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  1. 1. The Future of European Air Transportation Challenges and Opportunities
  2. 2. Performance of Traditional Airline Model <ul><li>In 2001 airlines lost almost $13 billion </li></ul><ul><li>In 2002 losses exceeded $11.5 billion </li></ul><ul><li>US majors lost $11.4 billion in 2002 following a loss of $7.5 billion in 2001 (after approximately $5 billion in aid) </li></ul><ul><li>Half of 2001 losses occurred before September 11 th </li></ul><ul><li>Clearly industry was in serious decline before that tragic day </li></ul>                                                                                                                                                                                                  
  3. 3. Performance of the “New” model <ul><li>“ Low-cost” became an industry term </li></ul><ul><li>Positions traditional airlines as “high cost” </li></ul><ul><li>Successful “low-cost” airlines broke traditional performance mould: </li></ul><ul><ul><li>Ryanair 2002 operating profit €263.5m up 61.7% from €162.9m in previous year </li></ul></ul><ul><ul><li>Southwest operating profit $417.3m in 2002 was 30 th successive year of profitability </li></ul></ul>
  4. 4. Aer Lingus performance pre-September 11 th 2001 <ul><li>2001 Budget - Operating Profit of €64M (5% margin) - Net cash on the Balance Sheet - 6% increase in average fares - 12% growth in passenger numbers - 19% increase in transatlantic revenues </li></ul><ul><li>By July, 2001Forecast Operating Loss of €38M and net debt of €22M </li></ul><ul><li>Debt financing negotiated but not in place </li></ul>
  5. 5. Path to Crisis <ul><li>Immediate post 9/11 forecast showed if no action taken Operating Loss of €90M in 2001 Operating Loss of €152M in 2002 </li></ul><ul><li>No credit facilities available </li></ul><ul><li>Immediate Cash Crisis – depleted by January </li></ul><ul><li>Immediate action while developing a Survival Plan </li></ul><ul><li>2001 Operating Loss reduced to €52M and year end net cash €66M </li></ul>
  6. 6. Crisis post-September 11 th 2001 <ul><li>Facing closure: Aer Lingus identified as a likely casualty </li></ul><ul><li>Transatlantic Market in chaos 40% of revenues 50% of profit 60% of capacity (ASKs) Load factors fell to <40% within 2 weeks of 9/11 </li></ul><ul><li>Cost base and work practices unsustainable </li></ul><ul><li>Action must be urgent and radical </li></ul><ul><li>Change must be permanent – develop Survival Plan </li></ul>
  7. 7. Survival and beyond <ul><li>€ 190 million cost reduction – 16% </li></ul><ul><li>33% reduction in staff </li></ul><ul><li>Become relevant ! </li></ul><ul><li>Not the “normal” cyclical downturn – fundamental change in the business </li></ul><ul><li>Certain assumptions proved invalid: </li></ul><ul><ul><li>“ Recovery” of business traffic </li></ul></ul><ul><ul><li>Fares levels </li></ul></ul>
  8. 8. Ireland – Heathrow average yields 2001 to date 2002 €86.12 2003 €70.86 2001 €101.27
  9. 9. Ireland – Heathrow average yields 2002 2001 €101.27 2002 €86.12 2003 €70.86
  10. 10. Ireland – Heathrow average yields - actual versus “plan” 2002
  11. 11. Ireland – Heathrow average yields - actual versus “plan” Plan assumed return to 2000 levels of Premier Traffic “ Plan” €100.71 Actual €86.12 € 31.48 2002
  12. 12. Building a Sustainable Business – the challenge <ul><li>€ 190 million cost savings secured by April/May </li></ul><ul><li>Be “relevant” in the market </li></ul><ul><li>Significant reduction in fares </li></ul><ul><li>Remove traditional restrictions </li></ul><ul><li>Pricing transparency - </li></ul><ul><li>Maintain customer service ethos </li></ul>
  13. 13. Cost Base and Price <ul><li>The key to a sustainable and profitable business in the changed environment is aggressive and relentless cost management. </li></ul><ul><li>Aggressive cost control means aggressive pricing. </li></ul><ul><li>Aggressive pricing makes you relevant and attractive to the customer. </li></ul><ul><li>Price stimulated air travel after 11 September. </li></ul><ul><li>Aer Lingus - costs and prices are down - passenger numbers and load factors are up </li></ul>
  14. 14. Cost reductions achieved to date - €344 Million
  15. 15. Change in business model
  16. 16. Cost reductions achieved to date - €344 Million
  17. 17. Distribution <ul><li>Focus on “cost to check-in” </li></ul><ul><li>Benchmarking against Ryanair showed a massive cost disadvantage </li></ul><ul><li>More than €20 per passenger per sector difference </li></ul><ul><li>Commission to travel trade represented significant cost </li></ul><ul><li>Internet distribution provided solution </li></ul>
  18. 18. <ul><li>Worldwide online sales increased from 2% to 50% </li></ul><ul><li>>60% of total Irish sales now via website </li></ul><ul><li>150,000+ site visitors a day </li></ul><ul><li>€ 1.5 million+ revenue a day </li></ul><ul><li>Distribution costs reduced by €76 million representing 22.1% of total cost reduction programme </li></ul><ul><li>Unit distribution costs down by 70% in 2004 </li></ul>
  19. 19. Cost reductions achieved to date - €344 Million <ul><li>Staff related costs reduced by €67 million representing 19.5% of total cost reduction programme </li></ul><ul><li>Significant that 80% of total cost reduction programme is in non staff related costs </li></ul><ul><li>Traditional cost cutting programmes often fail because of difficulties addressing staff costs </li></ul><ul><li>Next step change in the cost base will come from fleet standardisiation </li></ul>
  20. 20. Fleet – standardise, less complexity <ul><li>European fleet – move to single aircraft type </li></ul><ul><li>17 new Airbus A320 ordered (CFM engines) </li></ul><ul><li>Fleet change complete by end 2005 </li></ul><ul><li>Funding from internal resources without recourse to external financing </li></ul><ul><li>Long haul fleet review initiated </li></ul>
  21. 21. Cost categories – in order of scale <ul><li>Aer Lingus spends more on airport charges than we do on fuel </li></ul><ul><li>Fuel is always considered a significant part of an airline’s cost base </li></ul><ul><li>Airport charges do influence route decisions </li></ul>
  22. 22. Growth - Opportunities <ul><li>There is enormous potential in the development of further US gateways. </li></ul><ul><li>Aer Lingus is restricted to just four gateways (New York, Boston, Chicago and Los Angeles) under the US/Ireland Bilateral Agreement (special agreement for Baltimore). </li></ul><ul><li>US carriers can fly from anywhere in the US. No restrictions. </li></ul><ul><li>We will open a number of further gateways in the US if this situation changes. This could lead to a doubling of transatlantic visitors to Ireland within a short timescale with major benefit to Irish business and tourism. </li></ul><ul><li>In 1994 we operated 34 flights per week to 2 gateways. By 2001 this increased to 120 flights per week to five gateways. </li></ul>
  23. 23. Premier class shorthaul review <ul><li>Companies are seeking to reduce expenditure on travel resulting in a significant reduction in business traffic </li></ul><ul><li>Fewer companies are approving Business Class travel for journeys less than 6 hours </li></ul><ul><li>Low Cost carriers now acceptable to wider number of companies for business travel </li></ul><ul><li>Price and flexibility of ticket now a greater driver of behaviour than class of service </li></ul>
  24. 24. Premier class shorthaul <ul><li>Aer Lingus Premier loads have reduced since 2001 </li></ul><ul><li>Significant number of routes have very low average Premier loads </li></ul><ul><li>2003 v. 2002 Heathrow Premier traffic declined by 31% UKP by 11% Continent by 14% Overall short haul –24%. </li></ul><ul><li>This follows a decline in 2002 v. 2001 of 18% , and in 2001 v. 2000 of 10% </li></ul>
  25. 25. Average Premier bookings per flight - 2003 Premier Class withdrawn from all routes except for flights to Heathrow and from Dublin to Brussels, Amsterdam, Frankfurt, Manchester, Birmingham, Edinburgh and Glasgow
  26. 26. Aer Lingus – The Transformed Business Model <ul><li>The key is cost </li></ul><ul><li>Simplify the business – less complexity </li></ul><ul><li>More direct routes – 31 new routes launched </li></ul><ul><li>Quality service </li></ul><ul><li>Low fares – more passengers </li></ul>
  27. 27. Key operational highlights 2003 <ul><li>Passenger numbers up 6.2% to 6.6 million </li></ul><ul><li>Passenger load factor up 3 points to 81% </li></ul><ul><li>Record year for Transatlantic passengers, up 19.4% to 1.1 million </li></ul><ul><li>Transatlantic passenger load factor up 3 points to 86% </li></ul><ul><li>Transatlantic revenues account for 38% of total passenger revenues </li></ul><ul><li>Continental European passengers up 27.6% to 2.1 million </li></ul><ul><li>28 new European routes introduced since 2001 </li></ul>
  28. 28. 2003 performance <ul><li>Operating profit of €83.0 million – up 30% on 2002 </li></ul><ul><li>Operating margin of 9.3% (6.7% in 2002) </li></ul><ul><li>Profit for the year of €69.2 million – up 96% on 2002 </li></ul><ul><li>Cash position improved – free cash increased to €384.8 million </li></ul><ul><li>Net cash increased to €226.2 million </li></ul><ul><li>Shareholders’ funds increased to €321.9 million </li></ul>
  29. 29. Profit and Loss
  30. 30. Balance Sheet
  31. 31. Key statistics – Continuing operations
  32. 32. Future Fundamentals <ul><li>No return to the old model </li></ul><ul><li>More cost reduction across all cost captions </li></ul><ul><li>Lower costs mean more low fares </li></ul><ul><li>More routes </li></ul><ul><li>More </li></ul><ul><li>Less complexity! </li></ul><ul><li>More profits </li></ul>