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, 17 Méan Fómhair, 1980

Wednesday, 17 September, 1980

AER LINGUS TEORANTA AND AERLÍNTE ÉIREANN TEORANTA

Mr. J. W. Varrier, Associate Director—Scheduled Services Division, and Mr. H. M. Clough, Product Planning Manager of Dan-Air Services Limited called and examined.

352. Chairman.—I thank the witnesses for coming along to help us. I will be glad to have the benefit of their experience in the Irish market and in the UK market in particular. I understand that the company have operations in many parts of Europe as well. Will the witnesses comment on the “Open Skies” policy which is being pushed in the US but which is regarded as not being particularly suited to Europe, although there are certain camps that would like to see it adopted in Europe?

Mr. Varrier.—In our view the CAB policy of total de-regulation has been almost explosive in its effect. It is not entirely an unmixed blessing even in the particular conditions of the US. It is necessary to distinguish at the outset that the conditions in the US are very different from those that pertain in Europe. In the US we are dealing with one cohesive nation: there are no international boundaries to be considered, there are six to nine major airlines all of substantial equality in terms of finances, resources, equipment and so on, who are competing for that business; there are long distances and a large population. Whilst there is developed surface transport in the form of railways and roads the distances and the development are a different picture from what we have in Europe.

Contrast that with the European situation where there are in the EEC nine member states with nine international frontiers and nine systems of air traffic control and only as yet a rather undeveloped attempt at a cohesive traffic control system; nine nations each of which has a national airline which is either wholly or substantially in public ownership. From those two comparisons it is obvious that there are powerful reasons why a total revolutionary de-regulation in Europe would be a near disaster. There should be a very controlled move towards de-regulation, and it probably cannot be total. In order to bring that relaxation about there has to be some form of political initiative taken by the Council of the EEC. At present, air transport between the member states is broadly covered by bilateral agreements about which Mr. Clough can speak. Those bilateral agreements cover not only the range and frequency of services but also control access to the market. There has to be some development in these areas if there is to be introduced into the European scene a greater element of competition.

353. Deputy Deasy.—Do I take it from that, that the company are in favour of some modification of the present IATA cartel?

Mr. Varrier.—I would not accept that there is any longer an IATA cartel following the change in structure of IATA. As the Deputy is probably aware, the old IATA system was broken into two parts, the trade association part and the tariff fixing part. The functions of the tariff fixing part have been substantially modified and it is now open to carriers to make a bilateral tariff filing without going through the IATA machinery. We are in favour of a measure of relaxation of control but we are firmly of the view that it has to be evolutionary and progressive and not done suddenly as was the case in the United States, because there is much that is good in the existing structure of air transport that could well be destroyed or considerably weakened if we went into a total abrupt de-regulation system.

354. Senator Hillery.—Is there a risk that service and frequency might disimprove if price competition becomes more intensive?

Mr. Varrier.—There is always a risk if the price competition is totally uncontrolled, as has happened on the trans-Atlantic and more recently on the Hong Kong routes. At home I would argue the other way. We in the British domestic scene obtained the Gatwick-Aberdeen licence to operate alongside our existing Gatwick-Newcastle licence and we have been able to introduce an element of price competition which quite clearly demonstrates that there has been an improvement in frequency, in service and in options open to the public.

355. Chairman.—You said Europe is a different situation and that there are complications there. You also said that “Open Skies”, or that kind of policy, should be adopted more slowly. Is that because of the difficulties of doing it? If it is a good policy in general in the US to have open competition is it not a good policy to have similar competition in Europe? Given that there will be complications, do you consider it desirable that there should be free competition?

Mr. Varrier.—I find that difficult to answer because one is in danger of answering in terms of principle. On the one hand one would be leaning towards free and unfettered competition but, being pragmatic about it, one is always inhibited in one’s answer by the knowledge of the practical difficulties and constraints that will undoubtedly exist for the next ten years or more. It is difficult to give a specific answer because of that.

356. Senator Cooney.—Am I correct in thinking that the constraints at this stage would be mainly political? Obviously commercial considerations will have to be solved. Which would be the major element, the political or the commercial?

Mr. Varrier.—Undoubtedly the major element is political but with a commercial flavour going back to the point I made, that most member states in Europe have national airlines wholly or substantially publicly owned.

357. Senator Cooney.—Arising from that, would you have sympathy with a flag carrier from an island country, which shall be nameless, that might make the case that because it is an island country the flag carrier would have loyalties to it that no other airline might have and it might be affected by more than commercial considerations? Would you accept it as a reasonable point of view that a flag carrier in that situation would have to get some political advantage that others would not?

Mr. Varrier.—It is incumbent on any island community to preserve its life-line routes. I am using the word in the context of our own-involvement on the Channel Islands. That argument is frequently put forward and is thoroughly sustainable. This is one of the reasons why we advocate that while there should be a relaxation of regulation there should not be total de-regulation.

358. Senator Cooney.—Those reasons would probably prevent it from ever happening totally.

Mr. Varrier.—That is a fair comment.

359. Deputy Deasy.—Is your company happy with the present air transport arrangements between Britain and Ireland?

Mr. Varrier.—No.

360. Deputy Deasy.—Could you expand on that?

Mr. Varrier.—It is necessary to outline our role in Ireland. We started operating into Ireland as a result of an approach made in 1976 by those connected with the development of Cork airport. We opened our Bristol-Cork service in April 1977. We developed that route cautiously and the following year opened the Jersey-Cork service. We then applied for the Gatwick-Cork licence. The licensing process was protracted and while that was going through British Airways withdrew from certain routes. We applied for and were awarded the Bristol-Cardiff and Newcastle-Dublin routes. The services on all those routes are governed by the existing bilateral agreement between the Republic of Ireland and Great Britain. That has affected us adversely in two ways. Having obtained the licence from the British Civil Aviation Authority to operate from Gatwick, as the second London airport, to Cork and Shannon, the terms of the air services agreement were applied against us in the sense that we were awarded traffic rights to Cork only and refused them to Shannon on the grounds that it was outside the existing bilateral agreement. The second area is that we have been obliged to apply the fare structure agreed by Aer Lingus and British Airways. We recently applied for a revised package of fares, including some reductions, on the new routes we are serving and on our established Cork route. As yet we have had no response from the Irish authorities.

361. Deputy Deasy.—There was a press report some months ago that you sought to charge a certain fare on a route between Ireland and Britain — I think it was the Cork Gatwick one—and the Department of Transport would not agree to the fares. It demanded that you charge a higher fare. Is there any truth in that?

Mr. Clough.—That position is true. It applied in 1977 when we first commenced the Bristol-Cardiff-Cork service. There were fares on IATA books. They were there because some years previously there had been a service by Aer Lingus but that terminated in 1971. Aer Lingus were able to carry passengers from Bristol-Cardiff to Cork via Dublin. We proposed to operate a direct service and the fare need not be as high as those on the books. We would like to have charged a lower fare but we were refused permission by the Department of Transport. In the event, a compromise agreement was reached whereby the normal tariff could not be reduced but we were allowed to charge a lower excursion fare.

362. Deputy Deasy.—Could you give details of the amount involved approximately?

Mr. Clough.—We can supply you with the exact amount, perhaps not at this moment but we can let you have it separately. This facility continues to be a problem. As Mr. Varrier has explained, Dan-Air have applied for approval to liberalise quite a number of fares on UK domestic services and also from UK provincial points to places in the Republic of Ireland. Holland and so forth. The requirement is that those fares be approved by the foreign governments in addition to the British authority. We have filed in the case of Bristol-Cardiff-Cork and in the case of Bristol-Cardiff-Dublin for a package of lower fares and we are waiting to hear from the Department of Transport whether they will allow this application. I do not know what the answer to that is going to be. All I can say in the light of experience is that we have found it extremely difficult to obtain the approval of the Irish authorities to lower fare proposals. We get the impression that they work hand in glove with Aer Lingus and that if it is against Aer Lingus interests it is likely that the Irish authority will not approve a different application.

I will make one further point. It has been mentioned that we plan to start the London/Gatwick-Cork service next year. In our studies we came up with the most favour-able result by combining Cork and Shannon together in a triangular operation that would give us the best financial result. The Irish authorities have refused us traffic rights so far, to operate into Shannon and we have only one of the two Irish points that we sought from London. We intend to start the London-Cork service next year. We would like to have our own tariff structure, but if I might be permitted a personal opinion, the chances of us filing for a separate tariff structure different from what Aer Lingus and British Airways charge and of that being approved in the present climate are remote. We are prevented from charging the public lower fares which would give the public a better deal.

363. Senator Cooney.—Do British Airways and Aer Lingus charge the same fares?

Mr. Clough.—Yes—under the terms of the Air Services Agreement. The tone which runs through that bilateral agreement is that there should be a single designation of one carrier by each country, and of course there is no competition between British Airways and Aer Lingus. Most of their services are in pool and they have regular marketing meetings to agree the fare structure which will be charged. There is no risk of one carrier introducing a different type of fare which would be more competitive than the other. They agree the fares, therefore there is no competition.

364. Deputy Kenneally.—Do the same criteria apply on the Dublin-Newcastle route even though Aer Lingus and British Airways do not operate there?

Mr. Clough.—That is rather difficult to answer for two reasons. One is that we have taken over the route only fairly recently. We took it over on 1 April and we have adopted the existing tariff structures, in other words the tariff structure which is on the books. Secondly, there is no competition really from Aer Lingus there because the nearest place to which they operate would be Manchester or Glasgow. Therefore, there is no reason why Aer Lingus should object unless they felt that they could influence traffic from the northeast to travel down to Manchester and travel on one of their services from Manchester. It is an academic question. However, we have the application before the Irish Department of Transport. They have not responded yet and I do not know how they will do so.

365. Senator Cooney.—Is the fare which the company have asked for Newcastle-Dublin the IATA fare which they found on the books?

Mr. Clough.—When we took over the service we took over the existing structure, the fare which is on the books. It is not really IATA because, although it may be agreed at an IATA forum, it is really sponsored by Aer Lingus and British Airways. They get together and they decide all the UK-Ireland fares before they go to the IATA conference and they merely table it and say that “we, the two national carriers, apply for this fare structure”, and it is then rubber-stamped.

366. Senator Cooney.—I made a mistake by referring to IATA. Is it a fare that was on the books?

Mr. Clough.—Yes.

367. Senator Cooney.—And the company decided to use that as the basis of their application. Did they do any studies to see if they could bring in a lower fare of their own?

Mr. Clough.—Yes. We have been on that route for only a very short period of time. But we have applied to reduce the fares on all the UK-Republic of Ireland routes that we operate, which are Bristol-Cardiff-Cork-Dublin and also Newcastle-Dublin.

368. Senator Cooney.—Would that include routes for which there are no other carriers?

Mr. Clough.—Yes.

369. Deputy Deasy.—Have the company at any time applied to operate on the Dublin London route?

Mr. Clough.—The position is as Mr. Varrier has said. Certainly we have considered the idea but we are under the impression at the moment that the Irish interpretation of the Air Services Agreement is that there should be single designation, which is to say that each country may designate one airline on this route. If I may elaborate on that, we have some experience of this because we have been licensed by the Civil Aviation Authority to operate on the route London/Gatwick to Cork-Shannon and the Irish authorities have refused traffic rights to and from Shannon. It happens that in so far as traffic rights are concerned, Shannon and Dublin are in the same Schedule and the Irish authorities have informed the Department of Trade, which is their equivalent on the British side — that their interpretation of the Air Services Agreement is that there should be “single designation” only. The British interpretation is different from that, but the Irish authorities have used a tariff provision to block the application rather than a specific point in the Schedule of the Air Services Agreement.

370. Deputy Deasy.—Are the company saying that they have not applied because they do not see any point in applying?

Mr. Varrier.—That is it in a nutshell. The criteria which the British Civil Aviation Authority apply when dealing with a licence application contains a reference to the likelihood or otherwise of traffic rights being granted by a foreign government. If the Civil Aviation Authority have reason to believe that those traffic rights will not be forthcoming then they are more or less obliged to reject the application. For purely pragmatic reasons — the work and the cost involved in preparing a case, employing a lawyer to present it for you and so on — if you know at the very outset that the chances are remote of your obtaining that licence there is no point in applying.

Mr. Clough.—The policy guidance to the Civil Aviation Authority is that they are permitted to grant a licence only when traffic rights exist already or where there are chances that traffic rights can be obtained.

371. Deputy Deasy.—Do the company believe that there is sufficient competition in air transport on the routes between Britain and Ireland at present?

Mr. Varrier.—No. We believe that there should be a relaxation of the system to allow a carrier, who is able and willing, to offer a wider range of fares or lower fares, provided they can be demonstrated to be profitable rates but not predatory. We believe that the time is coming when there should be an independent carrier operating on the London-Dublin route.

Mr. Clough.—We would be of the opinion that the public on the London-Dublin route are paying probably at least 20 per cent more for their fares than they need and in the case of London-Cork it is in excess of that amount. We can demonstrate that because we have a route which is broadly comparable. We ourselves this morning travelled on the Aer Lingus service, from London/Gatwick to Dublin. The flying time was one hour ten minutes and the aircraft type was a BAC 1-11. We operate a service almost identical in terms of aircraft, mileage and flying time from Gatwick to Newcastle. The round trip fare which we charge from London/Gatwick to Newcastle for the same flying time with the same equipment and for the same distance is £79 return, and we have a Pex excursion return fare of £42.50. In so far as London-Dublin is concerned the single fare is £50, with £100 return, the Pex fare is £55 and the Apex fare is £66. It will be seen that on London/Gatwick to Newcastle we are £79 as opposed to £100 charging on London-Dublin. Our Pex fare is £42 as opposed to the equivalent Pex fare for London-Dublin of £55 or the Apex fare, which is very similar with an advance purchase provision, of £66. So you can see those figures back up my contention that the public is paying 20 per cent more on the London-Dublin route than it need to do on a comparable route in the United Kingdom.

372. Senator Hillery.—May I take it that you can make a profit?

Mr. Varrier.—I would like to emphasise at this point that we are an independent company. We are quoted on the stock exchange. We depend for our very existence on profit so that any fare that we offer has to be cost related and have the potential to become profitable.

373. Chairman.—Is it profitable in the long term? It might be suggested that you are offering to quote lower fares on certain routes as an initial gambit to develop the route to attract traffic and that as soon as you establish your service you would put up the prices. Might it be suggested, in other words, that you are not really making much profit but trying to establish a new route?

Mr. Clough.—Let me answer that by saying that the route in question, London/Gatwick Newcastle has been operating since 1975, so we have been operating over five years and our fares have always been lower than British Airways. By way of example, again to illustrate the competition, we took over the Aberdeen-London/Gatwick route from British Airways on 1 November last year. Our single fare is £5 below theirs, £10 return. In fact, on the London/Gatwick-Aberdeen route we charge £51.50 and £103 return. The flying time is one and a half hours. British Airways charge £113 return. We currently charge an advance purchase fare except that we call it a Pex fare— because there is no requirement for advance purchase — of £56.50. British Airways equivalent fare is £76.50. You will see that their is a £20 reduction there. We offer hot meals on all our flights to and from Newcastle from London; British Airways do not. We are very proud of the fact that the Aberdeen service is what we consider to be the best service in the United Kingdom.

374. Chairman.—You are saying positively then that any of these cheaper fares which you suggested on the UK/Irish routes will be profitable, that there is no element of starting with cut price fares to get into the traffic or anything like that.

Mr. Varrier.—It would be accurate to say that we depend upon a fare mix on any given aircraft. We believe in a three-tier structure. the normal economy fare to be cost-related and pitched as low as we can reasonably make it with a profit element built into it. the Pex fare that Mr. Clough has described with minimal restriction designed to attract the leisure market predominantly and. lastly, we have a fare which is rather akin to a stand-by fare but with a booking facility. It is a last minute seat filler. Clearly the last minute seat filler is in no way profitable taken in isolation. It would be very wrong of me to suggest otherwise. It is the philosophy that £20 for that seat if it has been sold before the aircraft goes is better than no fare if it is not sold at all. But otherwise the other two fares are cost-related and are geared to produce a profitable operation on that route. Furthermore I would go back to the point I made in my opening remarks concerning the matter of relaxation rather than de-regulation; it is a requirement on us as a carrier when filing for a tariff structure on any route that that route must be demonstrated to be capable of becoming profitable within a build-up time of three years and that it must further be shown not to be predatory in the sense that the Chairman is suggesting. It must be shown not to be a lead in fare but something that is properly economically costed.

375. Deputy Deasy.—An expression has been used here in recent times, “fly by night operators”, who charge low fares initially to get a section of the market and then having done that they up their prices. But that expression has been used more in terms of the North Atlantic rather than in relation to anything between Britain and Ireland because the element of competition is not there at the moment. But are you saying that you would maintain these fares if you were allowed to fly on these routes on which you are prohibited at the moment?

Mr. Varrier.—I would ask you to look at our track record. First of all, our group, the Davies & Newman group, is a long established group in the City of London which started in ship broking in 1922. Our ship broking activities are still world ranking. We moved into aviation in 1953 and our company are unique —and I use the word with the utmost care —in that we are the only British airline which is still operating under the same name, the same management and substantially the same capital structure as the day that we started. We celebrated our silver jubilee in 1978.

376. Senator Hillery.—Could I ask you to identify what special features of your operations enable you in fact to offer fares substantially below those of British Airways or Aer Lingus?

Mr. Varrier.—It is generally accepted within the industry that we are a lower cost operator. We certainly present a leaner and perhaps hungrier aspect——

Senator Hillery.—Despite the hot meals?

Mr. Varrier.— ——despite the hot meals, than the national carriers. Staff levels are substantially lower than on the nationalised carriers. That is true of the majority of the European flight carriers. We exercise very tight cost control right through the organisation. I think you would agree if you have studied, as I am sure you have, the relative performance of airlines and I say this not to knock British Airways but to make my point; British Airways are often quoted as the world leaders in the numbers of staff they employ and they usually feature somewhere near the bottom of any list comparing airline productivity. That really is the principal answer. I would not dare to comment on Aer Lingus in those terms.

377. Chairman.—You do not fly the Atlantic?

Mr. Varrier.—No.

378. Chairman.—Is this because there are some technical reasons or because you do not consider it a profitable route?

Mr. Varrier.—We flew the Atlantic for a number of years on a charter basis—our company is about 75 or 80 per cent charter orientated. We realised that the Atlantic was not a market in which we could operate profitably. We ceased our charter Atlantic services about three years ago. We concentrate on the things that we believe we do well.

379. Chairman.—I have a list here of what seems to be most of the biggest airlines in the world, all experiencing very serious losses and so on. The argument which is advanced by Aer Lingus is that they cannot cut fares any longer because they are going to lose money and this is the experience of every big airline. They are all losing money and cutting fares is only going to accentuate that. Is your answer to that that they are just not operating as efficiently and as leanly and hungrily as you are?

Mr. Varrier.—That would be substantially true. In fairness to our competitors and indeed to ourselves, as an industry, we are passing through a very turbulent period in our very turbulent history. On the one hand we have factors such as the explosive de-regulation in America brought about by the CAB which has led to almost suicidal competition in the North Atlantic. This was the illustration I used when I made my point about a relaxation rather than a de-regulation. We have passed through a year in which our fuel prices have gone up by well over 100 per cent. In the same year we have had cost increases imposed on us by Government agencies in the United Kingdom in the sense of landing fees, air traffic control charges, security charges and so on. We have suffered the inflationary effects of wage settlements amongst all our staff which have ranged from something of the order of 15 per cent up to as much as 21 or 22 per cent.

That is one side of the equation. On the other side of that equation there is the current wave of consumerism which is pressing and clamouring for lower air fares. The airlines are in the middle. The pip will begin to squeak if not burst. We have chosen to follow a fairly cautious progression in our attempts to get cost-related and lower fares. We have seen on some of our own routes that where we have tried to take our fares up to match those costs we have met market resistance. The way to overcome that is to bring those fares back down again to a level at which the market will respond and to seek to fill your seats. We believe we have achieved some results from that policy.

380. Deputy Deasy.—The allegation is made by some national airlines that if an open skies policy is allowed, with de-regulation, there will be selective competition, with independent companies opting for the profitable runs, or the high density traffic runs. What would be your answer to that?

Mr. Varrier.—I believe that is an inevitable consequence of total de-regulation. That happened in the United States when some 30 cities that once had services no longer have them and the American carriers were clamouring to get on to what you have called the profitable routes. Yes. I think that is a risk. Again I come back to my earlier point, we do not believe in de-regulation. We believe in some relaxation to allow some greater access to the market for the independent carriers to provide a level of competition but still retaining some kind of governmental control over that access to the market.

381. Deputy Deasy.—Have you found the Civil Aviation Authority in Britain a sober body in that regard, in the sense that it has controlled the operations of the airlines, be they national or independent, and have you found it very helpful?

Mr. Varrier.—We have found it substantially helpful. I shall ask Mr. Clough to give his views in a moment. We have found it broadly helpful. Occasionally we have run up against what we believe to have been inconsistencies in its decision-making process. It would be difficult to call examples to mind on the spur of the moment. But overall our feeling is that the Civil Aviation Authority has exercised a very reasonable and moderating influence and, at the same time, has been working within Government policy.

To follow on from there, there is now a very clear sign that the British Civil Aviation Authority—consequent on the new Civil Aviation Bill currently going through Parliament — is moving substantially in the direction we had hoped it would. It is moving towards a lighter touch, if you like, in the sense of de-regulation but regulation will still be there. It will prevent access to the market by companies that are not well founded, that cannot demonstrate the correct levels of financial backing, equipment, expertise and so on. It will continue to exercise some control over pricing policy but, we hope, with a lighter touch which will enable people who want to be innovative in introducing fares to do so without the hindrance that we, as a company. have suffered over the past few years.

Mr. Clough.—I should like to elaborate on that. Certainly I would agree with the point Mr. Varrier made, that in the first place the Civil Aviation Authority on the whole has been very fair-minded. The CAA is an independent body. It receives certain guidelines through a mandate from Parliament under which it must work. But within those guidelines it is very fair-minded. The problem which we as an independent carrier have experienced in the past—and of course other independent companies also—has been the previous mandate, which the CAA has been obliged to follow. Parliament, through the various Secretaries of State for Trade— responsible for aviation matters in the United Kingdom — have issued what they call policy guidance to the Civil Aviation Authority in the past.

It is that policy guidance which has worked against the independent companies and prevented them from developing. Going back to 1970-71 there was a committee called the Edwards Committee which considered the whole ramifications of aviation and where they thought we were going in the future. At that time there was the State airline, British Airways, and a whole host of other independent carriers, a larger list certainly than there remains today. Their conclusion was that there should be competition and, as they saw it, this was best provided for by British Airways being given preference to operate the most important routes and for a measure of competition to be provided by one strong, independent carrier. They came to the conclusion that it seemed sensible— however unfair they thought it might have been — to designate one British independent carrier at that time to be the second force carrier. British Caledonian Airways were designated for that purpose.

Therefore the policy guidance throughout the past eight or nine years has been that, except in areas within the United Kingdom. which is to say in European areas and various other parts of the world, if there were competing applications a measure of preference should always be given in awarding a licence to either British Airways or British Caledonian. This has meant that all the lucrative routes which have been referred to went to those carriers and the remaining independents were left to pick up the pieces nobody else wanted. Now there is a different Government in power in the United Kingdom. They have a different philosophy although it would be fair to say that there has not been a very great divergence of opinions between the Labour and Conservative Administrations in terms of civil aviation. However the present administration have now proposed a new Bill, the Civil Aviation Bill. It has been through the House of Commons three times. I think it now requires the assent of the House of Lords and Royal assent but, once that is granted, the new Civil Aviation Bill will come into operation. The fundamental purpose of the new Civil Aviation Bill is that the measure of preference which existed previously will disappear. Also under the Bill British Airways will cease to be a State airline in the sense that it now is and will become a company in similar terms— there is a technical expression for it — to British Petroleum.

382. Deputy Kenneally.—Reverting to the fares structure, might I ask for a comparison in the Dan-Air operation? You spoke about a 70 minute flight between London/Gatwick and Dublin. How would that compare with a flight to, say, Norway, Sweden or France? Could you give me a comparison of the fare structure in that regard? What would be the comparison with a flight to, say, Bergen?

Mr. Clough.—We operate to Bergen from London and from Newcastle. I do not have those fares with me because I was not expecting questions in relation to them.

383. Deputy Kenneally.—I am wondering what would be the cost of an equivalent 70 minute flight to another country.

Mr. Clough.—The difficulties, as we see them, of getting Government approval from the Irish authorities apply also in the case of many European authorities.

Mr. Varrier.—If I may say so, the Deputy picked a very good point in that we subscribe to the view that air fares to Scandinavia likewise are too high. We are willing and anxious to reduce the economy level of fares on our routes, which we can do, and still remain profitable on those routes. We are prevented from doing so for exactly the same reasons which we outlined to you this afternoon: we have an air services agreement that was renegotiated between Great Britain and the Scandanavian countries as recently as a year or so ago with fairly tight constraints being imposed. It was an eleventh-hour agreement. The Scandinavians are as protective as, or more so even, than most other European countries. Therefore we have a major political problem there aggravated by the fact that they are substantially outside the EEC.

Mr. Clough.—Mr. Varrier was saying earlier that the ability to control fares is dictated largely by the provisions of the air services agreement. A classic example of this is that we were awarded a licence to operate a route between London/Gatwick and Munich. The licence was awarded towards the end of last year. Traffic rights were obtained about February this year and we commenced a service on 1 April. When we obtained the operating permit from the German authorities it specifically stated in the conditions that the fares will be those as approved by Lufthansa.

384. Deputy Deasy.—Obviously you welcome the EEC Commission’s report on air fares to the effect that generally they are too high.

Mr. Varrier.—Yes, in fact we contributed to that report. In February this year I spoke to the Transport Commissioner of the EEC in Brussels on that very matter.

Mr. Clough.—Of course the majority of these Governments seek to protect their national airlines. This is part of the problem with which the EEC is now getting to grips. Certain countries are more flexible than others. Surprisingly enough Switzerland is one country which favours a measure of less regulation, or a light regulatory touch in terms of fares. They would like to see air fares being reduced and will encourage airlines to do so. But the majority of other European countries adopt a posture of protecting their national airlines.

Mr. Varrier.—In our experience the most liberal are the Dutch.

385. Chairman.—Could you tell us the outcome of the agreement with Lufthansa or, have you got round to finding out what they have agreed to yet?

Mr. Varrier.—We were advised very early on that we were required to apply their published tariffs. That was made very clear. Furthermore. the sting in the tail of the granting of our traffic rights to Munich was the concluding paragraph which bore the signature of the German Minister for Transport, the gist of which was along these lines: “in the event that this new service is seen to harm German airlines we reserve the right to revoke these traffic rights”. That is a measure of the lack of competition which exists within the EEC.

386. Senator Cooney.—Might I ask a question with regard to the number of people employed in Dan-Air? We understand you have 3,500 persons employed in the Dan-Air group, including 1,500 in your engineering subsidiary. I do not know whether personnel comes within your field of activity in the company but could you give us some idea how your numbers of employees grow annually, or do they grow at all?

Mr. Varrier.—They have been static or declining slightly over the last two to three years. I must admit that this is not my particular field but, watching the figures that are published to me as a member of senior management, I think we are some 50 or 60 people fewer this year than last year and perhaps a similar number the year before. Beyond that I am afraid my memory fails me.

387. Senator Cooney.—And in those years your operations have been expanding?

Mr. Varrier.—Our operations have been expanding. Our total carriage of passengers throughout the airline has been running between 3,500,000 and 4,000,000 annually. It fluctuates by a few hundred thousand depending on the nature of the charter market. We have had a progressive growth in the number of passengers carried on scheduled services from of the order of 400,000 in 1978 to 519,000 in 1979 and. if we achieve our target for 1980. it will be something of the order of 610,000.

388. Senator Cooney.—In addition to the growth in passengers and particular services. you have been establishing new services over the last number of years?

Mr. Varrier.—Indeed we have.

389. Senator Cooney.—Have you been able to do this with a reducing or static staff, and with a fleet that comes to 47 aircraft?

Mr. Varrier.—Yes. I would have to look at the list to confirm the number but, substantially, yes.

390. Senator Cooney.—One last question: In the accounts of Davies & Newman, are the accounts of Dan-Air shown separately?

Mr. Varrier.—Yes.

391. Chairman.—You gave as a rough kind of guide to your thinking that, for instance, on the Dublin-London route passengers were paying 20 per cent more than necessary. Can you explain how you would offer lower fares?

Mr. Varrier.—May I qualify that, Mr. Chairman, for one moment on a matter of detail? There is a substantial element of cost in ground handling and I have to say that the handling charges which we are currently paying in Ireland are much the highest that we pay anywhere in Europe. Our 20 per cent reduction in that fare would, we expect, be reflected in handling charges at a more equitable level to the level which we pay in other places.

Mr. Clough.—What we are saying is that the handling costs will have to be comparable with those in the UK.

Mr. Varrier.—They are quite disproportionately high, to be very frank about it.

392. Deputy Deasy.—Can you say why?

Mr. Varrier.—I have no idea why. We have referred the matter to Aer Rianta and Aer Lingus. The chief executive of Aer Rianta some 18 months or more ago took up the matter on my behalf and came back apologetically, having satisfied himself that Aer Lingus were charging us in accordance with their own published tariff, so that there was no discrimination against us. It remains a fact, however, that those rates are amongst the highest that we pay in Europe.

393. Senator Cooney.—Do you do your own handling in some areas?

Mr. Varrier.—In some areas we do indeed do our own handling.

394. Senator Cooney.—But would you be prepared to do your own handling in Cork?

Mr. Clough.—Can I qualify that? When we say we do our own handling, in fact, the only handling that we are permitted to do at Cork, for example, is really passenger handling because a rather unique situation arises in that the baggage handlers, the airport loaders, who are normally employed by the airport authority, in Cork are actually employed by Aer Lingus. Unless you have economics which would justify having your own handlers, and there would need to be a very large operation for that, you must use Aer Lingus handlers.

Mr. Varrier.—If I may elaborate on Mr. Clough’s point, in answer to your question, we do our own handling, certainly, in those places where we have a sufficient density of services to make it economically justifiable. We would be unlikely to reach that situation in Ireland until we had perhaps, something like a London-Dublin route where we might be operating two or three times a day, where the throughput would justify the infrastructure necessary. Part of the economics of our type of operation is to buy in services that we do not wish to provide ourselves, at a sensible economic rate.

395. Senator Cooney.—To clarify a point, do I take it that the 20 per cent advantage that you could offer over the existing fares, Dublin-London, is based on a lower handling charge than the present one?

Mr. Varrier.—It takes into account a lower handling charge. I would not like it to get too exaggerated. The handling represents a percentage and the percentage effect is not overwhelming, but it is an example of the cost controls we exercise in stations which we control. We are suffering on our Irish operation.

The witnesses withdrew.

Mr. Michael Dargan, Chairman; Mr. D. M. Kennedy, Chief Executive and Director; Mr. Neil Gleeson, Assistant Chief Executive-Finance; Mr. M. Ó Riain, Assistant Chief Executive Commercial, of Aer Lingus Teoranta and Aerlínte Éireann Teoranta called and further examined.

396. Chairman.—We have asked you to come to see us again because there have been significant developments since we saw you last. We should like you to comment on the developments that have occurred, particularly the curtailing of services in certain areas and the reduction of fares. Fares are of particular interest to us because you almost convinced us on previous occasions that it was not possible to reduce fares. We should like to get some comments from you on why and in which circumstances you decided first of all to curtail certain services and at the same time proposed to reduce certain fares. We will direct our questions to Mr. Dargan and he can redirect them.

Mr. Dargan.—Mr. Kennedy has been handling these matters.

Mr. Kennedy.—I will start with the question on routes. The main change that has occurred since we last met the Committee has been the closure of the Chicago route and some cutbacks on services to the UK and continental Europe —cutbacks in frequency. The closure of the Chicago service has been under study for some time. In the memorandum which we submitted to you earlier this year we referred to an examination of that service. The poor results which we experienced this summer and the prospects for the medium-term period ahead have now persuaded us there was no possibility of being able to continue a year round scheduled service to Chicago. The closure of that route will save us in the current year approximately £500,000, and that, essentially, is the rationale for this. We do not regard ourselves in any sense as abandoning the Chicago route, because we will continue to maintain a sales office there and it is our intention to continue to cater for the traffic in Chicago and surrounding areas through the consolidators in that area, carrying the traffic either on our New York service or, possibly, in the summertime —in 1981 and other summers—by a charter service. Of course that is looking further ahead than we have in mind at the moment. Therefore though we will not have direct routes to Chicago this winter we do not in any sense intend to walk away from it.

The cutbacks in frequency announced in regard to other parts of our operations represent an alignment of capacity to our perception of what the market will be during the current winter. We have announced a number of cutbacks in frequency but there is no question of any other route being abandoned. At this stage I should like to refer to a matter which I regard as being relevant in this context. A British Airways announcement was published in the newspapers yesterday on steps they are taking in the light of the current difficulties of the airline industry worldwide. It is a remarkably close parallel to the kind of announcement we made last July. I have here an article from The Times of London yesterday and another article of today which refer to the British Airways situation and the airline situation worldwide. I will leave that with the secretariat so that it can be put into the record. In essence, British Airways are talking about a cutback in services of some 8 per cent in the course of the rest of this year. They are talking about a shortfall of revenue in the first five months of this year of about £100 million. They announced that, whereas last year they had a pre-tax profit in the first five months of that year of £42 million, this year they have a pre-tax loss of £17 million. They are also talking about reducing staff by 3,500 in the course of the current year.

397. Deputy B. Desmond.—In relation to the Chicago side, one newspaper, I think it was the Irish Independent of 29 July, reported that the Aer Lingus saving would be £1 million in a full year. Is the £½ million referred to the £½ million savings from November on?

Mr. Kennedy.—That is correct. In fact the projected loss on the route for 1980 on a fully allocated cost basis would have been somewhat in excess of £1 million. Cutting off the winter operation will save some £500,000 of that loss.

398. Deputy B. Desmond.—What about the winter operation? When one looks back, the company pulled out of Montreal last year and will have pulled out of Chicago from 1 November next. What would be the saving if the company were to pull out of Boston?

Mr. Kennedy.—Boston is a different case. Boston can be served even in the winter months by operating some of the New York services through Boston. It is a larger sales area, there is more revenue there than in the Chicago area and also geographically it is easier to serve. By continuing to operate into Boston in the course of the current winter we will incur some additional cost. However so far as the summer operation is concerned it makes economic sense to operate into Boston and to have some of our New York services through Boston.

399. Deputy B. Desmond.—Effectively, is the trans Atlantic service at the minimum that could possibly be operated?

Mr. Kennedy.—Yes.

400. Deputy B. Desmond.—Any other shedding would be tantamount to withdrawal. Is that so?

Mr. Kennedy.—Yes.

401. Senator Hillery.—On the question of the Chicago route, according to a recent newspaper report Trans-America are considering flying between Shannon and Chicago next summer. If they do, how will that affect Aer Lingus?

Mr. Kennedy.—That would depend on their frequency, on their fares and also on our success in the market place in persuading the public at large, and the consolidators, the major tour operators, that they should send their traffic by Aer Lingus. I mentioned two possible ways in which we intend to continue to service Chicago in the summer time. One would be by bringing traffic over New York and the other would be the possibility of having a charter operation into Chicago. I can assure the Committee that our sales people in Chicago are not just sitting down and saying that we do not have a direct service, so that is the end of it.

402. Deputy Deasy.—During a previous hearing I asked if the company had a press officer and was informed that they had. I have seen some of his work in the interim, for instance his reply to the editorial in The Irish Times on 8 August. I notice the press officer did not take up the man from Illinois who wrote to The Irish Times on September 3 criticising the proposed withdrawal from the Chicago run. This man, Mr. Joseph J. English, seems to ask some relevant questions and I will quote briefly from his letter to The Irish Times:

“It seems to me, as one involved in the hotel and travel business, that Aer Lingus’ efforts to meet the competition were belated and half-hearted to say the least. At no time did they match the NWO and TAA fares; the commission they offered to the travel agents was less than half that offered by the US carriers, and there was still no serious Aer Lingus advertising in the Chicago area.”

What is your comment?

Mr. Kennedy.—The press officer did answer some of the points in that letter in a subsequent letter that appeared in The Irish Times only yesterday. He made it clear that we regard ourselves as being in very serious competition with the other air lines in question and explained the basic rationale which we have touched on here previously for what we are doing in the North Atlantic, namely to concentrate our resources on the high density routes using the most cost efficient aircraft, which is the 747. Given the situation in which we find ourselves, the idea of concentrating our resources on a route which offered the possibility of year round service and where the advantages of the low-unit cost of the 747 compared to the 707 must be taken into account, we are sure that that is the right policy for us to adopt. One important matter to remember in relation to some of the smaller routes, such as Chicago, is that the aircraft which we used previously on this route, the 707 are in terms of size well suited to the market but they have been rendered almost obsolete in terms of cost purposes by the increased fuel cost. The unit consumption per seat flown on the 707 is about one third higher than on the 747. The substantial fuel price increases of from 40 cents a gallon to one dollar and 20 cents a gallon over a period of 12 to 18 months made the economics of the 707 disimprove drastically and that accelerated the process which had already been there in our approach towards the North Atlantic, the philosophy of concentrating our resources in the area where we could get the advantage of the low unit cost aircraft.

Mr. Ó Riain.—Those other carriers, such as North-West, may be able to serve Chicago with wide bodied aircraft because they also bring traffic in from the west coast, Minneapolis and places like that, to Shannon or the Continent of Europe. We just run between Shannon and Chicago. We try to fight them on their own ground as far as fares are concerned but the other airlines have greater flexibility in combining traffic like that and that other traffic is not open to us.

Mr. Kennedy.—It is worth putting on record that North-West in particular have been incurring very high losses in the course of the current year for the first time in their history and recent articles in the US press are querying the decision of North-West to go on the Atlantic in the first place as a decision which is costing them a large sum of money in terms of additional losses.

403. Deputy B. Desmond.—In relation to the Atlantic, it is two months now since the company introduced a special holiday fare of 446 dollars with a seven day minimum stay, and an add on fare of 99 dollars. How is that working out?

Mr. Kennedy.—We believe that it will be successful. The advance bookings are encouraging. The main feature is the 99 dollars add on which is something we have never tried before. It is a new concept and we are hoping to generate additional traffic to come to Ireland which would otherwise go to Europe. Now we can offer a very cheap access to Europe through our services.

404. Deputy B. Desmond.—Are people using it on the stop-over?

Mr. Kennedy.—They will be. It is being sold but is not in operation as yet.

405. Senator Cooney.—When you were with us before, we were discussing the North Atlantic. I gathered that you were making the point that competition had become so cut-throat that people who engaged in it would go to the wall. With regard to prices on the North Atlantic I asked you the last time if they were going to the wall and you said they were. Subsequently we were surprised to see that you had found some more cash. Whether these were real reductions or otherwise you might explain. Are you getting into the North Atlantic price war?

Mr. Kennedy.—We have been in it for years and we cannot stay on the Atlantic unless we are in it. What we have said on many occasions is that the general level of fares is far too low for economic operation. That remains the case. At the same time if one can come up with fare concepts which are not dilutionary, in other words, lower fares to which existing traffic will not transfer and which generate new traffic which can be carried on seats which would otherwise be empty, there will always be scope for them. That is what we have done. One of our winter fares announced is the weekend fare. That is not a new concept this year although the fare level of £165 return from Shannon to New York which we are charging this year is somewhat higher than last year. We believe that fare will generate additional business without having a dilutionary effect. The other fare which Senator Hillery touched on. 99 dollars add on fare, is in the same category. If one can come up with fares which fit these criteria of generating new business and not being dilutionary and which one can put in a shop window as the lowest fare in the market place it makes sense to do so even if, at the same time, the overall fare structure is not good enough for the economics of the business. This is what is happening in other markets. Everybody is conscious of the fact that there is a price war between London and New York. However that price war is concentrated only in a small part of the market. The main fares between London and New York. first class fare, ordinary fare. Apex, are going up all the time. The carriers have recently announced an increase of 14 per cent but that did not get as much publicity as the price war on stand-by fares. There are some signs in certain parts of the industry that there is an increased awareness of the need to get the general level of fares moving in the right direction. Last week North West filed a fare increase of 10 per cent across the board to Ireland and that received little publicity in Irish newspapers. That is getting the general level of fares up and is welcome. If one can bring in low fares which fit the criteria I have outlined that is not inconsistent with the view that the general level of fares is too low.

406. Senator Cooney.—Is the £165 weekend fare profitable?

Mr. Kennedy.—Yes, because it is generating traffic which would otherwise not be there. The traffic is travelling on 747s which in most cases would not be full.

407. Senator Cooney: If you have a 747 taking off which would have been empty except for the fact that you filled it with people availing of the £165 return fare would that be a loss?

Mr. Kennedy: Yes, if all the passengers were paying this fare.

408. Senator Cooney.—What are the other ones you mentioned?

Mr. Kennedy.—One is the weekend fare which we are selling in reverse in the United States. That is the same concept. The other one I mentioned is the fare for a passenger who travels with us from the United States to Ireland where we will sell him for 99 dollars extra a return ticket on any of our services in Europe.

409. Chairman.—The reason we asked you to come back was that we had to redraft our report because of changes which have taken place in the last two months. Can you say that you have reached the end of the announcements in regard to fares on these routes for the next few months?

Mr. Kennedy.—On the Atlantic particularly?

Chairman.—Yes.

Mr. Kennedy.—There is nothing significant on the Atlantic except for the question of our response to the NorthWest fare increase which we are studying at present. We will be announcing something on that very shortly.

410. Chairman.—As regards the North Atlantic, can we take it that there will be no more important announcements in the next few weeks?

Mr. Kennedy.—It is unlikely.

Chairman.—If it happens, please let us know.

411. Senator Cooney.—Is it correct that there has been no change of policy with regard to the North Atlantic?

Mr. Kennedy.—That is correct.

412. Deputy Deasy.—You announced on 1 April that you were increasing your return fare from London to Dublin to £99 and then in the last week or two you reduced it under certain conditions to £55. That seems a rather drastic reduction although it is welcome. Can you give any explanation?

Mr. Kennedy.—The basic rationale is similar to the answer I gave to Senator Cooney about the North Atlantic. It is consistent with the general fares policy we had over the years. We are catering for a number of different markets and there are different fares and conditions which are appropriate to each market. It has always been our policy to try to get very high load factors by the use of a sometimes complex but imaginative fare structure which satisfies the criteria I spoke about earlier. The £55 fare in relation to London is a particular example. It is not available on every flight. We are selling it on flights which traditionally have low load factors. For example, during the day we have a considerable number of flights between Dublin and London and there are certain flights which would tend to have most of the seats filled flying in one direction but only a low proportion of seats filled when flying in the other direction. It has the normal excursion-type conditions attached to it such as advance booking and staying over a weekend, and will be made available on flights for which we normally have difficulty in getting high load factors. We expect that it will generate new traffic and also will give a better spread of traffic on the different flights throughout the day.

413. Deputy Deasy.—Is there any possibility that the company’s fixed fare structure will be reduced?

Mr. Kennedy.—The problem here is that our unit costs are continuing to rise. Our fuel bill is going up all the time and we expect next year that our unit costs will be at least ten percentage points or so ahead of our unit costs for 1980. Also we see fairly stagnant market conditions likely in 1981. Therefore, the scope for reducing the general level of fares appears to us to be extremely limited. Indeed the requirement is far more likely to be one of having an increased yield, but I hope that within that increased yield there will be opportunities coming up for the kind of fares we are talking about which are geared specifically for particular market segments and which will not carry additional net costs. However, the overall situation in relation to fares — we are talking about the general structure —is that they are likely to go up.

414. Deputy Deasy.—The company probably are aware that we did have representatives of an independent air company with us here today and they are of the opinion that they could offer a 20 per cent reduction in the fixed fare rate between London and Dublin provided the standing charges were reduced from what they think are extremely high.

Mr. Kennedy.—That would not be consistent with what they have done on the routes on which they are operating.

415. Chairman.—I had better outline what they said. Dan-Air were the company and they said two things. First of all on a number of routes on which they did get licences to operate—these were Dublin to Bristol and Cardiff and Dublin-Newcastle—in each of these cases they had applied for permission to reduce fares of the order of 20 per cent and they were quite convinced that they could operate them profitably at less than the fare they were permitted to charge. They were not permitted to bring down fares and they were convinced that this was because it would not be in the interests of Aer Lingus and British Airways who prevented them from being allowed to charge what they were offering. They said that they did not apply for permission to fly from London to Dublin because they were convinced that they were wasting their time and they would not have any chance of getting a licence. They said that, judging from other routes which they fly, they were satisfied that they could charge a fare 20 per cent less flying between London and Dublin. These were the main points they made.

Mr. Kennedy.—Their record is that on the Dublin-Cardiff, Dublin-Bristol, Dublin-Newcastle and Cardiff-Bristol, fares they filed increases recently and those fare increases bring the fares which they are offering on those routes exactly in line with the fares which Aer Lingus charge on those routes. That is the record of what they did as distinct from what they say they would do.

416. Deputy Deasy.—That is what they told us. They said they had applied for a lower fare structure between Bristol and Cork but the Department of Transport would not allow them to charge the lower rate. Can you comment?

Mr. Kennedy.—Was that a number of years ago?

Deputy Deasy.—They did not give a time in this case but they said that they could do it economically at a lower rate.

Chairman.—They gave us the impression that it was very recent and that they were more than anxious to do it.

417. Senator Hillery.—They had a statement in the public press three or four months ago to that effect, that their application for a lower fare from Cork to Bristol had been refused by the Department of Transport.

Mr. Ó Riain.—On Cork-Bristol we should check our own side as to what the situation is. I am not aware precisely what happened there. The point has been made by the chief executive that on a route like Newcastle, for instance, on which Dan-Air have been operating for a few years, and on which Aer Lingus does not operate, that they are charging the same rates as the Aer Lingus charges to Manchester, Leeds and Birmingham. Dan-Air are getting out of Newcastle as much as they can get relating to the fare structure that we have to other points of the UK. About three weeks ago there was an announcement in the newspapers which took me by surprise, that Dan-Air were proposing to introduce new air fare structures on the Newcastle and Bristol routes to Dublin and this was represented by the newspapers as being a cut in Dan-Air’s fares to Dublin out of those two cities. We have studied their fare conditions and compared it with our own.

Taking the particular case of the Cardiff/Bristol fare proposals, they involved putting up the one-way normal fare from £44.50 to £46 and introducing a new basic excursion fare of £55 return compared to an Apex fare of £53 previously and a new peak excursion fare of £75 return compared to a previous £71.50.

All these fares are higher than at present. The only reduced fare is a one-way excursion of £23.50 with very strict limitations on availability. These restrictions are more severe than those we apply to our lowest Apex fare on the Dublin/London route of £55 which is comparable to their proposed new low fare in terms of rate per mile.

Dan-Air’s proposals really involve juggling around with particular excursion fares. We have changed some of our promotional fares and will be doing more of it and representing it as being new bargains for particular travellers. In general, however. Dan-Air are going for the maximum on the routes that they have open to them out of the UK. Moreover, they are operating 748 propeller aircraft compared to our jets.

418. Chairman.—Dan-Air say that the air fares between the UK and Scandinavia are also in their opinion too high. They say that they would be quite prepared and more than anxious to fly to one of the Scandinavian countries at something like 20 per cent less than they are permitted but again the Scandinavian government would not allow them.

Mr. Kennedy.—If I wanted Aer Lingus to get on a route and was finding some difficulty with the licensing authority on that route I would say exactly the same thing, that of course I can operate at 20 per cent less than is being charged at the moment. It is better to look at their actual record to judge what might happen.

Deputy Deasy.—They are on record as seeking a lower fare to Cork than was granted by the Department.

419. Chairman.—May we take it that Aer Lingus will not object to the application for a 20 per cent cut on the fares which they are obliged to charge now?

Mr. Kennedy.—Between Dublin and London?

Chairman.—The ones I mentioned, Cork Bristol, Dublin-Bristol.

Mr. Kennedy.—If they want to operate those routes at 20 per cent less, I don’t understand why they have increased the fares in the past few weeks.

Mr. Ó Riain.—I think I can say correctly that Dan-Air has not opted for reduced fares from Dublin except from a statement that we have just been talking about, a newspaper statement recently that they are going to change some of their promotional fares.

Mr. Kennedy.—In the case of Dublin-Newcastle Aer Lingus does not operate, so what you are quoting them as saying is not consistent with what they did in practice.

420. Chairman.—I think what they said about that was that it was being kept in line with other fares and that although Aer Lingus and British Airways are not directly involved they would not want to deviate from the normal pattern.

Mr. Kennedy.—The same carrier got a licence to operate between Cork and Gatwick after a lot of agitation this year and then did not operate.

421. Deputy Deasy.—Let me just clarify that. We were told recently that Dan-Air obtained a licence to operate a service between Gatwick and Cork as we have just referred to. The company hopes to start operating the new service in the summer of 1981. They have told us that they have not yet got a fare structure from the Department of Transport and that is the delay.

Mr. Kennedy.—They got that licence almost 12 months ago. They got it in plenty of time to operate in 1980 and they decided not to operate in 1980.

422. Deputy B. Desmond.—On the general situation in Aer Lingus you made over £4 million for the year 1979-80. You have now had six months of the current year operating. You did indicate to us strongly and you made a further statement indeed in presenting your annual report that 1980 would probably see the air transport industry record its worst ever results. How bad or how good are the Aer Lingus results now after six months trading? What is the loss? You have just done your six months now. What is it likely to be for the full year to April 1981?

Mr. Kennedy.—I find it difficult to put a precise figure at this stage on what the likely out turn for the year is because there are many factors which can influence it between now and the end of the year. For example, at the moment it is very much in the balance what our wage bill will be in the current year and that is very relevant. But I can say that we did of course have a strike during the month of June. I think I referred to it at the last hearing as having cost us about £6 million. We had originally been aiming at marginally better than a break even result so that would, with the effect of the strike alone, and if everything else had been in line with our original plans, have left us facing a potential net loss for the year of the order of £5 million. Obviously, with the way the industry has gone — the recession has affected Aer Lingus — we are now not on our original targets and are therefore likely to have an even worse result. But more than that, I would like to say our effort at the moment is to ensure that we hold the loss to an absolute minimum in the course of the current year and trim back the operation to the point where it is commensurate with the requirements as we see them. It is going to be a difficult task.

423. Deputy B. Desmond.—Would I be widely out of focus if I were to surmise something in the region of £10 million of a loss?

Mr. Kennedy.—It is difficult to answer because the first six months are always very different from the second six months. In the first six months of the year with our acute seasonality problem we carry a very large proportion of our traffic but a significant measure of our costs occur at a continuing and consistent level throughout the year so we obviously do better in the summer months than in the winter months.

424. Deputy B. Desmond.—September seems to be quite good. The tour operators indicate that September is much better. Certain routes seem to be holding up such as the Dublin-Paris route. They seem to be holding up much better than two or three months ago. Is there any prospect at all of a break even result in 1980-81?

Mr. Kennedy.—I would not see any possibility of that at all because of the effects of the strike.

425. Deputy B. Desmond.—And if there is a further national understanding that puts it out of the question. The loss will certainly be about £5 million as against £4 million or £5 million profit.

Mr. Kennedy.—It will certainly be at least that.

426. Deputy B. Desmond.—I have just a few other questions. Have you stopped actual recruitment?

Mr. Kennedy.—Not totally but very close to it.

427. Deputy B. Desmond.—Have you taken on any trainee pilots this year?

Mr. Kennedy.—None at all. That is not just related to the immediate current situation because the training of a pilot takes about 18 months but, looking ahead to 1981 and 1982, we see ourselves with a surplus of pilots.

428. Deputy B. Desmond.—What about the air hostess situation? Have you taken on any this year?

Mr. Kennedy.—We took on some.

429. Deputy B. Desmond.—That would account for normal attrition but overall is there no increase in staff this year?

Mr. Kennedy.—No. As part of our cutback we will be having a reduction in the total number of employees during the course of the winter.

430. Deputy B. Desmond. Will that be of the order of 200 or 300?

Mr. Kennedy. Yes.

431. Deputy B. Desmond. What is your retirement rate?

Mr. Kennedy. I do not have the exact figure.

432. Deputy B. Desmond. I am trying to get a rough idea of the total number of staff in employment. Overall you would be minus about 250.

Mr. Kennedy. Yes.

Mr. Ó Riain. There may be some recruitment for the skilled trades. We talked about it before. That would be included.

433. Deputy B. Desmond. Would this be the first year since the fifties that Aer Lingus staff figures dropped?

Mr. Kennedy. No. In the course of the last recession in the mid-1970’s the figures went down as well.

434. Senator Cooney. In the two years to March of this year you increased your staff by 824.

Mr. Kennedy. That is right.

435. Senator Cooney. Is that not a very big percentage increase?

Mr. Kennedy. That question came up before. A large amount of that increase was in relation to our ancillary activities. I am talking about ancillary activities within the airline and particularly our maintenance and overhaul operation where we had a very substantial increase in employment. I do not have the figures with me but I know that it is a very significant amount. Approximately half of that was to do work on behalf of other airlines. Furthermore our figures were artificially low in March, 1978 as we were in the middle of a strike and all our normal summer recruitment had stopped. The other 400 would have been related to growth in business in the order of 25 per cent which took place in Aer Lingus over those two years.*

436. Senator Cooney. This is not comparing like with like but you are operating a fleet of 22 planes and your Airmotive business as well. Dan-Air have a fleet of 47 planes and have also an air engineering subsidiary and their staff is 3,500. It is not growing. It is a static staff and they are all the time trying to reduce it. I see Aer Lingus have increased by over 800 in two years. If the company was worried about costs and faced with the present financial position it would seem to me that an airline with about 6,500 staff is overstaffed. Are you overstaffed?

Mr. Kennedy.—One of the reasons Dan-Air have fewer employees per aircraft is that we do a lot of their training for them. That gives us extra staff and them fewer staff.

437. Senator Cooney.—Presumably you earn a profit on it?

Mr. Kennedy.—Yes, we earn a profit on it.

In looking at these comparisons of staff numbers, inter-airline comparisons, one has got to be very careful that one is comparing like with like. I think we have been through this before. When one extracts the ancillary activities we carry out, the work we do on behalf of other airlines, and the work we do in-house ourselves, there are two factors at work. If we are doing work on behalf of Dan-Air it makes us higher than the norm and also makes them lower than the norm. Therefore, one has to ask oneself what is the policy of the airline in relation to doing work on its own behalf and also the extent to which they are taking in work from other airlines. When one extracts the 1,500 or so staff of Aer Lingus who would be employed doing work for other airlines—you asked us for comparisons with other airlines in Europe—on the whole Aer Lingus compares extremely well with these carriers. If one is looking at the number of staff per aircraft, compared with an airline like Dan-Air, one aircraft type is a 748 with a capacity of 40 passengers and another is a 747 with a capacity of 400 passengers. Such a comparison is meaningless and you are not comparing like with like. One must do an awful lot of research work behind the scenes to make fully valid comparisons and we have done a lot of this ourselves. We genuinely find it difficult to reach a firm conclusion because of all the facts that must be taken into consideration. But I am quite satisfied that in general on an inter airline comparison in Europe where all the factors are taken into account we stand up well. Our policy of generating viable employment in the community by selling services to other airlines is one of which Aer Lingus is proud. However, it makes us appear to have more staff than other airlines of comparable size on a superficial examination of such figures.

438. Senator Cooney.—Apart from inter airline comparisons, with regard to your problems are you satisfied that there is no level of over-manning in Aer Lingus?

Mr. Kennedy.—No, I am not satisfied of that at all. I never said that.

439. Senator Cooney.—Is there a policy to reduce staff?

Mr. Kennedy.—Yes there is. Again going over ground covered previously, there are two areas in which we could make significant inroads. One is in the area of increased flexibility within the organisation, with more people working across traditional boundaries as it were. With co-operation we could do a lot more in that regard and we are working very hard in an endeavour to get that co-operation. We could also—and again this comes back to the question of getting union agreements—do more in the area of increased computerisation. That is a major priority with us at present. Yes, there is no question but that there is scope for improved productivity.

440. Senator Cooney.—Am I right in thinking that basic to any improvement in productivity and a tight manning level is union agreement?

Mr. Kennedy.—Yes.

441. Senator Cooney.—Is it forthcoming easily? What has been your experience?

Mr. Kennedy.—Our experience over the past couple of months when we were working at a new level of intensity to try and cut down on waste and inefficiency in any area has been quite encouraging. Certainly within the organisation there is an increased awareness of the problems facing us, the gravity of the situation and there is by and large a commitment to try to work together to do something about it. On the other hand, we have not made the kind of progress we would like to see in relation to a general productivity agreement in relation to which we have been having discussions with the various unions. In particular this relates to the increased use of computerisation within the organisation. We are still working hard at that but have not made any significant breakthrough.

With regard to the general elimination of waste and inefficient practices that can develop over the years, yes we are making good progress there at present but there is still ample scope for improvement if full co-operation is forthcoming.

442. Deputy Deasy.—Has that been reflected already in improved financial performance?

Mr. Kennedy.—Yes, in reducing payroll costs and in achieving savings in other areas, I am confident that we will achieve the targets we have set ourselves in the current year, which are the revised targets we introduced a few months ago.

443. Deputy B. Desmond.—In relation to efficiency and the general facilities open to Aer Lingus, have you had any discussion recently with the new board of Aer Rianta about what I might call ground-level facilities for passengers and general assistance given to passengers. At lunchtime today I met two Americans who arrived at Shannon about 8 o’clock this morning on a direct Pan Am flight from Los Angeles. They were in transit to catch the Aer Lingus flight to Dublin at around 12.30 p.m. Because they were in transit they remained in the transit lounge and from 8 o’clock to 12.30 p.m. they could not get a cup of coffee or a sandwich. They were offered drinks by Aer Rianta—I would stress this because it is not the direct responsibility of Aer Lingus—which they did not want. They urgently needed a cup of coffee and a sandwich. That was their first impression of Ireland. They were a newly married couple on a first visit to Ireland. They will be going back with Aer Lingus to Shannon. I felt positively embarrassed when they told me. It appears to me that at a number of our airports where Aer Lingus must avail of Aer Rianta facilities that elementary kind of service to passengers is not available. Likewise I would point to the transit area at Orly Airport where Aer Lingus passengers have to suffer the consequences of the whims of airport staff attached to the French airports authority. Again, you could do very little about it, despite your duty officers best efforts. But Aer Lingus passengers travelling from Paris to Dublin cannot even get a place to sit down. They queue for hours on end waiting for check-in staff belonging to the French airports authority to turn up or awaiting security staff to check their baggage. This is an area in which I would strongly urge there should be greater liaison between yourselves and the new board of Aer Rianta.

Mr. Kennedy.—Like any other airline, we are a customer of Aer Rianta. We pay for what we get from them and we complain when we do not get sufficiently good facilities. The relationship with Aer Rianta in Ireland is obviously closer than with other airport authorities but it is essentially the same kind of situation as would obtain, say, at Orly Airport. We are just a customer of the airport authority and we do our best with them to ensure that the facilities are adequate for our passengers. As often as not the blame comes back on us when it is not at all our problem.

Mr. Gleeson.—That incident related by Deputy Desmond surprises me because normally that coffee bar at Shannon is open first thing in the morning when our flight gets in there.

444. Deputy B. Desmond.—Perhaps Aer Rianta opens for Aer Lingus, if they have to, but might not open for other airlines. Would this be the position?

Mr. Ó Riain.—No, the full lounge is normally going at full swing. They were leaving at 12.30 and transatlantic flights are outbound by that time.

445. Deputy B. Desmond.—Well, would they not have had to take their baggage, go through customs and then re-check back in?

Mr. Ó Riain.—No, it is in the duty-free area in the transit lounge.

Mr. Gleeson.—I too am puzzled about that story.

Deputy B. Desmond.—Well, I was furious because those people were hungry.

446. Deputy Deasy.—Would Mr. Kennedy have any comment to make on the letter to the Aer Lingus staff newspaper. Aer Scéala, by a Mr. Aidan Quigley—an extract from which appeared in Business and Finance in a recent edition—which stated that Mr. Quigley, a jumbo pilot with 35 years of service in the company, made some rather pertinent remarks to the effect that he is now a member of an organisation “bent on self-destruction”. He was reported as saying that Aer Lingus had become a company in which “we demand more money for less work”. It reported further that he said the company is rampant with trade abuses, go slows, walkouts, industrial threats, demarcation disputes, management diffidence and indiscipline.

Mr. Kennedy.—I think there is a certain element of overstatement in those remarks.

Deputy Deasy.—They are Mr. Quigley’s.

Mr. Kennedy.—Yes, I know they are. I am not attributing them to the Deputy but my comment stands.

I think he is reflecting the frustration and irritation many of the older, more senior members of the airline staff have had to face for many years in dealing with some of the problems on the industrial front which we have experienced recently and which have been extremely frustrating and have created many difficulties. Having said that, I feel that there is a substantial element of overstatement there.

447. Chairman.—Should there be any significant developments between now and the issue of the Committee’s Report on Aer Lingus, would you let us know?

Mr. Kennedy.—Could I mention, in that context that there is one item? We are looking in detail at our short-haul fares at the moment, not with a view to across the board reductions but with a view to seeing whether the different fare levels and the different kinds of product offered to the different market segments are appropriate. There may be some changes in relation to that.

448. Chairman.—Will they be relatively marginal?

Mr. Kennedy.—Yes, relatively marginal.

Mr. Ó Riain.—They might be seen by some people as dramatic breakthroughs and we will certainly present them attractively but in the context we are talking about they are variations within the existing framework.

Chairman.—Thank you very much, gentlemen.

The witnesses withdrew.

*See Appendix 7.