Irish carrier Aer Lingus dropped a real downer of a first-quarter trading statement into the markets this morning.
Revenue dropped 16 per cent in the first three months of 2009, passenger numbers fell 6.5 per cent and yields, or ticket prices, fell by a staggering 10.8 per cent at a time when its competitors are raising fares. The Irish airline is also burning through its cash reserves — with its stockpile dropping 9.2 per cent to $593.6m in the quarter. That is in stark contrast to its competitors, who, though burning cash, are nowhere near Aer Lingus’s rate.
British Airways’ cash reserves for instance, dropped 14 per cent in the nine months ended Dec. 31 2008, but are still at about £1.6bn. Ryanair, which has tried to take over Aer Lingus two times but has been rebuffed by the Irish government, which holds a 25 per cent stake in the AERL, has €1.8bn of cash.
Here’s a useful chart from UBS airline analyst Tim Marshall showing cash flow forecasts for European airlines between 2009 and 2013. Click to enlarge:
All of those airlines look to have bigger cash reserves than Aer Lingus and a slower burn rate. Cash is all-important to airlines in downturns, allowing them to survive a run of operating losses until the good times return. In fact, part of Ryanair’s strategy is to expand while competitors go bust. From its last quarter statement:
The rate of airline closures and consolidation across Europe continues to accelerate. Recent developments include the Air France/KLM 25% stake in Alitalia, the EU’s approval of the Clickair/Vuelling merger in Spain and the January bankruptcy of the Lithuanian carrier FlyLAL. As losses increase in 2009, more EU airlines will close and/or consolidate, as many lack the cash reserves to survive next winter.”
That may be a real possibility for Aer Lingus now. Here’s Bloxham analyst and veteran airline-expert Joe Gill on the subject:
In the course of twelve weeks Aer Lingus’ fortunes have dramatically deteriorated. This morning’s IMS is warning that operating losses in 2009 will be “materially” below bottom of the range expectations (-€80m) due to continued severe weakness in yields. If we punch in fare declines of 15.5% for the full year on short-haul, the EBIT loss is -€122m. That, in turn, further erodes net cash at the carrier to below the €400m previously guided.
Aer Lingus must urgently address its cost base if the value of its equity is to be protected from liquidation. A dramatic overhaul of long-haul is needed which may prune services back to just New York, Chicago and Boston. The long-haul operations at Shannon could be at risk too, while short-haul capacity also needs to be reviewed as Irish air travel continues to spiral downwards. Both bases at Belfast and Gatwick must also form part of any cost appraisal.
In Q1 Aer Lingus total revenues fell by 16% while passenger volume was down 6.5% (-5.7% in short haul, -12.5% in long-haul). Revenue per pax contracted 9.6%. SH yields fell 10.8% in Q1, while LH yields were back 18.9%. Net cash at quarter end was €593.6m, down €80m due to restructuring payments and costs of a new A330. Fuel is now hedged 74% for ’09 at $825 per tonne and 25% of 2010 at $876. The blended fuel bill in 2009 will be $820.
It is hard to underestimate the threats posed to Aer Lingus’ future. Some parties may think this carrier has an endless supply of cash to fund restructurings and generous redundancies. It does not. Instead of pious comments about the company’s role in Irish society, some hard commercial and radical thinking is now required. Aer Lingus needs a full-blown merger with a stronger carrier, and quickly.”
British Airways, which already has a codeshare agreement with Aer Lingus, could be a contender. And of course, even with CEO Michael O’Leary looking a little gaunt recently, Ryanair may still have the stomach to take Aer Lingus on again for a third time. The Irish government, arguably in need of funds and with an increasingly lame duck carrier on its hands, may finally be willing to change its stance on a merger.
In fact, Ryanair’s offer price of €1.40 a share must be looking pretty good right now…
Related links:
AffAir Lingus – FT Alphaville
Ryanair 50:50 – FT Alphaville