Government must help air industry take off: ThePost.ie


TCH Archives > Sunday Business Post > 2005/01/23 > Government must help air industry take off

Government must help air industry take off
Sunday, January 23, 2005 - By Tadhg Kearney
The Irish air transport industry is at a number of crossroads.

Decisions made by the government this year will have a major impact on tourism and the overall economy for years to come.

The challenges include the future ownership structure of Aer Lingus, the completion by the Dublin Airport Authority of the full divestment of assets and staff to the Shannon and Cork airport authorities, a renegotiation of the air bilateral Ireland/US agreement and the continuation of negotiations to create a single liberalised air transport market between Europe and the US.

The clear lesson of the past year must be that the sooner Aer Lingus gets out from the clutches of state ownership, the better. The public interest and the consumer interest have been ignored and the government's policy on Aer Lingus was driven by post-election panic in north Dublin. This drove Taoiseach Bertie Ahern to an act bordering on petulance in the Dáil, when he criticised the airline's management team.

Ahern didn't want Willie Walsh and his management team making a few million out of the privatisation of Aer Lingus, so the boys resigned and hundreds of millions of euro were wiped off the value of the company. Clever move. This year, Aer Lingus will get a new chairman and chief executive and its management team will face the challenge of building on the legacy of the Walsh era. It is clear that, whatever the merits of state ownership of our national carrier in the past, the overriding interest of the company and the public interest dictate that the sooner the company is privatised, the better.

Twenty years ago, the airline industry was an extremely conservative one, in which change came slowly. Policy and strategy were developed over many years.

In the past decade, that same industry has become one of the most competitive of all, with unremitting competitive pressures and a continuous demand for innovation and agility that requires quick decision-making and maximum adaptability.

Government ownership is not capable of dealing with the realities of that kind of marketplace. The government must realise that, if it is to get value out of Aer Lingus, it must do so when the company is in a position of strength.

Privatisation must seek to maximise the value of the airline to the state but also to maximise the potential of the company to be an internationally successful airline.

The strategic importance of Aer Lingus to Ireland is its transatlantic routes and its slots at Heathrow airport.

The model used for privatisation must seek to protect these, as they are critical to underpinning direct foreign investment and tourism, but must do so without unreasonably restricting the company's potential. This won't be easy.

On top of that, the new management team will need time to establish its credibility in the airline industry and in the financial markets, before any flotation can be contemplated. The fear is that the window of opportunity may have passed and Aer Lingus will have to depend totally on borrowings to fund its future growth plans, instead of a preferable combination of private equity and less borrowing.

Airlines are one key part of the equation of moving in and out of the country - the second is airports. Now that Aer Rianta has been abolished, the divestment of its assets to the three fully-independent state-owned airport companies at Dublin, Cork and Shannon will be completed shortly. The fruits of this policy have already been confirmed with the announcement by Ryanair of a huge route development deal at Shannon.

This is the largest such announcement in the history of the state, both for air traffic and tourism growth, as up to 80 per cent of these new passengers will be inbound.

What makes this deal particularly attractive is that it will deliver large numbers of European tourists on a year-round basis into the west of Ireland, which has huge capacity in the off-season. It would not have been possible to have delivered this deal at Shannon under the old Aer Rianta regime.

So far, Gary McGann and the new board at Dublin are giving every indication of being well up to the task. The delay in a decision on an independent second terminal should not unreasonably delay progress, if the new board continues to be innovative and adaptable in away that the old Aer Rianta clearly was not.

It could be argued that the completion of the new second runway is the most urgent priority facing Dublin Airport.

The quiet success story among the airports in recent years has been Cork - it has had a sensible cost base and an innovative marketing team, which has delivered new routes and passenger growth year-on-year. Its long overdue capital investment programme will provide new facilities. However, one hopes that this plan will not result in old Aer Rianta-style over-investment, thereby creating an unsustainable cost base.

The third key issue is regulation. The outcome of two sets of negotiations will have a profound impact on transatlantic traffic. Negotiations on an EU/US aviation agreement should move forward with new vigour, culminating in a first package of agreements in the second half of the year.

Separately, discussions between the Irish and US governments to renegotiate the bilateral agreement will result in a winding down of the restricted transatlantic air access policy.

The negotiations between Europe and the US, which seek to deliver an open aviation area agreement, have some risks but also huge potential. If such an agreement - often incorrectly called an EU/US open skies agreement - were successfully negotiated, it would create the single biggest aviation market in the world, with a population of 750 million.

The road to such an agreement will not be easy, particularly as the American industry is negotiating from a position of uncharacteristic weakness.

Historically, the American airline industry was far more efficient than its European counterpart and American aircraft manufacturers dominated the world. Over the past decade, and particularly since September 11, this situation has been reversed.

Almost all the big American carriers are in difficulty, with many of them having entered Chapter 11 bankruptcy protection in recent years.

Meanwhile, the European airline industry, with some notable exceptions, is in a pretty robust state. As a result, the American appetite for opening up its home market to European carriers is limited, to say the least.

Even small airlines like Aer Lingus would relish the opportunity of taking on the American carriers and would probably do well. Despite some foot dragging by the US, however, there is an inevitability that agreement will be reached.

Separately, discussions have been ongoing during the past year between Irish and US transport officials, and informally at ministerial level, to renegotiate the current Shannon gateway policy, which requires transatlantic airlines to use Dublin and Shannon airports. While there was logic to this policy in the past, such a policy does not sit well in a liberalised market environment, from which Ireland has gained so much.

If the present policy is to be unwound, there should be a transition period of up to five years to allow Shannon to adapt to the new environment. If such a transition period were agreed, then prudent voices in the west of Ireland would be likely to accept such a proposal.

However, the US must respond by giving Irish air carriers far greater access to American airports.

As we have seen before, the US is very quick to lecture other countries about opening up their home markets to American competition, but are very slow to open up the US market to foreign competition.

Industry experts maintain that, in a non-restrictive environment, Ireland/US air traffic could double in a very short period. Prudently managed, this could be a win-win situation for Irish airports, Aer Lingus and air passengers.

Ireland is home to some of the best international air transport operators. If the challenges facing the industry during the coming year are properly handled, Ireland's benchmark position as one of the most efficient and competitive air transport markets in the world will be further enhanced.

The industry will do its part. Hopefully, the government will too.

Tadhg Kearney is chairman of the Air Transport Users Council of the Chambers of Commerce of Ireland and a director of the Shannon Airport Authority. The views expressed are his own.