Committee Reports > List of Committees > Joint > 1989 > Committee on Commercial State-Sponsored Bodies (5th Committee) > Report No. 05 - Aer Lingus PLC and Aerlinte Eireann PLC

FIFTH REPORT

AER LINGUS PLC AND AERLINTE EIREANN PLC

1 INTRODUCTION, SUMMARY AND RECOMMENDATIONS

1.1 Introduction

This is the Joint Committee’s second report on Aer Lingus plc and Aerlinte Eireann plc. Since the first report was published in December 1980, there has been considerable change in the airline industry and in the competitive environment of the State airline companies. This report, therefore, concentrates on how Aer Lingus and Aerlinte Eireann have responded and adapted to the changes, on their financial and operational performance and on the strategic issues now facing the Companies.

1.2 Summary

i)Aer Lingus Group, comprising Aer Lingus plc and Aerlinte Eireann plc, is owned 100% by the Irish Government, with a total investment of IR£73.61 million as at 31 March 1988. Each of the two air companies is controlled by a Board of Directors comprising twelve members, including the Chairman, appointed by the Minister for Tourism and Transport.

ii)Following a period of sustained losses in the 1970s and early 1980s and a financial restructuring package which was put in place in 1983/84, Aer Lingus has been very successfully managed back to a situation where it is satisfactorily profitable and has a sound financial structure. This recovery is demonstrated by the profits achieved in recent years, recovering from a net loss of £11.7 million in 1980/81 to a net profit of £37.8 million in 1987/88. In 1988/89 it is expected that a net profit of approximately £40 million will be achieved.

iii)The activities of Aer Lingus span three main areas:

iv)In 1987/88 each of these areas was profitable. Similar results are expected in 1988/89 but the air transportation sector results may be affected by the intense competition on certain routes. Air transport operations, generally, have a volatile profits record; performance in this area being very much affected by general economic conditions and other external factors. This fact underlies the Aer Lingus policy of developing profitable investments in other areas in order to provide stability of income and a sound financial base.

v)Aer Lingus Group’s capital structure has been greatly strengthened in recent years and has enabled it to meet the financial requirements of a re-equipment programme for its European operations.

vi)In its air transport operations Aer Lingus has coped successfully in an environment of increased competition, particularly in the area of fares. Through cost reductions and capacity management it has improved its performance considerably. It has extended its route network, both in Ireland and in Europe, and is currently examining other possibilities.

vii)A number of major issues that will affect the future role and operations of Aer Lingus have been identified. These are concerned with:

Fleet Renewal

Renewal and expansion of the European fleet is currently in hand. The requirements in terms of aircraft and finance that might be required for the Atlantic will be determined by developments but, at this stage, no major commitment is envisaged before the mid-1990s.

Future Sources of Capital

Aer Lingus Group has adequate funding for its immediate capital needs. Existing levels of profitability, coupled with other existing means of financing investment may not, however, be sufficient to meet the needs of both longer-term fleet replacement and a continued programme of expansion of ancillary activities. New approaches to financing may be required in the future.

Privatisation

The question of privatisation has been raised in relation to Aer Lingus. This report considers the background to privatisation, its objectives, advantages and disadvantages and identifies major national issues that would require to be considered in any proposed privatisation.

Regulatory Developments

Perhaps the most immediate challenge facing Aer Lingus is in the area of regulatory developments, particularly in Europe. Aer Lingus has been quick to exploit new opportunities but, as a small airline operating on the periphery of the European market, it is vulnerable in competing against the large carriers. Strategic alliances, together with the necessary support by the Irish Government in deregulation issues, will be important in ensuring the future of Aer Lingus in Europe and elsewhere.

1.3 Recommendations

In putting forward the following recommendations, the Committee has taken account of the views of the various groups involved in Aer Lingus, as put forward in the written submissions to the Joint Committee and in the public hearings. Having considered these views and the performance of Aer Lingus to date, the Committee has made the following recommendations:

i)The current management policies should be continued in the areas of:

ii)The Committee recommends that the air companies adopt a rational group structure for the organisation of all of its activities. The structure should, apart from being operationally and financially effective, be one that reflects the major business activities of the Group and which will facilitate the future financing of its operations.

The structural rationalisation might well involve a merger of the two companies with a holding company and the re-organisation of specific activities into appropriate subsidiaries. The process of rationalisation is likely to be complex and perhaps, lengthy requiring, possibly, a special Act of the Oireachtas. It should, therefore, be treated with some urgency as a critical factor in adapting Aer Lingus for future uncertainty.

The Committee notes that, although currently profitable, very substantial losses have been sustained on the Atlantic operations over the years. Accepting Government’s policy that the Company has a continuing role in meeting national needs through the provision of a transatlantic service, the Committee nevertheless recommends that the costs of maintaining that policy should be made more explicit and should be kept under continuous review.

iii)The Government should continue to support the National carrier’s interests in any interstate or European Community discussions or negotiations affecting operating rights. In particular, the Government should continue to be aware of and support the needs of Aer Lingus in terms of:

De-regulation may require some safeguards for Aer Lingus, a small airline operating on the periphery of Europe. It is particularly important since Ireland will have no land connection with Europe and the national airline may be a vital element in regional policy.

iv)In the context of both European de-regulation and increasing competition and also, possible future needs for funding of activities, Aer Lingus activities should not be restricted to simple trade relationships. They could well include not only shareholdings in other organisations but such arrangements as cross shareholdings with other carriers or joint ventures, as has already been done in non-transport undertakings. Alliances with other small state owned airlines, who are concerned with similar issues, both commercial and state, might be advantageous. Possibly, the introduction, on a reciprocal basis, of non-national directors with European aviation experience could be useful in giving the airline a European perspective. It would seem that, in the next few years at least, the problem of attacking the European market will be the major strategic question for Aer Lingus’ management.

v)In the context of any possible introduction of external sources of equity in future years, Aer Lingus should identify any impediments to such developments and assess any requirements for structural, operational, legal or other changes.

vi)The Committee discussed the concept of privatisation in relation to Aer Lingus and recommended that, should Government consider such a development in the future, prior to any decision being made in this regard, the Government and management of Aer Lingus should consider how the Airline does, or can in the future, show at least the major characteristics that would need to be present if privatisation were to proceed successfully, namely:

The Committee took the view, however, that privatisation was only one of a number of possible sources of further capitalisation for the Airline.

vii)Finally, as befits a successful commercial organisation, Aer Lingus should undertake to provide an annual dividend to its shareholder based on the normal commercial return expected on the investment in the Company and thereby recognise the cost of funds provided by the State.

2. THE ROLE OF AER LINGUS

2.1 Legal Position of the Air Companies

The Aer Lingus Group comprises Aer Lingus plc and Aerlinte Eireann plc. Aer Lingus plc was incorporated as a private limited liability company in 1936. It operates air services within Ireland and between Ireland, the United Kingdom and Europe. Aerlinte Eireann plc, which was incorporated in 1947, operates air services between Ireland and the United States.

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 separate public limited liability companies on 27 July, 1967. Each of the Companies has its own Board of Directors, capital structure and accounts. There are subsidiary and associated companies reporting to both.

Although separate legal entities, the two Companies share a common management and Board of Directors. The services of both Companies are integrated under the marketing name of ‘Aer Lingus’ as Ireland’s national airline.

In order to avoid confusion and repetition in this report, the name ‘Aer Lingus Group’ denotes the activities and subsidiaries of Aer Lingus plc and Aerlinte Eireann plc combined.

2.2 Ownership and Control

Aer Lingus Group is owned 100% by the Irish Government, with a total investment of IR£73.61 million as at 31 March 1988.

The issued share capital of Aer Lingus plc at 31 March 1988 amounted to IR£36,393,003. This comprised 21,393,003 ordinary shares of IR£1 each, all of which, apart from a small number of Directors’ qualifying shares, are held by the Minister for Finance, and 15,000,000 preferred ordinary shares of IR£1 each which are held by Aerlinte Eireann.

The issued share capital of Aerlinte Eireann plc at 31 March, 1988 amounted to IR£47,217,042. This comprised 37,217,042 ‘A’ shares of IR£1 each and 10,000,000 ‘B’ shares of IR£1 each. All of these, again 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 IR£5,000,000 in Aerlinte Eireann in the form of non-repayable interest bearing capital.

Each of the Air Companies has a Board of Directors comprising twelve members, including the Chairman. The Boards for the two Companies are identical. Eight directors, including the Chairman, are appointed by the Minister for Tourism and Transport, with the consent of the Minister for Finance, in accordance with the provisions of the Air Companies Acts, 1966-1983. Four worker directors are appointed by the Minister for Tourism and Transport in accordance with the Worker Participation (State Enterprises) Act, 1977. The Chairman of the Board of Directors is appointed by the Minister for Tourism and Transport with the consent of the Minister for Finance.

Under Section 17(1) of the Air Companies Act, 1966, each Company is required to furnish to the Minister for Tourism and Transport as soon as may be after the end of every accounting year of the Company:

(a)a balance sheet at the end of that accounting year, duly audited by the Auditors of the Company,

(b)a profit and loss account for that accounting year, duly audited by the Auditors of the Company, and

(c)a copy of the Report of the Directors of the Company to the shareholders of the Company for that accounting year.

Furthermore, each Company must, if so required by the Minister, furnish to him 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.

The audited Accounts and Reports of the Directors are furnished to the Minister for Tourism and Transport who submits the Accounts to Government prior to their presentation to both Houses of the Oireachtas and in advance of the Companies’ annual general meetings. The Accounts are presented in a form agreed by the Minister for Tourism and Transport and after consultation with the Minister for Finance.

In addition to the submission of annual Accounts and Reports, Aer Lingus Group also submits quarterly management accounts to the Minister of Tourism and Transport. These are accompanied by a statement from the Chief Executive concerning the Group’s performance in the year to date together with an assessment of likely developments over the remainder of the year.

The longer-term corporate planning process of Aer Lingus Group is undertaken within the framework of the Aer Lingus Inter-departmental Review Group. The Review Group was established by the Government in 1986 to undertake a detailed study of the Aer Lingus fleet replacement strategy and the associated funding proposals in the period up to the mid 1990s in the light of developments in tourism and air transport policy and the effects of those developments on fare levels, traffic growth and the financial performance of Aer Lingus.

2.3 Objectives and Responsibilities

The objects of both Aer Lingus plc and Aerlinte Eireann plc, as set out in each Company’s Memorandum, are identical to each other. The objects are wide ranging and comprehensive and provide the basis for a considerable variety of activities, both directly and indirectly related to the two first objects which are expressed as follows:

Within the context of the objects as set out in each Company’s Memorandum and against the background of a new regulatory and financial environment, Aer Lingus has redefined the Group’s objectives. In its submission to the Joint Committee, Aer Lingus defined its mission as follows:

“To provide and develop an air transport service which will be safe, efficient, reliable and profitable, and to develop and operate such businesses as will contribute to that mission.”

This mission statement must be set against the objectives for Irish air transport regulatory policy which have been set out by the Minister for Tourism and Transport as follows:

This Ministerial statement differs from previous statements of policy in that

Taking account of these policy considerations Aer Lingus has translated its mission statement into a number of specific objectives as follows:

National Objectives

Commercial Objectives

Financial Objective

In summary, Aer Lingus in its role of national carrier must find ways of meeting national aims without impeding the attainment of its own commercial and financial objectives.

2.4 Activities

The activities of Aer Lingus Group may be loosely grouped under three headings, viz:

Air transport activities include both passenger and cargo, with cargo and mail earning some 12% of airline revenue in 1987/88. In that year, scheduled route kilometers for the United Kingdom, Europe, North America and internal services totalled 41,137, over which some 2,670,000 passengers were carried.

Airline related services include traffic handling, aircraft and engine maintenance and overhaul and general airline services. Traffic handling services are provided to other airlines at Dublin, Shannon, Cork, London, Manchester, New York and Boston. Overhaul and repair services for aircraft, aircraft engines and components are provided by the Aer Lingus maintenance and engineering facility at Dublin Airport, and by two wholly owned subsidiaries - Airmotive Ireland at Rathcoole, Co Dublin and SRS Aviation at Shannon Airport. General airline services include pilot training for other airlines, computer services and software for the airline industry and catering.

External ancillary activities comprise a range of undertakings and interests including the following:

Hotels and Leisure

Financial and Commercial

The relative importance of the three major areas of activity can be seen from a breakdown of total operating revenues and profits. The last Aer Lingus Annual Report showed results for year ended 31 March 1988 as follows:

3. FINANCIAL PERFORMANCE

3.1 Profitability

Aer Lingus Group has shown an excellent profit record over recent years and of particular note is the trend of recovery from a net loss of £11.7m in year ended 31 March 1981 to a net profit of £37.8m, after interest, in the year ended 31 March 1988. This trend will continue into 1988/89 with the Aer Lingus Group achieving net profit of approximately £40m.

Within this overall growth, however, there have been significant differences in the performance pattern of the Group’s main activities. Comparisons between the operating profits, before interest, of the four major business sectors over the five year period ended 31 March 1988, given in the Aer Lingus submission to the Joint Committee, show the following:

The difference in performance patterns is significant. Air transport operations have produced reasonable operating profits in 1987/88 and we understand, again in 1988/89 but these must be set against a volatile profits record both in Europe and on the Atlantic. Airline related services, which at least partly reflect trends in the airline business generally, is rather more consistent and has shown substantially increased profits in recent years. Hotels and leisure again show a certain volatility of profits but this may be attributable, at least partly, to redistribution of investments in this area. Financial and commercial activities have shown consistent growth in profitability over the last five years and contributed some 29% of operating profits in 1987/88.

The volatility of air transport profitability, together with the vulnerability of other individual sectors to general economic downturn or other commercial factors, emphasises the need for a reasonably wide spread of activities within the Aer Lingus Group. The factors affecting the profitability of individual sectors are dealt with in more detail in later sections of this report.

3.2 Funding

The current financial state of Aer Lingus Group must be set against the background of a major financial restructuring package which was put in place in 1983/84. Following a period of sustained losses up to 1982/83, Aer Lingus found itself burdened with heavy borrowings which carried a high interest bill and which represented a serious imbalance in the combined debt/equity ratio for the Group. In 1982 the Government undertook a review of the Group’s financial position following which it approved a comprehensive financial package designed to restore the Group to profitability as quickly as possible. The package comprised the following main elements:

•Investment of an additional £30 million equity in Aerlinte Eireann plc, bringing the total Government investment in the Group to its present level of £73.61 million.

•Provision of a cost alleviation payment to Aerlinte Eireann which recognised that Company’s role in meeting national needs through the provision of a transatlantic service into Ireland. Because of the improving performance of Aerlinte the payments were scaled down from the planned level of £5 million per annum to actual payments as follows:

•Implementation by the Companies of a programme of improved efficiency, asset disposal and measures to reduce the workforce and increase productivity.

Since the implementation of the restructuring package, shareholders’ funds have been increasing because of a combination of factors, including:

•increasing net profits

•selective profitable sale of assets

•revaluation of other assets

Changes in shareholders’ funds, as per the most recent Aer Lingus Annual Report, have been as follows:

Details of the movements in the separate companies are shown in Appendix I to this report. The significant differences between the operating profits earned by the Group and the changes in the Profit and Loss Account for each year are largely accounted for by movements during the year. The main elements in these movements relate to a transfer of £21 million from revenue to capital reserves in 1986/87 and currency translation adjustments in each year. These latter adjustments represent the net change in the IR£ balance sheet value of assets held by Group companies which are denominated in other currencies, notably US$, caused by changes in the exchange rate between the IR£ and those currencies. Investments subject to such adjustments include Omni Hotels in the US and Airmotive which, whilst located in Ireland, is accounted for in US$.

The increase in shareholders’ funds, coupled with reductions in the overall level of Group borrowings, greatly strengthened the Group’s capital structure. The Group has again been profitable in 1988/89 but has also engaged in a major re-equipment programme without the addition of new equity. The Annual Report and Accounts for the year ended 31 March 1988/89, when published, will reflect these factors.

4 TRANSPORT OPERATIONS

4.1 Introduction

As at 31 March 1988 Aer Lingus Group operated scheduled routes totalling some 41,137 kilometers. In the year 1987/88 air transport operations generated revenues totalling in excess of £293 million and yielded operating profits of £6.9 million before interest; we understand that the results for 1988/89 are likely to be as satisfactory. This success for air transport operations must be set against a background of a changing regulatory environment, increased competition and overall traffic growth while recognising the past patterns of fluctuations in profitability in this sector.

4.2 Regulatory Environment

The Aer Lingus Group submission to the Joint Committee noted that:

“The regulatory regime which had been applied consistently by virtually all governments to civil aviation since the end of the Second World War has now been changed radically and irreversibly. Beginning with the US Airline Deregulation Act of 1978, withdrawal of government surveillance from the commercial activities of airlines has spread from market to market….”

A number of developments in deregulation have directly affected the operations of Aer Lingus. In particular, two new international agreements that will open up new opportunities for Aer Lingus were concluded in early 1988.

The “Luxembourg package”, introduced by the Council of Ministers of the European Community in January 1988, provided a more liberalised regime for international operations within the Community. The main elements of the Luxembourg package include the following:

The agreement eased some constraints on the operations of Aer Lingus while the Company also gained some ‘fifth freedom’ rights which enabled it to provide services from Manchester to Copenhagen, Zurich, Hamburg and Milan and from Birmingham to Brussels.

In February 1988 an agreement between Ireland and the United Kingdom further liberalised routes between the Republic and Britain, with regard both to operating licences and tariff approvals. In essence, this agreement means that operators will be granted route licences between the two countries and may set fares at any level unless both governments object to the granting of such licences or the setting of such tariff levels. Under this agreement two new routes, Dublin to Newcastle and Dublin to Stanstead, were opened up by Aer Lingus in March 1988. Subsequently, two further routes, Cork-Birmingham and Cork-Manchester, were opened.

Significant questions relating to air transport regulation are still outstanding. These questions relate both to future deregulation in Europe and to route rights to the United States. Under the terms of the existing bilateral agreement between Ireland and the United States, Aer Lingus may fly into New York, Boston and Chicago only. The airline has no access rights to the West Coast and other major market areas in the United States. This is likely to become an important strategic issue in the future of the North Atlantic service.

The question of the future regulatory environment in Europe, in the context of 1992, is one of particular concern and is dealt with in more detail in Section 8 of this Report which considers major issues facing the Airline.

4.3 Competitive Environment

Liberalisation of the regulatory environment has changed one element in the competitive environment of Aer Lingus Group. A further significant development has been the overall fall in average airfares and, particularly, the major price competition being experienced on Irish Sea routes. The advent of Ryanair and the competitive stance taken by the new airline required a dramatic programme of fare reductions and a greater emphasis on special fares. In April 1989, British Midland Airways (BMA) began operating on the Dublin-London route. The effect of this new entrant onto the route has yet to be established. The BMA approach, however, has been to compete strongly for the business travel segment with its “Diamond Service” and this competitive factor will undoubtedly increase service costs and reduce profitability for Aer Lingus.

Aer Lingus Group has been enabled to compete successfully in this new competitive environment primarily because of the implementation of a major cost reduction programme over recent years. Up to 1987/88 this programme achieved annual cost savings of some £44 million as against 1980/81 and total annual savings of £55 million are targeted by the end of 1989/90. Unit costs per available tonne kilometre (ATK) in 1987/88 were 4% lower than in the previous year and 11 percent lower than in 1985/86. Of the total savings achieved since the initiation of the programme, approximately 50% have resulted from payroll savings. These reductions in costs do not include significant savings resulting from lower fuel prices which, taking 1987/88 prices compared to those which existed in 1985, represent a saving of some £20 million.

A further factor in the ability of Aer lingus Group to cope with, and perhaps benefit from, increased competition has been the development of more sophisticated yield management systems which enabled the airline to refine its market segmentation and to increase marginal income derived from the sale of capacity through special promotional fares. This has been particularly important in developing growth in the discretionary segment of the travel market.

This capacity utilisation has been reflected in the overall revenue load factor which marginally increased from 67% to 68% in 1987/88, with the passenger load factor also increasing from 71% to 72%. Aer Lingus load factors in 1988/89 were again satisfactory, even though the capacity being operated has increased considerably in the same period. Load factors are very satisfactory when comparisons with other airlines are taken into account. A survey of international airlines, carried out by international accountants Ernst & Whinney in 1987, showed Aer Lingus Group load factors to be comparable with those being achieved by other major airlines. (See table in Appendix II to this Report).

Despite these achievements, however, the increased competition on fares will have eroded profitability on major UK and European routes. The effects of this increased competition are coupled with the inevitable costs associated with route expansion and development, and it is likely that overall profitability on European operations for the year ended March 1989 and for the next few years at least will be below the levels achieved in 1987/88.

4.4. Traffic Growth

In 1987/88 a combination of lower fares and increased advertising by Aer Lingus resulted in record levels of traffic growth. Broken down by sector, the growth in traffic, as per the Annual Report, was as follows:

On the Ireland-UK routes, where there was an increase of 17% in total air and sea traffic, Aer Lingus and British Airways has had to meet strong price competition from Ryanair. The competitive situation thus created led to, or at least hastened, the provision of a wide range of fare options and a significant reduction on the average fare. This, in turn, led to a switch from surface to air travel, with the market share of air increasing from 41% in the year to July 1986 to more than 55% in the 12 months to July 1988. In the competition between airlines for this increased traffic, Aer Lingus has performed very satisfactorily and has captured a significant proportion of the additional market. This trend has continued in 1988/89 with an overall increase of more than 38% in traffic; this has been obtained by price competition and non-price competition, such as flight schedule adjustment and advertising.

On the Ireland-Continent routes, overall market growth in air traffic was only 6% in 1987/88 and within that sector, the performance of Aer Lingus was very satisfactory. Growth in 1988/89 was considerably above that level.

On the Ireland-US routes, conditions in 1987/88 had been somewhat more difficult. Total market growth has been in single figures and in that context, the achievement of a 6% increase by Aer Lingus was reasonable, particularly in that Pan Am and Delta started operations in 1986. In 1988/89, the traffic levels on the US routes remain constant. Aer Lingus has increased capacity on these routes so as to ensure its place as a major carrier on the Atlantic.

On the domestic routes, a 25% increase in true domestic passenger traffic was achieved in 1987/88. As the 1988 Annual Report notes, there was a fundamental change in the economics of short sector domestic routes because of lower fuel prices, a buoyant market in the UK and the acquisition of additional Shorts 360 aircraft. Four new routes, Dublin-Sligo and Dublin-Galway in 1987/88 and Dublin-Knock and Dublin-Waterford in 1988/89 were added to the existing domestic routes of Dublin-Shannon and Dublin-Cork. A further new route, Dublin-Farranfore, Kerry, is to be opened in 1989/90. Two new freight services were operating in 1988/89, Manchester-Frankfurt and Birmingham-Brussels.

4.5 Future Prospects

As we noted earlier in Section 3.1, the profitability of air transport operations is subject to considerable fluctuations. A table of operating profits before interest for the last five years, compiled from information given in the Aer Lingus submission to the Joint Committee, shows:

Thus, while the profitability of air transport operations in 1987/88 and again in 1988/89 was very satisfactory, that profitability is, at least to some extent, vulnerable to a reversal of the same forces that led to the improvement and to competition in the marketplace. These possible threats include the following:

•The general level of economic activity, particularly in the United States and the United Kingdom. A fall-off in economic activity would inevitably lead to reduced traffic on the Atlantic and Irish Sea routes.

•Expenditure on fuel represents a major operating cost for the Airline, with an approximate annual spend of some IR£30 million on fuel. Increases in fuel prices would have a significant impact on fare levels and/or operating profits. In addition, of course, a major change in fuel prices would also have a broader economic effect. Fuel prices are denominated in US dollars so that exchange rate movements translate directly into fuel price changes.

•The US dollar exchange rate has wide-ranging importance for the operations of Aer Lingus Group. The Group’s sensitivity to changes in the dollar-punt exchange rate has been summarised by Aer Lingus, in its submission, as follows:

“In the short term, a weak dollar is unhelpful to Aer Lingus:

a)US revenues are reduced when translated into 4punts;

b)these reductions are not fully offset by the parallel savings in dollar costs (which include all costs incurred in the US, aircraft maintenance materials and fuel supplies for the whole network);

c)a low dollar also discourages US leisure traffic to Europe which is the dominant element of total traffic on the Atlantic network and a substantial element of European traffic;

d)airline related services are also affected in that revenue from aircraft maintenance is largely denominated in dollars and a weak dollar reduces revenues. This is partly but not completely offset by savings on parts and materials bought in;

e)the external ancillary activities portfolio includes a number of dollar companies (Omni Hotels, GPA, ATS) whose results are translated into punts for Aer Lingus financial reporting;

f)interest and tax benefit from a weak dollar.

Overall, the exposure is not very great. A 10c move in the dollar would reduce the bottom line by less than £3 million at the present time. It should also be noted that the balance sheet benefits from a weak dollar as dollar debts are converted into IR£s.

The Group’s sensitivity will be somewhat less in the future following a re-orientation of the hotel and leisure activities from the US to Europe.

In the longer term, the fleet re-equipment programme involves major dollar expenditure with each unit costing of the order of $25 million. It should be noted that the market in new and used aircraft is denominated in dollars regardless of the country of origin. This would tend to reverse the sensitivity since a strong dollar would make new aircraft more expensive in punt terms.”

•The significance of the level of interest rates varies according to the time span involved. Current results are not overly sensitive to interest rates because, amongst other things, a significant proportion of borrowing is at fixed rates. Aer Lingus has estimated that, overall, a 1% change in interest rates would cost less than £800,000 annually.

The level of interest rates has greater implications for future investment and future borrowing capability, particularly in relation to the continuing programme of fleet replacement.

•The possible entry of new carriers must always remain a factor. In the case of the Irish Sea routes, the increased competition served to increase the total market in air travel. This would not necessarily occur on other routes where surface travel is not a significant element of total traffic. New competition would, therefore, be for a share of a slowly growing, static or decreasing market. The impact of such competition on average air fares and on capacity utilisation and load factors might be considerable.

For the reasons outlined above and because of the cyclical history of air travel, it cannot be assumed that air transport operations can maintain and improve current levels of profitability at all times. This factor has been recognised by Aer Lingus who see an appropriate response in ensuring maximum flexibility of operations and cost structures to enable it to meet fluctuations in the level of its activity. Flexibility in this sense relates to a range of areas including:

•The need for new aircraft purchases to recognise not only the economics of immediate operations but also the needs of the second market for leasing or sale of surplus aircraft.

•The need for air related activities to be separated from the transport operations and to focus on external markets for their services.

•The need for flexible staffing structures geared to the requirements of the Group’s operations. This approach has, of course, underpinned the Group’s rationalisation programme which has been implemented over the last few years.

•The need to develop profitable ancillary activities that will spread the risk and provide the profitability and cash flow necessary to offset downturns in transport profitability and to provide or attract capital necessary for future development.

5. AIRLINE RELATED SERVICES

5.1 Introduction

Airline related services provided by Aer Lingus Group companies include traffic handling, maintenance and overhaul of aircraft and engines and general airline services. As outlined earlier, these services are provided from within the Airline structure and also by separate entities within the Group, major components being:

Whilst initiated by Aer Lingus to maximise utilisation of resources and to generate profits in support of the Group, development of airline related services has been of value in maintaining employment at a time when the cost reduction programme was reducing employment in the transport operations.

5.2 Profitability and Future Prospects

Airline related services have made a significant contribution to Aer Lingus’ Group profitability over the last number of years. The table of sectoral profitability given in Section 3.1 showed the operating profit before interest for airline related services to have been as follows:

During 1988/89, we understand that further significant growth in profitability has been achieved. When related to the level of operating activity in air transport, there appears to be little direct connection between the profitability of the two sectors within Aer Lingus Group, as is shown by the following graph:

There must, however, be a relationship in the long-term between the general level of air transport activity and the level of activity and profitability of the Aer Lingus Group airline related services. Aer Lingus’ management have recognised the fact that in a general downturn in air traffic business, the Group companies involved in airline service activities will inevitably experience a reduction in internal Aer Lingus business and will, if they are to cope, have to seek their fortunes on a contracting and therefore, increasingly competitive external market. This cannot be done from a standing start and consequently, we understand, the emphasis by Aer Lingus management is on having these companies regard themselves as stand-alone entities responsible for generating their own business.

During 1988/89, Aer Lingus has expanded its aircraft maintenance business by undertaking work for new customers including Saudia, Quantas and Air France. Airmotive will undertake a joint venture with Pratt and Whitney, the US engine manufacturers, involving Airmotive in engine case repair work for the first time. This venture will be structured as a separate company employing some 300 people. Also, in a joint venture with the ESB, Aer Lingus will undertake work in the vacuum metalising area in the coming year.

6. HOTELS AND LEISURE

6.1 Introduction

The hotel and leisure industry has, for many years, been an important element in the Group’s overall activities. As outlined in Section 2.1, the Group’s involvement in the industry currently includes:

The present position represents a repositioning of the Group’s activity in the hotels and leisure industry in recent years. The main changes have been:

6.2 Profitability and Future Prospects

The profitability of the hotels and leisure activities of Aer Lingus Group has been buoyant for a number of years but suffered a relatively large decline in the 1987/88 financial year. This fall was, we understand, largely accounted for by the sale of the Dunphy New England Hotels and the consequent loss of contribution from these operations. A significant capital profit was, however, made on this sale. The Aer Lingus submission to the Joint Committee showed operating profits before interest for the previous five years as follows:

Despite the fall in profits generated by this sector in 1987/88, a review of the returns being earned on the Group’s investments in this area show that, with one exception, these were excellent. The rationalisation of the Group’s interest in the United States together with the continued development of the other undertakings have increased profitability in 1988/89 to a satisfactory level.

The future profitability of the Group’s hotel operations will require investment strategy in the area to be continually reviewed in the light of changing circumstances. This is important, not only from the point of view of maintaining the profitability of operations, but also from the point of view of achieving optimum levels of capital profit on realisation of assets. Past restructuring of Group interests has been in line with this strategy.

6.3 Competition with Private Undertakings

During the Committee’s hearing which was attended by Aer Lingus’ management, there was considerable discussion about the possible role of Aer Lingus in developing the tourist industry in Ireland. This role is primarily one of providing very low access fares while a secondary task is to work with the tourist infrastructure in the country to develop the linked products with the fares.

7. FINANCIAL AND COMMERCIAL INVESTMENTS

7.1 Introduction

The major investments by Aer Lingus Group in external financial and commercial undertakings include:

•16% holding in GPA Group

•100% ownership, including staff shareholdings, of the PARC organisation which has specialised in personnel and recruitment services, project management services, hospital management services and nursing home and other care services. PARC has more recently applied for and been granted an export trading house licence.

•100% ownership of the CARA companies providing computer and computer consulting services.

•75% holding in ATS Automation Tooling Systems Inc. of Canada, which is engaged in the design and construction of robotic manufacturing systems.

•100% ownership of Altek Automation Limited, a robotics company based in the UK

•100% ownership of Irish Helicopters Limited.

In addition to these specific investments, Aer Lingus Group has derived a considerable contribution to profits from its past activities in re-insurance in the aviation market. Underwriting, which was in conjunction with Insurance Corporation of Ireland, ceased in 1985 but profits earned on past business written was taken into the 1987/88 Aer Lingus Group accounts, as part of the profits from ancillary activities (financial and commercial).

7.2 Profitability

Profits earned by Aer Lingus on external financial and commercial investments have been very satisfactory overall. In addition, the levels of profits have been growing steadily, as can be seen from the operating profits before interest that have been earned over the last five years. Earnings in 1987/88 were particularly satisfactory and earnings in 1988/89 are again satisfactory. The Aer Lingus submission to the Joint Committee showed the following:

Review of the returns being earned on individual investments showed that performance has, in many cases, been impressive.

The main weakness in this area had been the performance of CARA. In 1986, a subsidiary set up in the United States to market hotel systems was sold off, resulting in a write-off, we understand, of some £2 million. The 1986 Annual Report also noted that “a depressed market led to substantial erosion of margins in the computing division”. The company had another difficult year in 1987 but did contribute to Group profits. Steps have been taken to deal with outstanding problems and we understand that the CARA companies are now operating satisfactorily.

Aer Lingus is considering the possibility of making an investment in the charter business; this particular area has shown enormous growth potential in recent times and accounts for a significant proportion of airline passenger traffic in Europe.

7.3 Future Prospects

In its submission to the Joint Committee, Aer Lingus pointed to the importance of the ancillary activities to the future development of the Airline. The submission summarised this importance as follows:

“External Ancillary Activities are now a very important part of the Group, contributing £22.6 million (60%) of the Group Net Profit for the year to 31 March 1988. It is imperative that Ancillary Activities continue to grow in the future and to provide increasing earnings to the Group so as to enable it to accelerate the fleet replacement programme necessary to accommodate traffic growth. It is also required so as to strengthen the airline’s capital base to meet increased competition in the air transport marketplace.

Net capital investment in these Ancillary Activities from all Group sources over the coming years is estimated at around £15 million to £20 million annually, but this may vary both in amount and timing depending on opportunities. Following the restructuring of our hotel investments, a strategic review is in progress to identify the best opportunities both for growth in our existing businesses, particularly hotels, and for other investments in sectors with good earnings potential which will form the nucleus of further development of Ancillary Activities in the 1990s”.

Earnings from this sector in 1988/89 were again very significant in the Group’s overall profitability and the strategic importance of this sector to the future development of Aer Lingus remains.

8 MAJOR ISSUES

8.1 Introduction

In carrying out its review of Aer Lingus Group, the Joint Committee has considered written submissions from the Companies’ management and from the Central Representative Council of the Aer Lingus trade unions (CRC); it has taken into account the memorandum submitted by the Department of Tourism and Transport; it has taken account also of the evidence given by Aer Lingus’ management and by the CRC representatives in separate public hearings; and it has considered the written submission by Dr Edward Cahill of University College, Cork.

Examination of these sources has identified a number of major issues that will affect the future role and operations of Aer Lingus. These issues concern the following:

The main factors concerned in these issues are considered in the following sections.

8.2 Fleet Renewal (Shorthaul)

The Memorandum prepared by the Department of Tourism and Transport for the Joint Committee noted that “Aer Lingus corporate planning exercises of recent years have identified the issue of replacement of the European fleet as the single most important strategic priority facing the airline.” An Interdepartmental Review Group was established by the Government in 1986 to undertake a detailed study of the Aer Lingus overall fleet replacement strategy and the associated funding proposals in the period up to the mid 1990s.

Aer Lingus has already implemented a major part of its fleet replacement programme and progress to date may be summarised as follows:

The proposal for turboprop aircraft arose from the need to cater for strong growth on the commuter routes while also releasing some jet capacity to the larger routes. The additional orders for new jet aircraft represent an acceleration of fleet replacement and continued response to expansion opportunities. The investment represented by these aircraft totals approximately $450m.

Aer Lingus has advised Government that they envisage being able to finance the purchase of the twelve jet and the four turboprop aircraft involved in these orders out of existing resources supported by borrowings or, where suitably advantageous, by financial lease purchase arrangements, without requiring an Exchequer investment. The Aer Lingus submission to the Joint Committee cautioned, however, that

“the Aer Lingus capacity to continue making commitments for new aircraft may not fully cover all of the airline’s re-equipment needs unless some equity investment can be attracted to the airline”.

In this context, the 1988 Annual Report noted the following:

“Our success in expanding the airline’s traffic base paradoxically increases the need for profit growth to finance additional aircraft acquisitions. Some years ago we set a target for after-tax profits of some IR£30 million per annum to be sustained over a period. In the light of changing circumstances, that target is now clearly inadequate. We need to ensure that we can invest heavily as required in fleet replacement and fleet expansion without damaging our financial structure. Accordingly, an upward revision of our profit targets for the next five years is under way”.

Aer Lingus management has not yet stated what the new target levels of profits will or, indeed, should be. A number of factors are involved, not least of which is the difficulty in predicting traffic levels and growth rates in the future. It is, however, an important issue since it has implications in many different areas, including:

8.3 Fleet Renewal (Atlantic)

Renewal of the Atlantic fleet is more problematic. The three existing B747s were manufactured in 1969 and a decision on renewal will arise in the medium rather than the long-term. Options that will be considered for expansion and renewal of the Atlantic fleet will include second-user B747s as well as a possible investment in other types such as newer long range twin jet aircraft.

Aer Lingus has, we understand, advised the Interdepartmental Review Group that replacement of the three existing units will cost between $150m for second-user aircraft, and $350m for new aircraft, these costs being at 1988 prices. Additional requirements could arise if the Chicago route proves to be economically attractive, if Aer Lingus is granted rights to the West Coast destinations, and/or if extra capacity is required on the Boston route.

The economics of the various options will be extremely important in making a decision on replacement. The relative economics will probably depend upon a number of factors, including:

Aer Lingus have cautioned that operating profits and/or financial leasing may not provide the capital required to finance the replacement and, if necessary, the expansion of the Atlantic fleet. They are anticipating, however, that the question will not arise until the mid-1990s. This question of fleet financing will then be part of the larger question of overall Group financing for the future.

During discussions relating to replacement of the Atlantic fleet a question was put to the Company’s management as to whether it might be necessary to have to come back to Government sooner than five years time because of the safety aspect of the fleet. The Company Chairman emphasised that the Company’s mission was, among other things, to provide a very safe and efficient service. It would continue to do that and if the management had doubts about the safety of the fleet at any stage it would, of course, replace it. Aer Lingus takes the view that the fleet, although in service since 1969, is relatively ‘young’ in terms of flying hours.

8.4 Future Sources of Capital

The funding of Aer Lingus Group has improved enormously since the period of restructuring in the early 1980s referred to in section 3.2 of this report. The injection of capital at that time, combined with cash flow generated by operating profits and capital gains on sale of assets has enabled the Group to finance a major rationalisation programme and, latterly, to start on a programme of fleet renewal and expansion. The Group has adequate funding for its immediate capital needs.

Aer Lingus’ management, however, has pointed out in its submission to the Joint Committee that existing levels of profitability, coupled with other existing means of financing investment, may not be sufficient to meet the needs of both longer-term fleet replacement and a continued programme of expansion of ancillary activities and that new approaches to financing may therefore be required.

In its submission, Aer Lingus outlines other possible scenarios where additional equity might be required. It refers to the possibility that opportunities or requirements may arise for new investments not provided for in existing plans or for acceleration of current plans. These could be in the airline proper, arising from more rapid traffic growth or from the possibility of strategically important investment in existing or new start-up airlines elsewhere in Europe. Alternatively, it suggests, growth of ancillary activities may lead to a need for significant investment either in some new business or as an extension of existing operations. In addition it recognises the fact that the airline business is notoriously cyclical and, despite current levels of profitability, there is no guarantee that Aer Lingus will, in the future, be able to generate the level of profits required to enable it to fund its longer-term fleet replacement and expansion.

In its submission to the Joint Committee, the CRC of the Aer Lingus trade unions has suggested that, because Aer Lingus is currently able to proceed with replacement and expansion of the short-haul fleet without recourse to Government, this is likely to be the situation when it comes to replace the Atlantic fleet in the mid-1990s.

It is premature to take a fixed view on this question. During the hearing which was held on 27 September, Mr. Slowey, Chairman of the Aer Lingus Boards, stated that “in five years time, around the mid-nineties, we will be looking for new aircraft for the trans-Atlantic route and at that time, if not beforehand, we will come back to Government to identify what needs, if any, we will have”. Mr. Slowey further went on to say that he “would distinguish between the airline identifying its cash needs over a term and where we should get that. We go to the shareholders, who in this case are the Government”. The question at that time will rightly be one of Government policy. Inevitably, however, the question of privatision has been raised in relation to Aer Lingus.

Privatisation

There is no one simple criterion for privatisation as it inevitably involves a mixture of strategic and commercial/financial considerations.

A significant number of governments have explored the possibility of privatising their national flag carrier. Reasons given have ranged from the desire to promote competition and efficiency, to the desire to relieve the public purse of a call upon it by the airline to provide loans to fund aircraft acquisition.

To date, airlines that have been privatised include:

Aerovias de Mexico

Canadian Airlines International

British Airways

Malaysian Airlines

Singapore Airlines

Others that are actively pursuing this course include:

Air New Zealand

Mexicana

Philippine Airways

The fact that only a relatively small number of airlines have been privatised to date is, in some instances, a reflection of the inadequate profits and return on capital earned in the past, and also of political and strategic considerations which weigh heavily in certain instances.

All of the major issues relating to future sources of capital and/or privatisation involve important questions of Government policy and it is useful, therefore, to examine the underlying objectives of privatisation, to set out some of the advantages that are claimed for this approach and to consider some of the national issues that would arise in relation to the privatisation of Aer Lingus.

Objectives of Privatisation

Privatisation involves the sale of all or part of business by its State shareholder. In general commercial terms, consideration of any sale of a business involves a small number of simple, but fundamental, questions including the following:

In this context, the price is right from the seller’s point of view if it provides a return to the shareholder which is greater than could be earned if the shareholder continues to hold and operate the business. It is irrelevant, therefore, whether the business is profitable or not, and, indeed, it could be argued that the right time to sell a business is when it is profitable. This is done constantly in normal commercial deals. Aer Lingus itself has adopted this approach in disposing of profitable businesses as, for example, in the case of the Omni Hotel chain in the United States.

On the other side, the price is right for the buyer:

In the case of Aer Lingus, the question of possible privatisation has been primarily linked to the future funding needs of the Group and the possible requirement for the State to provide additional funding. In commercial terms, the question is really one of whether the State will get a proper return on its investment and whether the funds that are, and might be, tied up in Aer Lingus could be used to greater benefit elsewhere. In simple commercial terms, the direct return to the Government on its investment in Aer Lingus would appear to have been inadequate in terms of the marginal cost of those funds to the Government. This, however, leads to questions of national issue which have to be addressed.

Advantages of Privatisation

In recent years there has been considerable movement towards privatisation internationally. Many different types of organisation have been transferred to the private sector, including the following examples:

The motives for privatisation are varied but the benefits claimed include the following:

Many of these benefits have been realised in practice, but it has been argued that the longer term effects of privatisation are yet to be assessed.

Problems of Privatisation

In considering the implications of privatising Aer Lingus, a number of possible problems, and/or disadvantages, have been identified, particularly by the CRC submission to the Joint Committee. These include the following:

More general problems that have been identified include the following:

Many of these possible problems are concerned with issues that are larger than pure business economics. Steps may be taken to avoid certain of the problems but others require a specific view in relation to national interest.

Methodology of Privatisation

The privatisation process has tended to take one or other of the following forms:

The shareholders will seek expert advice in deciding upon the method to be used in any particular case. Much will depend upon the circumstances of the business concerned, its size, profitability, growth prospects, capital structure and so on. It is likely, however, that privatisation of an airline would be through offer for sale to the public. Limited powers are, however, usually retained through the medium of either:

Privatisation, particularly through offer for sale on the Stock Exchange, may rightly give rise to Government concern to prevent recently privatised enterprises from passing into foreign control and ownership. Accordingly, the Articles of Association have generally contained powers including ones which enable the directors to refuse to register foreign owned shares when a specified percentage threshold is reached. The golden share’s prime power is to prevent the company from deleting the clauses (and therefore powers) relating to foreign ownership. Sponsors however have a general dislike of the golden share concept because of its uniqueness.

In the case of privatision of British Airways the argument against a golden share was clear. Under the air services agreements between the UK and other countries there is generally a condition that the airline designated by the UK Government to operate a particular route should be substantially owned and controlled by the UK Government or its nationals. Against this background there was not perceived to be a need for the UK Government to hold a golden share on the premise that licences would be withdrawn if control passed overseas, and therefore the directors would always be obliged to ensure that this did not happen.

National Issues

In relation to any consideration of the privatisation of Aer Lingus there are serious issues of national importance and public policy which require careful consideration. The CRC, in its submission to the Joint Committee, has pointed out some of the major issues involved. It claims that “it is economically and socially essential that Ireland continues to own its National Airline”.

It argues that:

In this context, it is important to consider the extent to which the Government can control the provision of services to and from Ireland by means other than full national ownership of the major airline.

In the case of a number of the entities which have been privatised in the United Kingdom, the British Government has retained a “Golden Share” which enables it to maintain a veto over major changes. The same approach could be used in the case of Aer Lingus.

In addition, a government may exercise significant power over the activities of airlines through the terms of the licences granted. Provision of an adequate service will usually be a condition of an air service agreement and breach of that condition will involve withdrawal of a right to fly into the country or particular airport. Additional safeguards may be provided through other arrangements.

These safeguards are affected by questions of deregulation, particularly within Europe, which is considered in the next section.

8.5 Regulatory Developments

As outlined earlier in section 4.2 of this report, the regulatory environment in Europe has begun to change, first with the introduction of the “Luxembourg package” in January 1988 and then with the February 1988 agreement between Ireland and the United Kingdom. Change brings both opportunity and threats, and the Committee examined the position of Aer Lingus in relation to these opportunities and threats.

Aer Lingus’ management has been quick to take advantage of the “fifth freedom” rights provided by the Luxembourg agreement. It accepts, however, that Aer Lingus is a small airline in European terms and has pointed out the necessity for the Airline to seek out alliances or joint ventures with other airlines abroad.

In its submission, Aer Lingus went on to say that:

“The rationale for this approach basically is:

However, on the broader front, it should be noted that despite the changing regulatory regime in Europe, Aer Lingus is still very largely restricted to the seasonal and relatively low volume network of routes (apart from the London routes) into and out of Ireland. We believe that with the rapidly changing regulatory and competitive situation this is not a healthy or sustainable posture in the medium to long term. The full effect in the aviation field of the single European market scheduled for 1992 is not yet clear but, in the meantime, a strategic priority is to seek such alliances as are permitted under existing law so as to secure our future through broadening the scale and range of activity. Currently our options in this regard are restricted by the control of national ownership of airlines which is still retained by the member states of the European Community. Aer Lingus will both press for changes in this situation while still trying to create alliances that are currently allowed.”

It is in this context that one views the potential participation of Aer Lingus in a Turkish based charter airline and similar developments elsewhere.

A major part of the CRC submission to the Joint Committee was concerned with the possible adverse effects of developments in the regulation of civil aviation in Europe. The submission argued that aviation policy in Ireland should support Aer Lingus because:

The submission outlined the experience of de-regulation in the United States and quoted claims that:

In addition, it now appears that the economies of routing flights through important hub airports has meant that travel time between regional airports has actually increased. This, however, has been balanced to some extent by lower fares.

The CRC submission concluded that “the lessons to be learned from the US de-regulation ‘experiment’ must be taken on board by the EC Commission…”. CRC went on to say that “Ireland should not be premature in de-regulating the home scene and the Irish airtransportation structure should not be divided”.

These are obviously questions of national and community policies which are the concern of the Irish Government.

It is not expected that deregulation in Europe will follow the same path as the U.S. or will be quite so dramatic. It is more likely that competition will be allowed to increase gradually, initially in the area of fares and in the number of airlines serving individual routes.

Another major factor that will tend to lead to a more phased and balanced approach is the fact that the interests of national governments throughout Europe are involved. It is likely that all of these governments will take a cautious approach, assessing the impact of each step towards deregulation on their own airlines before committing themselves to further developments. This important check did not exist in the United States and it is unlikely that the European airline industry will go the same way as that of the United States.

Aer Lingus’ management has pointed out that the full effect in the aviation field of the Single European Market schedules for 1992 is not yet clear. The major elements of European Community air transport policy have been outlined by the Commission of the European Communities in “A Common Market for Services”, published in March 1988. Significant elements include the following:

1992 Objectives

The right to provide transport services freely throughout the European Community is an essential element of the transport policy laid down in the EEC treaty. In the air transport sector, increased competition in services and fares will be introduced while the rights of Governments to restrict capacity and access to markets will be limited. These are interim measures. In 1989 there will be a revision of the Directives on air services and fares, passenger capacity and market access.

In general, the Commission has followed a two phased approach in relation to the transport sectors. The first phase involves liberalising transport services between Member States. In the second phase, the aim is to liberalise transport within Member States by opening up the national markets to non-resident carriers.

Measures

A series of measures for adoption by 1992 are intended to open up the various transport markets. In the context of air transport, specific measures relate to:

•Sharing of passenger capacity and market access

•Inter-regional air services

•Fares

•Application of the Competition Law

•Procedure for application of the Competition Law

The European Commission is in the final stages of completion of its second round of air transport liberalisation measures. It is likely that the measures will involve increased pressure on each member nation to relax restrictions on their home market.

Future Implications

Perhaps the most important measure to date is the Council Decision 87/602/EEC of 14 December 1987 which applies to the sharing of passenger capacity between air carriers on scheduled air services between Member States and on access for air carriers to scheduled air-service routes between Member States.

This decision is important from two perspectives. First, it is the one that most directly impacts upon the ability of airlines to extend the range of competitive activity onto new routes. This extension provides opportunities but also brings threats. This question has already been touched upon. The second important aspect of this decision is that it is entirely binding on those to whom it is addressed. No national implementing legislation is required.

Any extension of the scope of such regulating decisions in the future could have significant implications for Aer Lingus in the European air transport market. A central question in relation to future regulatory policies will, therefore, be the level of autonomy retained by national government in the control of air transport.

9 ACKNOWLEDGEMENTS

The Committee appointed Ernst & Whinney, Chartered Accountants, as specialist advisers for the purpose of this inquiry and it wishes to express its appreciation to Mr Thomas Grimes, Mr Sean Kelleher and Mr Michael McNulty of Ernst & Whinney for their advice and assistance. The Joint Committee also wishes to records its thanks to the management and staff of Aer Lingus for their co-operation during the course of the enquiry.

* Note The Annual Report notes an increase of 63% on the domestic routes. The adjusted figure given above relates specifically to flights boh originating and terminating within the State.