Flight path back will be more bumpy for Aer Lingus than Ryanair
AN IRISH executive I know was returning from New York to Dublin last month for important business. His Aer Lingus flight to Ireland had just six passengers on it. It also had a lot of cargo, which might have gone some way towards justifying the financial cost of keeping the service flying.
While Ryanair has been incredibly vocal among Irish airlines during the pandemic, when it comes to quarantines, costs and risks perhaps Aer Lingus and its parent IAG Group is where more of our attention should be drawn.
Ryanair secured a pay-cut deal with quite a few of its unions in recent weeks.
Aer Lingus put forward a plan to cut pay further which would have kept pay at 50pc of pre-Covid levels (instead of the current more severe cut to 30pc of pre-pandemic pay).
If it had been backed, the plan would have averted layoffs. A new heightened level of uncertainty has crept into the airline industry. Everybody knew how awful it has been but there is now a sense that the negative impact on travel will go on for longer.
In the first six months of 2020, Aer Lingus made a €316m operating loss. It is looking at up to 1,000 redundancies. British Airways wants 12,000. Its parent group IAG also owns Iberia and Vueling. British Airways has tapped a British government-backed loan guarantee to the tune of €314m. Iberia has done something similar in Spain, taking its state-backed funding to €1.23bn.
On Friday, IAG confirmed it had launched a massive rights issue to raise €2.75bn. This is an enormous sum, equal to around 70pc of its current market capitalisation.
The wider group picture raises obvious questions about the underlying strength of the Aer Lingus balance sheet and whether the former State airline may need to avail of some kind of state supports like its sister airlines.
IAG is quite capable of borrowing money on the open market but the difference between using a state guarantee and normal market rates can be significant when it comes to the interest rate that is paid.
The Irish Government has said very little about how it plans to deal with State aid programmes for bigger companies. This is
particularly problematic for airlines. The German government has delivered a huge €9bn bailout for Lufthansa.
The German airline competes with Ryanair in Germany and lots of other airlines across Europe. Ryanair is challenging the terms of the Lufthansa bailout in court.
Airlines have generally underestimated the underlying depth of the impact that Covid-19 would have on their businesses.
To put it in perspective, two directors of IAG, including the group chairman Antonio Vázquez Romero, spent more than €1.5m buying shares in IAG in early March on the back of strong results beforehand. They made the purchases at between €4.67 and €5.22 per share. IAG shares are currently trading in Madrid at around €1.99. And there is still a long way to go here. Those guys won’t see that money again for some time.
Dublin Airport figures show a 97pc drop in continental European passenger numbers in June compared to the same month last year. UK traffic was down 96pc and traffic from North America was down 98pc.
The bigger long-term question for Aer Lingus, more so than Ryanair, is how long it will take for North American traffic to recover.
The US remains a Covid-19 basket case. And there are real question marks over the future of long-distance business travel even after this pandemic has passed.
Transport Minister Eamon Ryan has said that any bailout of Aer Lingus, if needed in the future, would have to come with parallel commitments on passenger refunds.
The head of the pilots’ union, Evan Cullen, told an Oireachtas committee that Aer Lingus could be wound up without State aid or an easing of travel restrictions. Cullen told the committee that no airline could afford to lose €1.5m per day.
Ryanair has now got its cash burn losses per day down to zero.
It is also sitting on cash of €3.9bn and has 333 unencumbered planes. The flight path back for Aer Lingus may be a lot bumpier.
Hibernia’s Nowlan gives early warning on office market
THIS time last year the crane count on the Dublin skyline was 123. It was an extraordinary statement about how construction and property development had bounced back after the 2008 crash.
At the same time, it was widely lamented that not enough of these cranes were working on residential projects but in fact were taking advantage of the boom in demand for quality office space.
Many of them are back but what will the demand for new office space be in the short to medium term?
Kevin Nowlan, chief executive of Hibernia Reit, gave some indication about the short term at least at the company’s AGM during the week.
He said demand for offices had slowed and this would have a modest impact on asset values. Because Nowlan runs a listed property company, he has to give regular updates on performance, valuation and outlook.
Imagine if there had been more listed property companies in Ireland back in 2008 when the market began to wobble.
Instead, the sector was dominated by old-style developers who owned their own companies and kept everything opaque. Some were directors of more than 100 separate companies.
In the UK when the crash began there were lots of more transparent property firms that warned about impending doom. The response from Irish developers to an obvious problem in Dublin was that falling prices in London were great because it would provide better buying opportunities.
Back to the present and Nowlan was able to emphasise how 98pc of rent for the September quarter had been paid or was on an agreed monthly payment plan. His statement didn’t give a breakdown.
While rightly acknowledging that offices were likely to remain “integral” to most organisations, Nowlan cannot be sure about the longer-term impact future trends will have on office demand and valuations.
There have already been some sizeable office deals in the Dublin market in recent weeks. Ultimately, there will always be buyers of good assets, the key issue is at what price.
Henderson Park Capital is reported to have sold the EBS Building Society headquarters to German investment fund KGAL for €94m. Henderson acquired it from Green Reit along with four other properties. Green bought the building in 2013 for €46m. Henderson’s purchase price is not known.
Unusually for a Reit, Hibernia straddles both commercial and residential property. Other Irish Reits tend to be one or the other. The demand for housing is not likely to drop any time soon, especially rented property. Perhaps a previous weakness could become a positive.
Nowlan summed up the implications of a changing office market, at least in the short term, by suggesting landlords would have to compete on price when it comes to new leases on vacant buildings. At least he is warning people early.