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 Up Front With Martin B. Deutsch

martin FLYING INTO THE GREEN

BY MARTIN B. DEUTSCH

June 16, 1997 -- There was a week back in October, 1993, when Aer Lingus lacked the funds to pay its employees. While there was never a formal bankruptcy for the airline, it was a close call. This tidbit was imparted to me a few weeks ago by Gary McGann, Aer Lingus’ chief executive, who was recruited in 1994 to turn things around, an objective he and his team seem to have achieved in rapid order. In that disastrous year of 1993, the airline lost in excess $300 million. Last year it posted a record profit of $65 million.

What happened in such a short span to bring Aer Lingus to “its best year ever” and add a further tinge of optimism to the near-term outlook? McGann addressed the issue in an interview in his office at Dublin Airport. He calls the past ten years a “troubled decade” for Aer Lingus that saw the liberalization of air transportation in Europe. “We were 10 years behind the U.S., and we did not respond quickly enough,” he says.

The advent of low-cost, no-frills carriers, McGann says, undetermined the traditional belief that costs would be recoverable from fares. “The low-cost airlines stimulated the [passenger] market,” he says, “but took business away from sitting tenants [such as Aer Lingus], and our equity base was far too narrow for the size of the business.” The rapidly changing scene was exacerbated in the early 1990s by the Gulf War, worldwide recession and rising fuel prices, all of which conspired to bankrupt airlines, particularly in Europe.

What saved the day for Aer Lingus in 1993 was a fresh infusion of equity ($225 million) from the Irish government, with European Union approval, provided a major restructuring was implemented. Critical requirements, according to McGann, included:

Modification of the infamous “Shannon” rule, which required all North Atlantic flights to enter Ireland through Shannon. By allowing direct flights to Dublin from Aer Lingus’ active U.S. gateways — New Yor/J.F.K., Chicago and Boston — “We were able to attract more business travelers,” McGann says. Today Aer Lingus has daily service from JFK to both Dublin and Shannon, and flights to the former seem to be registering stronger load factors.

Restructuring the head count, a move that saved $75 million by eliminating 1,500 of the company’s jobs worldwide. There was also a related three-year pay freeze and changes in work practices — not easy conditions to impose on a totally unionized organization. But the staff was subsequently “rewarded” with a 10 percent pay boost.

Fleet Restructuring. Aer Lingus’ 22-year-old 747s were costly to maintain and had a propensity to “guzzle fuel.” The carrier began to modernize, turning to Airbus A-330s (the fifth Airbus is due this month and another one is in the pipeline). The fleet now averages 5.8 years.

All non-core operations, such as hotels and a computer division, were mandated to be sold off, raising $350 million.

It was a total makeover, McGann says, and it has led the government, other shareholders (the staff holds 5 percent) and Ireland’s Department of Transport to give Aer Lingus a green light to seek an equity partner, either in the U.S. or Europe. “We can’t stand alone; we’re too small,” say McGann, who would “like to build Dublin into a mini-hub,” feeding passengers from “very congested” U.K. and European gateways to the U.S.

Aer Lingus has a flexible mandate to find an equity partner by December, and McGann says he’s talking to potential candidates on both sides of the Atlantic. The airline has rights to Los Angeles, which lie fallow because it “lacks the business traffic [and feed] to fly economically on a daily basis,” he says. “But we would serve Los Angeles with a U.S. partner.” (Aer Lingus currently has a code-share agreement with Delta Air Lines out of JFK, an arrangement that McGann sees as mutually beneficial; there’s also a limited codeshare with Finnair.)

Logical Choice. Another logical codeshare alliance would involve Continental. On May 15, the day I interviewed McGann, Aer Lingus launched daily (except Tuesday) flights from Dublin to Newark. The Newark service —using an L-1011 for the moment — will operate into mid-October. “Then we’ll see if there’s a legitimate opportunity and demand to fly year-around,” he says. McGann calls talks with Continental about a Newark codeshare “very much liking to have our cake and eating it too,” since Aer Lingus’ deal with Delta at JFK would continue.

McGann believes Aer Lingus would bring much to the table in any equity partnership. “We compare favorably with other airlines on seat, comfort, pitch and service standards,” he says. The airline also ranks third or fourth at Heathrow. Indeed, with 33 slots and 1,200 staff, Aer Lingus is the largest third-party provider of check-in and ramp services at Europe’s most coveted entry facility. McGann also points out that Ireland has Europe’s only pre-clearance for U.S. immigration, which attracts Americans flying home from the U.K. and Europe. On the other hand, he admits that Aer Lingus does not have a long queue of suitors, citing, among other factors, Ireland’s relatively small population of 3.5 million. (Some 30 to 40 million Americans, however, claim to be of Irish descent.)

On the subject of Heathrow, McGann says he is surprised that a decision on the American Airlines-British Airways merger is taking so long, but he still thinks it will happen. He calls the Northwest-KLM alliance “very successful” and United-Lufthansa-Air Canada-SAS-Thai Airways (the Star Alliance) “very powerful.” But all of these alliances in an open-skies environment are “very threatening,” according to McGann. That’s why Aer Lingus “must have a premium product, schedules, pricing and broader mileage awards, as well as a strong alliance partnership, to continue to compete effectively,” he says. At the top of his wish list are additional U.S. gateways in Philadelphia, Washington, D.C., and San Francisco (with a partner).

Dublin Native. McGann, who will be 47 this year, is incisive, quick-witted and thoughtful. His background is basically financial and administrative, although he’s had oversight of sales and marketing operations. Before joining Aer Lingus, he was CEO of Gilbeys of Ireland. A native of Dublin, he has a BA and masters degree in administration. He lives with his wife and three daughters in Dublin.

A few personal observations: My wife and I flew business class (Premier) to Dublin and home from Shannon. The service was warm and charming, the food surprisingly good, the A-330s roomy and passenger-friendly and the in-flight entertainment options up to expectations (I was particularly pleased with several of the audio channels.). Checking in was smooth and efficient, and the lounges were comfortable. The airline has made great strides in the last few years. Good for Gary McGann, and good for Aer Lingus.

This column originally appeared in Travel Agent magazine.

Copyright © 1991-2006 by Martin B. Deutsch. All rights reserved.