THE FRIDAY INTERVIEW/Christoph Mueller, Aer Lingus chief executive:ABOUT 80 people gathered in a room in the London offices of bluechip law firm Ashurst earlier this week for a glimpse of Christoph Mueller's vision for Aer Lingus.
It was the German’s first outing with the investment community and shareholders – Ryanair had two representatives there – since taking the controls, and he seemed to pass the test. “We wanted to provide the analyst community with the data points they need to feed their models, and we will compare notes on March 10th [when the airline publishes its 2009 results],” he says.
He adds that the main reason why the meeting was organised was to give additional information to the capital markets “to get a fair valuation in place”.
“That’s a start of a process. We are fully committed to recovering the share price.”
The share price is only one of Aer Lingus’s woes – at about 70 cent, it is just one-quarter of the value of Ryanair’s first bid in 2007.
The headwinds facing the airline sector are considerable. Recession has seen consumer demand in Ireland plummet, forcing airlines to slash costs and cut capacity. Unlike Ryanair, Aer Lingus is largely dependent on the Irish market. Transatlantic business traffic collapsed in the first half of last year and Aer Lingus’s new base at London Gatwick, which was supposed to diversify its revenue base, has failed to deliver.
In parallel with this, Aer Lingus had a raft of expensive new aircraft waiting to be delivered and was burning through its considerable cash pile at a rate of knots – €400 million of it was spent in 2009. That’s to say nothing of the boardroom upheaval last year: chief executive Dermot Mannion took flight, and there was a second bid from Ryanair – an irritant on the Aer Lingus share register.
The challenges facing Mueller were considerable. So why did he take the job?
“It is a fantastic carrier and you can be proud of it,” he says, sitting bolt upright in his chair. “We have product liked by the customer. It’s a safe operation. If you see the training standards and all that, you can exchange it one-to-one with Lufthansa or any world-class carrier. Our maintenance is fantastic. I have to say, my expectations were beaten in a lot of cases. So the operating business ticked the boxes – that is normally in a turnaround what takes longest to address.”
As Mueller sees it, the media has exaggerated Aer Lingus’s financial woes. Yes, it lost €94 million in the first six months of 2009, but the idea that it is running out of cash is nonsense, he argues.
“Not in years, not in years,” he says. “When I joined and I read in the press that we could run out of cash, I thought maybe I have overlooked something here in my due diligence.”
Mueller says the cash will last to 2014 or 2015 at least. “That is without making any profits.”
Returning Aer Lingus to the black is his main challenge. The airline booked a “small profit” in the second half of 2009, an encouraging start.
Mueller took a scalpel to the route network, axing flights to the US west coast, among others. “California is in as bad a shape as Ireland,” he says. “Simply, the demand has dried up. Companies have stopped trading. But in my airline career, I have pulled out of California three or four times but I have always restarted it after two or three years.”
He says Los Angeles and San Francisco are the logical fifth and sixth routes for Aer Lingus to operate to the US – it already has New York, Boston, Chicago and Orlando. The California withdrawal could be a “temporary” move. “Nobody is really helped if we fly with empty airplanes.”
Gatwick, much trumpeted by Aer Lingus at the time of its launch last March, is being scaled back. Launching at a time of recession and taking on EasyJet in its own backyard was a mistake. Mueller described it as “overkill”.
“In the middle of the recession, to attack a low-cost carrier [EasyJet] in its home base is just not working – you lose too much money. Fortunately, we stepped on the brakes early enough when we discovered that this will be a black hole.”
Reports that the airline lost €40 million at Gatwick are wide of the mark, he adds.
Mueller is an industry veteran and no stranger to downturns. His CV includes stints with Lufthansa and German travel giant Tui. He was also the last chief executive of Sabena, the Belgian carrier that collapsed in the wake of the 9/11 attacks. To be fair to Mueller, Sabena was well on the road to ruin by the time he took charge. He insists there are no similarities between Sabena and Aer Lingus’s plight.
“It was a completely different case,” he says. “Aer Lingus is not a carrier on the verge of bankruptcy. It is like black and white. Aer Lingus is a fully intact airline. We had a couple of fixes to apply but . . . we made a small profit in the second half of 2009 – not a lot of large carriers have achieved that.”
The fixes are many. The delivery of new Airbus jets has been pushed back at no cost to Aer Lingus, helping to preserve its cash balances. Loss-making routes have been axed and it has brought some stability to its fuel hedging.
Most importantly, a redundancy deal has been agreed with staff and unions that will deliver €74 million annually in savings. The payback time will be 9½ months, a record for Aer Lingus.
Mueller wants to ditch the airline’s focus on being a low-cost carrier and position it between the likes of Ryanair and big, full-service airlines. A franchising deal has been cut with Aer Arann to feed traffic from regional British airports into Dublin and Cork under a new “Aer Lingus Regional” brand.
A joint venture with United Airlines takes off in March, operating from Washington DC to Madrid. “It’s very simple: we fly, they sell, and [both] make a profit. In the joint-venture contract, the ramping up to four aircraft is foreseen. When and where will depend on the recovery in the US economy.”
Mueller is also looking east to Asia. But Aer Lingus will not fly directly to the continent due to a lack of demand.
“If we fly to Sydney, for example, we would have to invent a new airplane, because 52 passengers a day is simply not enough for us.”
But Mueller believes the airline could feed passengers into one of the large European hubs for another carrier – most probably Heathrow, given Aer Lingus’s strong slot position there. “We would like to have one alliance partner with which we can co-operate on all that,” he says.
Mueller tells it straight and has excellent English. He has a confident air and gives the impression that he has a plan and knows how to make it work.
He has been working round-the-clock since arriving in September. He is conscious that he is the latest in a long list of Aer Lingus chief executives in recent times. Michael Foley, Willie Walsh and Mannion all came and went in the last decade, and there have been a few interim bosses too.
“That is a little bit scary, I have to say,” says Mannion. “I hope I turn that profile around.”
