Attack the best defence for bolshie Aer Lingus

AER Lingus chief operating officer Mike Rutter is not a man for mincing his words and, amidst all the good news he announced last week, he had a clear warning for staff at the airline.

Aer Lingus could lose out on a €1bn aircraft investment to another IAG subsidiary — its new low cost carrier Level — if staff don’t play ball on pay, the straight-talking Newcastle native told this newspaper.

Earlier in the week, at a press event, Rutter had announced a new transatlantic route to Philadelphia as well as the purchase of eight Airbus A321 Long Range aircraft. He joked that he had eschewed the opportunity to come to the podium to announce the airline’s new route to the sound of the theme music of the city’s most famous son, the fictional boxer Rocky Balboa. But his message was impressive nonetheless.

The new IAG-funded aircraft purchase translates to a further investment by Willie Walsh-led IAG of €1bn on top of the €1bn it has already invested since buying the government stake in Aer Lingus.

Indeed, the new aircraft would give Aer Lingus the potential to go from the 2.5 million transatlantic passengers it carries today to 4.5 million passengers when the new aircraft enter service in 2020. This, said Rutter, would see the airline expand its workforce by 800 staff. Good news indeed.

But like the famous Philadelphia fighter, Rutter is also adept at landing a few rapid jabs when needed.

Relations with Dublin Airport Authority have “soured immensely”, he said, because of what he claimed was a lack of adequate investment by the airport authority in basic infrastructure such as taxiways, gates and stands. Indeed, so disgruntled is the airline with the service it claims it is getting at Dublin that it would consider the extraordinary move of buying Terminal 2 from DAA.

That would seem like a highly unlikely move, not least because Aer Lingus — and IAG — have a complete lack of expertise at running an airport. But it was certainly a loud warning to new DAA chief executive Dalton Philips in his first week in the job that Aer Lingus is currently his most bolshie customer.

And Rutter also threw a few digs at Ryanair, itself currently backed up against the ropes due to its cancellation of flights affecting more than 700,000 passengers over recent weeks. The pilot shortages that caused those cancellations were in part due to the much more pleasant terms and conditions enjoyed by Aer Lingus pilots.

“We never have a problem hiring pilots,” said Rutter, before acknowledging that this in itself explained at least some of Aer Lingus’s higher costs compared to a competitor such as Ryanair.

And it was Rutter’s warning to staff on competitiveness and productivity that perhaps has the most immediate bearing on the airline’s plans. In recent weeks the Labour Court has recommended that Aer Lingus staff should be given a total pay rise of 8.75pc over 39 months, well below the 19.1pc demanded by trade unions, not to mention the issue of a profit share.

The airline, as reported by this newspaper, had argued in great detail in a Labour Court submission that it faces major competitive pressures on short haul routes from Ryanair and on transatlantic routes from Norwegian’s new services from Dublin, Cork, Shannon and Belfast. In recent months Aer Lingus has successfully introduced a new no-frills low-cost fare on its transatlantic routes. But if Norwegian further expands its operation here, as some well informed sources are predicting they may, the pressure on Aer Lingus will only increase.

Operated by an Irish subsidiary of Norwegian, the transatlantic arm of that airline has had great success in driving down costs using the type of non-traditional employment contracts of which managers at unionised Aer Lingus can only dream.

Asked by this newspaper would Aer Lingus consider establishing a Norwegian-style subsidiary to operate the eight new A321LR aircraft to help it compete with the Scandinavian low cost carrier rather than operating them “in-house” under existing terms and conditions, Rutter was circumspect. While Aer Lingus is still committed to its current model of directly employed staff he indicated that this was on the proviso that the airline can maintain cost competitiveness and improve productivity, no easy task in today’s aviation environment.

Even more pointed was his response when asked how the current dispute over pay could impact management thinking on these issues. According to Rutter, the new aircraft could be given to another IAG company — for example, its new low-cost carrier Level — if it is unable to remain competitive.

Rutter insisted that Aer Lingus has been “the leading value carrier in the reduction of cost per available seat kilometre across the Atlantic, over the last two years while our two major competitors have seen increasing costs”.

This cost reduction, he said, has come from a number of productivity initiatives deployed in 2016 and 2017 and there is more to come.

“We have a further 22 initiatives targeted at cost reduction in 2018 that will continue that trend. We also continue to exploit synergies derived from our membership of a large airline group. The group’s buying power gives us savings in many areas of purchasing. Everything from fleet costs to marketing spend, catering supplies and a whole range of other areas in between.”

Negotiations that could see Aer Lingus joining IAG’s transatlantic joint-venture with American “are progressing well” and the airline “looks forward to joining if and when all regulatory steps have been completed,” said Rutter.

Indeed the strength of American Airlines at Philadelphia could help feed in passengers to the new Aer Lingus flight and no doubt influenced its choice as a destination.

But on the other side of the Atlantic, Aer Lingus is also facing huge competitive pressures in the European short-haul market, largely from Ryanair’s relentless expansion into major hub airports and, recent events notwithstanding, its reinvention as an airline with some level of customer service. Rutter’s announcement last week did also include some European expansion but it was noteworthy that this was largely focused on holiday and leisure destinations rather than the traditional business cities at the heart of Europe where the airline has found it tougher to compete.

“Aer Lingus has had two excellent years in its short-haul business, across all markets, including Euro business cities,” said Rutter in response to a query from this newspaper. “Recent events involving our major competitor have helped add further momentum to that strong performance. Investments in leisure routes reflect growing consumer preference for Aer Lingus services as reflected in this week’s CX [customer experience] survey,” he said.

But Rutter knows only too well that when Michael O’Leary inevitably comes swinging back off the ropes, Aer Lingus better have its guard held very high.