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No more Mr Nice Guy
14 March 2010 By David Clerkin, Markets Correspondent
Better to burn out than fade away. Aer Lingus chief executive Christoph Mueller, now six months into the job, dramatically closed the door last week on the possibility of the airline drifting towards oblivion over a protracted period.
Instead, he offered staff one of two options: accept immediately the reforms he deems critical to giving Aer Lingus a fighting chance at survival, or go on strike and turn the airline’s demise from a medium term theoretical problem to a short term racing certainty.
Perhaps conscious that his predecessor, Dermot Mannion, talked tough on costs but never fully succeeded in addressing Aer Lingus’s tenuous relationship with the real world, Mueller has made it clear that, whatever his tenure will be remembered for, it will not be inaction or prevarication. Nor will he let a good crisis go to waste. He began the week by shipping a blow that could be devastating to any chief executive of a quoted company: failing to deliver his full-year results to the stock exchange on schedule.
Detractors, who would argue that Aer Lingus is still far removed from the behaviour that would be expected from a plc, were given ample evidence to back up their claim as the airline pulled its scheduled results announcement at the last minute on Tuesday.
It did little for Mueller’s reputation that Aer Lingus could not deliver one of the most basic requirements of a quoted company.
The fact that it was down to cabin crew rejecting his cost-cutting plans - which in turn meant that the audited numbers in the planned results announcement, containing a restructuring charge, were no longer accurate - was just as damaging.
Mueller defended the last-minute replacement of formal results with a cobbled-together trading statement, saying there was ‘‘no legal requirement’’ to issue the results last week and that repackaged numbers would be made available soon. But the investment community could be forgiven for wondering whether, if Aer Lingus could not even meet its target for publishing results, it could be relied upon for the more complex task of surgically repairing its unsustainable cost base.
Mueller came out fighting, however.
He dropped a bomb on the cabin crew - the only one of five staff groupings to reject his reforms - by announcing that they would all be fired within a month, with 770 of the 1,000 to be rehired.
Then, as if to highlight his no moreMr-Nice-Guy policy, Mueller offered only the legal minimum payment of two weeks’ pay per year worked, capped at €1,200 for each year’s service.
For staff who still remember former chief executive Willie Walsh offering nine weeks’ pay per year worked - and a minimum payoff of €40,000 - when he announced plans to offload 1,300 staff in 2004, Mueller’s unsentimental approach is likely to have come as an enormous shock.
‘‘Retaliation is not our business," Mueller said last week. But the punishment meted out to dissenting staff on this occasion suggested that the Aer Lingus workforce will need to think twice before defying their new master in future.
For those unhappy with Mueller’s strategy, the decision is now one of putting up or shutting up.
Yet Mueller offered few clues on whether the prospect of a strike would keep him awake in the nights to come.
In the same week that Walsh, now BA chief executive, was struggling with the threat of a grounded fleet just in time for the onset of the busy summer travelling period, Mueller opted to run the gauntlet with the unions. The few hard numbers contained in last week’s trading statement hinted that he no longer has the time or scope for bluffing.
Revenues for the year to December fell 11 per cent to €1.2 billion, triggering a pre-exceptional operating loss of €81 million - up from a loss of €20 million a year earlier.
Despite the fall-off in revenues, however, the airline was still spending more as operating costs (excluding fuel) nudged up by 2 per cent. Only for fuel prices falling sharply during the year - a factor that Mueller and staff can take little credit for - the bottom line would have been about €70 million worse off.
The urgency of Mueller’s task was highlighted by the continuing pressure on Aer Lingus’s net cash balances, which fell from €654 million to €336 million last year.
Cash generation has become a problem: the airline suffered a 14 per cent fall in passenger revenues last year despite carrying 4 per cent more passengers.
Average fares fell from €87 to €77 on short-haul routes and €304 to €256 on transatlantic services as Ryanair and US carriers continued to turn up the heat on price. Ominously for investors, both of these numbers are below the levels of 2005, when Aer Lingus was still state-owned. Unit costs, meanwhile, appear to be stubbornly resistant to falls even when compared to the semi-state days.
More detailed scrutiny of the long-haul business reveals sharp declines, as passenger numbers fell 15 per cent year-on-year, barely clearing the one million mark. Despite the new Open Skies regime that was once heralded as a major opportunity for the airline’s transatlantic business, the pressure on long-haul is now in red alert territory.
Those who argued that Ryanair’s takeover attempts in 2006 and 2008 should be resisted in order to protect a transatlantic service out of Ireland may, by now, be fretting that this has become one of the biggest millstones around Aer Lingus’s neck.
While the union reaction to last week’s developments was predictable, staff may worry that, in Mueller, they are now dealing with a chief executive whose lack of appreciation of the nuances of former Irish semi-states shows signs of becoming a major problem for them.
Mueller may have no wish to achieve the same outcome as when he was the last-ever chief executive of the now-defunct Belgian flag carrier Sabena. But by bringing matters to a head after six months in charge, it is clear that a slow, painful death for Aer Lingus is not part of his plan.
In doing so, he has made it near certain that he will go down either as spectacular success or an utter failure. No one remembers mediocrity anyway.
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