Ground Floor:Despite difficulties caused by increased security and sometimes freakish weather, global travel was strong in 2006 and the Travel Industry Association predicts it will continue to expand by about 4.6 per cent every year for the next 10 years, writes Sheila O'Flanagan
The association cites strong growth in China, increased growth in the euro zone and relatively low interest rates (notwithstanding recent increases) as reasons why people won't be sitting at home in the year ahead.
This is good news for the airline industry even though it continues to struggle with its overall structure. If past events and security issues have not deterred people from travelling then the problem is clearly not one of finding customers. Yet players have to get the model right to turn paying passengers into a profitable bottom line.
There is no doubt in most people's minds that Ryanair owns the cutting edge of profitable budget airline positions. It posted record half-year profits of €329 million and grew traffic by 23 per cent during 2006, while total revenues rose by 33 per cent and yields increased by 9 per cent - notwithstanding higher costs due to fuel charge increases. Passenger numbers were 22.1 million and the share price closed the year at €10.45 compared to €8.30 in 2005.
Meanwhile, Aer Lingus, which finally went public, closed at €2.74 - its share price caught between the stalled Ryanair bid at €2.80 and its rival's 19 per cent stake in the company, but still at a comfortable level for everyone who got in at the IPO giveaway price of €2.20. The current annual report shows an operating profit of €72.4 million and an increase in passenger numbers by 15.6 per cent to 8 million.
It amuses Michael O'Leary to call Aer Lingus a small regional airline but the numbers show that he's right.
However, the big difference in their businesses is the Aer Lingus hub slots at Heathrow and its transatlantic operations. Long-haul destinations account for almost 40 per cent of the Aer Lingus profit line. At the same time, though, it's the short-haul business that has driven passenger numbers for the regional airline. With British Airways admitting that premium fares - mainly on long distance - are a major contributor to its profitability, it would be interesting to see O'Leary's take on transatlantic flight services.
The battle between Aer Lingus and Ryanair isn't about numbers and profitability because that's not a contest anymore. Ryanair has it won hands down. It's about identity and ideology.
It's not only in Ireland that there is tension over the identity of the "national" airline. In Australia, Qantas (privatised 11 years ago) is facing a takeover bid. The unions are furious, politicians divided and the public unhappy. The board, however, has recommended the bid to shareholders. The reason the board is so supportive is that the bid prices the stock at 61 per cent over the weighted average share price over the six months before the offer.
Management recommended the offer on the basis that they "have taken the company about as far as they can under the current ownership structure" - pretty much how Willie Walsh saw the previous Aer Lingus situation himself.
The reason the public doesn't like the idea of the sale is that Australians have an emotional attachment to Qantas and that the consortium making the bid is based overseas. Nobody in Australia is too keen on seeing the national airline owned by people who aren't based on the continent, and the foreign contingent is mainly made up of US equity houses led by Texas Pacific.
There was a lot of talk about the strategic importance of Aer Lingus during the lead-up to its flotation. The same issue - although rather more important for the Australians - is being discussed with regard to the Qantas sale.
Almost all of Qantas's international business is, by reason of its location, long-haul. Even domestic flights are long! Flying from Perth to Melbourne takes as long as Dublin to the Canary Islands. In a country the size of Australia, air travel is vital. Nevertheless they haven't actually got their heads around the potential for squeezing every last cent from the travelling public.
On a Qantas flight from Sydney to Auckland this year (one of its shorter international flights) I was leafing through the onboard shopping guide. As I had a few Aussie dollars left I reckoned I should spend them during the flight. There was an order form with the shopping guide and so, having dismissed most of the goods offered, I settled on a pendant which cost exactly what I had left.
I filled out the form and handed it to the cabin attendant who told me politely that as it was a short-haul flight it was "unlikely" they'd have time to process my order. She would do it after the cabin service if at all possible. The flight takes three hours! On a three-hour Ryanair flight you'd have paid for your sandwich, coffee and water and have been bombarded with a variety of money-spending opportunities before ever reaching cruising altitude! Even Aer Lingus would have made sure that someone attended to the sky-shopping needs.
But in three hours there was no time to spend the dollars on Qantas. Which is why they definitely need a strategic partner. Fairly quickly.
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