Aer Lingus: Evolution to Value Carrier

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Aer Lingus: Evolution to Value Carrier

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The Aer Lingus business model which delivered sustainable success

1.0 Introduction

Aer Lingus’ 84-year history has been one of continuous change and development. The business
model for many decades was restricted by distinct factors; ‘Distressed State Airline Syndrome’,
poor financial performance (near bankruptcy several times) coupled with insufficient cost
control, dominant union influence, disproportionate staff levels, poor staff utilisation,
bureaucratic management style and an indigenous route and passenger connectivity policy which
hindered passenger growth and profitability (Skinner and Cranitch, 1990; Barrett, 2002, 2006,
2015; O’Connell and Connolly, 2017). Ryanair launched as a Low Cost Carrier (LCC) in 1991
and quickly established a foothold in Dublin and Cork Airport, carrying 3 million passengers by
1996, it was on the horizon as a real competitor and threat. From the early 1990s, the Aer Lingus
business model was driven by crisis management, primarily due to its origins and philosophy as a
legacy state Full Service Carrier (FSC). Faced with bankruptcy in 1993, the Cahill plan delivered
costs savings and efficiencies which turned around its fortunes from loss to profit making and
survival by 2000. Various strategies adopted and implemented during the last 16 years,
contributed to significant organisational change, which ultimately delivered transformation and
realignment (Balogun et al., 2016) to the business model.

2.0 Events after the new Millennium

The new millennium began with financial market turmoil in the technology sector known as the
dotcom bubble (O’Mahony, 2015), Foot and Mouth disease which caused travel restrictions
between Ireland and UK, and the September 11 attacks in 2001. These events detrimentally
affected passenger numbers travelling on UK and North American routes. Losses of €2.5 million
per day were being incurred by November 2001 (O’Connell and Williams, 2005). Led by Willie
Walsh, a new direction encompassing a fundamental alternation in the business model (Balogun
et al., 2016) was manifested by transitioning the airline into a Low Cost Carrier (LCC). Cost
control measures, staff reductions, fare reductions (long and short haul), fleet commonality with
only Airbus A320/A321 operating short haul, ancillary revenues, closure of the Aer Lingus travel
shops and moving ticket sales on line (marketed as [Link]) were the core strategic
elements for the period 2001 to 2005 (O’Connell and Williams, 2005; O’Connell and Connolly,
2017). New routes to Alicante, Madrid and Malaga launched from 2001, this signalled intent to
take on the charter market (Irish Times, 2002), Ryanair followed in 2003 with Spanish routes
from Dublin and Cork. This period ensured survival by creating passenger growth, from 7
million in 2001 to 8 million by 2005 and from losses of €139 million in 2001 to profit of €82.6
million in 2005 (O’Connell and Williams, 2005). The business model was revolutionised in a
relatively short period (Balogun et al., 2016). The continuous growth of Ryanair, 28 million
passengers annually with profitability of €268m (Ryanair, 2005) demonstrated the challenge to
remain competitive with the LCC model, especially in the context of achieving low operating
costs, whilst still providing long haul operations with business class services to the United States.

3.0 Events from 2005 to 2009

The period 2005 to 2009, was dominated by three critical events; Initial Public Offering (IPO)
September 2006, record high jet fuel prices and economic downturn in 2008. The IPO valued
Aer Lingus at €1.16 billion but an unexpected scenario quickly developed whereby Ryanair
became a shareholder1 which led to involvement at board level until 2014. Jet fuel prices soared
to highs of $180 per barrel in 2008 (ICAO and Platts/RBS, 2011), this led to increased fuel costs
of €148 million (2008) and coupled with a weak US dollar significantly affected financial
performance, thus, recording an operating loss of €160.9 million, followed by losses of €169.6
million in 2009 (Aer Lingus, 2008, 2009). Strategically, it was about survival with immediate
focus on cost reduction known as the ‘Greenfield programme’, when launched in October 2009
the economy was in full recession, Aer Lingus was experiencing declining passenger numbers
and saddled with over capacity (Dobruszkes and Van Hamme, 2011). Airline partnerships were
agreed in 2008 with JetBlue Airways, connecting passengers to 40 US destinations including
JFK-New York and Logan-Boston, with United Airlines to 200 US destinations and with Aer
Arann which provided transfers to the US via Dublin from secondary airports in Ireland and the
UK (Aer Lingus, 2008, 2009). These partnership policies formed the basis of operational
longevity.
4.0 New CEO with a New Vision

Christoph Mueller (appointed September 2009) implemented ‘Greenfield’ immediately and made
rapid progress, staff costs had decreased by €53.3 million in 2010. Competing from Dublin as a
LCC was unsustainable while equally full service was no longer viable on short haul routes due
to the price sensitive mindset of passengers expecting low fares (Dresner, Lin and Windle, 1996;
Dennis, 2007; Hofer, Windle and Dresner, 2008; Wong et al., 2019). During the period 2010 to
2015, Mueller created and implemented a visionary strategy, which transformed the business
model by positioning as a ‘Value Carrier’ or hybrid model (Aer Lingus, 2010; de Wit and
Zuidberg, 2012; Mueller, C, 2014; O’Connell and Connolly, 2017). The hybrid model
encapsulated blending the business model by moving away from delivering one product type,
thereby, forcing in the LCC case to compromise on the product offering (Franke and John, 2011;
Wong et al., 2019). The hybrid strategy involved investing in technology, products and services
that appealed to the business traveller coupled with seamless integration to a route network via
partnerships (Taneja, 2010, p. 33).

5.0 Transforming to a Value Airline

The visionary strategic principles comprised; ‘Value Carrier’ (hybrid model) positioning, cost
reduction with improved resource utilisation by increasing pilot flying hours (Wall, 2009; Aer
Lingus, 2020b), alignment of capacity with demand, partnerships and alliances, yield focus and
connectivity (Aer Lingus, 2010). Balogun et al. 2016, p.47, defined the Air-France KLM
‘Transform 2015’ programme as a large-scale realignment, involving significant debt and cost
reduction, restructuring medium-haul connectivity and developing ancillary revenues via on-line
sales. The ‘Value Carrier’ strategy was more significant than realignment, it was another
fundamental change to the model. Implementation was during a period when jet fuel oil prices
were at record highs as illustrated in Figure 1, with an on-going pension fund deficit which
caused significant financial liabilities €190 million placed into ESCROW fund (Aer Lingus,
2014) and LCCs had circa 50% (Klophaus, Conrady and Fichert, 2012) of large segments of the
European market, surpassing most of the top Full Service Carrier (FSC) seat share – see Figure 2.
Figure 1. Jet fuel price versus profit margin 2010-2018

Source (Eurocontrol and IATA/Platts, 2019)

Figure 2. European Airline seat share: 2005 vs 2014

12%

10%

8%
2005
6%
2014
4%

Source (Flight Global, 2015)

Transforming to a ‘Value Carrier’ was ingenious and secured a viable long-term future. From
2010 to 2015, Navigation costs (which are outside of the operators control 2) ranged from 21% to
27% of total Cost per Available Seat Kilometre (CASK), the fuel hedging policy was inefficient
and expensive (O’Connell and Connolly, 2017) fuel ranged from 23% to 27% of total CASK.
However, remaining operating costs were stringently managed and efficiently controlled as
illustrated by Figure 3.

Figure 3. Operating Unit Costs – CASK

Source adapted from Aer Lingus Annual Reports 2009-20183

‘Value Carrier’ transformation involved identifying with price sensitive, leisure and business
travellers by providing a blend of services (Franke and John, 2011; Wong et al., 2019). Three
customised fare options were launched to enhance this perception, for example, ‘Plus’ fare
included seat selection, check in baggage and airmiles. The hybrid model focussed on delivering
products and services at the right price by removing the no frills experience. Ancillary (retail)
revenues increased by 8% from 2010 to 2014 which equated to €19.14 per passenger (Aer
Lingus, 2010 - 2014), circa 95% of this revenue was profitable (McCabe, 2015). Ancillary
revenues have become an integral part of airline business models worldwide (Bisignani, 2014;
Warnock-Smith, O’Connell and Maleki, 2017).

5.1 Aer Lingus’ Partnerships

New practices were instigated to address the annual decline in passengers and load factors during
winter months and slack periods caused by seasonality. Washington to Madrid services were
operated on behalf of United Airlines from 2010 to 2012 using Airbus A330 (Aer Lingus, 2012),
winter season operations were provided to Novair seasonally from 2013 to 2015 again using
Airbus A330 (Aer Lingus, 2014). ‘Little Red’ contract with Virgin to transfer UK passengers
from regional airports to London Heathrow using A320 and ASL Airlines provided B757 aircraft
(leased-in) to operate transatlantic services matching capacity requirements during the winter
season (Aer Lingus, 2013). These practices combined with Stobart Air passenger connectivity
(established since 2010) generated revenues of €29.4 million in 2013 increasing by 45% to €42.7
million in 2014 (Aer Lingus, 2013, 2014).

Stobart Air (formerly Aer Arann) partnership was aimed at connecting passengers from UK
regions to Dublin Airport. This proved successful and by 2013 the partnership was extended
until 2023 (O’Connell and Connolly, 2017). Stobart Air fleet of ATRs (regional aircraft)
provided a feeder network into transatlantic operations. By the end of 2014, Flybe were
providing additional transfers from Exeter, Inverness and Southampton (Routes on line, 2014).
Aer Lingus recognised passenger growth potential from the UK and existing capacity to handle
growth in Dublin Airport. Moving into Terminal 2 without added passenger charges to the
airline (Madden, 2010) was instrumental. Irelands’ bilateral with the USA, permits at Dublin and
Shannon Airport, immigration, customs and border clearance, this provides a level of
convenience for connecting passengers (CAPA, 2016). Adjusting US flight schedules to provide
onward connections for passengers arriving from the UK and Europe was essential in creating the
Dublin hub. Existing Partnerships with JetBlue and United provided further connectivity for
passengers, in 2014, circa 50% long haul passengers transferred from or to the partner airlines.
Re-scheduling European routes delivered connect passenger traffic of approximately 30% to the
US via Dublin, and circa 20% from the US to Europe via Dublin (Aer Lingus, 2014). O’Connell
and Connelly, 2017 identified that by 2015, re-mastering network connectivity (bank structure)
had provided more frequencies and wider network penetration, see Figure 4. Another
revolutionary transformation had been achieved, indeed the hybrid strategy was prescient with
respect to creating an international hub at Dublin Airport.
Figure 4. Aer Lingus Route Network

Source (Aer Lingus, 2020a)

6.0 The Takeover by IAG and why it made sense to merge.

In July 2015, the European Commission approved a €1.3 billion takeover of Aer Lingus by IAG
(BBC, 2005). Several conditional commitments were attached to encourage sufficient
competition, such as, IAG releasing 5 daily slots at Gatwick Airport (European Commission,
2015). In 2015 Stephen Kavanagh was appointed chief executive, the hybrid model benefits
were becoming evident with operating profits of €140 million (Aer Lingus, 2015). Kavanagh had
served within the senior management and was involved with the execution of the ‘Value Carrier’
transformation. Continuous cost control, increased revenues and record operating profit
summarise the financial performance since 2015, as illustrated in Figure 5 and Figure 6. The
impact of IAG has been evident in relation to fuel cost control, averaging at 22% of total CASK,
the fuel hedging policy is decided and controlled at group level. Cargo revenues have remained
steady at €53 million since the IAG takeover (Aer Lingus, 2011, 2012, 2013, 2014, 2015).

Figure 5. Aer Lingus CASK v RASK Figure 6. Aer Lingus Profit/Loss

Source (Aer Lingus, 2009-2018) Source (Aer Lingus, 2009-2018)

In the last few years, Aer Lingus benefitted immensely from corporate knowledge and expertise
due to senior management moving from IAG group companies to Aer Lingus executive roles
such as chief financial officer and chief executive. These staff changes facilitate knowledge gain
and knowledge transfer and also promote the ability to deal with a broader range of threats (Day,
1990; Heracleous, Wirtz and Johnston, 2004; Redpath, O’Connell and Warnock-Smith, 2017).
Dublin Airport Authority stated in 2016, its key position as a European and North American
gateway, transatlantic traffic was the fastest growing segment showing a record 2.7 million
passengers, with a 23% increase in passenger transfers to a record 1.2 million and increasing to a
further 2.1 million connecting passengers at Dublin Airport by 2018 (DAA, 2016, 2018). IAG
acknowledged potential for Dublin to mature into a major transatlantic hub, in so doing,
reinforcing this a key strategic enabler (IAG, 2018). In 2018, Dublin - London Heathrow was the
worlds’ 14th busiest route, served by Aer Lingus and British Airways carrying circa 1.8 million
passengers with Load Factors of 81%, the top 5 Dublin connections were to the US, 4 of the top 5
London connections were also to the US (OAG, 2018, p. 16). Aer Lingus continues to improve
US and European connectivity, sampling 44 US originating flights for summer 2020 provided a
median and mean transfer time of 2 and 2.47 hours respectively for European destinations4.

Several competitive threats emerged in recent years in the form of airport connectivity and
operators. Gatwick Airport offer connection services, which is aimed at assisting passenger with
flight transfers without an inter airline ticket (Gatwick Airport, 2015). Norwegian competing
with new routes to Fort Lauderdale, Los Angeles and New York from Gatwick (CAPA, 2013)
and significantly, Icelandair providing North American connections via Reykjavik from
Gatwick, see Figure 7. Aer Lingus responded to these competitive threats by; increasing ASK by
12% in 2017 and 10% in 2018, daily services to Philadelphia, new Seattle service connecting
with Alaska Airlines, improving the ‘Value’ model offerings, which demonstrated IAG
knowledge gain (Redpath, O’Connell and Warnock-Smith, 2017). The ‘Value Carrier’ has
adapted to fulfil the Dublin hub potential, combat Gatwick Airport services and to differentiate
from Icelandair propositions by introducing additional products; in long haul with business class
lie flat beds, receiving 4 star Skytrak, complimentary beverages during dining and free WI-FI in
economy class (Aer Lingus, 2015, 2016, 2018) and in short haul with AerSpace offering free
middle seat row 1 and lie flat beds on Airbus A321 LR flights (Aer Lingus, 2019).

Figure 7. Icelandair Route Network

Source (Icelandair, 2020)

Ryanair and Aer Lingus were Europes’ most profitable carriers in terms of operating margins
(CAPA, 2019), indicating that LCCs and Hybrid are successfully competing from a primary
airport (Wong et al., 2019). Strategically, incremental hybrid adaption is important, a LCC
partnership providing more passengers connecting at Dublin was explored (O’Halloran, 2016;
Blue Swan, 2017) and an Atlantic Joint Venture agreed with Iberia, British Airways, Openskies,
Finnair and American Airlines selling integrated services and flights, subject to approval (Aer
Lingus, 2017, 2018). Interestingly Etihad and EasyJet recently announced integrated services
and connections (Etihad Airways, 2020).

7.0 Conclusion

Santos et al. (2009) refers to business model reactivation in the context of a LCC positioning to a
hybrid model via the addition or removal of activities. Corbo, 2017 examined business model
hybridization and suggested that misalignment of the value proposition would restrict the airline
in achieving a sustainable advantage. Aer Lingus’ transformation to a hybrid model carefully
centred the concept of ‘Value Carrier’ as the core proposition to passengers with continuous
delivery of new services such as; ‘AerSpace’ passenger comforts, transformed connectivity via
Dublin Airport, fares with products and services aimed at price sensitive and business customers,
technology including smart phone boarding cards and free on-board Wi-Fi. Adherence to the
‘Value Carrier’ business model has revolutionised and delivered a competitive sustainable leader
in the European market.

Endnotes
1
Ryanair acquired a 19.1% shareholding by early October 2006 (Ryanair, 2006), by 2012 ownership
increased to 29.8% and Ryanair had made three acquisition offers (Aer Lingus, 2012).
2
For European Operations, Navigation charges are determined by EU law, such as, Commission
Implementing Regulation (EU) No 391/2013 of 3 May 2013 laying down a common charging scheme
for air navigation services
3
Figure 3 shows unit costs per ASK and the total CASK, it does not show ‘Currency/Gains’ and
‘Property, IT and other costs’ because they are negligible for the purposes of the chart illustration, all
data calculations and charts are contained in Appendix I (costs_v5_2020-01-28)
4
Sampling of 44 flight connections from the US to European cities in Brussels, Germany and Spain,
from 6th to 13th June 2020 provided information to calculate the median and mean connection times, all
data calculations are contained in Appendix II (connections_v2-2020-01-31)

REFERENCES