What have you learned from the changes in the Aer Lingus business model?
Aer Lingus has certainly evolved over the years. We went from being a legacy carrier to a low cost carrier (LCC) after the tragedy of 9/11. It worked well while the Irish economy boomed but it became clear that we needed to evolve yet again when the economic environment deteriorated locally and globally. So we have taken another step forward and become what we describe as a value carrier. It is basically a hybrid model with short haul similar to an LCC model and long haul more akin to full service with two cabin classes.
Our unit costs are lower than legacy carriers but, because we use major airports, they are more than some LCCs. But I think the fact that we now serve some 11 million passengers every year and that we are profitable in a very difficult economic environment proves that the model works and that we have made the right decision. In fact, we have had plenty of other organizations study our business model for inspiration. Being a value carrier is really about putting the customer first and correctly matching their requirements with our network, fleet, and product. To be honest, the changes we made were painful and certainly very difficult. But while we have left the legacy carrier and low cost models behind, there is one consistent element that has never been forsaken and that is the value of our staff in providing great customer service. That has been consistent in all phases of the Aer Lingus story.
How will the airline business model evolve at an industry level?
Everybody talks about consolidation. But this isn’t an industry solution although it may be right for individual carriers. As we have proven, there will be a wide range of applicable business models. And when they talk about consolidation in connection with Aer Lingus, it always seems to be assumed that Aer Lingus would be on the receiving end—that someone would take us over. But I don’t accept that. We are a profitable airline and our balance sheet is good enough for us to maintain our independence. Our business model is also scalable so we have room to grow organically.
What about alliances and codeshares?
Again, it’s about knowing and serving your customer. We have multiple partnerships because we are interested in serving the Irish community wherever they may be in the world. Unfortunately, the Irish diaspora is not reflected in any one alliance. Effectively, we would only benefit from about one-third of any alliance network. We prefer to be more targeted in our approach and so, for example, partner with United and JetBlue in the United States to offer good connections to a variety of US destinations. Over 70 US domestic routes carry the Aer Lingus code.
So the Irish diaspora determines your fleet and network?
Absolutely. Our long haul network is mainly centered on the United States but we also serve Australia and the Middle East through our partners. Some 65% of our long haul tickets are sold in the United States. Our home market is abroad!
But we also have to look at competitors in the market and how they might affect our strategy. We compete with Ryanair from Ireland and of course there is strong competition across the Atlantic from a number of carriers. But unlike Ryanair, we fly into major airports—most notably London Heathrow. And to the United States we have the advantage of pre-clearance. Departing passengers clear US immigration in Dublin or Shannon and they arrive in the United States effectively as domestic passengers. Our fleet is mainly Airbus and it is mainly owned by the airline. There are 40 A320s for our short-haul network, for example, supplemented by 12 ATRs.
We have a few leases to facilitate a degree of flexibility and we will lease three Boeing aircraft in 2014 to serve the North Atlantic market. That is a very volatile sector so it makes sense to lease. But generally, ownership means we have tight control over our outgoings and are not subject to the various charges associated with leasing. We have Airbus A350s on order due for delivery from 2016 but we evaluating our fleet requirements and will make some firm decisions by early next year.
What are you doing to develop the distribution of your product?
It’s true that we are a retail organization now. Our website is the second most visited in Ireland. We sell 90% of our tickets through the Internet and we can offer the full range of Aer Lingus products on our website. But we can’t do that through global distribution systems and travel agents. And that remaining 10% is still very important to us. At first sight, our short haul product would look like any other LCC, because that is the basis of our model. But we offer so much more and the product can be adapted to fit the demands of the customer.
You can keep a booking open for a couple of days for a small fee, for example. That’s something that isn’t possible to see through a GDS and it’s why we support IATA’s New Distribution Capability (NDC) project. Technically, NDC isn’t that difficult and the potential gains are huge. We still have important markets that prefer to use travel agents even though Internet penetration is high. The United States is an example. And we have to be able to serve those customers properly.
Added value revenue has become critical to profitability but isn’t it a double-edged sword with customers able to opt out as well as opt in?
Of course, we must be careful. There are a couple of aspects to this. The first is to thoroughly evaluate what works and what doesn’t work. We have stopped access to lounges in Malaga and Alicante, for example, because the demand simply wasn’t there. On the other hand, the ability for customers in economy class to book business class meals has proven so popular that we are unable to keep up with demand. We didn’t know what would happen in either case but we learned quickly. The second point is ensuring total transparency for the customer. This is critical to the customer and in fact we find that although there are customers that opt out, these are more than compensated for by the additional purchases of other customers.
The customers want to know that you are being fair and that you are not trying to trick them into additional spending. That would very quickly backfire. Ultimately, in the modern environment, you have to give choice to the customer. And as long as you are transparent, fair, and provide value for money then you will be successful. The agreement at ICAO on the environment was a big step forward but it seems Europe remains to be convinced. Are you concerned that the industry may yet have to battle a regional emissions trading scheme? We are still unsure about the European situation. It is important to keep this discussion going in the right spirit but ICAO has great experience and I cannot envisage a better body to take charge of implementing a global emissions trading scheme.
Whatever the scheme, I think it is absolutely vital that any money collected is put back into environmental projects and not just deposited in general government coffers. That wouldn’t be fair. In any case, I remain to be convinced that emissions trading is absolutely necessary. Look at the price of fuel. An airline already has the greatest incentive it needs to be environmentally friendly and reduce fuel burn.
European regulation in passenger rights has also come under scrutiny.
It used to be that the United States was at the forefront of consumer protection but recently Europe has become very strong in this area. It is regrettable but it is understandable. Certain LCCs abused the system and it was inevitable that the regulators would step in. Aer Lingus has never had a single law suit from a customer and yet we must pay for the way others abused the system. But regulation in itself is not the problem. I would accept regulation if it is fair and equitable among all modes of transportation. The problem is that the authorities added different approaches and created different layers without ever addressing the core issues. And now aviation is treated very differently to other modes of transportation. How do you explain the reasoning behind this fact?
If a taxi drops you at the bottom of a hill when it is snowing heavily even though you live at the top of the hill, you understand—and you don’t have any right to insist the driver attempts to get up the hill. If a law existed that said a taxi must try to get to the top of the hill or pay you back the full fare, taxis would simply stop running when it started to snow.
Airlines are not only paying for problems, such as bad weather, outside of their control but they are also paying an amount that is not related to the money paid by the customer. If there was another volcanic ash cloud we could be paying for customers to stay in hotels for a week or more—even if they only paid $50 for the air ticket. There must be limitations to the exposure faced by airlines. So, the current rules are not fair and they are not equitable. In fact, in the Netherlands it has become so obvious that airlines are exposed in this area that a whole sub-industry has built up with lawyers advertising their services to sue airlines under the passenger rights ruling, EU 261. Whenever that happens you know the law has gone too far.
More information at www.aerlingus.com