty between Ireland and the United Kingdom specifies two carriers for that route. Each country can designate a carrier to operate on that particular route. The treaty designates a number of cities in Ireland and in the United Kingdom which may be served, some cities to be served by one-carrier—if you like, a monopoly UK carrier or a monopoly Irish carrier—and other cities will be served by a UK carrier and an Irish carrier.

If I could go back to the US analogy you were drawing. The “open skies” type concept you were talking about is a myth. The US do not believe in “open skies” in any real sense. For example, there is no way the United States would allow an Irish carrier to do what the Irish/US bilateral treaty allows US traffic to do, namely, to pick up traffic from a point within the country and carry it onwards. We are not allowed to carry traffic from New York to, say, Mexico, and there is no way the US will allow any foreign country to do anything of that kind. Similarly, we are not allowed carry traffic on what is called a cabotage basis within the country. We are not allowed carry traffic between Boston and New York. The US definition of “open skies” is very limited, when it happens not to suit its own purposes.

Mr. Hayes.—If an Irish company have a plane going from Boston to New York they are not allowed take even one person on board in Boston.

48. Deputy Deasy.—Would you be opposed to allowing independent carriers to operate from Dublin to London and other British centres?

Mr. Kennedy.—They are already operating.

49. Deputy Deasy.—But not to London?

Mr. Kennedy.—No. I have a list of some of them here. Air UK are operating between Dublin and three UK provincial points. Dan Air are operating between Dublin and three UK provincial points and between Cork and three UK provincial points. British Airways have the routes I mentioned. British Midland operate between Dublin and East Midlands and Brymon operate between Cork and Plymouth. Up to about a month ago British Midland operated between Dublin and Liverpool and then withdrew. I would not have any problem in competing against another British carrier between Dublin and London in place of British Airways if the British Government decided to license someone else in their place. This is a general point one has to make in any public utility—one is always potentially vulnerable to selective competition which will just focus on the more profitable parts of the market and which will not carry any of the public service obligations and commitments which have to go elsewhere.

If I may make another point. We would be quite happy with a more liberal regime within Europe provided we got similar opportunities and were allowed to operate, say, the London-Paris or London-Frankfurt routes. We had rights at one stage between Manchester and Europe and built up the traffic between Manchester and six major continental European cities. When the markets had been developed to a sufficient extent British Airways took over those routes and threw us out. The Government of the day negotiated a phased withdrawal and we are now unable to operate between Manchester and continental Europe. The harsh reality is that nobody really believes in “open skies” but rather in his own particular interpretation of it.

50. Chairman.—Are air transport agreements between Governments negotiated almost entirely for the benefit of their own airlines or are there considerations of a political or diplomatic nature?

Mr. Kennedy.—I think there are. The underlying motivation is the development of air traffic and freight, between the two countries. That is not necessarily, although hopefully it would be, to the benefit of the airlines, but it is certainly to the benefit of trade, commerce and tourism between the two countries.

Mr. Hayes.—Could I give an example there? When the IDA go to the States to try to induce an American company to locate in Ireland, one of the things they say is that we have a freighter going every day between Shannon and New York. That indicates that there are very broad reasons behind all these negotiations.

51. Chairman.—Would the agreements be largely for the benefit of the airlines or would there be a large content, other than that, in these air transport agreements?

Mr. Ó Riain: When the civil aviation authority of Switzerland and the civil aviation authority of Ireland are negotiating an air agreement there is equal opportunity for the carriers of each country. That may be seen as each going out to do their own thing for their own airline, but the whole philosophy of the ECAC agreements is an arrangement in Europe where countries negotiate to give equal opportunities to the carriers of their respective countries. If we take Ireland dealing, let us say, with Germany, there may be five German airlines but there is only one Irish airline. The Irish Government would wish the Germans to nominate a single carrier that would compete with a single Irish carrier.

52. Chairman.—The interests involved all the time are almost entirely the interests of the respective airlines. That is the point I want to get at. Would Aer Lingus find from time to time that an agreement made between our Government and that of another country would contain conditions which would have no bearing on Aer Lingus? Would you feel that there were interests, other than the airline interests, involved?

Mr. Kennedy.—I am not sure I understand the point. I find it hard to see how an air treaty could not but have a major implication for the airline.

53. Chairman.—It might be for diplomatic reasons. It might be a quid pro quo situation. In return for a certain country taking our goods, might the Government give them very favourable concessions in regard to their airlines?

Mr. Kennedy.—I understand.

54. Chairman.—Does this enter into it to any extent?

Mr. Gleeson.—Historically it has been believed in airline circles that the bilateral agreement between Iceland and the United States was one in which there were interests which had nothing to do with airlines because the Icelandic carrier got rights to carry traffic out of New York via Reykjavik into Europe. It subsequently got rights not to stop at all in Iceland and to carry traffic between two points of which it was not a national carrier, which was a rare thing, in exchange for military bases in Iceland.

Mr. Ó Riain.—In the Irish case there is no such other commercial factor influencing any bilateral agreement with the exception of the 1945 agreement between the United States and Ireland where the objective was bringing as much traffic as possible into Shannon Airport. In the 1945 agreement there was no provision for an Irish carrier operation.

55. Deputy Deasy.—To go back to finance, when you say that there is a £43 million investment by the Government in Aer Lingus, how far does that investment date back?

Mr. Kennedy.—To 1936.

56. Deputy Deasy.—That is the total investment you have?

Mr. Hayes.—It is the total investment, £15 million of which we got the year before last.

57. Deputy Deasy.—You are seeking £20 million?

Mr. Hayes.—We will be.

58. Deputy Deasy.—What profit or loss did you make overall?

Mr. Hayes.—We did not really say £20 million. We were asked what it would take to make the debt equity ratio 50-50.

Mr. Kennedy.—The profit figures for the two companies combined in 1976-77 was £100,000; 1977-78, £4.6 million; 1978-79, £4 million. Our last financial year ended on 31 March 1980 and we do not expect the outcome to be significantly different from the previous year.

59. Deputy W. O’Brien.—The same pattern?

Mr. Kennedy.—Yes.

60.—Deputy Deasy.—What are your big profit making routes?

Mr. Kennedy.—On the air transport side, the European routes have been marginally profitable as a whole. There is a league table of ones which are very marginal and ones which are quite profitable within that. Take air transport as a whole—the Atlantic has been losing money; the European side has been marginally profitable and the overall profits have been coming from the ancillary side.

61. Deputy Deasy.—Do you see a situation where you will be self-sufficient?

Mr. Kennedy.—We envisage ourselves as being self-sufficient. We envisage ourselves in the same category as any company which has to go sometimes to its shareholders for a rights issue. If it has an expansion programme involving major capital expenditures it goes to its shareholder, it gives its prospectus, its estimate of the future and what it needs the money for. We see ourselves in that same category. The last subsidy which Aer Lingus received from the State was in 1951. We have not received a subsidy since then and it is one of the main objectives of the way we carry out our business that we should not receive a subsidy.

Mr. Hayes.—We think that the subsidy situation, apart from the fact that it is dangerous and psychologically damaging, is the death knell of initiative, innovation, drive and energy.

62. Deputy Fitzsimons.—As regards increased costs, are your fuel costs much worse than for other airlines?

Mr. Kennedy.—No, not worse than other airlines. They are much the same as the others. Our fuel bill in 1972-73 was £3.5 million. The estimated fuel bill this year is £42.5 million.

Mr. Hayes.—That deserves to be said again.

63. Deputy W. O’Brien.—In 1972 it was what?

Mr. Kennedy.—In 1972 it was £3.5 million.

64. Deputy Deasy.—Do your competitors on the North Atlantic run have a big advantage because of reduced fuel costs in the United States?

Mr. Kennedy.—Not as such because we pick up fuel in the United States as well. We have some of the benefits of cheaper fuel in the US although the probability is that being a large buyer of fuel in the United States they might be able to exercise more clout in the market place than we would. Where they have an advantage—it is more on the revenue side rather than on the cost side—is that in many cases they have an extensive domestic network in the United States which can feed into their Atlantic traffic which we do not have. We have to rely on the other US airlines in the United States to feed traffic into the few gateway points that we have.

65. Deputy W. O’Brien.—In reply to a question you said an increase of 20 per cent on fares on the North Atlantic would give you a break-even situation. What impact would that have on the £8 million repayment on the interest?

Mr. Ó Riain.—The interest charge of £8 million arises from out total capital investment. There is another £8 million which is the operating loss on the Atlantic. The interest charge of £8 million is cleared by our profit and after that we have the £4 million figure which Mr. Kennedy has just been talking about. The 20 per cent increase in our Atlantic rates would eliminate the loss of the £8 million operating account that we suffer on the Atlantic route. It would cause the Atlantic next year to break-even but it would make no impact on our £8 million interest.

Mr. Kennedy.—To correct a figure you used for the Atlantic our losses are between £6 million and £7 million.

66. Deputy Deasy.—Would you vigorously oppose the introduction of independent companies on the Dublin-London run?

Mr. Hayes.—In principle we would not oppose any independent company that had to operate commercially if they wanted to come in and do all of our routes. But it would be appalling for someone to be allowed in to take the volume route and not have the burden of taking the other routes as well.

67. Deputy Deasy.—If they were prepared to take the other routes as well?

Mr. Hayes.—In that case we would not have any problem.

68. Deputy W. O’Brien.—You would agree with it?

Mr. Kennedy.—Yes, if they could provide a complete service. It is analogous to the situation of providing electricity. I am sure somebody could come in and compete with the ESB very effectively by providing electrical power in the city of Dublin but not take on rural electrification. The same arguments apply when providing a postal service or telephone service. It is exactly the same kind of argument in any basic public service. The principle is accepted within the United States that carriers who are performing a public service in terms of operating routes which are not commercially viable are actually subvented out of State funds to the tune of about 100 million dollars a year for operating these services.

Mr. Gleeson.—Out of Federal funds.

Mr. Ó Riain.—In relation to Deputy Deasy’s point, on the Dublin-London route we are charging fares 25 per cent a mile less than the fares charged between London and continental points. British independent operators have not been showing an interest in the London-Dublin route because there are easier places for them to earn a living in. As regards the Laker possibility, which has been mentioned already, Mr. Kennedy said the Dublin-London run was one of the 600 odd routes that he applied for which were rejected by the UK Civil Aeronautics Authority for reasons that clearly commended themselves to that body that was set up to encourage competition in the airline industry. If they reject Laker they have some very good reasons for it. Some of the crticisms of Laker expressed in the CAA document were that there was no justification for the fares being proposed, no statement of what the impact would be on the total traffic or on other airlines and so on. They were all rejected. As regards the Aer Lingus position on permission to operate between London and Dublin, it is the Irish Government and the Department of Transport that would make the decision, not Aer Lingus. Aer Lingus would be making the point that the airlines of Ireland deserve equal opportunities with the airlines of the other countries. We are only a one airline country. As regards carriers such as Laker there is a lot of misunderstanding about what their real fares are. In effect, on the Atlantic between London and New York they are charging the same general level of fares that are being charged by people like British Airways. They are no longer the people who are providing marvellous bargains that are not available from other carriers.

69. Chairman.—You mentioned a figure of the fares from London to Dublin being 25 per cent less than comparable fares. You have already said you have different kinds of fares such as APEX fares and so on. What comparisons are you making?

Mr. Kennedy.—The comparisons stand up irrespective of what fares you take as long as you are comparing like with like. The figure of 25 per cent would apply to the full fare but a relatively small proportion of all our traffic use full fares. When you look at the promotional fares sometimes you have difficulties in getting a precise comparison because the conditions attached to fares may be different in different markets. By and large, taking excursion fares, APEX fares or the full normal fares—if you compare like with like—the fares between Ireland and Britain are some 25 per cent cheaper per mile than comparable fares between Britain and continental Europe.

70. Chairman.—Between London and Paris and between London and Brussels?

Mr. Kennedy.—Yes.

Mr. Hayes.—No matter how often we say this publicly the public do not believe us.

71. Deputy Deasy.—I want to ask a question about Shannon. The accusation has been made that Irish flights from North America quite often overfly Shannon for the flimsiest of reasons and that other air companies which are flying into Shannon land in precisely the same conditions. The assertion has been made that some of the crews want to get home to Dublin for their tea. Is there any substance in the assertion that there is wilful overflying of Shannon?

Mr. Kennedy.—No. Any overflying of Shannon of that kind is done for operational reasons.

72. Deputy Deasy.—You are satisfied about that?

Mr. Kennedy.—Yes. I am quite satisfied about that.

Mr. Hayes.—You may say I am biased but I must have flown the Atlantic about 35 times and I only once went to Dublin. It was impossible to see the runway in Shannon on that occasion.

Deputy Deasy.—It is good to clarify that point.

73. Deputy Fitzsimons.—When we are talking about Shannon, to what extent do the compulsory stops at Shannon increase your costs?

Mr. Kennedy.—We would save approximately £700,000 per annum if the compulsory stop did not exist. In terms of our operating costs on the Atlantic as compared to an airline operating New York-London only, the existence of the two airports in Ireland and the need to serve the two markets in Ireland adds 5 per cent to our operating costs. There is a cost penalty in that.

74. Deputy Kenneally.—Within the operating costs there are landing fees which are said to be high in Ireland?

Mr. Kennedy.—Yes, landing fees are very high. If you like us to develop that we will.

Mr. Gleeson.—We made this point at the time when Aer Rianta were coming before this Committee. We wrote to you then saying that we found the landing fees in Ireland high. There is not a lot I want to add to that other than to say that we still find them high. They are still high by comparison with international standards. In our network we are unfortunate in having a combination of a lot of our traffic operating between Britain and Ireland which together have the highest landing fees of any airports we serve anywhere else. In the financial year we are in now we will serve 48 airports in Europe and North America and the Irish airports are eleventh highest down in that list.

75. Chairman.—Aer Rianta say partly the reason why airport charges are high in Ireland is because of Aer Lingus’ handling charges over which they have no control.

Mr. Gleeson.—That must be a misunderstanding. The handling fees do not come into it. Landing fees just relate to the landing.

76. Chairman.—It is not fair to look at landing charges alone. Other airlines have complained about the charge of landing at an airport in Ireland. When this was put to Aer Rianta they said that part of it was that Aer Lingus does the handling for many of the other airlines and that Aer Lingus’ handling charges are unduly high and that is one reason why the charges are high. Comment?

Mr. Gleeson.—I was not aware they said our handling charges were unduly high because we could contest that without any difficulty.

Mr. Ó Riain.—Could we develop the point about the landing charges per se before handling charges are taken into account?

Mr. Gleeson.—We are talking about factual matters here. I know that Aer Rianta in the course of their evidence, which I read, said one has to take all sorts of other things into account such as security and so on. We have taken all these things into account and, in order to give comparisons, we analysed all airport data and put in everything, with the exception of fuel through-put charges which occur at some airports. One does not pay fuel through-put charges if one does not get fuel. That charge is levied by the airport on the fuel companies who pass it on to the carrier. That is the only thing that we left out. and it is not significant in the totality of the fee. Security charges are included and all the other items that go to make it up.

The evidence may have been a little bit confused because of the curious situation in London Airport where they have a stratified structure in which there are peak period charges, winter and summer charges. To compare these things, we have taken our total operation in and out of Heathrow, for example, and applied it to Dublin. We found that that gives you a lower charge in London than in Dublin. In other words, you pay a high charge in the summer peak hours—five hours during the day—in London Airport and the remainder of the day is at a much lower rate. In the winter you only pay half the fee you pay in the summer. Therefore, it is quite difficult to compare them. To give you an exact comparison, if you put all our London flights into Dublin you find it is cheaper now in London than in Dublin, with the single exception that on the rates proposed from 1 April 1980 and which are being contested by the IATA carriers, and allowing for the value of the Irish pound as at today, it would be somewhat dearer in Dublin than in London. In the United Kingdom airports and in a few other cases, Brussels and Amsterdam—I have a list of 48 airports here—the fees are cheaper. In my view the evidence stands.

77. Chairman.—In making comparisons between other European airlines we have to have some objective means of comparing the performance of Aer Lingus. Would you regard Air Austria. Finnair and TAP as being fair comparisons?

Mr. Kennedy.—Yes, in terms of size.

78. Chairman.—Do they also seem to be comparable, in the size of the countries and so on?

Mr. Kennedy.—TAP, Air Austria and Finnair would probably be as good a sample as you could come up with.

79. Chairman.—Aerlinte’s revenue per ATK is very low and Aer Lingus’s is very high. What is the reason for that?

Mr. Kennedy.—The revenue rate is normally related to the underlying cost structure and it is characteristic of airline operating costs that the unit cost will drop with increasing distance because there are certain costs which occur, such as the landing charges we have just been speaking about, irrespective of whether the stage length is 100 miles or 4,000 miles. Landing charges, maintenance charges and fuel consumption are also heavier on short stage lengths. Long haul operations generally within the airline industry are less costly on a per mile basis or on a unit basis than short haul operations. That is the main reason why Aerlinte look low and Aer Lingus look high in revenue terms per ATK. There are other factors as well. Aerlinte’s low ATK is also due to the general level of fares on the Atlantic. If you look at the Aer Lingus revenues they are very high compared to Aerlinte because of the great difference in average stage lengths between the two companies, but by comparison with other short-haul carriers they do not have a high revenue rate. They have a revenue rate below the European average despite the fact of having the shortest average stage length within Europe but one. Of all the carriers in the Association of European Airlines, for example, only British Caledonian have a shorter average stage length than Aer Lingus.

80. Chairman.—And is it not a particularly successful one?

Mr. Kennedy.—Yes, it is quite successful. Their average fare is about 30 per cent higher than ours. They are a similar airline in terms of stage length, structure and size of operations, but their fares within Europe are about 30 per cent higher.

81. Chairman.—In your submission to us you talked about the difficulties of Aer Lingus being a short haul airline. Yet we find Aer Lingus are making a profit and Aerlinte are not making a profit. That complaint does not seem to be very realistic. Comment?

Mr. Kennedy.—I do not think Aer Lingus’s profit performance is adequate. It looks good by comparison with Aerlinte, but I do not regard it as being at a satisfactory level of profit. If we did not have our present level of ancillary activities and if we did not have the Atlantic route, we would be quite concerned about the level of profitability of the Aer Lingus side. We are concerned, in the sense that we do not regard it as being sufficiently profitable. The conventional wisdom in the industry in the past was that because of costs short haul aviation was unprofitable and long haul aviation was profitable. In the sixties Aerlinte made profits and Aer Lingus made losses, but this has been thrown into reverse in the seventies largely because of the situation on the North Atlantic.

82. Chairman.—Because of competition?

Mr. Hayes.—Because of irresponsible competition.

Mr. Kennedy.—Because of dumping.

83. Chairman.—Are you satisfied that it will sort itself out? Adjustments are made for that reason and in the end being a short haul airline is not really a great disadvantage. Is that so?

Mr. Kennedy.—Long haul operations are very profitable in other parts of the world. For example, Europe to Africa has a very profitable set of routes for most of the carriers operating there. Many European carriers—Swissair, Lufthansa and SAS—are subsidising their Atlantic losses not by their European operations but by their long haul operations to Africa. The point is that the yield is very much higher.

Mr. Hayes.—Put it this way, all long haul operations are very good, except the Atlantic.

Mr. Kennedy.—They are intrinsically more profitable.

84. Deputy Deasy.—Are you happy about your overheads? Are you satisfied that administratively you are not too top heavy and that your manning levels are reasonably good?

Mr. Kennedy.—I am satisfied that they are reasonably good. I am also satisfied that they could be improved. It is surprisingly difficult to make valid comparisons between airlines because a large number of things have to be taken into account. For example, we have a great deal of ancillary activities which we carry out in-house. This pushes up our total number of employees. It is fair to say we also tend to do more work in-house than the average airline. We do virtually all of our own aircraft maintenance and flight catering; we do not have to buy services from a flight kitchen. We clean our own offices. We do not use contract cleaners. We do a lot of things like that. When you are looking at comparisons, which we do within the industry, there are an awful lot of comparative statistics one can look at. You have to take into account factors like size, seasonality, stage length, all of which can complicate the picture. When we go into this in more detail and compare ourselves with the better European airlines and try to factor out these particular environmental factors in terms of output per employee, we find ourselves marginally behind what we regard as the best European carriers, coincidentally by an amount which is about the same as the difference between the average working week here and in Europe. However the fact is that we have these external factors, environmental factors, which make life difficult for us but we cannot simply use them as an excuse. We must try to find ways of being a lot better than the European norm and I am satisfied that there is scope for improved productivity within the airline and that is a priority with management.

85. Deputy Deasy.—I notice in the figures of comparison between yourself and the charter companies that the greater part of their expenditure is on operations, whereas a high percentage of yours is on administration. Comment?

86. Chairman.—Some comparisons that we have made show that other airlines achieved between 27 per cent in the case of Air Austria and 86 per cent in the case of British Caledonian more ATK per employee in 1978 than Aer Lingus. Would you like to comment?

Mr. Kennedy.—About 1,500 of our employees are working on ancillary activities.

87. Chairman.—Is that the approximate number?

Mr. Kennedy.—Yes. That would be largely in providing maintenance and other facilities to other airlines and also traffic and ground handling at Dublin, Shannon, and New York, Boston, Chicago and a very large one at London where we bought a company which we have integrated into our operation. There are a lot of smaller ones—catering, for example—which are carried out in-house. There is a very substantial difference there. Also in making that kind of comparison one must look at the extent to which an airline will push out its service maintenance contract work to other airlines. It is the converse to our taking it in. It means that somebody else is pushing it out. On superficial examination that airline may appear to have a better output per employee, but the points I made must be taken into account.

Our philosophy grew out of problems which we ran into in the early seventies which are touched on in our submission where we had a down turn on the Atlantic. We also had the problems arising from Northern Ireland in our business. At that stage we were carrying quite a few more people in certain parts of the organisation than we had work for. The way we overcame this difficulty was to exploit it as an opportunity. We went out and generated additional business, most noticeably in the maintenance and overhaul side, but in other areas as well.

88. Chairman.—That may be part of the explanation. Certainly maintenance and overhaul appear to have an unduly high proportion of employees. Do those who come under the heading of ticketing sales and promotion seem to be considerably higher than any comparable airline?

Mr. Kennedy.—Not on an overall European basis. In relation to Europe in general our ticketing sales costs are not out of line with industry.

89. Chairman.—We are talking about the number of employees who are employed under the heading of ticketing sales and promotion which seems to be unduly high compared to various others. Is this so?

Mr. Kennedy.—I have a global figure on that. The proportion of our staff employed in ticketing and sales is 13.2 per cent. The IATA total, which would cover airlines all over the world, is 14.5 per cent and that does not show us as out of line. The other point in relation to comparisons is that we spend quite an amount of effort on generating traffic. We have a very strong marketing and sale function because of the fact that a very high proportion of our traffic is tourist traffic. It is not business traffic-must-go-type of traffic. We are not just providing services for business but we have to generate the business.

Mr. Hayes.—Their marketing may be under the heading of promotional activities.

Mr. Kennedy.—A lot of our expenditure under that heading arises because we are spending in the market place alongside Bord Fáille in generating tourism into Ireland. Tourism does not just come. Our function is not just to provide aircraft seats to carry the traffic.

90. Chairman.—It is understandable and justified that you have to spend a good deal of money on promotion. A lot of that would be advertising. Does it quite explain the number of employees that are involved?

Mr. Kennedy.—We have a very large sales force in continental Europe, in the United Kingdom and in North America. I am not sure of the exact number of sales offices we have but we are represented in all the major cities.

91. Deputy Deasy.—The document we have before us states that Aer Lingus employ three times as many ticketing sales and promotion staff per ATK as the other airlines. What is the Aer Lingus view on that?

Mr. Kennedy.—These were the three other airlines that you mentioned?

Deputy Deasy.—Yes.

Mr. Kennedy.—I am not familiar with that comparison but perhaps we could have a look at it and come back to you on it.* On a global basis, compared with all the IATA carriers, our proportion is in line. In fact ours has been marginally low in terms of the number of employees. There are definitional questions too. It has to be very clear that you are comparing like with like.

92. Senator Cooney.—The total number of personnel increased between March 1978 and March 1979 by 590. Would you know if there are similar increases between March 1979 and March 1980?

Mr. Kennedy.—Yes, it would have been of the same order as the year before.

93. Senator Cooney.—One thousand extra people in two years?

Mr. Kennedy.—Yes.

94. Senator Cooney.—What areas would they be deployed in?

Mr. Kennedy.—Could I take notice of your question and come back to you on it.* I know roughly what the answer is but I would prefer to give you a more precise figure.

Senator Cooney.—Of course.

Mr. Gleeson.—In relation to ticketing costs, like so many of these figures, they are loaded with the difficulties of trying to identify what is the right measure of cost. A tonne kilometre is as bad a measure of ticketing cost as you can get. It may be the easiest one to do but it is an extremely bad one because ticketing costs relate primarily to passengers moved, not how far they are moving, because there is not a great deal of additional cost in ticketing a passenger for 1,000 miles and ticketing for 100 miles. It is the same ticket and the same amount of writing. The stage length has a great deal to do with it. Secondly, it is the number of passengers not the tonnes that call for the ticketing costs. We carry a large number of passengers who travel relatively short distances. We have a much higher load factor than carriers generally. Of any tonne of available capacity that you say is offered we sell a much greater proportion in terms of passengers than other carriers do.

95. Deputy Deasy.—How does that compare with British Caledonian?

Mr. Gleeson.—I would not be able to tell you that offhand.

Mr. Kennedy.—They would be similar to us in stage length. They would not have as high a load factor as we have. Their load factor would probably be 10 percentage points lower than ours. So there would be a big difference.

96. Deputy Deasy.—But it is stated in a document I have here that you are between 50 and 100 per cent higher?

Mr. Kennedy.—I have not seen these figures.

97. Chairman.—Would you like to browse on them?

Mr. Kennedy.—I would have to query whether similar definitions are being used for ticketing sales and promotion. When you come across something as much out of line as that it looks very strange.

Mr. Gleeson.—Out of the IATA carriers, of which there are approximately 100, if you take the total proportion of people involved in ticketing and sales, ours comes out to be 13 per cent and the 100-odd airlines come out to be 14 per cent.

98. Chairman.—That seems to be a reassuring figure. Could we ask about aircraft utilisation? Do I take it that long haul airlines would have a better chance of having a good figure?

Mr. Kennedy.—Yes, that would be correct.

Mr. Hayes.—Because a lot of our business is tied up with the tourist trade, there is very high seasonality. Over the years one of the problems presented to Aer Lingus was how to deal with seasonality, which would automatically mean very low aircraft utilisation. Instead of it being an adversity Aer Lingus took it as an opportunity and started leasing out in the valley periods, making the aircraft utilisation much more effective and, therefore, obviously creating a new business of leasing which eventually led to an ancillary activity.

99. Chairman.—Can we get figures on utilisation per day, or it is done on an annual basis?

Mr. Kennedy.—You can do it on an annual basis or on a peak basis. We have both available. Making a comparison within Europe, we have the second highest utilisation of short haul aircraft in the peak period—second to Austrian Airlines, nearly 11 hours per day. Our short haul aircraft utilisation in the peak is an average of ten hours per day, which is an exceptionally high figure by industry standards. The British Airways figure, for example is six-and-a-quarter hours per day and British Caledonian seven-and-three-quarter hours per day. That relates to peak utilisation and is achieved by a very tightly integrated schedule, by very short turn rounds, by the development of markets for charter night flights, and a fare structure which generates traffic and enables us to use our short haul aircraft on a 24-hour basis in the summer.

In the winter we overcome the problem of seasonality and utilisation by leasing out. In the early sixties Aer Lingus were one of the first, if not the first, airline in the world to move substantially into the business of leasing out aircraft to other parts of the world. Last winter, for example, one Boeing 747 was leased to British Airways and one Boeing 747 was leased to Air Algerie. We also operated some B 747 flights for Kenya Airways. We operated a number of B 707 flights for Zambia Airways and we had a B 737 out in Honduras and one in western Canada. That is typical of our winter programme for the past few years to keep utilisation up.

100. Deputy Deasy.—To what degree do you operate night flights?

Mr. Kennedy.—In the summer time it would be quite high.

101. Deputy Deasy.—What destinations?

Mr. O Riain—On a typical Saturday or Sunday night in the summer we would have 13 B 737s, four of which would be on maintenance, and eight on inclusive tours to Spain and the Mediterranean. In other words, from about 9 p.m. until 6 a.m. eight out of 14 planes would be on charter night flights.

102. Deputy Deasy.—What about cross-channel?

Mr. Kennedy.—No, there is a night curfew ban in most UK airports. In London, for example, you cannot operate between 11 p.m. and 6 a.m.

103. Mr. Deasy.—You used to have night flights?

Mr. Kennedy.—There has been a general tightening up because of noise restrictions, particularly in North America and in continental Europe, which makes it more difficult to get utilisation up to an acceptable level and it is virtually impossible in the UK. The Mediterranean countries are less restrictive at the moment, so one can keep them going there.

104. Deputy Deasy.—The charters used to be considerably cheaper?

Mr. Kennedy.—That is right.

105. Chairman.—Generally speaking, do you feel you have done a good job on utilisation?

Mr. Kennedy.—Yes, it is one of the areas I am most satisfied with.

106. Chairman.—Is there any scope for pooling resources between Aer Lingus and other airlines? This happens. SAS and some Scandinavian airlines, for instance, pool their resources for overhauling, handling charges and various things of that kind. In view of the pressures of costs and so on, is there any scope in that direction?

Mr. Kennedy.—We tended to go a different way to the carriers you referred to. There are two major groupings within Europe who share overhaul and maintenance facilities, the KSSU group—KLM, SAS, Swissair and UTA—and the Atlas group—Lufthansa, Sabena and Alitalia. For example, aeroplane maintenance on a particular type of aircraft will be undertaken by one airline while the maintenance of another aircraft type will be undertaken by another airline, and engine overhaul will be looked after by a third airline. By and large, these tend to be very high cost operations because they are operating in high cost countries. Our approach has been quite different, namely, to develop business in Third World countries which would enable us to justify doing most, if not all, our maintenance here in Dublin. In net terms we get a very much more cost effective result doing it that way. We do more work on behalf of African airlines than any other airline in the world, and we are competing against just about everybody in sight for this business. Our approach is somewhat different and I think, more effective.

107. Chairman.—In other words, is the position that you are able to get your own aircraft done for nothing because you make so much money doing other people’s aircraft?

Mr. Kennedy.—It is not quite that way, but that is the objective.

108. Senator Cooney.—In your Chairman’s last published report it is stated that your turnover target for 1979-80 was £225 million, an increase of 20 per cent. Have you any idea at this stage if you are on target?

Mr. Kennedy.—Yes.

Mr. Hayes.—We should be making £10 million or £15 million profit to cater for the future, but we are not on target for that.

109. Senator Cooney.—Is your turnover on target?

Mr. Kennedy.—Yes.

110. Senator Cooney.—I notice that there was a substantial increase between 1978 and 1979 in land and premises, furniture, fittings and equipment. Could you tell us where the increase came in those two items?

Mr. Dempsey.—Primarily in hotels, in the exchange of a long term lease of our American hotels for purchase.

111. Deputy Deasy.—I am concerned about the level of the cross-channel air fares especially the Dublin-London return fare. You are going outside the reach of the ordinary working class person at the moment. Aer Lingus is used on that route by people whose fares are paid by their company or whatever business interest they are employed by. I feel that you should be within striking distance of the sea route fares. There is an element of discrimination if people who are coming home on holidays working in Britain are not allowed avail of this facility within reason. Comment?

Mr. Hayes.—You are talking about the normal fare and not talking about the APEX fare.

Mr. Kennedy.—The APEX fare Dublin-London at the moment is £64.

112. Deputy Deasy.—How far in advance do you have to book for that?

Mr. Kennedy.—One month. If you take what is the full fare—it is called the normal fare but that should really be in quotes because over our cross-channel network as a whole only about 30 per cent of the total traffic travel on that fare. It is the other cheap fares which are more relevant for the tourist traveller. We have been able to demonstrate that the actual levels of fares charged, whether the cheaper or full fares, are very much lower than is the norm elsewhere within Europe. We have the same kind of cost pressures as most other airline carriers we are competing with. We are extremely sensitive to the question of the kind of cost increases the market can bear and we are very loath to apply fare increases. Sometimes when you get your fuel bill going the way our fuel bill has gone you do not have any alternative but to try to recover your costs.

I should like to refer to the study which was undertaken recently by the Irish societies in the United Kingdom. They undertook it on the basis that they thought, as you are suggesting, that our fares are too high. They came out of the study saying that they were quite satisfied that our fares were not too high and that Aer Lingus had done an extremely good job in looking after the Irish emigrants in the United Kingdom. Aer Lingus did a very much better job than anybody else who was looking after them in terms of air transport or of transport generally. I could make a copy of that report for you.

113. Deputy Fitzsimons.—Frankly the general public feel that the cost of flying from Dublin to London is excessive and perhaps you should do a PRO exercise on this. Apart from the APEX situation, where there are conditions that you must book one month in advance, the cost of the dearer flight seems to be excessive. Is that so?

Mr. Kennedy.—I do not think there is any one part of our business into which we put more public relations effort. There have been a number of very favourable comparative studies carried out which have been well publicised in the papers. People have examined the situation, such as the UK societies, and have come to their conclusions. There have been studies carried out by Dr. Crowley of University College, Dublin, the results of which have been published in the papers, which support our arguments. There was an analysis carried out 18 months ago by Paul Tansey of The Irish Times which supported the points I am making. A lot of the comment which is made is very ill-informed.

114. Chairman.—Is that what you are up against?

Mr. Kennedy.—That is what we have to overcome.

115. Chairman.—It is commonly believed, no matter how erroneously.

On the question of depreciation, in your accounts depreciation is handled on an historic basis, writing off planes which are around 14 to 16 years old. By doing that are you giving a profit figure which is not related to reality if you accept the fact that your planes must be replaced periodically?

Mr. Kennedy.—You can make the same point for any company which is doing its accounts on an historic cost basis or depreciating on an historic basis. It can be argued in the case of our aircraft depreciation policy that some of the weaknesses of the historic cost convention—there is a weakness there—have been counteracted through very conservative estimates of aircraft life-years. Fourteen to 16 years, which we are using for most of our fleet, now appears conservative in the light of what we know about the potential life of aircraft in the market place and from a technical point of view.

116. Chairman.—Do you mean they would last longer?

Mr. Kennedy.—Our experience is that they will last longer than that. Any organisation which is doing its accounts on an historic cost basis is deluding itself if it believes it is earning large profits which can be used and which ultimately it will need for replacement purposes. If you look at the Chairman’s statement for each of the past couple of years, we have been hammering this point very hard; but we cannot fool ourselves into believing that £4 million or £5 million is in any way an adequate profit or that 14 or 15 per cent return on investment costs calculated on an historic basis is satisfactory. It is not satisfactory and we have no illusions about that.

117. Chairman.—It applies more to an airline than to most companies. Does the cost of replacing equipment vary from company to company?

Mr. Gleeson.—No, it would not.

Mr. Dempsey.—This is not intended to be a defence of the accountancy profession but prior to the days of the current cost accounting techniques, which are about to land on us now with the new statement of accountancy practice, this concern about the fact that depreciation on a historic cost basis was not providing enough for replacement can be reasonably answered by saying that that is not the place to provide for future replacements. Depreciation is not and never was intended to be the place in which one set aside sums for future replacement. It was intended to be a measure of the cost of wasting assets. Our problem has been, as a result of the lack of profitability, that we have not been able to set aside any moneys out of profits for fleet replacement reserves. That is the way in which we would be doing it if the profits were big enough, not through the course of depreciation charges but rather out of profits as a transfer to reserve in view of the very high anticipated replacement costs in years to come. At one stage back in the sixties Aerlinte, when it was going through a profitable period on the Atlantic, was providing for fleet replacement reserves and we actually built up reserves of about £7 million at its highest point. That all disappeared in the seventies with the losses.

118. Deputy Deasy.—Have your losses on the North Atlantic run ever tempted you to cut back on those operations?

Mr. Kennedy.—We have cut back on the operations very substantially. Within the past 12 months we have dropped Montreal and are endeavouring to sell our 707 fleet at present and concentrate on the more fuel efficient and cost effective 747 and also concentrate primarily on the New York operation.

119. Senator Cooney.—You had some labour troubles in the recent past. What is that scene like at the moment?

Mr. Kennedy.—As we said in our submission, and I would like to put it in context, in the history of the airline we only had one serious stoppage. By comparison with other airlines worldwide that is an extremely good record. Even during the course of that stoppage about 75 per cent of the operations kept going, and about two-thirds of the staff continued to work. But we have other problems. We are not immune from the kind of difficulties which exist in the Irish industrial scene today. One of our problems, which is touched on in our submission, is this question of different negotiating groups and relativities.

We have been working very hard to try to bring together these major union groupings within the airline, to get a common negotiation and to get away from these relativity issues which are causing great problems for us. We have been involved with the Irish Congress of Trade Unions, but, I regret to say, we have very little to report in terms of progress.

120. Senator Cooney.—Speaking personally—and I think I might be reflecting the views of a considerable number of people—there was a lot of admiration for your executives for the way they took off their coats and kept the airline running during that one strike.

Mr. Hayes.—Thank you very much. We believe a lot of the best possible type of public relations was generated at the time, because the staff showed their initiative in getting the job done.

Mr. Kennedy.—There is a lot more we can, should and must be doing to improve our productivity. One can show us in a reasonable light by camparison with other airlines if you make allowances for the difficulties, the size, the scale and so on, but the fact remains that we have to compete with bigger airlines and we have to be much more productive and effective than we are at the moment. There are a number of areas in which there are restrictive practices, lack of flexibility and rigidity built into the system which we have to try to break down, and this is a major priority as far as we are concerned in our dealings with the trade unions. It is also fair to say that we have some element of resistance to necessary change, perhaps “resistance” is not the right way of putting it, but attempts to exploit necessary change, to try to generate what most people would regard as unrealistic salary increases. These are problems of the community in general. We are in a high technology industry where we have to keep on changing and be that much more flexible and effective in using better technology. The imminence of problems of this kind is quite worrying for us.

121. Chairman.—Apart from the rate of wages, do you have more employees than you really need?

Mr. Kennedy.—If we could make the kind of progress I would like to make on restrictive practices and lack of flexibility on the one hand, and if we can implement, as we intend to implement, new technology, more computerisation in a number of areas, there are certainly savings and economies we could make in staff numbers but they would not be dramatic. I do not believe there is a gross element of over-staffing, but there is scope for improvement and saving.

122. Chairman.—With the introduction of new equipment or technology, it is sometimes alleged that Aer Lingus have far more employees than they really need, but by reason of public policy, or Government policy, they cannot get rid of them, they cannot let them go, they must keep them. Is that the position?

Mr. Kennedy.—No. I would not agree with that at all.

123. Senator Cooney.—Where have the 1,000 recruited in the last two years gone?

Mr. Kennedy.—Many of them have gone into ancillary activities and there has been a lot of growth in business in the last two years.

124. Deputy W. O’Brien.—Would you have had some retirements?

Mr. Kennedy.—Yes.

125. Senator Cooney.—Your slogan “The Friendly Airline” came in for some criticism lately. I cannot put my finger on the particular business magazine which said that the traditional level of friendly service from Aer Lingus was being departed from. Have you any comment on that, or do you consider that that comment is justified? Have you had difficulties in that area?

Mr. Kennedy.—I do not think it is justified. I am aware of certain shortcomings in our standards and in our service, but I would not have thought that that was an area in which we had slipped significantly. It is an area we cannot take for granted, and we do not. It is a very high priority with us—I was discussing it only this morning at a management meeting—as to how we can ensure that our frontline staff, in particular our cabin staff, are very well motivated.

126. Senator Cooney.—Have a high proportion of your hostesses married in recent years?

Mr. Kennedy.—Yes. Since the legislation changed a much higher proportion of them are married.

127. Senator Cooney.—What percentage are married?

Mr. Kennedy.—Guessing, close enough to 50 per cent. I do not believe there has been a significant change in staff attitudes and friendliness in handling the public. There are other areas where we want to watch very carefully what we are doing, but I do not think we have slipped significantly in that area. I believe our in-flight service compares more than favourably with our competitors anywhere.

Senator Cooney.—I agree with that.

Mr. Hayes.—It must be remembered that 20 years ago a trip to London took about two hours and there was plenty of time to chat with passengers. Now it takes 50 minutes and the staff hardly have time to push the trolley up and down the middle of the aircraft with 120 people on board. They do not have the time to work at being friendly. They just do their job. I do not think the service or level of friendliness has degenerated that much.

Chairman.—Thank you very much, gentlemen. I look forward to seeing you again.

The witnesses withdrew.

*See Appendix 1.

*See Appendix 2.

*See Appendix 3.