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

AER LINGUS, TEORANTA and AERLÍNTE ÉIREANN, TEORANTA

CONTENTS OF REPORT

FOURTEENTH REPORT

AER LINGUS, TEORANTA AND AERLINTE EIREANN, TEORANTA

I INTRODUCTION

1.1 Legal Position of the Two Air Companies

1. Aer Lingus Teoranta and its sister company, Aerlinte Eireann Teoranta, operate the national airlines of Ireland. Aer Lingus Teoranta was incorporated as a private limited liability company in 1936 and Aerlinte Eireann Teoranta was similarly incorporated in 1947.

2. Aer Lingus Teoranta operates air services within Ireland, and between Ireland, the United Kingdom and Continental Europe; Aerlinte Eireann Teoranta operates only between Ireland and North America.

3. Up to 1966 both companies were subsidiaries of Aer Rianta Teoranta, which acted as a holding company. Under the provisions of the Air Companies Act 1966, the two companies became (on 27th July 1967) separate and independent public limited liability companies, each with its own Board of Directors, capital structure and accounts.

4. Although separate legal entities, and providing services to different geographical areas, the two companies share a common management and the seven Directors are common to both companies. Both airlines use the common name ‘Aer Lingus’ for marketing purposes world-wide.

5. In this report, it is frequently necessary to refer to the combined operations of the two air companies as some information is not available on a separate basis. To avoid confusion, we shall use the name ‘Aer Lingus’ to refer to the combined operations of the air companies, reserving the full legal titles ‘Aer Lingus Teoranta’ (sometimes abbreviated to ALT) and ‘Aerlinte Eireann Teoranta’ (AET) for when we need to refer to the individual companies. The symbol ‘£’ in this report denotes Irish pounds.

1.2 Ownership and Control

6. The authorised share capital of Aer Lingus Teoranta is £36,500,000 made up of 21,500,000 ordinary shares and 15,000,000 preferred ordinary shares of £1 each. 21,393,003 ordinary shares have been issued, all of which apart from a small number of Directors’ qualifying shares, are held by the Minister for Finance. All preferred ordinary shares have been issued and are held by Aerlinte Eireann Teoranta. Loan capital at March 31st 1980 was £55,930,000.

7. The authorised share capital of Aerlinte Eireann Teoranta is £20,000,000 divided into 10,000,000 ‘A’ shares of £1 each and 10,000,000 ‘B’ shares of £1 each. All of the ‘B’ shares and 7,217,042 of the ‘A’ shares have been issued and, with the exception of a small number of Directors’ qualifying ‘A’ shares, are held by the Minister for Finance. In addition, the Minister for Finance has invested £5,000,000 in the form of non-repayable interest-bearing capital. Loan capital at the end of March 1980 was £45,349,000.

8. The total investment by the Government in Aer Lingus is thus £43,610,045 (of which £5,000,000 is interest bearing). The balance of capital requirements is raised by borrowings, including foreign currency borrowings; £12.77 million of borrowing by ALT and £26.52 million borrowing by AET are State-guaranteed.

9. The total capital of the two companies cannot be obtained by simple addition because of the investment of £15,000,000 by Aerlinte Eireann Teoranta and also because of a loan by Aer Lingus Teoranta to Aerlinte Eireann Teoranta which stood at £15,000,000 on March 31st 1980. The combined group position is summarised in Table 1, with comparative figures for 1979.

TABLE 1

Aer Lingus Combined Group Assets and Financing

Source: Aer Lingus Memorandum to the Joint Committee and Annual Report 1979/80.

10. This presentation indicates an equity: debt ratio of approximately 32:68 in the financing of Aer Lingus, as at 31st March 1980, compared with 35:65 a year earlier.

11. The chairman and directors of the two air companies are appointed by the Minister for Transport with the consent of the Minister for Finance. The Air Companies Act 1966 also provides that each company should furnish the Minister each year with balance sheet, profit and loss account and report of the directors for the year. Furthermore, each company must, if so required by the Minister, furnish him with such information as he may require in respect of any balance sheet, profit and loss account or report of the Company, or in relation to the policy and operations of the company.

12. Financial powers in the Act include authority for each company to borrow money (including foreign currencies), with the consent of the Minister for Finance, given after consultation with the Minister for Transport, on such terms and conditions as may be approved of by the Minister for Finance. Similarly, subject to certain conditions, the Minister for Finance may, after consultation with the Minister for Transport, guarantee repayment of interest and/or principal on borrowings by the companies (including foreign currency borrowings) and payments due in respect of aircraft leasing agreements.

1.3 Ancillary Investments

13. In 1970 the air companies adopted, with the approval of the then Department of Tourism and Transport, a policy of developing ancillary activities to offset cyclical swings in the air transport business and to improve the overall rate of return on capital employed. The importance which these activities have come to assume is indicated in Table 2 which shows an average capital employed in ancillary activities, grouped under the headings, ‘Aviation related services’, ‘Hotels, leisure and catering’, and ‘Financial and computer services’ as well as average capital employed in the main air transportation business. These figures show that ancillary activities accounted for about 35 per cent of average capital employed by the two air companies in the financial year 1978/79.

14. In the 1980 annual report, average capital employed by activity is no longer shown but operating revenues are reported. Table 3 shows operating revenues by main activity in 1979/80 with comparative figures for 1978/79. It may be seen that ancillary activities accounted for about 39 per cent of operating revenues in 1978/79 and 36 per cent of operating revenues in 1979/80.

TABLE 2

Aer Lingus Combined Group Average Capital Employed by Activity

(Year ended 31st March 1979)

Source: Aer Lingus Report and Accounts, 1979.

TABLE 3

Aer Lingus Combined Group Operating Revenue by Activity

Source: Aer Lingus Report and Accounts, 1979/80—Page 32.

1.4 The Joint Committee’s Report

15. This is the Joint Committee’s fourteenth report and the first on the air companies. The inquiry into Aer Lingus Teoranta and Aerlinte Eireann Teoranta was commenced in April 1980 and completed in December 1980; and evidence was taken at six sessions. Such is the size of Aer Lingus and the range and complexity of its activities that the Joint Committee recognised that it would be necessary to restrict the scope of its inquiry to a number of issues that appeared to the Committee to be of major significance. The matters on which we have concentrated our attention are:—

(a) Financial performance of the two air companies, with particular reference to the reasons for the poor results achieved by Aerlinte Éireann Teoranta on the North Atlantic routes;

(b) The international competitive environment for air transport, with particular reference to the moves towards liberalisation of fares, introduction of new types of services such as Skytrain, and the implications of these developments for Aer Lingus;

(c) Assessment of the efficiency of Aer Lingus relative to other airlines;

(d) Examination of the extent of ancillary investments by the air companies, the justification for these investments and their performance;

(e) The role of Aer Lingus in promoting tourism to Ireland and the financial implications of this role;

(f) The management and organisation of the air companies, including industrial relations aspects.

16. Our report has been structured to highlight these issues, as the Section headings and sub-headings show. In addition we found that in the light of our inquiries there were a number of ways in which the issues we had chosen to investigate had important implications for the future prospects of Aer Lingus. Some comments on future prospects are therefore included at the appropriate points.

II FINANCIAL PERFORMANCE

2.1 Profitability

17. Table 4 shows the profits achieved by Aer Lingus Teoranta and by Aerlinte Eireann Teoranta over the last 10 years and also the combined total operating revenue of the two companies.

TABLE 4

Aer Lingus Financial Results 1970/71—1979/80

(£’000)

Net Profit/(Loss)

Source: Aer Lingus Memorandum to the Joint Committee and Annual Report, 1979/80 —pages 37 and 39.

18. Total operating revenues show a steady increase of about 16% p.a. to 1975/76. The sharp jump in 1976/77 is mainly due to revenues of the Dunfey group of hotels coming into the accounts in that year. Revenue growth averaged about 21% p.a. between 1976/77 and 1979/80. The Committee considers that a most satisfactory record of growth is shown by these figures, although of course the figures would look significantly less impressive if adjusted for inflation. Real growth measures for non air transport activities are not available but one indicator for the air transport business is capacity ton-miles offered which increased by an average of 10% p.a. between 1976/1977 and 1979/80.

19. The profitability record is more mixed and in order to throw further light on this question, Table 5 was drawn up from information in Aer Lingus’ annual reports over the last six years. This shows separately the operating profits of the two companies in air transportation and of the ancillary activities. Capital employed in air transportation and ancillary activities is also shown separately up to 1978/79 so that rates of return can be compared between activities and from year to year.

TABLE 5

Aer Lingus Profits and Capital Employed by Main Activity, 1974/75-1979/80

Source: Aer Lingus Annual Reports, 1975 to 1980.

Notes

20. In evidence the Chairman of Aer Lingus told us that “The Aer Lingus side of the business is marginally profitable, the ancillary activity side of the business is very profitable, but on the Atlantic route we are losing money”.¹ Broadly the figures in Table 5 confirm this assessment. The turn around in the results of Aer Lingus Teoranta from 1976/77 is particularly encouraging. But the broad picture we see is substantial profits on ancillary activities growing strongly in recent years to offset a negative situation in air transport; and the main source of the air transport losses, certainly in the last three years, is clearly the North Atlantic routes operated by Aerlinte Eireann Teoranta.

21. The Committee was very disturbed by the poor financial performance of the air transport business, and particularly the heavy losses on the North Atlantic. The reasons for this situation are examined further in Section III below. At this point, it is sufficient to note the comment of Aer Lingus’ Chief Executive to us in evidence: “I do not think Aer Lingus’s profit performance is adequate. It looks good by comparison with Aerlinte, but I do not regard it as being at a satisfactory level of profit”.² One other comment we would make here is to regret the decision to discontinue publication of the analysis of capital employed by activity in the 1980 Annual Report. We recommend that the Department of Transport continue to request this information on a regular basis.

22. The Committee was also concerned that continued use of historic cost depreciation by the air companies might be giving too favourable a view of true profitability in the air transport business. Aer Lingus argued that their asset life assumptions (14-16 years for aircraft) are conservative and that in any case the correct way to provide for replacement is by means of allocations from profits to reserves.³ In their view the basic problem is low profitability, not misleading accounting. The Committee’s view however is that even if the role of depreciation is restricted to being “a measure of the cost of wasting assets” some adjustment for inflation is desirable. In any case, the Committee notes that Aer Lingus in common with other large companies will be expected to include current cost accounts in their annual financial statement from 1980/81 onwards under SSAP 16 which has been adopted by Irish and UK accountancy bodies.

23. One factor which has contributed to the poor financial performance in air transport is the strike which occurred in 1978, the first in the airlines’ history. Aer Lingus put the cost of that strike at about £5 million thus virtually halving the net profit for 1978/79. It is particularly disturbing that a further strike should have occurred during the course of our investigation, adding to the financial difficulties at a time when the international competitive environment is not at all favourable. The cost of this latest strike has been provisionally estimated by Aer Lingus at £6 million. Aer Lingus had earlier been forecasting a small profit of about £1 million for 1980/81 but as a result of the strike and the deterioration in the trading environment a sizeable loss now seems inevitable.⁴

24. In contrast to air transport, the results achieved by Aer Lingus ancillary activities have been extremely good. It is very fortunate for the companies, and indirectly for the Government and people of Ireland, that the policy of diversification adopted by Aer Lingus in the early 1970’s should have proved so successful and we congratulate those responsible for this achievement. We examine the performance of the ancillaries in more detail in Section IV.

25. Against this broad background of facts about Aer Lingus’ financial performance, there are two major issues which we feel should be addressed before moving on to more detailed matters. These are first the question of Aer Lingus’ capital structure, and in particular the equity/debt ratio that is appropriate; second, the question of what is the proper balance between the main business and the ancillary activities in terms of financial commitment.

2.2 Capital Structure

26. Table 1 showed that Aer Lingus’ equity/debt ratio as at 31st March 1979 was approximately 35 : 65. We note also that the Government increased its equity investment in Aer Lingus Teoranta by £15 million in December 1978. This was in the context of a substantial increase in fixed assets appearing in the accounts by the end of that financial year. A year earlier (i.e. 31st March 1978) the equity /debt ratio was 31 : 69 and of course this ratio would have deteriorated seriously if the increase in assets had occurred without any increase in equity investment. In the latest year, further increases in assets not matched by increases in equity (although the reserves improved) resulted in the equity:debt ratio falling to 32 : 68 as at 31st March 1980.

27. Aer Lingus argued in evidence before us, and in their written submission, for an equity/debt ratio of approximately 50:50. The main points made by Aer Lingus in support of this argument were as follows:—

(a) a high equity ratio is appropriate in view of the volatile nature of the airline industry as a whole and the particular difficulties attaching to air transportation to and from Ireland (with its high proportion of non-business traffic and the continuing losses on the North Atlantic) — these problems being compounded at present by uncertainties on the fuel front and by recession conditions;

(b) the heavy burden of interest charges arising from the large volume of debt — over the 5 years to 1978/79, annual interest charges averaged about £3.6 million (See Table 5, para. 19 above); in 1979/80 they rose to about £7 million and in the current year are expected to reach about £8½ million. These payments rob the companies of resources for expansion;

(c) Aer Lingus’ bankers have advised that they are under-capitalised as a commercial operation and that the proportion of debt in Aer Lingus’ capital structure should not exceed 50%. It is pointed out that recent experience in the international capital markets has made bankers cautious in viewing country risks and that as a result bankers are increasingly keen to ensure that a company is capable of servicing debt from its own resources, with Government guarantee very much a last resort.

28. In summary Aer Lingus argue that they are still under-capitalised, notwithstanding the injection of £15 million in 1978, and that this is undermining their commercial viability. They suggest that continuation of this situation carries the danger of a drift towards a subsidised air transport system with all the dangerous and undesirable features that would bring with it.

29. We have considered Aer Lingus’ arguments on this point very carefully and there are a number of observations we would like to make:—

(a) We examined the question of capital structure in our report on the British and Irish Steam Packet Co. Limited [21 March 1979, Prl. 8063]. In that case we agreed with the view of B & I that it was desirable that shareholders funds should not fall below 35% to 40% of its total capital commitment. We believe that this criterion would be appropriate as a minimum base-line in the present case. However, in view of the volatile nature of the industry, a rather higher ratio would be preferable even though Government guarantees are available to support borrowings. On balance we believe 50 : 50 could well be the right figure for Aer Lingus.

(b) We are concerned that the Government decision to increase its equity investment in 1978 was only reached after a delay of 3 years.⁵ We agree with the Chief Executive of Aer Lingus when he said “We would like to see a situation in which the capital structure was kept in proper condition on an on-going basis. . . we do not think it makes good sense for the shareholder not to do anything, to allow the business to get into bad financial shape, to have a bad capital structure and then be faced with an enormous requirement in terms of financial implications at a specific time.”⁶

(c) We note that Aer Lingus projections of capital expenditure on a 5 year basis are regularly submitted to Government, that major capital expenditure requires Government approval and that Government also approves Aer Lingus’ borrowing.⁷ The Government is thus fully informed of Aer Lingus’ capital requirements and financing proposals well in advance. If the Government is satisfied that the investments proposed by Aer Lingus are well-justified and has approved them we feel it should at the same time be prepared to commit its own contribution to their financing, including timely injections of equity finance when required. It is disturbing that the equity:debt ratio is again on a downward path and has fallen below 35 : 65.

(d) For their part, Aer Lingus should take into account the constraints imposed by their own financial position and the limited availability of Government finance in framing their capital expenditure proposals. It has to be recognised that great restraint on future capital outlays will have to be exercised while the present difficulties persist and additional equity finance should not be regarded as free capital in support of borrowing to finance low return investments.

2.3 The Balance between Air Transport and Ancillary Activities

30. Ancillary investments have increased from about 24%of capital employed in 1974/75 to about 35% in 1978/79 (See Table 5, para. 19). We have noted earlier the excellent profits record of the ancillaries and we examine this matter in more detail in Section IV below. Here our concern is with the balance between Aer Lingus’ main air transport business and the ancillary activities, particularly in view of Aer Lingus’ statement in their memorandum to us that “The airline’s policy is to continue to expand vigorously the ancillary businesses.”

31. The original reasons for investment in ancillary activities were to cushion the air transport business against cyclical fluctuations and secondly to provide a higher rate of return than could be achieved in air transport alone. Some investments have been supportive of the main business, for example, aircraft maintenance and overhaul services, passenger and cargo handling services and aircraft brokerage and leasing. Others have not been so directly connected, for example the investments in hotels and leisure. We have seen that to the present time these investments have been successful in achieving the objectives of greater stability and higher profitability. It may be argued that the tail may now begin to wag the dog, particularly as short term prospects for the air transport business are poor.

32. We were reassured by the statement by the Chief Executive of Aer Lingus in evidence that “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%. It would not be right for it to be above 50%. We regard the ancillary activities as a means to an end. The end to which they are devoted is to earn profits.… So we see ancillary activities as having correctly a subservient role to air transportation”.⁸ Aer Lingus felt however that this was not something that could be defined by a precise mathematical formula.

33. Our view on this matter is we believe close to that of Aer Lingus and essentially pragmatic. Necessary investments to preserve the health and profitability of the existing ancillaries should be undertaken, keeping in mind always the objective of a positive cash flow for the benefit of the air transport business. Similarly, in the case of ancillaries which fail to realise their potential and threaten to become a drain on the resources of the group, early divestment should be actively pursued. We feel that expansion into new areas should proceed on the basis that this would only be done when a good opportunity presents itself rather than simply to fulfil some pre-determined target level of investment.

III AIR TRANSPORT ACTIVITIES

3.1 The International Framework

(a) Air Transport Agreements

34. Scheduled air services to and from Ireland are operated on the basis of air transport agreements which are negotiated bilaterally with other countries. These agreements may cover some or all of the five main ‘freedom rights’. The 1st and 2nd ‘freedom rights’ are relatively less important than the 3rd, 4th and 5th rights. The latter rights are:—

(i)3rd Freedom: To carry traffic from your own country to the country of the second party to the agreement;

(ii)4th Freedom: To carry traffic from the country of the second party to the agreement to your own country;

(iii)5th Freedom: To carry traffic from the country of the second party to the agreement to a third country.

35. Ireland has bilateral agreements with the following countries into which Aer Lingus at present operates: USA, UK, France, Denmark, Italy, Switzerland, Netherlands, Belgium and Germany.

36. We summarise here the main features of the agreements with USA and UK.⁹

(i)US/Ireland Air Transport Agreement of 3rd February, 1945 as amended. Airlines of Ireland under this agreement are accorded in the territory of the United States rights of transit, non-traffic stop and commercial entry for international traffic on scheduled services at Boston, New York, Chicago in both directions. Airlines of the US under this agreement are accorded rights of transit, non-traffic stop and commercial entry for international traffic on scheduled services on the routes: US to Ireland and countries beyond via intermediate stops in both directions with 5th freedom rights at Shannon for points beyond Ireland.

In addition one US airline is accorded in the territory of Ireland rights of transit, non-traffic stop and commercial entry for international traffic at Shannon and Dublin, on the following route: US to Ireland via intermediate points in both directions.

All scheduled flights by carriers of both countries in either direction must serve Shannon.

(ii)Ireland/UK Air Transport Agreement of 5th April 1976 as amended. Under this agreement airlines of Ireland are accorded rights of transit, non-traffic stop and commercial entry for international traffic on scheduled services on 27 routes indicated in three schedules to the agreement; the three routes Shannon and/or Dublin-London, Shannon and/or Dublin-Liverpool and/or Manchester, and Dublin-Birmingham to be operated in parallel by one airline of each country. Airlines of the UK are accorded rights of transit, non-traffic stop and commercial entry for international traffic on scheduled services on 26 routes outlined in a fourth schedule to the agreement; the three routes London-Dublin and/or Shannon, Manchester-Dublin and Birmingham-Dublin to be operated in parallel by one airline of each country. Under the agreement, the Irish carrier has monopoly rights on the routes: Dublin-Edinburgh, Dublin-Jersey, Shannon-Liverpool and Shannon-Manchester. Except for the Shannon-North Atlantic route on which the UK carrier is given 5th freedom rights, traffic under the agreement is 3rd and 4th freedom.

(b) IATA

37. The International Air Transport Association (IATA) is in effect the trade association of the world’s airlines. It has a membership of over 100 airlines from 85 countries including our own airlines. A large part of IATA’s work relates to legal, financial and technical matters (such as air safety) which are not controversial. However, Governments have formally delegated to IATA the task of negotiating tariffs, reserving to themselves the right of approval (or disapproval).¹⁰ This part of IATA’s work has in recent years come in for strong criticism and there have been moves within IATA for reform.

38. The nature of the criticism as we understand it is that by setting fares too high, the IATA arrangements have encouraged excess capacity and over-high standards in such matters as in-flight service. When we asked Mr. Reed of the UK Civil Aviation Authority (CAA), who kindly gave evidence before us as an expert witness, whether IATA policies had militated against lower fares in Europe, he replied “I think it is undoubtedly true that the way the airlines have been allowed to set fares under this system has militated against the consumer intrest”¹¹ Subsequently in a written follow-up note¹² from the CAA, it said “Where price competition is prevented by regulation, competitive energy is channelled into devices to increase market share which, of their very nature, tend to be cost inducing… This cost-enhancing aspect of tariff regulation has been described by many commentators and is now well established in the literature of airline economics”. At the same time, Mr. Reed did not feel that a totally unregulated system would be satisfactory either.¹³ He also pointed out that it was extremely rare for Governments or regulating bodies to refuse to approve an IATA fares package.

39. Another witness, Mr Varrier of Dan-Air Services Limited, pointed out that the structure of IATA has changed. He said “I would not accept that there is any longer an IATA cartel following the change in structure of IATA. . . . 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”. But he also did not favour complete de-regulation: “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”.¹⁴

40. The position of Aer Lingus as expressed to us by the Chief Executive is one of strong support for IATA while welcoming the moves towards reform.¹⁵ He pointed to the technical work of IATA aimed at raising safety standards throughout the world, to the IATA clearing house arrangements which enable an individual for example to buy a round the world ticket on an Aer Lingus coupon rather than having to buy a separate ticket from each airline he uses, and to the communications network provided by IATA. In the area of tariffs, Aer Lingus felt that IATA had been “far too rigid and inflexible” and had been “falling apart because airlines could not introduce without difficulty new fares which were related to individual market requirements”. It is now much more flexible and responsive to market needs as a result of the reforms that have taken place. In summary, Aer Lingus “believe on balance that the benefits for a smaller airline... of being involved in the world trade association of airlines are quite substantial.”

(c) EEC Air Transport Policy

41. Although sea and air transport is excluded from the common transport policy as laid down in the EEC Treaty, Article 84.2 provides that “the Council may, acting unanimously, decide whether, to what extent and by what procedure appropriate provisions may be laid down for sea and air transport”. The EEC Commission in July 1979 adopted a memorandum entitled “Air Transport: a Community approach”. This memorandum we understand received a fairly general welcome in the EEC Council when the Ministers gave their initial reaction to it in December 1979. It was, however, stressed that this was an initial reaction only and that much work and study needed to be done before any decisions could be taken.

42. The Commission’s memorandum has been examined by the Joint Committee on the Secondary Legislation of the European Communities and they have made a report on it dated 4th June 1980 (Prl. 8991). We have considered the Joint Committee’s report, which had the benefit of the views of both Aer Lingus and the Department of Transport. We find ourselves in general agreement with the views expressed by the Joint Committee and in particular with the following observations of the Joint Committee:—

—Potential Market Entry and Innovation

“Safeguards are essential to ensure that the public service aspects of airline operations in terms of route frequencies and spread of fares are maintained” and “any liberalisation must, therefore, in the Committee’s opinion also include the fifth freedom which would enable Aer Lingus to acquire operating rights within the United Kingdom or linking other EEC countries with each other”.

—Fares

“The Joint Committee believes that it is in the public interest that air fares be kept as low as the economic viability of airline operators permits”.

—External Relations

“The Joint Committee accepts that a co-ordinated approach by the Member States in relations with third countries would be a most welcome development but it recognises that it may be very difficult to achieve”.

43. This last point is made in the report in response to the view of Aer Lingus that a concerted approach by the Community to relations with third countries would be of advantage from the point of view of a small airline from a small country. We see the point as being of particular relevance to relations with the US.

(d) US Air Transport Policy and Competitive Developments on North Atlantic Routes

44. The so-called ‘Open Skies’ policy of the US Government has dominated discussion of air transport developments in recent years. It was a major factor stimulating the movement towards reform of the IATA tariff negotiating procedures, particularly at the IATA meeting in Montreal in 1978. It has also been important because it has facilitated the proliferation of cheap fares on the North Atlantic routes in recent years, which have in many cases resulted in substantial losses on these routes for the airlines concerned.

45. It was put to us in evidence that while US policy had been generally pro-competitive and pro-market share for US carriers since at least 1970, the emphasis of this policy had changed. Initially, the main objective was “to find a niche on the North Atlantic for US supplemental carriers, as they were then called, who had prior to then earned most of their money on military charter work out to the Far East”.¹⁶ Thus in the first half of the 1970’s the main competitive pressure on scheduled airlines was from charter operators who were winning large volumes of traffic on the basis of low fares. Aer Lingus told us that they introduced their Apex-type fares in 1976 as a competitive response to charters. When these fares were first filed with the US Government they were rejected on the grounds of unfair competition to their charter airlines.

46. More recently the emphasis in US policy has been on bringing down scheduled fares. Mr. Reed in his evidence to us commented: “Although I think the people I discussed this with in the Civil Aeronautics Board and elsewhere are wholly sincere in believing in this policy, it is a fact that the policy harmonises very well with the United States international economic interests”.¹⁷ He did not feel that a totally deregulated regime would create a fair or mutual competitive framework because of the way US operators can control the feed of traffic into major hubs behind the gateways.

47. Another recent development on these routes has been the introduction of Skytrain Services by Laker Airways. Whereas Mr. Reed of CAA felt that Laker Airways have had a “massive impact” on air transport markets, particularly those over the Atlantic,¹⁸ Aer Lingus felt that Laker had only added another competitive thrust at a particular point in time. As Aer Lingus point out “the North Atlantic carriers were losing money prior to Laker”.¹⁹

48. What has made these developments particularly difficult for airlines is that they have occurred at a time when there is strong upward pressure on costs and the world economy has been suffering an extended recession, depressing demand. The main cost pressure has of course been fuel prices. From £3.5 million in 1972/73, Aer Lingus fuel costs increased to £17 million in 1978/79, over £30 million in 1979/80 and are expected to reach £42.5 million in 1980/81.²⁰ While extremely serious for Aer Lingus, this is an element of costs that has risen by a similar amount for all airlines. On the demand side, although air traffic has continued to grow in recent years despite the difficulties, we were disturbed to learn that in April and May of this year falls of 5% and 6% respectively in scheduled passenger traffic were experienced,²¹ indicating that in the US and the UK economic recession is biting quite dramatically.

49. In these circumstances, it is vitally important for a small airline in Aer Lingus’ position to be constantly exerting maximum effort to keep those costs which lie within its control down to the minimum level compatible with effective operation. This is particularly important in Aer Lingus’ case because apart from its small size (Aer Lingus’ share of world air transport capacity is about 0.3%), there are a number of other specific disadvantages which it has to overcome, such as a peripheral situation in relation to Europe, a high proportion of short-haul routes, a low volume of traffic originating in the home market and a highly seasonal demand pattern. These disadvantages are compounded by the present economic environment. This point was emphasised by the Chief Operating Officer in a recent circular to Aer Lingus employees. He pointed out that “the size and depth of our present problems are far in excess of any that we have seen before”.²²

3.2 Aer Lingus Performance and Productivity

50. In 1979/80 Aer Lingus carried 2.5 million passengers and flew nearly 20 million miles. One important factor to keep in mind when analysing this performance is the very different nature of the European operation of Aer Lingus Teoranta (ALT) and the North Atlantic operation of Aerlinte Eireann Teoranta (AET). Thus in 1979/80 ALT carried 2.2 million passengers and the average passenger journey on scheduled services was 313 miles. AET on the other hand carried only 0.3 million passengers but the average passenger journey was 3,079 miles. Another factor is the proportion of non-scheduled services (mainly charters, which characteristically are low fare, high capacity utilisation operations) but this is quite similar between the two companies: 16% for ALT and 18% for AET.

51. Aer Lingus provides cargo as well as passenger services and a useful summary measure of total services provided is capacity ton-miles offered (CTM) . The extent to which the services provided are taken up by paying traffic can be measured by revenue ton-miles sold (RTM) and the ratio between RTM and CTM gives the overall load factor. Table 6 shows these measures for ALT and AET over the last 10 years. It may be seen that ALT capacity offered has increased by 86% over the period while the increase for AET has been only 22%. Nevertheless AET’s operation is still significantly larger in ton-mile terms than ALT’s. The increases in revenue ton-miles have been rather greater, 96% and 35% respectively, reflecting an upward trend in load factor for both companies.

TABLE 6

Aer Lingus Capacity Offered, Sold and Load Factors, 1970/71-1979/80

Source: Aer Lingus Annual Report 1979/80.

52. The measures in Table 6 are physical measures. While a high load factor is helpful towards a good financial result, the cost of providing services and the revenue obtained are also very important. For example, a high load factor achieved by low fares may not improve profitability. Table 7 shows operating revenue and operating expenditure per ton-mile for the two companies since 1970/71. Operating revenue per RTM provides a measure of average fares and cargo charges. This figure is much higher for ALT largely reflecting the higher costs of ALT’s short haul European operation which can be seen in the figures for operating expenditure. However whereas operating expenditure per CTM has increased similarly for both companies (by a factor of more than 3), AET has only been able to raise revenue per RTM by a factor of 2.4 although ALT has been able more or less to match cost increases. As a result the operating margin on AET’s operation, as measured by the difference between operating revenue per CTM and operating expenditure per CTM, has been negative in every year since 1970/71, except 1973/74, despite the improvement in load factor which has occurred. Ideally, a positive operating margin of around 10% would be required to cover overheads and to provide an adequate return on investment.

TABLE 7

Aer Lingus Operating Revenue and Operating Expenditure per Ton-Mile, 1970/71-1979/80

Source: Aer Lingus Annual Report 1979/80.

3.3 Performance and Productivity Comparisons

(a) Introduction

53. At the outset, we emphasise that productivity and performance comparisons between airlines are difficult to make because no airline is in exactly the same situation as any other. There will be differences in route-network characteristics, often determined by geography and politics rather than economics, the differences in aircraft fleet composition partly reflecting differences in route-network and partly differences in timing of investment and technology choice. Other factors which may influence measured performance include differences in seasonality of demand, and even just differences in weather conditions which affect flight schedules and aircraft utilisation. Quite apart from these technical problems, there may be difficulties in establishing the appropriate comparisons because of data problems-for example, because companies use different accounting conventions or treat their information in different ways for reporting purposes.

54. We nevertheless felt it would be valuable to attempt some comparisons since by working through the figures and discussing the results with Aer Lingus we could hope to achieve a fuller understanding of the position. To assist us in this, our consultant prepared a number of comparisons based on the statistics published by the International Civil Aviation Organisation of the United Nations (ICAO). For comparative purposes, four of the smaller European airlines were selected: Air Austria, Finnair, TAP (of Portugal) and British Caledonian. The first three are the national airlines of countries whose situation may result in similar operational problems to those of Aer Lingus; British Caledonian was selected because it is recognised to be a relatively efficient operator although it is not a large airline by world standards.

(b) Load Factors

55. An airline’s ‘load factor’ provides a measure of revenue earning traffic carried in relation to capacity supplied. It is measured in the ICAO statistics by revenue tonne-kilometres performed (RTK)²³ divided by total available tonne-kilometres (ATK)²³ expressed as a percentage. Table 8 below shows load factors for ALT, AET, Aer Lingus (i.e. ALT and AET together) and the four comparison airlines for the years 1975 to 1978 (the latest year for which ICAO statistics were available at the time of writing). These figures show a very good average performance by the Irish airlines, only British Caledonian in two years showing a comparable achievement.

TABLE 8

Comparative Overall Load Factors 1975-1978 (%)

Source: ICAO, except items marked ^(a) which are derived from Aer Lingus Annual Reports.

(c) Operating Revenue

56. Table 9 shows comparisons of operating revenue in US cents per RTK, which provides an indicator of average fare levels on a per kilometre basis. A lower value for this indicator is to be expected on longer hauls but even allowing for this factor there is some evidence here that AET may have won its high load factors on the basis of rather low fares. The ALT figures on the other hand appear relatively high, except in relation to Air Austria.

TABLE 9

Comparative Operating Revenues 1975-78 (US cents/RTK)

Source: ICAO, except items marked ^(a) which are derived from Aer Lingus Annual Reports and may not be exactly comparable.

Note:

It should be noted that the figures in the table are affected by variations in the exchange rates of the American dollar and other currencies in the different years under examination.

(d) Operating Expenses

57. Comparisons of average revenue need to be seen in the context of cost levels. Table 10 shows operating costs in US cents per ATK for the same airlines as Table 9.²⁴ These comparisons show a relatively high level of costs for ALT, very similar to Air Austria cost levels, reflecting mainly the high level of costs associated with short-haul routes in Europe. AET costs are more closely comparable with those of Finnair, TAP and British Caledonian. Comparison of the main elements of costs, which was only possible for the combined Aer Lingus operation, showed Aer Lingus relatively expensive on flight operation expenses, maintenance, user charges and ticketing, sales and promotion (although Air Austria was generally higher) but closer to the lower cost airlines, TAP and British Caledonian, on depreciation, passenger service expenses and general administration.

TABLE 10

Comparative Operating Expenses, 1975-78 (US cents/ ATK)

Source: ICAO, except items marked ^(a) which are derived from Aer Lingus Annual Reports and may not be exactly comparable.

Note:

It should be noted that the figures in the table are affected by variations in the exchange rates of the American dollar and other currencies in the different years under examination.

(e) Operating Ratio

58. The operating ratio (operating revenues divided by operating costs) of an airline provides a measure of its basic profitability. Unless there is an adequate margin between operating revenues and operating costs a reasonable return on investment cannot be achieved. As a rough yardstick an operating ratio of 1.10 may be considered adequate in normal circumstances (i.e. a 10% margin). Table 11 shows that ALT has come close to achieving this standard but AET has fallen far short of it. On its own, ALT’s operating ratio has been similar to that of British Caledonian and better than the other airlines in the comparison. However, once AET is brought in, the result for Aer Lingus is below the average of the other airlines with only TAP performing worse.

TABLE 11

Comparative Operating Ratios, 1975-78

Source: ICAO, except items marked ^(a) which are derived from Aer Lingus Annual Reports.

(f) Employment and Productivity

59. We found an important difference between the employment statistics published by ICAO and those published by IATA. The difference appears to have arisen through a change in ICAO treatment of ‘traffic handling personnel’ being inadequately notified to reporting airlines. As a result it appears that in ICAO statistics since 1976 ‘traffic handling personnel’ are included with ‘Ticketing and Sales personnel’ for some airlines but with ‘All other Personnel’ for others. We have therefore chosen to use the IATA employment statistics in Table 12 as these figures show traffic handling personnel as a separate category. We urge the Department of Transport to take up this matter with ICAO as it caused needless misunderstanding between ourselves and Aer Lingus at an important point in our enquiry. Examination of the figures in Table 12 shows Aer Lingus to have a pattern of employment similar to the other airlines except that the proportion of ‘traffic handling personnel’ is relatively high and the proportion of ‘other personnel’ is relatively low.

TABLE 12

Staff Numbers Comparison, 1978

Source: IATA—We have used this source in preference to ICAO since Aer Lingus pointed out to us that ICAO had incorrectly included traffic handling personnel with ticketing and sales personnel in their published statistics.

60. A crude productivity indicator can be obtained by dividing the staff numbers by a measure of total activity such as available tonne-kilometres (ATK). This is done in Table 13. In this comparison a relatively high figure indicates relatively low productivity. Several of the Aer Lingus figures in this table are relatively high and the Joint Committee was concerned to find out more about the reasons for this apparently unfavourable comparison. Aer Lingus commented in some detail on this question in evidence²⁵ and in the light of Aer Lingus’ comments the Committee is of the opinion that Aer Lingus productivity is not substantially out of line with other European airlines. In view of the importance of this topic we deal with it rather fully in the immediately following paragraphs.

TABLE 13

Crude Productivity Comparisons 1978 (Staff/ATK)

Source: ATK from ICAO, staff numbers from Table 12 above.

61. One important point made by Aer Lingus is that revenue tonne-kilometres (RTK), which measure capacity sold rather than capacity produced might be a more appropriate divisor for certain activities such as ticketing and sales.²⁶ Aer Lingus’ higher load factors would then result in an improved comparison. The figures in the last line of Table 13, recalculated using RTK, are as follows:—

TABLE 14

Adjusted Crude Productivity Comparison, 1978 (Staff/RTK)

Source: RTK from ICAO, staff numbers from Table 12 above.

Using this adjusted, but still crude, comparison Aer Lingus shows up ahead of Austrian Airlines and TAP although still behind British Caledonian and Finnair.

62. A second point Aer Lingus make, is that comparisons between airlines can be affected by differences in airline organisation and practices, for example with regard to subcontracted work (maintenance, handling, catering, etc.). Aer Lingus provided us with some information on the extent to which the other carriers in our comparisons buy in services from other parties and provide services for other parties. As the information was supplied on a confidential basis the identity of the carriers cannot be disclosed but the figures which are shown in Table 15 demonstrate that Aer Lingus both buys in a much smaller proportion of services than the other airlines for which figures are available, and provides more services for others. Both factors will distort the crude productivity comparisons in favour of the other airlines. While we have been unable to adjust the comparisons to take account of these factors, we acknowledge that proper adjustments would go some way to explain the divergence between Aer Lingus and the more efficient airlines. We note however the observation of Mr. Reed (CAA) in evidence that “there is scope for reduction of overhead cost levels of long established national airlines and that in comparisons between Laker-type operations and other airlines a pure efficiency residual of between 10 to 20% remains, after allowing for other differences”.²⁷

63. Aer Lingus also supplied us with a graph which plots airline costs against average stage length for a large number of European airlines.²⁸ This shows Aer Lingus to have a level of costs below the average after taking into account average stage length.

TABLE 15

Proportion of Airline Services Bought In and Sold Out: 1978

Notes

‘Bought In’ = Proportion of service bought in.

‘Sold Out’ = Work performed for third parties as a percentage of the total cost of the service.

Source: Aer Lingus.

64. One other factor which affects performance is aircraft utilisation. We were concerned that Aer Lingus with a relatively small fleet and a highly seasonal pattern of demand might have difficulty in this respect. Aer Lingus explained²⁹ however that in the peak period they had achieved average utilisation of short haul aircraft of 10 hours per day compared with 11 hours for Austrian Airlines, 7¾ for British Caledonian and 6¼ for British Airways. This has been achieved by “a very tightly integrated schedule, by very short turn rounds, by the development of markets for charter night flights and a fare structure which generates traffic and enables us to use our short haul aircraft on a 24 hour basis in the summer”. In the winter the problem of surplus capacity due to seasonality is solved by leasing out. Aer Lingus was one of the first airlines to move substantially into this business and it has now become an important ancillary activity.

65. We give the final word on this matter to the Chief Executive of Aer Lingus who said in evidence:³⁰ “It is surprisingly difficult to make valid comparisons between airlines because a large number of things have to be taken into account. For example, we have a great deal of ancillary activities which we carry out in-house. This pushes up our total number of employees… We also tend to do more work in-house than the average airline. We do virtually all of our own aircraft maintenance and flight catering… We clean our own offices… When you are looking at comparisons… you have to take into account factors like size, seasonality, stage length, all of which can complicate the picture. When we go into this in more detail and compare ourselves with the better European airlines and try to factor out these particular environmental factors in terms of output per employee, we find ourselves marginally behind what we regard as the best European carriers… the fact is that we have these external factors, environmental factors, which make life difficult for us but we cannot simply use them as an excuse. We must try to find ways of being a lot better than the European norm and I am satisfied that there is scope for improved productivity within the airline and that is a priority with management.”

3.4 The North Atlantic Problem

66. We have noted at a number of points the extremely competitive situation on the North Atlantic routes that has existed for several years now. It has been a major factor in the poor financial results of Aerlinte Eireann Teoranta. Nor is Aerlinte alone. According to information given to us by Aer Lingus, over the ten year period 1970-79 all scheduled passenger operations on these routes taken together recorded losses amounting to $775 million on operating account (before interest, dividends and taxes) and $4,480 million after interest and taxes. Indications are that charter operators have also fared badly. Of the original “Big Six” US carriers only three (Transamerica, World, Capital) are left. Universal and ONA went into liquidation while Saturn merged with Transamerica. The mortality rate among the smaller European operators has also been high, with some spectacular casualties like Atlantis (Germany). Others, like Martinair (Holland), have simply abandoned the North Atlantic market. Many scheduled carriers who operated substantial charter programmes at the beginning of the decade, like PanAm and British Caledonian, are now out of the North Atlantic charter market completely. Dan-Air, who used to operate Atlantic charters for a number of years ceased these about three years ago because “we realised that the Atlantic was not a market in which we could operate profitably”.³¹ In the first half of this year (1980) the losses on North Atlantic routes have probably increased as a result of high fuel prices combined with recession in the US and UK.

67. The question naturally arises what steps Aer Lingus can take to limit losses on the North Atlantic or whether it might even be better to abandon these routes altogether. Among the steps which Aer Lingus told us³² they had taken to reduce losses here are:—

(i)in the 1970’s, a number of aircraft were sold off and the “B 747s” were leased out for periods;

(ii)load factors were boosted from approximmately 60% at the start of the decade to about 70% by the end by cheap fare initiatives and aggressive marketing. For example, on the Dublin-Shannon-New York route where it was in direct competition with TWA, Aer Lingus ended up with 75% of the market before TWA pulled out;

(iii)during this period, there were staff cutbacks and redundancies in the US and many of the Aer Lingus sales offices were merged with Bord Failte offices to save costs. The Fifth Avenue (New York) office was sold;

(iv)Aer Lingus have now decided to phase out “B 707” aircraft and concentrate on the “B 747” which is the more cost-effective vehicle;

(v)last year the company withdrew from the Shannon-Montreal route;³³

(vi)a further recent decision has been to withdraw Chicago services from 1st November 1980 and to concentrate services primarily but not exclusively on New York using the “B 747s”;

(vii)Aer Lingus has also announced new low fares on North Atlantic routes on an experimental basis from 15th September. These include off-peak special fares and an ‘add on’ fare costing $99 for US and Canadian visitors to travel from Ireland to any Aer Lingus destination in Britain or continental Europe.

68. One aspect of North Atlantic costs which is a specific disadvantage for Aer Lingus is the compulsory double-stop in Ireland. Aer Lingus indicated³⁴ that a saving of the order of £700,000 a year might be possible with a single stop only at the Irish end, although Shannon would continue to be used to a large extent since about 60% of trans-Atlantic traffic originates there.

69. We understand that the economics of its North Atlantic services is frequently reviewed by Aer Lingus. However, as the Chief Executive pointed out:³⁵ “One of the difficulties one has in looking at an individual part of one’s operations . . . is that if you cut out something which is unprofitable, unless you can remove all the overheads associated with that operation, you do not necessarily remove all the losses”. There is a very substantial sharing of overheads between the European and Atlantic sides of the operation and so far Aer Lingus have concluded that they would be worse off in financial terms if they decided to close down the Atlantic operation, sell off the fleet and make 1,400 or 1,500 people redundant. The thrust of policy has therefore been to reduce such losses. However at a later evidence session Aer Lingus also said that “the losses are now such that the correct commercial decision could conceivably be to look at the possibility of pulling off the route”. The complexity of the issue is well illustrated by Aer Lingus’ reply when we later had occasion to ask about the savings resulting from the withdrawal of Chicago services. We were told that “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”.³⁶

70. It seems clear to us that even with the benefit of such cost reductions as appear to be available it is unlikely that the North Atlantic services of Aer Lingus can achieve profitability while the competitive environment remains as difficult as the present. This raises awkward questions of public policy on which we feel bound to comment briefly.

71. It is a standard proposition in public sector economics that where an unprofitable service is preserved for reasons of national interest or social justice, that service should be supported by a specific subsidy rather than from the general revenues of the enterprise. We have considered this point in relation to the North Atlantic services of Aer Lingus and have reached the clear view that it would be most undesirable to introduce a direct subsidy. There are at least three reasons for this: Firstly, the precedents among other public sector organisations, in Ireland and abroad, are not encouraging. Secondly, such a move would be extremely unwelcome to the Board and management of Aer Lingus. Thirdly, we imagine, that an explicit subsidy on the North Atlantic routes could arouse adverse international reaction.

72. If our view is accepted there seem to us to be certain consequences that follow from it if the North Atlantic services are to be preserved:—

(a) Every possibility for reducing staffing and overhead costs and for increasing productivity should be vigorously pursued;

(b) Other measures for reducing costs should also be pursued, including review of the double stop in Ireland having regard to possible international implications as well as the potential cost savings;

(c) There should be continuing support for the development of ancillary activities which can generate positive cash flow and profits to support the air transport business (see para. 33);

(d) The Government should take seriously the concern expressed by Aer Lingus about its capital structure and commit itself to a firm policy to maintain its equity interest above the 35-40% minimum level indicated in paragraph 29 above;

(e) While the North Atlantic difficulties continue, a cautious approach to changes which might undermine the profitability of Aer Lingus’ European services is appropriate.

3.5 The European Services

73. The main issue we wished to consider in relation to the European services was whether the general level of fares, or some particular fares, were set too high, leading to possible exploitation of the consumer and/or undesirable cross-subsidisation.

74. Table 16 shows a comparison of the main fares available on a number of European routes. On this comparison the Irish routes, except Dublin-Birmingham, do not appear high. Recently, Aer Lingus has introduced a special £55 Dublin-London fare on flights which traditionally have low load factors and this would compare still more favourably.³⁷ On a more extensive comparison of normal economy fares from London to European destinations which we examined, out of 36 fares for distances of less than 1,000 miles, only 4 were cheaper on a per mile basis than London-Dublin and two of these were Dublin-Cork and Dublin-Shannon.

75. Even though the Dublin-London fares may be reasonable in relation to other European fares, this still leaves open the question whether they may not in themselves be rather high. For example, the introduction of shuttle-type services, licensing of additional operators (which would require amendment of the Ireland/UK Agreement) or seasonal charters could be expected to increase competition and reduce fares.

76. One airline which would like greater participation in Irish routes is Dan-Air. In evidence to us Dan-Air said that the existing air transport agreement and the policy of the Irish authorities limited the routes for which they could obtain a licence and that they were obliged to apply the fare structure agreed by Aer Lingus and British Airways. Dan-Air felt that there was no competition between Aer Lingus and British Airways because “They agree the fares” and “most of their services are in pool”.³⁸

77. Dan-Air gave it as their opinion that “the public on the London-Dublin route are paying probably at least 20% more for their fares than they need”. They cited for comparison their own fares on the Gatwick-Newcastle route which they stated to be similar in terms of aircraft, mileage and flying time.³⁹ On the Newcastle route Dan-Air’s normal fare is about 20% below the comparable London-Dublin fare and the special excursion fare is about 23% below its equivalent, although the Apex fare is the same on both routes. Clearly the proportion of passengers in each category would be a relevant factor in a full comparison. Part of the difference may be accounted for by higher handling charges at Dublin but Dan-Air considered that they also had a cost advantage due to lower staffing. It is also relevant to note that Dan-Air’s lowest fare was stated to be “rather akin to a stand-by fare” so as to act as a “last minute seat filler”’. Dan-Air agreed that this fare “is in no way profitable taken in isolation”.⁴⁰

78. Aer Lingus told us that they had carried out a study on the possible introduction of shuttle-type services cross-channel with British Airways but had concluded that it would be a higher cost operation and would not have any particular advantages for the market place.⁴¹ As for additional operators, Aer Lingus pointed out that Air UK, Dan-Air and British Midland also offer services between Ireland and UK, although only British Airways competes on Dublin-London.⁴² Aer Lingus also made the point that a public utility is always vulnerable to competition which just focuses on the more profitable parts of a business without accepting the public service obligations which go elsewhere. In this connection we note the reply given by the Minister for Transport in reply to a question on 14 May 1980 concerning Dan-Air cross-channel fares. He said, “While I am always willing to examine any filing on its merits I would not be prepared to approve any fare which would tend to undermine the economics of cross-channel services and militate against the operation of year-round services on the present extensive network of Ireland/UK routes”. A similar point is made against charters, i.e. that they would win a share of the business in peak periods at the expense of reliable year-round services.

79. On the evidence reviewed by the Committee, Aer Lingus fares appear very reasonable by the general standard of European fares. Nevertheless, the Committee believes that on a pure cost basis it would be true to say that the London-Dublin fare, and possibly other European fares, are on the high side. While we recognise the contribution which these services make to the support of Aer Lingus operations as a whole we feel that there should be further experimentation with lower fares on these routes and that there should be a particular effort to reduce costs in this area. This is a matter which we propose to re-examine when we next have occasion to report on Aer Lingus and we shall consider in the circumstances then prevailing whether the possibility of further competition on the London-Dublin route could be entertained as the only effective means of securing low fares based on low costs.

TABLE 16

Some European Fare Comparisons (Round Trip)

(Based on Fares from 1 April 1980—all fares expressed in Irish pounds)

Source: Aer Lingus.

80. The question of handling charges came up in the course of our inquiry. Aer Rianta in its memorandum⁴³ to us recorded that Aer Lingus provides a variety of services at Irish Airports as agents for Aer Rianta. These services include passenger handling, baggage handling, cargo handling and aircraft handling. Aer Rianta state that:—

“While the principal/agency relationship is accepted by Aer Lingus and we are fully satisfied with the standard of services they provide, it has not been possible to reach agreement on the level of control which Aer Rianta should exercise over the charges made by Aer Lingus for these services.”

Dan-Air maintained in evidence that “… the handling charges which we are currently paying in Ireland are much the highest that we pay anywhere in Europe”.⁴⁴

81. It is important to keep clear the distinction between

(a) Landing charges: landing fees, passenger load fees and certain other charges which are levied by Aer Rianta,

(b) Handling charges: passenger, baggage, cargo and aircraft handling charges which are levied by Aer Lingus; these services being supplied by Aer Lingus as agents for Aer Rianta.

In relation to the former, which were the subject of a complaint by Aer Lingus at that time, we recommended in our report on Aer Rianta that the question of the competitiveness of landing charges should be referred by the Minister for Transport to the National Prices Commission for urgent examination. We do not propose to comment further on such charges at this stage.

82. In relation to the handling charges we note Aer Lingus’ view that it generates “the costs in order to provide these services and we could be placed in an impossible situation if we handed over control of the charges to a third party”. Aer Lingus states that its charges are based on marginal costs and that a substantial part of the handling operation is required for its own traffic anyway. Aer Lingus also states that they operate an ‘open-books system’ so far as Aer Rianta are concerned “so that they are in a position to examine the structure of our costs”.⁴⁵ Aer Rianta are consulted by Aer Lingus about proposed changes in handling charges.

83. It appears to us that there is economic logic in the arrangements that now exist between Aer Lingus and Aer Rianta in this matter, but we urge Aer Lingus to keep its handling charges down to the maximum extent possible, so as to avoid a possible deterrent to the development of airline traffic to Ireland. If Aer Rianta are not satisfied, on the basis of the cost information made available to them, that the handling charges are reasonable, they should take up the matter with the Minister for Transport.

IV ANCILLARY ACTIVITIES

4.1 Introduction

84. Aer Lingus’ ancillary activities are in three broad areas⁴⁶:—

(a) Aviation Related Services: These comprise activities carried on by internal technical departments (e.g. passenger and cargo handling for other airlines at airports in the US, UK and Ireland; training services for other airlines) and by a number of subsidiary companies (e.g. maintenance and overhaul of other airlines’ aircraft carried on mainly by Aviation Traders (Engineering) Limited, a subsidiary of Aerlinte Eireann Teoranta; helicopter services in Ireland by Irish Helicopters Limited, an associated company of Aer Lingus Teoranta; and tour operator services in Ireland and Britain). The growth of the aircraft maintenance business will be enhanced with the development of Airmotive Ireland Limited, a company which when fully operational will have a fixed asset investment of £15 million and will employ approximately 600 people at a plant to rebuild jet engines at Rathcoole, Co. Dublin.

(b) Hotels, Leisure and Catering: The principal activities here are carried on by four subsidiary companies abroad (Aer Lingus-Dunfey Corporation in the USA acquired in 1976; London Tara Hotel Limited; Hotel Commodore S.A. in France; and Foxhills Golf and Country Club Limited) and by two associated Irish companies in which Aer Lingus has a 25% interest (Jury’s Hotel Group Limited; International Airport Hotel Limited). With approaching 9,000 hotel bedrooms under Aer Lingus control the company is by any standards a major hotel operator now. Also included are external catering services provided by Aer Lingus.

(c) Financial and Computer Services: The principal companies under this heading are Cara Data Processing Limited (100% subsidiary of Aer Lingus Teoranta) and Guinness Peat Aviation Limited, in which the Aer Lingus interest was recently reduced from 41.5% to 29.3% as a result of Air Canada joining the company’s stockholders. The latter company undertakes aircraft brokerage and leasing and has been one of the most profitable investments made by the airline. Also included are profits from sales of in-house computer services to other airlines and from aviation reinsurance conducted in association with the Insurance Corporation of Ireland.

4.2 Financial Performance of Ancillaries

85. The financial results achieved by the ancillary activities as a whole were included in Table 5 in Section II. We also discussed there the question of the proper balance between the main air transport activity of Aer Lingus and ancillary activities. In this Section we consider a number of more detailed points in connection with ancillary activities.

86. Table 17 shows an analysis of the financial results of the ancillary activities up to 1978/79 according to the same broad headings adopted in para. 84 above. Aviation related services have produced very good profits although the figures for return on capital employed are not very meaningful for this type of activity. The steadily rising trend of profitability on Hotels, etc. and Financial and Computer Services is a particularly satisfactory feature of the results. Presentation of financial information on ancillaries has changed in the 1980 annual report so that comparable figures for 1979/80 are not available. New information includes operating revenues and profit (before central services, interest and taxation). These figures are shown in Note (b) to Table 17 and these indicate continued strong growth of profitability.

TABLE 17

Profitability of Ancillary Activities, 1974/5-1978/9

Note

Source: Aer Lingus Annual Reports, 1975 to 1980.

4.3 Management and Control

87. Given the significance which ancillary activities have now come to assume in Aer Lingus total operations, the question of management and control is of some importance. While ultimate sanction rests with the Government, Aer Lingus said⁴⁷ that Government would normally restrict its appraisal to the broad policy aspects of a project. The Department of Transport and the Government would not see it as their function tomake a detailed commercial evaluation of individual projects: that is the responsibility of the Board and management of Aer Lingus. Aer Lingus confirmed that there has throughout been broad endorsement of their policy for ancillaries by the Government.⁴⁸

88. Internally the arrangements are⁴⁹ that the Chief Executive for Ancillaries reports to the Chief Executive who in turn reports to the Board. The head office management team for ancillaries consists of only 10 executives who are responsible for direction, coordination and overall financial control. In addition, about 25 other executives have some part-time involvement in specific ancillary activities, such as acting as the Aer Lingus nominee on the board of an ancillary. The subsidiaries themselves have their own full-time employees who are not Aer Lingus personnel.

89. It would have been impracticable to examine all the ancillary activities in detail. In the remaining paragraphs of this section of the report we comment briefly on areas where it seemed to us that there might be problems although we recognise that the performance of the ancillaries as a whole has been satisfactory.

4.4 Aviation Related Activities

90. Aer Lingus explained that the very high profit of the aviation related ancillary activities in relation to capital employed was not due to a high proportion of leased capital. Most of the capital in this area had been acquired for Aer Lingus’ own use (e.g. in maintenance and overhaul of its own aircraft). Not much of the capital had been specifically bought for the services provided by Aer Lingus to other airlines so that relating profits to capital for these activities produced a misleading picture, since only marginal capital requirements were reflected in the figures.⁵⁰

91. The jet engine rebuilding plant at Rathcoole (Airmotive Limited) is a major new investment in this area. Work has started on the project and is on target.⁵¹ The project will involve a total investment of over £22 million. This is to be financed by £5 million of equity from Aer Lingus, IDA grants of about £5 million or larger and borrowings of up to £12 million.⁵² Aer Lingus is satisfied that the project should show a very satisfactory rate of return although it is not without risks. The principal risks are: (1) that the total market may not develop as well as expected or that the new plant may not win its expected market share; (ii) that costs of production may exceed the estimates bringing down the rate of return; and (iii) the industrial relations risk involved in a large plant employing 600 people eventually. Aer Lingus are not unduly concerned about the market risk because although existing business of this kind comes predominantly from developing third world countries, significant contracts from Germany and the UK are expected. In view of the importance of this project and the major commitment of public sector funds through IDA and Aer Lingus, the Committee emphasises the necessity that all concerned will work to achieve costs of production in line with the estimates in a climate of good industrial relations.

4.5 Hotels

92. Hotels are a very important area of Aer Lingus’ ancillary activities. Aer Lingus has adopted certain policies in order to minimise the risks to which it might be exposed in this area. These include:—

(a) taking only a minority stake in the equity of hotels and encouraging other investors, in many cases institutional investors, to be the majority shareholders. Aer Lingus’ minority stake is then combined with a long term management contract, the fees from which can be expected rapidly to repay the equity investment. In such cases, Aer Lingus will negotiate a shareholders’ agreement requiring consultation in case of major changes in policy;⁵³

(b) Looking for a geographical spread of investments;⁵⁴

(c) concentrating on urban hotels rather than resort hotels in line with the less optimistic view of leisure developments now held by the company.⁵⁴

93. The Dunfey Hotels in the US constitute a rather special case in this field.⁵⁵ The hotels were originally acquired under a 35 year lease arrangement in 1976. These arrangements were very favourable to Aer Lingus and led the lessors, Aetna Life and Casualty Incorporated, a major US life company, to offer them for sale to Aer Lingus. A deal was fixed under which Dunfey Hotels passed into Aer Lingus ownership in December 1978, again on very favourable terms. From the original position where out of 21 hotels 14 were leased and 7 managed, the situation now is that there are 20 hotels, 11 owned, 2 still on lease and 7 on management contracts, three of these being part-owned. The financial outlay required to achieve this position has effectively been limited to Aer Lingus’ equity investment in Dunfey plus guarantees for bank borrowings.

94. With regard to the Dunfey Hotels the Committee is satisfied that an exceptionally fine investment has been achieved on very favourable terms.

95. Other major hotel investments include the London Tara Hotel (built and owned by Aer Lingus ) and the Commodore Hotel in Paris the lease for which was acquired in July 1979. These hotels and the hotels in America are linked in with package tours from Ireland and elsewhere.

96. On the question whether Aer Lingus might invest more in hotels in Ireland (in addition to the interest in Jury’s Hotel group and in the hotel at Dublin Airport), Aer Lingus commented: “The prime responsibility for providing hotel accommodation in Ireland is not ours but to the extent that we see a problem . . . 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”.⁵⁶ The Joint Committee agrees that this is a reasonable position for Aer Lingus to take.

4.6 Leisure Developments

97. In the early years of ancillary development, Aer Lingus felt that leisure related developments would be a promising area for investment. Two investments which were carried out in pursuit of this policy were a holiday resort project in the Canary Islands (to be implemented by Aer Lingus Espana Tourist Developments S.A. in which Aer Lingus have a 65% equity stake through Aerlinte) and the Foxhills Golf and County Club Limited in Surrey, England.

98. In the Canary Islands a site of over 40 acres was acquired in 1973 and infrastructure facilities (roads, lighting, water, etc.) have been put in. With the change in the world economic situation since the oil crisis in 1973, Aer Lingus and the other shareholders no longer feel that the outlay required to complete the investment by putting in hotels, apartments, etc. would produce a satisfactory pay-off.⁵⁷ The alternatives would appear to be either retaining the investment until prospects for it have improved sufficiently or divestment. Aer Lingus indicated that they would be prepared to dispose of all or part of their interest in this project if a buyer on suitable terms could be found. However, Aer Lingus are in no hurry about this and consider that the existing assets will maintain their value.⁵⁸

99. The Foxhills project⁵⁹ is located on about 400 acres in Surrey. The original conception in 1972 was that it would have championship golf courses and a full supporting centre of tennis, swimming, squash and so on, plus a hotel for which there is planning permission. In view of changed economic circumstances, the development is being phased. First the golf courses were completed in 1975 and in 1978 phase 2 consisting of the swimming pools, tennis and squash courts, restaurant and bar were completed. The project is operating satisfactorily and the operating result is now positive. However the profits are not sufficient to cover interest charges fully. Aer Lingus now feel that prospects in the next few years look quite good, but retention of this business is not considered an essential part of Aer Lingus strategy.

100. The Committee notes Aer Lingus’ willingness to sell off these two investments if a suitable buyer can be found. The Committee would not see any objection to this, which would be consistent with the views we have expressed earlier in para. 33, and would make a modest contribution towards improving Aer Lingus’ capital structure.

101. Blueskies and Sunbound, the Irish tour operators who were acquired by Aer Lingus in the early seventies, are obviously in competition with other Irish tour operators. Aer Lingus has agreed with the Irish Travel Agents Association that these companies will operate on a full arms-length basis. Aer Lingus is conscious of the danger of criticism for unfair competition. We were told in evidence that the pricing of charter services is decided by Aer Lingus on the basis of ordinary market considerations and that they do not offer any special deals or make special arrangements with their own tour operators.⁶⁰

4.7 Future Ancillary Investment

102. At a number of points in their evidence Aer Lingus underlined their desire to continue with a strong positive programme of investment in ancillary activities, including both expansion of existing activities and investments in new sectors. The general view of the Joint Committee on these matters has already been indicated in Section II (para. 33).

V AER LINGUS AND TOURISM

5.1 Objectives

103. In a statement of its functions and objectives adopted by Aer Lingus about 10 years ago, there is included the following objective related to community development in Ireland:—

“Tourism: To engage in tourist promotion to Ireland to the limit of our ability, directly and in cooperation with others, and at a standard that will earn international respect.”

In their memorandum to us, Aer Lingus stated that their role in promoting tourism is of particular importance for the Irish economy. It was also stated that “Aer Lingus has for many years played a leading part in developing the tourist market through its own promotional efforts and in close collaboration with Bord Failte”. Aer Lingus now has 38 sales offices abroad and overseas sales related costs are running at about £13.5 million annually. In some areas, office accommodation and personnel are shared with Bord Failte. Thus Aer Lingus see their role not simply as serving tourism by providing transport facilities but also as active promotion of tourism.⁶¹

5.2 Statistics of Tourists Carried by Aer Lingus

104. Aer Lingus statistics which are summarised in Table 18 show that 65% of passengers on European routes (including UK) are travelling for non-business reasons. On transatlantic routes the proportion is 88%. Thus a very high proportion of Aer Lingus passengers are tourists, if one counts as tourists those visiting friends and relatives as well as holidaymakers. Aer Lingus reckon that 42% of all tourists to Ireland, including non-air visitors from the UK, travel by Aer Lingus while for tourists arriving by air the proportion is 62%. However business travellers are also very important on some routes: 45% on London scheduled services, 39% on European scheduled services and 14% on transatlantic scheduled services.

TABLE 18

Analysis of Aer Lingus Passenger Traffic by Purpose of Journey and Route Group 1979/80

(Figures show percentages based on single trip numbers)

Source: Derived from statistics supplied by Aer Lingus.

105. The cross-Channel services which have the highest proportion of business traffic have shown the slowest growth in passenger numbers in recent years (8% p.a. 1975/76 to 1979/80). On the other hand, continental passenger numbers have grown faster than transatlantic passenger numbers—15% as against 12%—despite the high proportion of tourists in the latter. A high proportion of tourists therefore does not provide an assurance of high traffic growth. In fact in recent months the fall off in air traffic worldwide has been due in part to the depressing effects of recession on tourism.

5.3 Possible Conflict between Tourism and Commercial Objectives

106. The main question which the Committee wished to consider was whether Aer Lingus’ role in relation to promotion of tourism to Ireland was in conflict with its role as a commercially viable air transport operator. There seemed to be four main ways in which such a conflict might arise:—

(a) Aer Lingus might feel it necessary to operate services for tourism reasons on routes where the traffic volume is insufficient for commercial viability;

(b) the highly seasonal pattern of tourist demand for services might impose additional operating costs and other diseconomies;

(c) tourism being a very price sensitive sector of the air transport market, Aer Lingus might be drawn into offering unduly low promotional fares and other incentives in order to attract tourist traffic to Ireland;

(d) Aer Lingus’ direct promotional expenditure might rise to excessive levels.

107. To help the Committee in its consideration of this question, Bord Failte was also invited to give evidence and witnesses from Bord Failte appeared before the Committee on 30th April 1980.

108. Aer Lingus does not consider there to be a conflict in practice between its air transport role and its tourism promotion role. As one Aer Lingus witness put it: “The only product we have to sell is a trip to Ireland”.⁶² This means that expenditure on advertising Aer Lingus in foreign markets is in effect advertising Ireland as a tourist destination. As has already been seen, a high proportion of Aer Lingus’ passengers are in fact tourists. Clearly Aer Lingus would be bound to give very careful attention to its policies for this important market sector even from a strictly commercial stand point. Aer Lingus also stated that it would only operate a particular route network on the basis of its commercial viability. “We do not introduce any new services unless we are satisfied that they have the potential to be commercially viable.” ⁶³

109. From the other side, Bord Failte has stated in its memorandum to us that it considers it essential from the tourism view point for Ireland to have a strong, viable national airline because Ireland cannot afford to depend on the operations of carriers who have no long-term commitment to servicing Ireland. There are frequent consultations between Aer Lingus and Bord Failte on pricing policies, development of new routes, market research and so on.⁶⁴ It would be inconsistent with the views expressed by both parties for Bord Failte to press on Aer Lingus policies that would undermine its commercial viability or for Aer Lingus to accept such advice. Bord Failte also made the point that they would not wish to become too closely identified with a single operator, since other carriers could also play a part in bringing tourists to Ireland. Where new routes were being developed it was quite common for them to start with charters until the potential had been established. Then Aer Lingus might consider the feasibility of a scheduled service as had happened in the case of Dublin-Amsterdam.

110. It appears that insofar as there may in the past have been a divergence of views between Aer Lingus and Bord Failte, closer agreement has now been achieved. Aer Lingus agreed that the changes that had occurred in its fare structures in recent years had created a position more likely to encourage tourism.⁶⁵ However Aer Lingus had itself been active in the North Atlantic charter market prior to this. Aer Lingus also argued that in the European market they had taken the initiative to develop a wide range of innovatory fares, in advance of other airlines, even though there was not strong competition from charters or other operators. For example, the increase in inclusive tour business from the major Continental points to Ireland over a five year period in the middle of the 1970s went up by 200%.⁶⁶ On the UK routes also, Aer Lingus had introduced a number of promotional fares such as weekend fares, special excursion fares, all-the-way fares, spouse fares, APEX fares and inclusive tour fares. Aer Lingus said these fares “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 aggressive low fare, high load factor policy.⁶⁶

111. In the light of these arguments, the Committee is of the opinion that the risk of excessive route development in the interests of tourism is small and also that the flexible fare policies that can now be implemented permit promotional fares to be introduced without necessarily prejudicing sound commercial pricing. We are particularly impressed by the point that since a majority of Aer Lingus passengers are tourists, Aer Lingus needs to be actively involved in the long-term development of this traffic and fares for tourists must be a major feature of Aer Lingus’ price policies. It remains true however that tourist traffic is highly seasonal and that a balance needs to be struck between serving this market and providing regular services on a year-round basis in the interests of Irish business and administration.

112. With regard to direct expenditure by Aer Lingus on tourism promotion, the £13.5 million spent annually by Aer Lingus includes sales costs not directly related to tourism promotion. Bord Failte agreed that in the absence of Aer Lingus promotional efforts, Bord Failte’s promotional expenditure would need to be increased by £6-7 million or more.⁶⁷ This indicates that around half Aer Lingus’ outlay can be regarded as direct promotional expenditure. However, Aer Lingus do not consider that this expenditure could be saved. Aer Lingus consider it to have sound commercial justification from the point of view of their operations. The position was stated to be similar to the case of a private company which in addition to advertising individual products also undertakes corporate advertising: while it is difficult to attribute specific benefits to such a campaign, there can in suitable cases be a strong positive effect.⁶⁸ We note however that a large part of Aer Lingus’ promotional expenditure is in the USA where Aer Lingus services currently lose money and this must raise questions about the justification for, and the effectiveness of, the promotion being undertaken there.

5.4 Administration of Tourism Promotion

113. Duplication of effort by too many agencies pursuing the same objective could reduce the cost-effectiveness of the total effort to promote tourism to Ireland. Apart from Bord Failte and Aer Lingus, SFADCo. and CIE and various private companies are also involved in promoting Irish tourism. Aer Lingus believes that although a number of bodies are involved, coordination is better than in the case of other countries.⁶⁹ Nor do Aer Lingus consider the total effort to be over-expensive since the various agencies can go in on top of one another’s advertising. Bord Failte saw a distinction between national promotion of Ireland which is their role and the efforts of carriers who in attempting to win a share of the market would need to promote both their service and the destination. They also confirmed that there is a great deal of coordination between the various agencies involved. Bord Failte and Aer Lingus share offices at a number of locations which reduces overheads. They also work closely on advertising⁷⁰ using joint advertising quite extensively.

114. The Joint Committee is of opinion that there is reasonable coordination between agencies promoting Irish tourism. However the expenditure is now very sizeable and the Committee would have liked to see more evidence that this level of expenditure is fully justified in terms of results. There would appear to be a particular danger of Aer Lingus, because of its financial resources, taking on too much of the role of national promotion which is properly the job of Bord Failte. This would not be appropriate particularly at a time when Aer Lingus’ overall profitability is low, and Aer Lingus should concentrate its promotional efforts to serve its basic business of selling seats.

VI ORGANISATION AND MANAGEMENT

6.1 Introduction

115. In this final Section we bring together a number of points concerning Aer Lingus’s organisation and management, including industrial relations, which could not conveniently be dealt with elsewhere.

6.2 Organisation and Control

116. The first point that the Joint Committee would like to make is that we do not see the justification for having two main operating companies in Aer Lingus (Aer Lingus Teoranta and Aerlinte Eireann Teoranta). The position seems to have arisen for historical reasons which appear no longer to have any operational, administrative or other advantage. The two company situation has made more difficult our task in trying to understand the financial position. We recommend that the Government examine the possibility of effecting an amalgamation into a single company. However we would not want a move in this direction to lead to less full information being made available on the performance of different parts of Aer Lingus’ operation either in Aer Lingus’ published accounts or in the information which the Department of Transport obtains from Aer Lingus.

117. Apart from this point, the main issue related to the management of Aer Lingus that concerned us was whether adequate arrangements existed to ensure accountability and control of ancillary activities. Our comments on this issue are in Section IV above.

6.3 Employment Trends and Earning

118. Table 19 shows approximate numbers of Aer Lingus staff as at 1st January 1980. This shows total employment approaching 14,000 of whom rather more than half are employed by wholly owned subsidiaries within the ancillaries division. The remainder are employees of the two air companies, although the point has been made earlier that a proportion of these are engaged on ancillary aviation related services provided to third parties (e.g. baggage handling, catering, etc.). 83% of the air company employees, but only 3% of subsidiaries’ employees, are based in Ireland, giving total employment in Ireland of nearly 6,000.

TABLE 19

Aer Lingus Staff as at 1/1/80

Source: Aer Lingus memorandum to the Joint Committee.

119. Employment trends for the air companies are shown in Table 20. The figures are for 31st March of each year. The increase over the period is 1,145 (20%), about half of which occurred between 1978 and 1979. The Committee was concerned that such large increases in employment should have taken place when there was an urgent need to raise productivity in order to compete effectively in the market. Aer Lingus explained that the main causes of the recent increases have been the larger fleet now operated (2 additional B 737s and 1 additional B 747) and increased output (passenger numbers increased by about 40% over the period).⁷¹ Also about 235 of the increase in employment was in aviation related ancillary activity, mainly maintenance contract work, due to expansion of work in that area:—

TABLE 20

Air Companies Employment, 1976-1980

(Numbers as at 31st March)

Source: Aer Lingus.

120. Aer Lingus provided us with details of basic rates of pay and average earnings for employees by sub-grade in 1979/80. The figures do not include salaries of departmental managers which are not published. We have summarised these figures by function and by earnings band with the results shown in Table 21.

TABLE 21

Analysis of Aer Lingus Employees by Function and Average Earnings, 1979/80

Source: Derived from statistics provided by Aer Lingus.

121. Average earnings may exceed basic rates of pay for a number of reasons such as payments for shift/rostered duty, overtime, licence pay and bonuses. We noted that average earnings in some grades in 1979/80 were well above the top of the basic rate scales effective from 1/1/80. Earnings 30%-40% or more above basic rates were received by some technical and operative grades. Aer Lingus point out that the impact of factors leading to higher earnings is greater than generally applies in industry because of the round-the-clock nature of the operation, the high level of technology involved and susceptibility to disruption from many sources.

122. One particular factor which may have contributed to high labour costs is overtime. Middle and senior management do not have payment for overtime and maximum flight crew hours have to meet safety regulations and industrial relation agreements. Nevertheless, the overall overtime average per employee for the airline during 1979/80 was 3.76 hours per week. The following figures show average overtime by functional group:—

Source: Aer Lingus.

Particularly high overtime, averaging 9.88 hours per man week was recorded for production tradesmen. It was not practicable to investigate this important matter but we note that in a recent circular to Aer Lingus employees, overtime is one of four items singled out for specific attention by departmental managers. We agree that in the face of Aer Lingus’s present difficulties, and indeed at any time, there should only be overtime working when it is absolutely unavoidable.

123. The implications of staff numbers for productivity have been considered earlier in this report (Section III). At this point we note the observation of the Chief Executive of Aer Lingus “I do not believe there is a gross element of over-staffing, but there is scope for improvement and saving”.⁷² At the final evidence session he told us “Yes, there is no question but that there is scope for improved productivit”.⁷³ In particular, Aer Lingus feel there to be room for greater flexibility to break down rigidities that have developed over the years. A second area where Aer Lingus hope to achieve improvements is through greater use of computers. These two problems raise the question of industrial relations generally in Aer Lingus which is the remaining major issue we wish to consider in this Section.

6.4 Industrial Relations

124. Until 1978 Aer Lingus had not had any previous industrial stoppage. The trade union representatives who appeared before us made the general observation that industrial relations in Aer Lingus stand up favourably—for example in comparison with CIE.⁷⁴ However there was a feeling that in recent years the degree of loyalty within Aer Lingus had weakened and that as a result there is now plenty of room for improvement in industrial relations.⁷⁵ The strike by clerical workers in 1978 and the craftsmens strike which took place during our enquiry would seem to lend support to this point of view. This is a matter of great concern to the Committee.

125. It appears to us that there are a number of factors in Aer Lingus’ present situation which might contribute to a deterioration in industrial relations quite independently of any change in policies or organisation. Firstly, the airline has now reached the position of being a very large employer in the Irish economy and experience in other countries shows a definite association between size of firm and incidence of strikes. Secondly, Aer Lingus is no longer growing very rapidly and has indeed entered a period of some commercial strain which may require a degree of contraction in certain areas. This kind of situation is liable to generate industrial relations tensions. Thirdly, in the background there is the general situation of high inflation and recessionary tendencies in the world which has affected the Irish economy as well as others, creating a difficult environment for management and labour to handle, even given goodwill.

126. Nevertheless, whatever the predisposing factors, it is an extremely serious matter that events should have occurred that gave rise to losses of £5 million in 1978 and an estimated £6 million in 1980, not including any consequential damage resulting from cancellations and loss of confidence in Aer Lingus subsequently. Such developments cannot help to save marginal services and must prejudice employment in the long run.

127. After the 1978 strike by clerical workers, arrangements in the form of a joint working party were instituted to improve communications between management and workforce, as alleged lack of consultation had been a major factor in the strike. Union representatives agreed that consultation arrangements were now much improved for clerical workers and that in an informal way other sections of the workforce had also benefitted.⁷⁶ In view of the Company’s stringent financial position, it will be important that these arrangements continue to operate satisfactorily in the 1980s to deal with the problems as Aer Lingus moves to implement its computerisation plans.

128. Although there have been improvements in consultation procedures, the unions felt that there was still too great a tendency on the part of Aer Lingus middle-management to refer matters, which the staff consider should be resolved on the spot, upwards for decision.⁷⁶ It was not possible for us to probe this point in detail. However one development which may help matters in the future is the appointment of worker directors which will occur in 1981. With representation at the highest level in the company it may be possible to nip in the bud potential sources of discontent before they escalate to major proportions. To achieve this it will be necessary to institute at the same time appropriate structures below board level.

129. A remaining potential source of difficulty in industrial relations in future is the question of relativities. Both Aer Lingus and union representatives referred to this matter in their evidence to us.⁷⁷ Aer Lingus state in their memorandum that one consequence of the clerical strike of 1978 has been to make it more difficult to move towards a better coordinated negotiating structure. “We have been working very hard to try to bring together these major union groupings within the airline, to get a common negotiation and to get away from these relativity issues which are causing great problems for us” .⁷⁸

130. Relativity problems were at the root of the strike by some 1,000 tradesmen which took place between May 30th and July 4th 1980. The tradesmen, represented by ten different unions, claimed that there had been an erosion of the superior pay position which they had traditionally enjoyed relative to staff in the operative grades. The erosion was claimed to result from the operation of the participative job-ranking scheme for operatives. An additional argument was that a similar process had occurred as a result of the clerical job evaluation scheme. We understand that Aer Lingus feels that certain trades, such as engineering and electrical, have developed much further than others giving rise to a case for differential scales which recognise the changes that have occurred. The tradesmen however are unwilling to move away from a common grading for all tradesmen. At the time of writing the matter was being processed through the Labour Court, following agreement on an interim increase in basic rates. The Committee very much hopes that the matter will be settled in a manner that provides a basis of long term stability so as to ensure the survival of the Company in the difficult times ahead.

VII CONCLUSION

131. Various written submissions received from Aer Lingus are set out in Appendices 1 to 7.

132. Written submissions in relation to Aer Lingus received from:—

(a) Aer Rianta Teoranta

(b) Bord Failte Eireann

(c) Department of Transport

(d) Dan-Air Services

(e) Civil Aviation Authority (UK)

are set out in Appendices 8 to 12.

133. The Joint Committee took oral evidence from:—

Aer Lingus,

Bord Failte Eireann,

Irish Transport and General Workers Union,

Federated Workers’ Union of Ireland,

Civil Aviation Authority (UK), and

Dan-Air Services.

The Joint Committee was appreciative of the ready manner in which those who gave evidence responded to questions.

134. For the purpose of this inquiry the Joint Committee engaged Professor Christopher D. Foster, Mr. Hugh Wenban-Smith and Mr. Stephen Dewar of Coopers & Lybrand Associates Limited as consultants. It wishes to thank them for their invaluable advice and help at all stages of the inquiry. It also wishes to thank Mr. Liam Boyd, F.C.I.T., for the very informative position paper prepared by him for the Committee.

135. In view of the deteriorating economic climate for the air transport industry generally, and for Aer Lingus in particular, the Committee requests that a debate on this Report take place in the Seanad in accordance with the Order of that House on 14 May 1980.

(Signed) EOIN RYAN

Chairman of the Joint Committee

16 December 1980

*Note: Average capital employed is substantially less than total assets employed as shown in Table 1 mainly because of large additions to fixed assets in the books of Aer Lingus (on account of aircraft and property) very late in the financial year and because subsidiaries which have not commenced trading and assets not actively employed have been excluded.

^(a) A reclassification of items increased this figure to £54.4 million in the 1977 accounts.

^(b) These figures are average capital employed as defined in Note (a) on p.32 of Aer Lingus 1979 accounts; all other figures for capital employed are end-year.

^(c) Aer Lingus 1980 accounts do not include an analysis of group capital employed by activity.

¹ See Evidence (Question 20).

² See Evidence (Question 81).

³ See Evidence (Question 115).

⁴ See Evidence (Questions 422 to 425).

⁵ See Evidence (Question 3).

⁶ See Evidence (Question 11).

⁷ See Evidence (Question 2).

⁸ See Evidence (Questions 134).

⁹ See Appendix 10.

¹⁰ See Evidence (Question 33).

¹¹ See Evidence (Question 273).

¹² See Appendix 12.

¹³ See Evidence (Question 272).

¹⁴ See Evidence (Question 353).

¹⁵ See Evidence (Question 34).

¹⁶ See Evidence (Question 23).

¹⁷ See Evidence (Question 272).

¹⁸ See Evidence (Question 280).

¹⁹ See Evidence(Question 22).

²⁰ See Evidence (Question 62) and Aer Lingus press release (27 December 1979).

²¹ See Evidence (Question 322).

²² See Appendix 6.

23 These units are the metric equivalents of the RTM and CTM measures used in paragraphs 51 and 52 above. No difference in concept is involved.

24 It should be noted that the denominator in Table 10 (ATK) is different from that used in the revenue comparisons in Table 9 (RTK), reflecting a judgement that costs are mainly related to capacity supplied. Other denominators can be used (e.g. RTK, number of passengers, etc.) and are useful for some purposes.

²⁵ See Evidence (Questions 128 to 133) and Appendix 2.

²⁶ See Evidence (Question 129).

²⁷ See Evidence (Questions 284 and 286).

²⁸ See Appendix 2.

²⁹ See Evidence (Question 99).

³⁰ See Evidence (Question 84).

³¹ See Evidence (Question 378).

³² See Evidence (Question 38).

³³ Parliamentary Question No. 40, 11 June 1980.

³⁴ See Evidence (Question 41).

³⁵ See Evidence (Question 38 and 40).

³⁶ See Evidence (Question 397).

³⁷ On 25 September 1980 Aer Lingus announced the extension of its “Super-saver” fare, as from November 1 to all routes between Ireland and Britain, including those from Cork and Shannon.

³⁸ See Evidence (Question 363).

³⁹ See Evidence (Question 371).

⁴⁰ See Evidence (Question 374).

⁴¹ See Evidence (Question 31).

⁴² See Evidence (Question 49).

^a Interline, reservation and refund restrictions apply.

^b Available for Saturday/Sunday travel only.

^c Peak.

^d Off-Peak.

⁴³ See Appendix 8.

⁴⁴ See Evidence (Question 391).

⁴⁵ See Evidence (Question 307).

⁴⁶ A full list of Lingus subsidiaries may be found on pages 20 and 30 of Aer Lingus’ Annual Report, 1979/80.

^a Average capital employed as defined in note (a) on page 32 of Aer Lingus Annual Report 1979.

^b Comparative figures for 1979/80 are not available because of changes in the form in which information on ancillary activities is presented in the 1980 Annual Report. The changes include separate identification of taxation and discontinuation of figures for average capital employed while new information on operating revenues is provided. The information given for 1979/80 (with comparative figures for 1978/79) is shown below:—

⁴⁷ See Evidence (Question 194).

⁴⁸ See Evidence (Question 149).

⁴⁹ See Evidence (Question 152).

⁵⁰ See Evidence (Question 162).

⁵¹ See Evidence (Question 334).

⁵² See Evidence (Question 167).

⁵³ See Evidence (Question 184).

⁵⁴ See Evidence (Question 190).

⁵⁵ See Evidence (Question 193).

⁵⁶ See Evidence (Question 136).

⁵⁷ See Evidence (Question 137).

⁵⁸ See Evidence (Question 157).

⁵⁹ See Evidence (Question 158).

⁶⁰ See Evidence (Question 191).

^* Visiting friends and relatives.

⁶¹ See Evidence (Question 196).

⁶² See Evidence (Question 208).

⁶³ See Evidence (Question 198).

⁶⁴ See Evidence (Question 200).

⁶⁵ See Evidence (Questions 201-203).

⁶⁶ See Evidence (Question 203).

⁶⁷ See Evidence (Question 237).

⁶⁸ See Evidence (Question 207).

⁶⁹ See Evidence (Question 205).

⁷⁰ See Evidence (Question 225).

⁷¹ The Committee noted that, in the case of CIE, its Chairman’s review for 1979 contained the following comment—“In the case of the railway, except for freight sundries, the volume of business has been increased and, at the same time, the number of staff has been reduced by over 20%” (Prl. 9165).

^* Skilled and semi-skilled/Technians/Engineers.

⁷² See Evidence (Question 121).

⁷³ See Evidence (Question 439).

⁷⁴ Sec Evidence (Question 249).

⁷⁵ See Evidence (Question 264).

⁷⁶ Sec Evidence (Question 249).

⁷⁷ Sec Evidence (Questions 119 and 249).

⁷⁸ See Evidence (Question 119).