The bleak picture provides a perfect backdrop for a fundamental review of all costs and work practices, writes Ciarán HancockBusiness Affairs Correspondent

WHETHER TALKING to the Irish media, airline workers, analysts across Europe or the BBC's World Service, Aer Lingus chief executive Dermot Mannion had a loud and clear message yesterday - changes are afoot, and they won't be pleasant.

Aer Lingus made a loss of €20.2 million in the first half of this year. Mannion said that, at best, the airline would break even in the second half of the year. Analysts are predicting full-year losses of €25 - €30 million.

With Aer Lingus's fuel bill predicted to rise by about €70 million in 2009, Mannion said yesterday that losses next year could hit €100 million.

It's a bleak picture and yet it's the perfect backdrop for a fundamental review of all costs and work practices at the airline.

"Yet again, there is a need for a fundamental root-and-branch appraisal on where we are on cost, with proposals to deal with those areas coming forward at the appropriate time," Mannion said yesterday.

Privately, senior executives at Aer Lingus are guiding that proposals will emerge towards the end of September and will have to be in line with the losses that are likely next year.

"The days of scratching around for €15 million here or €15 million there are over; this has to be a major cost-cutting programme," said one senior source at the airline.

One analyst said yesterday's stark warning was a tactical move by Aer Lingus, designed to soften up the workforce.

"They want to send a big dose of reality to that constituency," said one senior analyst in Dublin, who asked not to be named. "They are quite conscious of how long it took to get PCI-07 through."

The PCI-07 restructuring plan was designed to deliver €20 million in cost savings by the end of 2007. In reality, it has still to be fully implemented.

This winter promises to be chilly for Aer Lingus. Rising oil prices and weakening consumer demand have prompted it to axe its Dublin-Los Angeles route and three short-haul services in Europe for the winter season.

Aer Lingus, like all airlines, is struggling to keep a lid on rising oil costs. In the first half of this year, the Irish airline saw its fuel costs rise by 49 per cent to €172 million. This wiped out the €58 million increase in revenues.

"We don't see any alleviation coming soon in relation to oil prices," Mannion said yesterday.

While revenues per passenger are increasing, the number of seats filled on each aircraft is declining. The airline's load factor on long-haul flights was down by 10 percentage points in the first half of the year and by 1.4 percentage points on short haul.

With the economies of Aer Lingus's main markets heading south, this is unlikely to change in the short term. In addition, the dollar and sterling have weakened and Ryanair is dumping millions of cheap tickets into the market to stimulate demand. It is also going to become more difficult to wring out extra fees from passengers in the form of baggage charges and fuel surcharges.

All of this gives Mannion a strong hand in what are likely to be tortuous negotiations with staff and unions.

Unions are likely to point to the airline's €802 million cash pile, which was always earmarked to help it renew and expand its fleet.

Mannion signalled yesterday his intention not to simply use that to soak up future losses: "Even if you have cash in the bank, it would not be a wise course of action to dissipate that cash to cover losses."

If Mannion is to seriously attack the cost base, it seems inevitable that the airline's headcount will have to be trimmed.

Aer Lingus's workforce swelled by 4 per cent to more than 4,000 in the first six months of this year, driven by the introduction of new aircraft. It is hard to imagine that this is a sustainable course in a cut-throat pricing environment. Indeed, it has postponed delivery of one new aircraft until 2010.

A number of outdated work practices remain within the airline. Management is believed to have had its eyes opened by the lower cost base achieved at its base in Belfast, along with the greater flexibility of workers there.

It seems inevitable that Mannion and his colleagues will seek to abolish certain work practices and to restructure existing grades and their rates of pay. How the unions react and whether the Government, as a 25 per cent shareholder with board representation, will wear job cuts or major changes to pay structures remain to be seen.

For now, Siptu and Impact are holding back, waiting for the proposals to be tabled.

One analyst summed it up succinctly: I think the cuts will be deep and fairly radical," he said. "In terms of jobs, it's not a question of how many people work for Aer Lingus in two years' time; it's more a case of how many will be direct employees and how many are contractors.

"Seniority-based pay scales are something they'll also be looking at. "They are still far from best in the class in industry. It's going to be a tough negotiation."