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, 23 Aibréan, 1980

Wednesday, 23 April, 1980

AER LINGUS TEORANTA AND AERLÍNTE ÉIREANN TEORANTA

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

Chairman.—We are dealing with ancillary services, tourism and future prospects today.

Mr. Hayes.—Would I be in order, Mr. Chairman, in saying that if you could give us five or six minutes we would run over the items that are hanging over from the last meeting, such items as the comparison with other airlines, capital structure, fares on the European routes, North Atlantic developments in the past few years and the staff number growth. That was one of the questions you asked yourself.

128. Chairman.—Would you like to do that orally or would you like to send us a memo on it?

Mr. Hayes.—We have it all in memo form but Mr. Kennedy would like to make a couple of brief points on each item.

Mr. Kennedy.—There were a number of queries raised by members of the Committee in the general area of staff productivity and of operating costs. We have prepared a memo which will be available to the Secretariat. We will leave it with them this evening. Perhaps I might summarise the main points in it. There was an error in the figures which were shown to us about our ticketing staff. The query was why we had such a high proportion of ticketing staff compared with other airlines. The short answer is we do not; there was an error in the figures, which showed us as having 40.8 per cent of all our staff under that heading. In fact the figure is 13.2 per cent, which leaves us very much in line with other airlines.

129. Chairman.—Was this an error of definition, or how did it arise?

Mr. Kennedy.—It was an error in the information you showed to us. I do not know how it arose. I do not think it was an error of definition; I think it was an adding up of two categories by mistake. This is the way it appeared to us but I do not know.

Secondly, the question was also raised of the total output per employee, that in comparison with a number of other European airlines with which a comparison was made Aer Lingus did not appear to achieve a high output per employee. We had made the point that this was related to the fact that, first of all we do a lot of work ourselves for other airlines which does not show up in the statistics for which we employ people. The other side of that coin is that we do most of our work in house ourselves rather than let it out to other airlines to carry out on our behalf. We have done some analysis on the effects of that and the extent to which this distorts the figures vis-à-vis other airlines, particularly the other airlines in question. On the basis of making the appropriate adjustment our production per head comes out at 113,000 units compared with the other four airlines figures of 105,000, 127,000, 110,000 and 155,000. So we are fairly well in the middle. But in fact the other point which we made last week was that this is not a very good index on its own. A more relevant index is the sales per employee, what we call the revenue tonne kilometers as distinct from available tonne kilometers, because we have a higher load factor than all other carriers in Europe, certainly the ones with which you were comparing us. We come out significantly better in the league table when it is done on that basis. The figures there show that we have 74,000, the other four carriers having 47,000, 69,000, 52,000 and 88,000.

The last point under that heading was the operating revenue per employee—the same kind of point applies here. There is a lot of revenue earned by Aer Lingus employees on activities other than air transportation. When one looks at the operating revenue per employee in a gross sense, taking into account all of the factors involved, we compare very favourably with all the airlines in question with the exception of Austrian which has an exceptionally high fare structure which distorts theirs. They have an average fare about twice the European average. That is the reason they were out of line there.

The general picture which emerges is that our productivity is in line with other airlines, and certainly not out of line with the four with which we were compared. There is also information which we have on unit operating costs made available on a confidential basis by all the European airlines. We have been able to plot this on a graph, not identifying individual airlines. The Aer Lingus position on the graph compares favourably in terms of being very much lower than the norm and significantly lower relative to the graph than the four airlines in question. That information has all been made available to the Secretariat.

On the question of staff numbers and the growth in staff numbers over the past couple of years, we are making available to the Secretariat information on that. Essentially the question was: why did we have over 800 more people in 1980 than in 1978? There are three factors involved. Firstly, we were understaffed at the time the comparison was made in 1978 because we were in the middle of a strike at the time and our summer recruitment was delayed. That accounted for about 150. Approximately 250 of the growth is related to ancillary activities. The balance of approximately 450 is related to the increased output we have had since 1978, which amounts to about 25 per cent. That is given in more detail in our documentation.

There were a couple of questions raised in relation to capital structure. We have put in a short paper for the Secretariat which summarises our views as to why we are unhappy with the capital structure. Essentially the point is being made that we are a commercial organisation and, as such, have to compete commercially. We have been advised by our bankers that on the basis of a commercial operation we are under-capitalised. We need to have not more than 50 per cent debt and that unless this is put right by the shareholders we will be in a position of being unable to grow, unable to replace assets when they come up for replacement. Effectively we will be unable to compete as a commercial concern in the market place.

We are also making available information on fares. The question came up of how our fares compared with those of other European Airlines. We have up-to-date information in relation to a very extensive comparison of fares out of London to a wide variety of points in Europe. That is the full normal fare. The question was raised also as to how our cheap fares compared. There is a separate sheet of paper we are submitting on that which we believe substantiates the points we were making last week.

Also we are submitting a paper on the North Atlantic which is an industry summary. When I say “industry summary” it is a brief summary of what has happened generally to the industry over the past ten years with particular reference to the most recent results in 1979. The main points we are highlighting in this regard are the problems which we in Aer Lingus are experiencing, problems shared by all airlines who have been operating on the North Atlantic, scheduled, non-scheduled, European, North-American.

We are also submitting the paper we promised on the study carried by the Federation of Irish Societies in the United Kingdom on air transportation, on travel costs and services between Britain and Ireland, and some other similar related material.

Finally we have something not by way of submission, which the Committee might like to consider. A number of questions were raised about IATA and their role generally within the industry, why we were a member of them and the pros and cons. I was talking last week with the Director General of IATA, Mr. Hammarskjold, who happened to be in Dublin at an airline meeting. If the Committee wanted to talk to him about IATA, about his perspective on the industry and about the difficulties of the industry he will be prepared to give evidence to them. That, obviously, is a matter for the Committee to decide.

Mr. Hayes.—These were the points which we found to be outstanding from last day.

130. Deputy Fitzsimons.—Will these be circulated?

Mr. Kennedy.—Yes, we have papers for the secretary.*

Chairman.—In the table that we gave to the company all the figures were ICAO’s figures. I cannot understand who went wrong.

131. Deputy Deasy.—Are all the figures wrong or just one figure?

Mr. Kennedy.—A couple of figures in that table were wrong.

132. Deputy B. Desmond.—Was it the ratio between employees and passengers?

Mr. Kennedy.—It was the question of the percentage of staff in different categories within the airline. Some of them were so far out of line that they would obviously be wrong. I am not sure where the error came from.

133. Deputy B. Desmond.—Particularly in the sales department?

Mr. Kennedy.—Yes, particularly in the sales department. We were shown incorrectly, and in the case of Finnair also, an incorrect figure was used from the source data. We have the source document which is the IATA source and we have made that available to the secretary.

Chairman.—It is not IATA. We got our figure from ICAO.

Mr. Gleeson.—We can identify the figures. They check out to the point where the 40.8 per cent can be got by adding together our ticketing sales and promotions staff of 838 and our ground handling staff of 1,760. If you add these two figures you get 40.8 per cent. Likewise for the other carriers, if you take the production figures and the employment figures given you can get all these figures but they are jumbled up rather badly.

Chairman.—We will check back on them anyway.**

134. Deputy Fitzsimons.—What is Aer Lingus’s view in relation to the proper balance between air transport and their other activities? Is 35 per cent a fair investment in ancillaries? Is it too high?

Mr. Hayes.—Like Topsy, it growed. We did not set out originally to have any particular percentage investment in ancillary activities. It happened because we were presented with difficult situations. Some philosopher has said that people can be divided into two types, one section who see difficulties and the other section who see opportunities despite the difficulties. With these horrendous difficulties on the air transport side we decided to go into ancillary activities and it might be up to 35 per cent, or even 50 per cent. We do not think it should go over 50 per cent.

Mr. Kennedy.—We do not see it as something which can be or should be defined by a precise mathematical formula. Since the function of ancillary activities is to support the air transportation side of our business we would not wish it to grow above 50 per cent. It would not be right for it to be above 50 per cent. We regard the ancillary activities as a means to an end. The end to which they are devoted is to earn profits, whereas in the case of air transportation that, of course, is the ultimate purpose for which Aer Lingus was founded. So we see ancillary activities as having correctly a subservient role to air transportation. Therefore, probably not more than 50 per cent would be appropriate, but it is something one should look at on a fairly pragmatic basis and we would be rather dubious about the validity of trying to develop a precise mathematical relationship between the two.

135. Deputy Fitzsimons.—In view of the fact that most of the company’s profits are coming from ancillary activities, is there not a danger that they might be tempted to concentrate more on that area than on running the airline?

Mr. Kennedy.—That danger exists. We are very conscious of that danger within the airline. We are organised in such a way that the risk of that happening is minimal. I have no doubt, and I do not think any of my colleagues in management have any doubt, that our main purpose is to run the airline. It is essential today and likely to continue so in the foreseeable future that we will have to have ancillary activities because of the profits which they make to underpin the uncertain results of the air transportation side. We are very conscious of the need to organise ourselves internally at management level so as to make sure that we do not forget we are an airline. I do not think that has occurred.

136. Deputy Fitzsimons.—In view of the fact that there is, at peak season anyway, an acute bed shortage in Dublin, and Killarney and places like that, should Aer Lingus not perhaps concentrate a little at home rather than abroad in this area?

Mr. Kennedy.—Yes, though one would distinguish between the two separate reasons for getting into hotel investments. The reasons we went into hotel investments abroad were purely and exclusively profit-related. We were not interested in the tourist infrastructure in London or New York. That was not our business. In so far as the Irish scene is concerned, we invested in hotels in Ireland in the 1960s. We have at the moment a 25 per cent shareholding in the Jury’s Hotel Group and we also have a 25 per cent shareholding in the hotel at Dublin Airport. The prime responsibility for providing hotel accommodation in Ireland is not ours but to the extent that we see a problem—and there are signs of problems developing in tourism in the next few years in certain locations in Ireland—then we might have to play some role in helping to prime the pump. However we would prefer not to take a leading role and to get into major competition with the other hotel operators and with private enterprise here in Ireland. That essentially is not our role but we have a responsibility to ensure that the infrastructure for tourism generally is correct. To the extent that it is not correct we might have to play a role as a minority partner again as we did in the 1960s.

137. Deputy Fitzsimons.—I was interested for some time in the company’s Canaries development. At what stage is that at the moment? I see that the company might intend unloading it. Is this so?

Mr. Dempsey.—That is at a fairly early stage. All we have done in our Canaries development is to put in what is called the infrastructure. In other words we have built the roads, we have put in the lighting, the water, the sewerage and so on. We have built no building. We have no plans at the moment for putting up any building. In other words, the project is at the moment in a state of suspension. The progress on it has been deferred.

The reason for this, without getting into too long an answer, is the change in the world economic situation and in particular in resort development economics compared with them at the time when we bought that land in 1973. It is now clear to us, and it has been for quite some time, that to erect hotel buildings, apartment buildings, and all of the usual facilities that would be put on a site like that would not be likely to produce a very satisfactory pay-off. For some time now, fairly discreetly because it is something that we do not want to become too openly involved in in relation to the Spanish authorities, we have been looking for buyers or part buyers. When I say “we”, I mean us and the other shareholders. Aer Lingus have 65 per cent of it and there are two banks involved, the Bank of Ireland and a bank in Spain, and there is a tour operator, Bray Travel in Ireland, also an investor. We have to ensure that the policies of the company are in line with those of all of the shareholders. Our posture at the moment therefore in summary is not to go ahead with that development.

138. Deputy Fitzsimons.—It is a white elephant, is it?

Mr. Dempsey.—I would not use that phrase, Deputy. It is a most beautiful piece of land. Some day somebody is going to develop it at a great profit. We had hoped it would be us but it may not now be us.

139. Deputy L. Lawlor.—The overall intent in the management of the finances of the company is obviously to get into the profit making situation in the ancillary activities to help fund the great capital requirements of the airline side but is there a lag period where the airline will be short of capital investment while the capital is going into the ancillary activities? Has that happened in the past and, regarding re-equipping with new planes and so forth, are you going to have a phase where you will not have adequate capital to invest in an airline activity because you are putting it into the ancillaries?

Mr. Kennedy.—In the first place, historically that has not occurred. We have not been prevented or inhibited from carrying out any investment in the air transportation side because of or in any way related to investments or borrowings which we incurred in our ancillary activities. It has not occurred as a matter of fact. Most of our borrowings for ancillary projects are borrowings which were raised specifically against that project and in most cases against the assets involved in that particular project. So there has been no case in which there has been as it were competition for capital in which the air transportation side has lost out.

Looking ahead into the future we see a continuing need to invest particularly in the more profitable sections of our ancillary activities. We see the entire ancillary activities programme as being self financing and in fact being a net cash contributor to the entire operation rather than the reverse, which is the question the Deputy is asking. At the same time one would have to say that the rules under which we are operating whereby all of the capital raised for ancillary activities is loan capital—and it is a 100 per cent debt finance—is a very severe burden. In terms of the total capital structure of the group it is one of the particular problems which we have to take into consideration.

140. Deputy Deasy.—Could you give us a list of your ancillary activities?

Mr. Kennedy.—Yes. At what level of detail?

Mr. Dempsey.—To give a general report here would necessitate taking both companies together. You have to look at both companies.

141. Senator Cooney.—Is there any contrary opinion in the Board or within management to further expansion into ancillary activities?

Mr. Hayes.—There is a discussion always going on at the board meetings on all sorts of things although we have a consensus on every investment we have made and the board have agreed unanimously. But sometimes I argue against things; sometimes other board members argue against things. It all depends on what the proposition is but there is no concerted opposition to any particular investment.

142. Senator Cooney.—Is there no philosophical objection?

Mr. Hayes.—There might be an objection here and there, for instance, for going to Spain. There might be an objection in going into something which is not quite as related to the airline industry as some of our ancillary activities are but there is a consensus and a 100 per cent agreement each time.

Mr. Kennedy.—At board level there has been explicit approval of a policy supporting the programme, which was put to Board by management, of a five-year plan for continuing investment in ancillary activities. The overall philosophy, the overall policy has, I think it is fair to say, the very strong support at Board and management level but then obviously, as the chairman says, when different projects come up inevitably questions are raised.

Mr. Hayes.—Of course if we did not have the successes under our belts, there would be an awful lot of extra questions and objections raised.

143. Chairman.—But if your only criteria is making profit is there not a danger that you may end up by being a conglomerate in all kinds of things and, although that might be a good idea from the point of view of making profit, it would also be rather risky? It would certainly hold very serious problems of management and control. Have you some philosophy as to how far you are going to diversify?

Mr. Kennedy.—I think that perhaps comes back to the question we had a few moments ago. I think at Board and management level we are very conscious of the fact that we ought not to be trapped into allowing ourselves to become a conglomerate. In all of our investment projections and in our plans we are not at any stage contemplating that the size of the investment in ancillary activities would be in excess of 50 per cent. We are very conscious of the point which you are making. We do not want to go in that direction. We do not think it is appropriate for us. We have no mandate from our shareholders to go in that direction and I think that at Board and management level we are very clear on that. We regard ourselves as being an airline first and foremost.

144. Chairman.—Would you say that you have reached or are reaching a situation where management is becoming a problem having regard to the fact that you have diversified even to this extent?

Mr. Hayes.—No, as long as we have the management, not the individuals maybe, because I suppose everybody is dispensable, but the type of top management structure that we have and the type of individual that we have. If suddenly we lost all our top management team and if they were replaced by anything less than outstanding people we would be extremely vulnerable and I would be terribly worried and concerned and the whole Board would begin to become very agitated because we would not have the trust and the confidence in the new people. Therefore, it is a very important question you asked, Chairman. All of us in business know that a huge amount of success depends on the individuals who are looking after everything and the Board have absolute confidence in the six, eight or ten top people in Aer Lingus on that point.

145. Deputy L. Lawlor.—You have a number of operations where you have a 50 per cent shareholding or less. How do Aer Lingus select people to represent them on the boards of subsidiaries where they have less than a 50 per cent shareholding? Take for instance the Jury’s Hotel Group, where you have a 25 per cent stake. Have you had to put in capital to fund their recent capital expenditure programme? How many of your executives are in directorship positions on the boards of your subsidiaries?

Mr. Dempsey.—Let me put it this way without going into too much detail. We have approximately 20 significant operating subsidiaries which are wholly-owned or held as to over 50 per cent. We have approximately eight significant associated companies where our shareholding is less than 50 per cent. We have approximately 28-30 people who sit on the boards of various companies. With the exception of myself and my deputy who are full-time associated with ancillary activities, there is no airline executive sitting on more than two boards. We review this very carefully and we believe that we have a fairly tight centralised control. This is a matter that is reviewed frequently by the Board of Aer Lingus. The people who are sitting on the boards are executives of the airline and we watch very carefully how these people are selected to ensure that nobody is particularly over burdened.

146. Deputy L. Lawlor.—Just another point about the 25 per cent shareholding. Had you to fund expansion in the hotel group in which you have a 25 per cent shareholding even though it might not have suited your capital investment programme at the time? To maintain your 25 per cent shareholding, had you to come up with funds to maintain your position in the group at that particular time?

Mr. Dempsey.—At the particular time the Deputy is talking about, I do not think so. Our initial capital, apart from some restructuring, is still the same. The plans the Deputy may be talking about are future plans.

147. Deputy L. Lawlor.—In Dublin they spent a lot in the past two or three years. In Cork they have embarked on a fairly major capital programme. Have you had to find 25 per cent other than the borrowings?

Mr. Dempsey.—No, but incidentally if we did we would look at that as an investment on its merits. In other words, if the Jury board came to us and said they believed they should have a rights issue, for example, and that our share would be X hundred thousand pounds, we would look at that investment in the same way we would look at any other ancillary activity investment project.

148. Senator Cooney.—Would you be called on to guarantee borrowings?

Mr. Dempsey.—We have not been, but if we were we would look at that also to ensure that that was not an unreasonable position for us.

149. Deputy B. Desmond.—This Committee, as the representatives of Aer Lingus will appreciate, are fundamentally concerned with broad issues of policy. We received a rather sparse submission from the Department of Transport on 31 January 1980. They said very categorically in their submission to us that the policy of developing ancillary activities with good potential was approved by the Department. They said that in 1970 the air companies adopted this policy and as a matter of historical record during the decade Aer Lingus is probably the one State-sponsored body which has most diversified. Has the Department or the Government at any time come to you and given the Government’s view on your developments? What is the liaison between your Board and the Department of Transport if you decide to adopt a certain policy on borrowings to finance ancillary activities? Is there a prior consultation, a prior contact or prior sanction? I am particularly interested in that area because it has very considerable importance for the general work of the Committee.

Mr. Hayes.—I would like to handle that in broad outline. My predecessor discussed the philosophy of it originally with the then Minister, Deputy Brian Lenihan, and it was endorsed that we should go into ancillary activities. From time to time as various Ministers have come our way, both my predecessor as Chairman, Paddy Lynch, and myself have always made it a point to have the Minister meet the Board as well as meeting the Chairman and ancillary activities have come up each time because we made sure it did. We have had broad endorsements of our policy every time, with no exception at all, no matter what Government or Minister was there. Mr. Kennedy will go into the nitty-gritty of how the individual things are dealt with by the Department and the Minister on a routine basis.

Mr. Kennedy.—The general practice which has been followed, without exception to my knowledge, is that if we have an idea for a new investment in a new industry sector, or a significant capital expenditure in an industry sector where we are already involved. we would discuss it in advance with the Department of Transport. In the event of moving significantly into new areas or major investments we would seek their approval and this has been the practice. We tend. I think, where we have something which is coming up, to work on the basis of discussing it in advance with the Department and briefing them on our thinking and finding out if they have any particular issues which they would wish to raise. If we are satisfied that we have a project with which we should proceed, having cleared it with our own Board, we would go to the Department and formally seek their approval for it.

150. Deputy B. Desmond.—In so far as there is a direct involvement with Department representatives at board level, what is the reporting procedure from your ancillary activities? To whom is the reporting made by Mr. Dempsey?

Mr. Kennedy.—Mr. Dempsey reports to me and I report to the Aer Lingus board. Mr. Dempsey also attends the Aer Lingus board meetings and the Aer Lingus board spend a significant amount of time at each of their meetings on ancillary activities.

151. Deputy B. Desmond.—Do the management representatives on the boards of the ancillary companies report directly to Mr. Dempsey?

Mr. Kennedy.—Yes.

152. Deputy B. Desmond.—Is there any broad data available as to the extent to which management resources are devoted generally to ancillary activities?

Mr. Dempsey.—Including myself and my deputy, Mr. Foley, who are members of the senior management team reporting to David Kennedy, and then onwards to the Board, there are ten executives in what we call the head office for ancillary activities for Aer Lingus. These ten people collate all the reporting coming up from the subsidiary companies or, in the case of an ancillary activity that is not incorporated, from a branch of a department within the company. For example, as I think you are aware, the maintenance and overhaul outside contract work for other airlines is not incorporated separately. It is a department within Aer Lingus that already maintains and overhauls Aer Lingus’s own fleet, so that is not a separate subsidiary company. But to the extent that they are doing ancillary activity work, reports from that department flow through the finance group in the airline and up to one or other of the ten appropriate executives I have mentioned who are totally and full-time devoted to the direction, coordination and liaison of the ancillary activities as well as carrying out overall financial control, in conjunction with their finance function within the airline.

Apart from that there are then, maybe another 25 to 30 executives in the company, as I said when I answered an earlier question, who have part-time involvement in specific ancillary activities, not for ancillary activities as a whole, but specific ones, people who sit on the boards of subsidiary companies or associated companies and, perhaps, give several hours a month to that company, sitting as it were, as Aer Lingus’s nominee director on the board of that company.

In addition to that, of course, there are the senior executives of our major subsidiary companies who are not Aer Lingus personnel. They are out on the edge of a circle, if you drew a matrix to try to describe this—people, for instance, like Jack Dunfey, the President of the Dunfey Corporation. He is not an Aer Lingus executive but he is, nevertheless, a senior executive working full-time on a particular and very profitable ancillary activity. Then there is the general manager of the London Tara Hotel, or whatever it may be. I do not know whether that helps the Deputy to understand.

153. Deputy B. Desmond.—Yes, indeed, I am clear on that. I am trying to correlate that with the Department’s submission. The Department did submit to us as well—I presume you have received a copy but if not we will make one available—a table indicating the profits realised from the ancillary activities for 1973-74 to date. The Department indicated in a separate sentence that the top figures of the table do not take account of interest charges. The question automatically arises: why not? To what extent will today’s high interest charges affect you immediately and how do they affect the profit table for 1979-80 and for 1980-81?

Mr. Dempsey.—The reason they do not include interest is not that we do not think interest is a proper charge at that level. It is a fairly common practice in business reporting to avoid trying to apportion what are called central finance charges. In other words many companies which have different product lines in different business sectors find it more convenient to raise a lot of their finance centrally, from central debt management and, therefore, when you come to try to apportion loans that have been entered into for the general good of the company between different activities, frequently you get some distorted results. What we do, which is in line with what I guess would be 80 per cent of current practice, is to report the pre-interest profits of each of the various sectors and then have one item for interest and then finally net profit. However, having said that that is the normal way of doing it, of course, we can attempt to allocate interest to different sectors.

To give you an indication, the reported profits for 1978-79, that is in our last annual report for ancillary activities, would have been just under £12 million pre-interest but post-foreign taxes, British tax and American tax in particular. The interest bill for the airline as a whole in 1978-79 would have been in the region of £4½ million of which one could reasonably allocate £2½ million against that profit of £12 million. Now, in this coming year the profit both pre-interest and post-interest will be bigger. We have not got to the stage yet of having audited accounts but that £12 million from ancillary activities, pre-interest and post-interest, will go up quite significantly in the year ended 31 March 1980 and the interest will go up quite significantly. The main reason for the interest going up is the point we touched on at the last meeting, namely, the transfer of most of the hotels in America from a lease situation to an owned situation. Therefore the interest will have gone up, and both pre-interest and post-interest profits will have increased.

We can allocate something in the region of £30 to £35 million of borrowings currently against ancillary activities. Some of those are specified loans and, therefore, the interest is clear. Others of them were not specific loans but central Aer Lingus loans and an interest allocation is less clear.

As far as your final point about the current interest rates is concerned, a high proportion of the ancillary activity borrowings are at fixed rates. For example the sterling borrowing for the London Tara which was raised in 1971-72 was a fixed rate loan, so that the amount of unfavourable impact of the current high interest rate situation is thereby minimised.

154. Deputy L. Lawlor.—What did our entry into the EMS mean for the company with the foreign borrowings that you have now and in view of future exchange fluctuations? Has it created any great difficulties or advantages?

Mr. Kennedy.—I think the entry into the EMS, as such, did not have any major impact. The fact that there is now a floating relationship between the punt and the pound sterling is something which does have an impact. We have substantial surplus of earnings in sterling currency—I think it amounts to about £10 million per annum—and, because of that, we have had a policy of favouring borrowings in sterling where we could match, as it were, the asset against the liability, or the earnings against the requirement to pay back the borrowings. If one takes fluctuations—and I think this is the point you are at—what does the currency fluctuation mean to us now? In terms of fluctuations vis-à-vis the dollar, it does not matter to us very much because our dollar earnings are approximately matched by dollar denominated expenditure. This arises from the fact that our fuel bills are all denominated in dollars. That about matches, so it does not matter very much in terms of our profit and loss account. In so far as the variations between sterling and the Irish pound are concerned, it is on the profit and loss account helpful to us if sterling goes up vis-à-vis the punt but it is unhelpful to us at the balance sheet level where we have to look to a long-term repayment of sterling borrowing. That is the balancing, as it were, so that the net effect over a period of currency fluctuations is, hopefully, kept to a minimum.

155. Senator Cooney.—With regard to future ancillary activities, in your submissions to us you indicated that part of your strategy is to plan for investment in new business sectors. Would you like to give us an indication of what way your mind is running in that regard or, perhaps, you would like to deal with it privately afterwards?

Mr. Haves.—One reason why we said that is, we are apprehensive about the fact that, in general, our activities have been so good that there must come a time when one of them will down-turn. Just because almost all of them are fantastically good now, does not mean that they will continue that way. We would like to have some eggs in another basket. Whether we want to talk about those eggs now or later is up to the Committee.

Chairman.—We will take it later.

156. Senator Cooney.—I have another question on the ancillary activities and it relates to the Tenerife project. How does Aer Lingus stand financially at the moment in regard to that project?

Mr. Dempsey.—The total Aer Lingus share at the moment is £1.2 million and we have also guaranteed borrowings of a subsidiary company of which we have 65 per cent, up to a limit of about £500,000. The figure is £1.7 million, if one included the guaranteed borrowing.

157. Senator Cooney.—How long do the company reckon it will take before there can be some move to getting out?

Mr. Dempsey.—I find it difficult to answer that question without wanting to appear that we have a problem about selling something we originally bought and thought was very good. We are not unduly concerned to dump it, as it were. It is not in that condition. We have an estate agent’s valuation. In fact, the auditors of the Spanish company ask for a valuation each year of the underlying asset which is this partially developed land in Tenerife, so that the balance sheet can be certified clean. We have an asset that we believe has maintained its value. We have spoken to between 60 and 70 major interested institutional and other potential buyers and co-developers, hotel companies, banks and so on and the unanimous response is that we have a beautiful site and there is no doubt that it is going to be a winner to which we say: “Would you like to come in on this?” The reply we get is that it does not quite suit their plans at present. If we could get a buyer tomorrow we would be quite happy to let him develop it from there. It may be that we would get a part buyer, in which case we would be quite interested in somebody who wishes to build a hotel, for example, or put apartment buildings on portion of the site, which is over 40 acres. It could either go quickly, slowly, partially or wholly. We are not unduly concerned. In the total context of the size of our investment in ancillary activities, it is not a major problem. It is not in that condition.

158. Senator Cooney.—I should like to turn to another activity, the Foxhills Golf and Country Club. Could you give us the genesis of that?

Mr. Dempsey.—The genesis starts in the early seventies at the beginning of our ancillary activities when we had the sort of encouragement that David Kennedy was referring to from the then Minister, Deputy Lenihan in 1972. At that point we made the investments in Foxhills and in Tenerife. We saw then, in common with a great number of others, a tremendous future, and profitability, for the leisure industry. Tenerife and Foxhills were conceived at the same time and bought within half a year of each other in order to earn profits from leisure developments. As far as the Foxhills project is concerned there are 400 acres of very attractive land 20 miles from Hyde Park corner in Surrey. It is owned by us to the extent of 85 per cent and 15 per cent by the Bank of Ireland. On this we have partially completed the developments. The original conception in 1972 was that we would have championship golf courses, a major sporting centre of tennis, swimming, squash and so on, plus a hotel for which there is planning permission. Because the world changed somewhat dramatically within a year or so of buying the land, with the quadrupling of oil prices and general deterioration of economic conditions, the leisure industry as such became somewhat less attractive. As a result of that we slowed down our investment. We prepared the golf courses first, completed them in 1975, and in 1978 we completed what we call phase 2, the swimming pools, tennis and squash courts and recreation facilities generally, restaurant, bar and so on. We have not gone ahead with the hotel. It is approximately five years since the golf course was first opened and the project is partially completed and operating satisfactorily. The profits we make from it, as we have reported from time to time, are not equal to the interest charges. However, they are not far short of it now. It is attracting members at a very good rate. It has both a membership club and a public golf course facility. We believe that while it has been disappointingly slow, this is because of the external conditions I referred to. It is also a fact that since we made that decision to go into the leisure industry, we have made a successful entry into the urban hotel field, particularly with the London Tara and the Dunfey chain in America. Therefore, our investment pounds as it were, have been somewhat re-directed towards urban hotel operation rather than resort hotel operation, because we believe there is more profit in the former. Foxhills has developed slowly and at the moment it is reasonably profitable and projections for the coming few years look quite good.

159. Senator Cooney.—The cost of investment in Foxhills you have submitted to us is £85,000 from Aerlinte and £15,000 from the Bank of Ireland and then very large interest free loans. Is there any reason for that strategy?

Mr. Dempsey.—We have used that strategy on a few occasions merely to give flexibility. A total equity investment locks the equity into the company. It is not always easy then to restructure the capital. From our point of view, and from the Bank of Ireland’s point of view, it seemed reasonable not to invest too much in the way of equity but rather let the company have this equity type of capital without actually classifying it as equity. If we had an interest bearing loan that would have had different implications.

160. Senator Cooney.—The company made a profit of £100,000 in the year ended 31 March 1980, and current plans call for a profit of £175,000. That would be a spectacular increase?

Mr. Dempsey.—Not particularly. I wish to make a point in relation to confidentiality here.

161. Senator Cooney.—Would you like to leave that until afterwards?

Mr. Dempsey.—I had better. A lot of our competitors would like to know the company’s thinking for next year.

Senator Cooney.—I had some questions on Dunfeys which I will leave to later.

162. Deputy B. Desmond.—On the general capital approach of the two companies, the company made £7½ million from the ancillary activities last year with an investment of £4.4 million. On a conventional basis, this seems to suggest that a substantial amount of capital is leased in relation to such services. With the recession, the high interest rates and the prospect that one or two subsidiaries can at any one time show a loss—is this a source of concern? Is the extent of the capital leased by the company in relation to such services very high?

Mr. Dempsey.—Very low. The amount of leased capital in the area the Deputy is talking about, in what we call, aviation related services—the maintenance and overhaul of other people’s equipment, engines, major components and aircraft, traffic handling. which is the handling of other people’s passengers, and freight at various airports around the world, and the Irish Helicopter operations—training flight crews and that general area—is small. In most of those businesses there is very little capital invested—leased or otherwise. If we tried to relate the profit to capital, we would get a misleading picture from that section of our annual report. One ought not to judge profitability from that section based upon what is really marginal capital. Most of the capital we have to invest for plant and equipment for maintenance and overhaul we need for our Boeing aircraft maintenance and overhaul. Not too much of it is specifically bought for outside work.

163. Deputy B. Desmond. I do not know the precise ramifications of the investment in, for instance, the Rathcoole plant. Where would this capital come in?

Mr. Dempsey.—That would be in there but, of course, the Rathcoole plant is still developing and will not be operational until the end or this year or early next year.

164. Deputy B. Desmond.—Is there any projected rate of return from Rathcoole?

Mr. Dempsey.—There is a very satisfactory rate of return projected.

165. Senator Cooney.—Have Aer Lingus set up another company in respect of the Rathcoole operation?

Mr. Dempsey.—Yes, we have a separate Company.

166. Senator Cooney.—Will that be wholly owned by Aer Lingus?

Mr. Dempsey.—Yes, 100 per cent.

167. Senator Cooney.—Where is the capital needed for that company coming from?

Mr. Dempsey.—As we see it at the moment, we believe on independent financial advice, that this is going to be a significant subsidiary, that it needs a very sizeable equity investment from the parent airline. This is not only important from a structural point of view but it also is important in relation to the grant aid that it will receive from the IDA. The figures, in very round terms, will involve a £5 million equity investment from the airline, grants of a similar or somewhat larger amounts and borrowings of up to £12 million. Those are the broad indications of the figures in that company. Those figures will be reached at the end of about four or five years. It will take quite some time for this plant to build itself up to its full capability. Apart from the initial purchase of the factory plant at Rathcoole, the conversion of that and the provision of finance, there will be a very significant amount of capital involved in what one would call working capital, the inventory of spares and all of the parts that will be needed in this engine rebuilding process. That will be a fairly hefty portion, that will build up according as the business builds up.

168. Deputy B. Desmond.—Are there any technical problems relative to the construction of the plant there? I remember Dublin County Council asking about the capacity aspects. We have some reports from our engineers about services, which have to be provided, such as disposal and so on. Have the company got over these problems?

Mr. Dempsey.—They are all solved, yes, and everything is going very well at the moment.

169. Senator Cooney.—Are there any question mark factors that the company have had to consider, weigh up and discount in deciding to proceed, anything that might come in to cause hiccups to this project later on? What factors could adversely affect it in years to come?

Chairman.—Is this in relation to Rathcoole?

Senator Cooney.—Yes.

Mr. Dempsey.—Mr. Kennedy has been very closely involved and may wish to add to this, but it is one of the projects that was carefully analysed over about a two-and-a-half year period before we made the final decision to go ahead, and it shows a very satisfactory looking return, apart from the obvious community benefits, that arise from investments of this kind. Like any business, the risks will fall under three broad headings. The first risk will be a failure of the total market. The supply of jet engines needing to be overhauled has to keep growing in total and has to be a big market for us to get a reasonable share. Secondly, within that market we could fail to get our proper share. So far, in the engine overhaul work we have been doing at Dublin Airport we have been very successful. We feel confident that our selling of our services in this direction will continue successfully, and that we will continue to get a reasonable market share. The marketing side is one risk obviously. This company is projected to have a turnover of about £40 million by the fifth year so it will be a very big enterprise. The second risk is on the production side, that our cost of production could be such that, in order to make a profit and return a reasonable profit on the capital investment, we may have a price problem. We clearly have to be very careful about our costs of production. That relates to our own control mechanisms making sure that we can control and manage the plant properly and also control what we have to pay for labour and material. There is that question mark.

That brings one into the third area which relates to the whole industrial relations climate. If in the community as a whole we seek to pay ourselves too much we will run into significant difficulty on what will be a very large labour force of 600 people by the fifth year. That could be a problem, so there are risks.

170. Senator Cooney.—With regard to the market risk, the company runs into this because they are already in the business. Do the company’s customers come from any particular group of airlines? I have a recollection from our visit to Collinstown that the work was mainly from the third world airlines. Am I right or wrong in that?

Mr. Kennedy.—Yes, the majority of them, but there is a fairly significant minority also coming from some of the smaller European airlines who are significant customers of ours. There are a number of customers from the UK and from continental Europe. Although not exclusively, we are predominantly involved in third world developing countries.

Mr.Ó Riain.—On the engine side, we are into more areas than the third world countries. We are expecting to have significant contracts from Germany and from Rolls Royce in the UK, who are supplying engines to us for overhaul. So we are not as dependent in Airmotive on third world business as we are in aircraft maintenance per se. I think we could say that the marketing of Airmotive seems to be improving all the time. We have a substantial number of contracts already virtually signed up despite the fact that Airmotive is not yet in production. Of all the items Mr. Dempsey was talking about, that is the one which we need be least concerned about.

Mr. Hayes.—To put Mr. Dempsey’s remarks another way, if in the next couple of years a third country or an eastern country or a low cost country, or all three things combined, suddenly got the technology to do all this cheaper than we can and if they had the marketing as well—these are combinations of all the horror stories and it happened in other industries around the world—we would be running the risk of being decimated in that plant. We do not think it will happen but it is a risk that we have to keep in our minds.

171. Deputy Kenneally.—Is there a problem in getting materials? I got the impression that you carry a huge stock of spare parts, something like £1 million’s worth. Is it that they are fairly difficult to get and you take them when they are available?

Mr. Dempsey.—They are not particularly difficult to get but obviously there are long lead times. Therefore one has to have a very sophisticated provisioning system. For the airline’s own needs, leaving aside the outside work, we have to have—and have had for many years—a very sophisticated spares provisioning system both to ensure that we get the right balance between the necessity not to have an over investment in inventories, which could cost a lot of money at today’s interest rates and, at the same time, not running the risk of having an aircraft sitting on the ground that cannot take off and be productive because a particular spare part is missing. So the balance between these two is the trick.

Mr. Ó Riain.—Might I add something to that? We are able to compare our spares holdings to the size of the fleet, that is, the ratio in Aer Lingus, to what obtains in other airlines. So we can read across the entire airline industry as to what would be a reasonable amount of spares to be holding for 14 B737s. Generally we come out on the right side. At the moment we are fairly advanced in introducing new computer systems which have as their objective the reduction of our spares holding by about 15 per cent, because it is costing us a lot of money to hold all those and the objectives of our new data processing installation at the airport is to get that figure down.

Mr. Kennedy.—There is a general problem of shortages of certain key materials in the aviation industry developing. A substantial majority of spare parts come from the United States of America and some of the materials have in the past six months become quite scarce and the situation is somewhat more fluid. There is more of a problem there now than there would have been six months ago.

Mr. Ó Riain.—It is the diversion of aluminium to the motor car industry in the United States that gave problems.

172. Deputy B. Desmond.—Have you sought assistance from the IDA?

Mr. Dempsey.—Yes, we have.

173. Deputy B. Desmond.—Could you disclose what they offered you?

Mr. Dempsey.—We have a commitment from the IDA which is a fixed amount plus variables relating to the cost outturn, and the sum of money involved will be greater than £5 million.

174. Deputy B. Desmond.—Any new industrial company of 600 workers, particularly in a skilled area, receives massive assistance in terms of training grants and so on. Are you going to get such assistance?

Mr. Dempsey.—Yes.

175. Chairman.—With regard to the Dunfey Hotels, you paid $37 million for the interest there. Is there any further obligation? Have you taken over any loans or is that the net cost to Aer Lingus?

Mr. Dempsey.—Yes. I would prefer to say that we bought into the Dunfey Hotels for three-quarters of a million dollars. The $37 million you are referring to is the purchase price of the hotels which was in exchange for the restructuring of the original lease obligations.

176. Chairman.—There are guarantees mentioned in this memo. There was an original guarantee of something like $20 million. Is that extinguished now?

Mr. Dempsey.—That is extinguished.

177. Chairman.—Then there is a new one of $15 million.

Mr. Dempsey.—That is right. Ten million dollars in relation to one of the hotels on lease to the landlord of that hotel and $5.5 million to banks who required a parental guarantee.

178. Chairman.—Is that the total of guarantees involved?

Mr. Dempsey.—That is the total of all guarantees.

179. Chairman.—But I cannot find these guarantees reflected in the Accounts?

Mr. Dempsey.—You would not because the Accounts you have are only up to March 1979. That document that we submitted brings it right up to date.

180. Chairman.—The chairman of Aer Lingus stated in the annual report for 1977-78 that ancillary activities continued to earn over 85 per cent of its revenue in foreign markets. Would that still be approximately true?

Mr. Hayes.—Yes, even more.

Mr. Kennedy.—If anything greater.

181. Chairman.—If you look at the Aer Lingus and Aerlinte combined group assets employed, on page 35, loan capital and bank borrowings have gone up by £32 million and there is extra equity of £15 million. Could you break that down in general terms?

Mr. Gleeson.—I would refer you to page 17, fixed assets for Aer Lingus and page 27, fixed assets for Aerlinte. I think you will be able to get most of it there fairly readily. It is mostly in Aer Lingus where it is gone up from £38 million, a consolidated figure there from £38 million up to £80 million, that is £42 million for additional assets. Primarily it is under the fleet and under land and premises.

182. Chairman.—That is the figure I had in mind. Is that the fixed assets of the parent company?

Mr. Gleeson.—No. I am looking at the consolidated figures. It includes the acquisition of the hotels under land and premises. They are gone up from £3.6 million to £16.4 million.

183. Chairman.—We came across an article in The Economist last year in relation to CIGA which seemed to be very alarming. What is the position about that?

Mr. Dempsey.—That relates to the earlier question in relation to one of the notes on our Accounts.

184. Deputy B. Desmond.—In relation to the overall hotel investment side—with relatively small equity participation—how does one assess the risk involved or how does one face up to it in terms of something going sour? Is the work done within the company in assessing the risk?

Mr. Dempsey.—Yes. I might be able to reassure you about a typical minority shareholding in a hotel. The reason why we have in a number of cases recently taken a minority stake in certain U.S. hotels is to avoid some of the risks that might be involved in making a major significant investment in any one property. From the figures the Chairman referred to earlier, $37 million, it can be easily seen that we have bought these hotels at a very inexpensive price, if you divide the number of bedrooms into that figure. We do not wish, as an airline and the subsidiary company does not wish, to get involved in the very high price per bedroom that one can nowadays pay. Therefore, the policy that we have adopted, with some success to date is to minimise our risks by taking a minority stake in the equity and to encourage other investors, using in many cases institutional investors for a variety of reasons—for their own investment purposes, their own tax purposes and so on—to be the majority shareholder, we in turn for our minority stake securing a long-term management contract. In the doomsday type situation behind your question, the rug being pulled from under us after a year or two if something went wrong in a particular location, competition next door or whatever, our position as a minority shareholder is very secure because in many cases we would have got back our equity stake out of the management fees in the first couple of years. If the worst were to happen and we were to lose our equity stake we would still be well protected.

In addition to that we negotiate, not only in the hotels sector but in all cases, fairly toughly, we believe, shareholder agreements. The majority shareholders cannot do such things as sell the hotel, greatly change the policy of the company, fire the general manager or other major matters without consulting with us as a minority partner.

185. Deputy B. Desmond.—Leaving aside the American situation and going on to the European end, you have the Commodore and so on. As regards mainland Europe, are you in a more comfortable situation in Paris in terms of, say, the Commodore and do you intend to extend?

Mr. Dempsey.—Yes, we are in a comfortable position. That is a wholly-owned position and not a minority situation.

186. Deputy B. Desmond.—You have considered a hotel in Brussels?

Mr. Dempsey.—We have considered hotels in many European cities and we intend, as it is very much part of our policy, to have hotels in other European cities. We looked for arrangements of the kind which we have been successful in securing in America, namely to expand in Europe in a similar direction by taking minority positions and securing management contracts.

187. Deputy B. Desmond.—I notice there is refurbishing going on in the Commodore. Is that part of your lease agreement? How deeply embedded are you in the management structure of that hotel?

Mr. Dempsey.—Completely. We bought the lease. We are fully involved. The management who are virtually the same team as were there before in the previous hotel, are now reporting to us. We set up a separate subsidiary company to control the direction and operation of that hotel. The money for the refurbishing you speak of, in the lobby, on the outside and in general other areas and which hopefully, you will see more of in the future comes from our budget. In other words, we allocated a certain number of francs as a renovation programme, because the hotel needed a facelift.

188. Deputy B. Desmond.—I was interested in your Paris traffic. Is a substantial charter programme being ferried into the Commodore?

Mr. Dempsey.—The Commodore is being sold through packages out of Ireland. It is being sold through packages out of the London Tara and is keyed in to the American reservations network. We are feeding business into the Commodore from London and from Dublin.

189. Deputy B. Desmond. Are you happy with the way it is going?

Mr. Dempsey.—I will be happier when it makes more profits.

190. Chairman.—When you say you bought the lease, you mean you bought an interest in the lease? You have not a freehold? You are buying the interest in a long lease?

Mr. Dempsey.—We do not own the freehold. An insurance company is the freeholder. The previous owners, the Joe Lyons Group, had renegotiated the lease which expired in 1978. They renegotiated another seven years and we bought that from them with, effectively, key money. But although it only has a seven-year term the rights of renewal are with the Lessee.

Mr. Ó Riain.—Going back to Deputy Desmond’s initial question about how we assess the risks of our investment, we try to spread our hotels geographically and not concentrate merely in one area. That is related to the policy you have been talking about of opening hotels in the mainland of Europe. In addition there is the point that we are looking for urban hotels rather than resort hotels. These are all part of the considerations being put together in trying to minimise our risks in the whole hotel venture.

191. Deputy B. Desmond.—With your investment in the tour operators, the travel agencies and so on, how do you resolve the internal conflict of charter pricing and scheduled pricing? Surely there must be a problem internally?

Mr. Kennedy.—We do not really regard that as an ancillary activity because the reason why we are involved in tour operators and travel agencies is more related to the way in which we sell our air transport product than to the objectives of ancillary activities, but that is really an aside. In so far as tour operators are concerned, and one is talking presumably about the Irish market because we have tour operators in other markets as well, in Continental Europe and in the United Kingdom, they operate at arms-length from the airline. At the time the two major operators involved, Blueskies and Sunbound, were acquired by the airline in the early seventies we came to an arrangement with the Irish Travel Agents Association that they would operate on a full arms-length basis and have their own profit targets and profit objectives apart from the parent company. This is the way they have operated consistently. When appointing board members to these subsidiary companies we take great care that we would not appoint anybody who was involved on the sales side of the airline itself. We are not conscious of any feeling among the tour operators in the private sector that they are competing unfairly, or are involved in a privileged position because of their ownership. We do not allow that to happen. The pricing of charter services is decided by Aer Lingus on the basis of ordinary market considerations. Obviously the competitive consideration with other carriers is an element in this. We do not offer any special deals or make any special arrangements with our own tour operators. They operate genuinely on an arm’s length basis from us.

192. Senator Cooney.—In regard to the risks in hotels, Mr. Dempsey indicated how that is taken care of where there is a minority interest. Where you own hotels totally, I suppose you operate in the same way as any other hotelier?

Mr. Dempsey.—Yes, except that we could argue that we got both those hotels at a very good price. One of the major problems with hotel operation is the financial side.

193. Senator Cooney.—I was going to ask you that question. The price you paid for all these hotels in the United States seems low. I am not in the hotel business and I do not know that that is so but that is just a comment. Was there anything about the age of the hotels or the condition of the furniture or equipment? Did they require extensive refurbishing or rebuilding or revamping?

Mr. Dempsey.—No. I will try to explain it in as uncomplicated a fashion as I can. This is quite a complex story. In 1974 an intermediary came to us and said there was a possibility that an U.S. hotel company in the New England states was available for sale for a certain price and asked if we would be interested in buying it. We heard the figure and were not very interested in buying. After a number of other conversations we said we could be interested in looking at it, provided some lease terms could be negotiated. The owner of this hotel company was Aetna Life and Casualty Company, Hartford, Connecticut, a very major life company in America who had bought the hotel-chain about four years earlier. It was a successful New England operator which had been in the business since 1954 and had built up a good profit record. Aetna had taken the decision to diversify for a variety of reasons which I need not go into. Four years later they reversed that policy decision. Effectively, that is what happened. They felt that they wanted to get out of the hotel business. From their point of view they took the decision at a very difficult time because hotel operators in the United States in 1974 and 1975 were performing very weakly. They found it difficult to find a buyer. They found us and we negotiated a very complicated and, from our point of view, very beneficial lease. We did not take any of the hotels in an ownership situation, we took them over as a lessee with rentals more or less related to profits. That had a 20 year life, with various extensions for another 15 years. Effectively it was a 35 year lease. Within the first three years the terms were particularly beneficial to the lessee. At the end of two years the landlord—the Aetna company—come to us and said: “This lease is very difficult and complicated and will mean we will have very complicated and difficult discussions over the years. Would you be interested in taking it from us? Would you like to buy the hotels?” Our reply was “Yes, we could in principle, provided we could negotiate a financial package which means that our annual outgoings to you will be no higher, preferably lower, than the lease rentals we would otherwise be committed to pay you”. As it happened again—and I am not sure I should be describing this as luck from our point of view—they were again in a weak position. They were able to swallow a capital loss on their books in 1978 because their profits from their basic business of life insurance, were so satisfactory. We did a deal with them which was effective from the end of December 1978 and therefore was incorporated into our accounts in March 1979. We took over the ownership of the hotels, which were previously leased at a price way below the then market price and is even further below the market price at the moment. Long-term financing at fixed interest rates in the single figure area means we have a buying price, one of the key factors in hotel economics, which is very low. That is a very brief version of how we got to where we now are—a sort of double deal which could not be repeated.

Chairman.—We are running very late. We have not even reached tourism and we want to hear about future prospects. May we move on to tourism?

Mr. Kennedy.—May I interrupt for a second?

194. Chairman.—Yes, is there something you want to finish on ancillary matters?

Mr. Kennedy.—There is a point I was reminded of by what Mr. Dempsey said. It goes back to the very first question Deputy Desmond asked in relation to the process of approvals at Government level. The understanding of the Department of Transport is that when we put a particular project to them for approval, they will normally restrict their perspective on it to what one might call the policy aspects of it. They regard the assessment of the commercial viability of the project as being primarily our responsibility, and it is our fault if it goes wrong. In other words, it is not perceived to be a function of the Department or the Government to exercise themselves with the detailed commercial evaluation of individual projects. That is a responsibility of the board and the management of the airline. They are concerned with policy and issues of principle where investments are concerned.

195. Deputy Kenneally.—What in general terms is the involvement of Irish tourism with the national airlines?

Mr. Kennedy.—We are very deeply involved in tourism in the sense that we have the dominant role in carrying overseas visitors to Ireland.

196. Deputy Kenneally.—What is the position vis-à-vis other airlines?

Mr. Kennedy.—Approximately 62 per cent of all tourists arriving in Ireland by air travel with Aer Lingus, 38 per cent travel with other lines. Forty two per cent of those coming from the UK, travel with Aer Lingus. We see our role as being essentially the providers of regular, reliable, safe, economic air transport. We also see ourselves as having a role, not just in serving tourism by providing part of the facility to get people here, but in the promotion of tourism, in which we play a very large part. I am not sure if you want me to expand on that latter point.

197. Deputy Kenneally.—Which routes do you go for and are they profitable?

Mr. Kennedy.—The most important routes would be London, Birmingham, Glasgow, Paris, Frankfurt, Amsterdam, New York and Boston. With the exception of Boston, they all cover their operating costs and most of them would be among the most profitable of our routes.

198. Deputy Kenneally.—Would you operate fewer services and charge higher fares in some of the routes if you were not concerned about tourism?

Mr. Kennedy.—There is not really a conflict here in practice. As a matter of principle we operate a particular route network on the basis of its commercial viability. But this rarely turns out in practice to be a contrary objective to the one of serving tourism. The one exception, I suppose, is that we have taken the initiative in developing services from continental Europe to Cork and Shannon, which were of marginal profitability in their early years. We see these in terms of long-term market growth and being viable in the long term. We do not introduce any new services unless we are satisfied that they have the potential to be commercially viable.

199. Deputy Kenneally.—Do you subsidise fares, and to which country? Is there justification for that?

Mr. Kennedy.—I am not sure what you mean by subsidising the fares. In a sense we do in that all our ancillary activity profits help to keep the airline operation afloat at the moment. Our fares policies are determined on the basis of market considerations and commercial considerations. We do not have any formally defined objective or implied objective of taking a loss on certain services or certain routes because there is a substantial tourist element there. It does not work that way.

200. Deputy Kenneally.—Have you had discussions with Bord Fáilte?

Mr. Kennedy.—We have had many discussions with Bord Fáilte in relation to pricing policies, in relation to development of new routes, on promotional programmes of market research and a whole range of activities.

Mr. Hayes.—To illustrate, if I am travelling to London on a business trip for two days I might be paying £90, and I might be sitting next to a tourist who has his holiday planned for three months and he might be only paying £55. So it combines the tourist interest and the business interest in the one plane.

Mr. Kennedy.—The point here is that the large range of discounts on promotional fares which we have, serve the tourist interest, but they also have a sound commercial basis, because they enable us to fill seats and operate with consistently higher load factors than other airlines. We would not be able to have so many seats filled if we did not have a very aggressive policy of promotional fares across our various markets.

201. Chairman.—Although there may not be a conflict of interest now, would you accept that there was to some extent a conflict of interest some years ago as between Bord Fáilte and your Board in the sense that you were not providing special fares which would encourage tourism, and by not providing them you were in effect discouraging tourism?

Mr. Kennedy.—Like many things, newspaper reports of conflicts between ourselves and Bord Fáilte were greatly exaggerated. Obviously there have been differences of approach in relation to particular markets and how best they can be served, but my direct experience, which goes back to 1974, is that it is very rare to have a serious difference of opinion between ourselves and Bord Fáilte. There are differences of approach but we get together and sort them out among ourselves.

202. Chairman.—But it is true that your fare structure has changed over the years. Certainly from the Bord Fáilte point of view, perhaps, improved, but have you a fare structure now which is more likely to encourage tourism than you had seven or eight years ago?

Mr. Kennedy.—Yes. That is probably a fair point.

203. Chairman.—Is this not due to the fact that one had to do something to compete with charter flights, and you did it by having special fare structures?

Mr. Kennedy.—Yes and no. It is fair to say that we have followed a very aggressive promotional fares policy in the past seven or eight years. But if one takes, for example, the continental European market, that is, incoming tourists from continental Europe to Ireland, it has been developed very largely by ourselves without any competition from anybody on the basis of a wide range of innovatory fares, innovatory in so far as the entire industry is concerned, such as the fly-drive type packages which we have developed. The inclusive tour business from the major Continental points to Ireland over a five year period in the middle of the 1970s went up by about 200 per cent. In so far as the UK is concerned, again there has not been aggressive competition from charters, but we have come up with a number of promotional fares, weekend fares, special excursion fares, all-the-way fares, spouse fares, APEX fares, inclusive tour fares, all of which, it is fair to say, were introduced by us rather than by British Airways because we believed they were required for the market and we believed the economics of our business as well as the cause of tourism would be served best by a very agressive low fare, high load factor policy. In so far as the North Atlantic is concerned, your point in relation to charters is certainly correct for that market; but it is, perhaps, a bit simplistic to say that it is only the advent of charters on the North Atlantic which forced the fares down. In fact, the fares charged by the scheduled carriers in the North Atlantic throughout the 1960s, when there was little or no charter competition, consistently came down in absolute terms as well as in real terms. Certainly some of the impetus that impelled our super APEX fares, for example, on the North Atlantic in 1976, was forced on us by very cheap charter competitive fares. There is no question about that but I would question whether that was necessarily a very good development.

204. Chairman.—Certainly a position has evolved which is acceptable in general terms to Bord Fáilte. Is that your view?

Mr. Kennedy.—You are talking about fares policies?

Chairman.—Yes.

Mr. Kennedy.—As I say, the differences of opinion between us in my experience over the past six years have been extremely rare. Where they have occurred, and I suppose it is inevitable that differences of approach may arise in points of detail, we have sorted them out between ourselves without any great problems.

Mr. Gleeson.—As between charters and scheduled services, we were foremost among the North Atlantic carriers in operating charters many years ago. The charter thing went into a certain period of excess capacity in the 1970s. Back in the 1960s we operated very extensive programmes of charters, and just looking for figures here now, back in 1969 we were carrying more than 50,000 charter passengers. A very high proportion of our total business was on charters long before the big wave of charters hit us, and we were immensely low on scheduled fares at the time.

Mr. Kennedy.—There is another point on that, which I should have made. There are only two carriers among the hundred odd members of IATA who carry as high a proportion of their traffic in charters as we do.

205. Senator Cooney.—On tourism, Aer Lingus are selling Irish holidays, and Bord Fáilte are selling Irish holidays, and there are various people—I do not know who runs these castles and banquets, is it SFADCO—selling these holidays. Is there any duplication in the marketing abroad or need for co-ordination?

Mr. Kennedy.—I hope it will not sound as if I am over-stating it, but I believe there is closer co-ordination between Aer Lingus and, indeed, all the Irish bodies involved in promoting Irish tourism than there is in any other country I know. There is very close co-ordination at the planning level in the various markets. Frequently, with Bord Fáilte we have done joint market research, we plan our advertising, television programme or whatever form of media, in consultation jointly with Bord Fáilte, and SFADCO are involved in that also. Tourism seminars and tourism workshops are again worked on together very closely. CIE is another company which is involved and there are private companies involved. In a number of cities we share offices with one another. There is a very high and satisfactory level of co-ordination.

206. Senator Cooney.—It may be satisfactory but is it over-expensive? Could one or other of you leave it to the others?

Mr. Kennedy.—I do not think so. We ensure that we get value—if we can—for whatever franc, dollar or pound we are spending on promotion, and use the campaign to support one another, and ride in on top of one another’s advertising. I certainly do not believe it is over-expensive.

207. Chairman.—Do you regard your promotion of tourism as being entirely from your own commercial point of view or would you suggest that to some extent it is undertaking an obligation to tourism from a national point of view?

Mr. Kennedy.—Our perspective on it is a purely commercial one, but there is also a significance from a national tourism promotional point of view. We do not, in allocating our budget for advertising, set out to spend a particular sum of money more because it is good for the country, as it were, in general terms rather than it being good for Aer Lingus. We do look on it in commercial terms, in the commercial interest of Aer Lingus.

Mr. Hayes.—It is analogous with a private company spending money on individual products and then deciding to go into a corporate advertising campaign. Nobody is quite sure really when you can measure immediately the benefits of a corporate advertising campaign. It is not directly analogous but it is the same sort of thing.

208. Chairman.—I had in mind partly the fact that for many years tourism and Aer Lingus were under the same Department. Was there encouragement to Aer Lingus to help tourism by, perhaps, promoting it more than you would do in the ordinary way?

Mr. Kennedy.—No.

Mr. Hayes.—I would have thought that the Board of Aer Lingus, especially its long-term members, would have resisted that very much. We always regard our mandate as to operate the company on a commercial basis.

Mr. Ó Riain: We are very conscious of the fact that every £ we spend in advertising Aer Lingus in any foreign market is advertising Ireland as a tourist destination, which is not the same case with the expenditure of other airlines. The only product we have to sell is a trip to Ireland and all our expenditure is on tourism. So we recognise that we have a very inter-dependent relationship with tourism. While we follow our commerial instinct in the commercial sphere we recognise that we have very much in common, share a lot in common with the tourist industry all the time.

Mr. Kennedy.—There is one other general point that I would make. With very few exceptions it is fair to say that virtually no other airlines spend any sums of money worth talking about in promoting tourism to Ireland. So we are promoting Ireland and promoting Aer Lingus, and to a significant extent where the Ireland promotion element is concerned, the other airlines are riding in on our coat tails. I think that is true for virtually every foreign market where we operate. I am not complaining about it, but it is a fact of life.

209. Deputy Kenneally.—Do British Airways give a fair bit of their advertising to Ireland?

Mr. Kennedy.—In Ireland only. You will search a long time before you will see an advertisement in a British newspaper for Ireland put in by British Airways. British Airways are advertising in the Irish market primarily not for travel between UK and Ireland but because they want to get long haul business out of their money.

210. Deputy B. Desmond.—British Airways have a rather attractive piece of advertising on RTE and so on.

Mr. Kennedy.—They are spending a lot on the Irish market this year.

211. Deputy B. Desmond.—How has it hit you, or has it hit you?

Mr. Kennedy.—Our market share is still very high.

212. Deputy B. Desmond.—Surely they are getting some spin-off?

Mr. Ó Riain.—If I may give a figure on that. We estimate that other airlines are getting £33 million in revenue out of the Irish market on travel from London on to other points and from Amsterdam on to other points. KLM and British Airways and people like that get a figure that adds up to £33 million out of the Irish market on travel, carrying Irish people around their networks. I am not talking about the route between London and Dublin. I am talking about the outside networks of these carriers. We would like to have some of that for ourselves. That is why these carriers are advertising in the Irish market—for that £33 million.

213. Deputy B. Desmond.—In that sense, since you have given the figure there, have you quantified in up-to-date figures the Aer Lingus contribution to Irish tourism?

Mr. Kennedy.—Yes, our total sales expenditure abroad—I will define precisely what that means in a moment—is £13 million per annum. That includes advertising and promotion; it includes all our sales costs, that is, sales staff; it includes the costs of our sales offices and it also includes commission paid to agents. The total is £13 million.

Mr. Ó Riain.—But on the income side?

Mr. Kennedy.—I beg your pardon, I misunderstood the Deputy. On the income side total tourism receipts last year, as reported by Bord Fáilte, including carrier receipts, were £240 million. Of that, £96 million, which is 40 per cent, would have been spent by passengers travelling with Aer Lingus, either on our services or when they arrived in the country.

Mr. Ó Riain.—That is 40 per cent.

214. Deputy B. Desmond.—Would your Dublin/Liverpool schedules be hit by the B & I Jetfoil?

Mr. Kennedy.—We do not see a major problem there. The Dublin/Liverpool schedules or the Dublin/Liverpool route, is a fairly marginally profitable one in any event quite irrespective of Jetfoil. In fact, BMA the British independent airline who were operating on that in competition with us, have pulled off it.

215. Deputy B. Desmond.—What were they charging—£84 return or something like that?

Mr. Kennedy.—Something of that order, yes.

Mr. Ó Riain.—A similar rate to ourselves.

Mr. Kennedy.—But we expect we will lose, certainly, some thousands of passengers to the Jetfoil which will make the economics of the Liverpool service that much less attractive for us. Let me put it this way. We do not view it as a major competitive threat to us, or as a very serious problem we have to face up to.

216. Deputy B. Desmond.—Aer Lingus is now under the Department of Transport. Now we have another Department handling tourism separately. This is in a sense a political question, but is that going to pose any problem for Aer Lingus?

Mr. Kennedy.—It has not posed any problems as yet. I would hope that in so far as our relations with Bord Fáilte are concerned—which is perhaps the key element— unless we have a sudden divergence of views within either organisation from where we are at present, I do not see that of itself posing a major problem.

Mr. Hayes.—One of the things about Bord Fáilte and ourselves is that the Director General of Bord Fáilte and the Chief Executive of Aer Lingus recognise one another as good businessmen as well as people with an Irish interest at heart. They genuinely regard one another as good businessmen and there is no conflict.

Chairman.—There is bound to be some mild conflict from time to time.

Anything else on tourism? Then we will probably have another session—it may not be a very long one at some time we can arrange that will be convenient to all concerned. You need not bring a full team if you do not feel it is necessary.

Mr. Hayes.—We might feel more confident with a full team.

Chairman.—Thank you very much.

The witnesses withdrew.

*See Appendix 2.

**See Committee’s Report (Para 59).