Costs on Aer Lingus's short-haul routes are almost double those of Ryanair per passenger, according to a study conducted by Goodbody Stockbrokers.
With Ryanair going head-to-head with Aer Lingus on almost 30 per cent of its short-haul routes, it is essential that the former State airline improves its cost performance, according to the report.
The report for institutional investors, drafted by analyst Joe Gill, estimates that short-haul costs at Aer Lingus are €80 per passenger compared at Ryanair's €41.
"While Aer Lingus may consider itself a premium carrier, the punters are voting with their feet suggesting that, for short-haul markets in particular, seats are a commodity and price is the key clearing house for volume."
Mr Gill said a "strategic challenge to Aer Lingus's profitability exists as long as Ryanair maintains a structural cost advantage".
However, he also said the recognition by the Aer Lingus board that unit costs were a crucial factor in airline performance was encouraging. "Aer Lingus intends to lower its unit costs through improved efficiencies and by spreading rising seat volume over fixed costs."
Goodbody expects the airline to generate earnings before interest payments and tax of €87 million in 2007, an increase of 14 per cent on 2006.
On Ryanair's 25 per cent shareholding in Aer Lingus, Mr Gill said the European Commission's rejection of Ryanair's attempt to take over its Irish competitor left three scenarios. Ryanair might retain its shareholding, something that could partly influence its Irish strategy so that both airlines would generate growing profits on short-haul flights out of Ireland.
Alternatively Ryanair might sell its shareholding to another airline. However, a subsequent takeover of Aer Lingus could create a strategic threat for Ryanair. Thirdly, Ryanair could seek to place its shares on the market and "unleash even harsher price competition in Ireland".
"Ironically, the EU Commission decision may have the effect of creating an environment whereby shareholders in both Aer Lingus and Ryanair benefit while ensuring no new entrants threaten the Irish market for either carrier."
