by Alan Ruddock
At the time Aer Lingus had no credit facilities available to it and was burning cash at a rate of approximately €2.5 million per day. We also had a shareholder [the Irish state] who was unable to provide financial assistance to the airline because of restrictions on state aid.
Aer Lingus was associated with failure and identified by all media sources as a likely casualty along with Swissair and Sabena. The action required had to be urgent, radical and, more significantly given this was not the first time we had faced into a major downturn, the change had to be permanent. Since then, it is fair to say we have delivered a more sustainable business which is profitable and has a much stronger financial position.
It was a succinct summary of a business plan conceived and executed in the midst of a crisis that threatened to destroy the company. Just thirty-eight years old when he was made chief executive, Walsh had joined Aer Lingus in 1979 as a cadet pilot and had worked his way from the cockpit into management; on the way he had also spent time as a union representative for the pilots in their negotiations with the company. His potential as a manager was tested and proved in the two years immediately prior to his appointment as chief executive. In 1998 Walsh had been put in charge of Futura, a troubled Aer Lingus subsidiary. Under Walsh’s guidance, loss was turned to profit and Aer Lingus was able to sell 80 per cent of its holding. As his reward, Walsh was appointed chief operations officer in 2000.
Despite that success, his elevation to overall chief executive had been a surprise to those outside the company who had never heard of Willie Walsh. However, Aer Lingus had few options in 2001. Recent years had been marked by a succession of management and board changes, culminating in the tragic drowning of Bernie Cahill, the airline’s chairman and author of its mid-1990s survival plan, in 2001. Cahill’s death was compounded by the resignation of Michael Foley, Aer Lingus’s chief executive, when he was accused of sexual harassment.
Walsh had taken over a company which, quite apart from the global crisis in aviation sparked by 9/11, was in internal turmoil. His response had been calmly efficient. Walsh knew that costs had to be taken out of the business if Aer Lingus were to survive, so he cut. At first his determination to reduce staff numbers met with little more than token opposition from the airline’s trade unions. They knew the prospects for survival were bleak and that without change Aer Lingus was doomed. But as Walsh continued to make cuts and the airline’s financial performance started to improve, so union intransigence started to reassert itself.
Within a year Walsh had faced down his first strike action – 360 flights were grounded in May 2002 when pilots opposed to redundancies went on strike. He was a victim of his own success: no sooner had he removed the prospect of collapse than the old complacency had started to reassert itself. But Walsh was not like his predecessors. He believed that Aer Lingus’s transformation had to be deep and permanent if the airline was to free itself from the debilitating cycle of boom and bust that had characterized its previous twenty years. His style was understated. He chose not to hire a secretary, answered his own phone, typed his own letters, drove to work in a ten-year-old car and continued to live in his modest family home in Donabate, north Dublin.
His remit, as he understood it, was to make Aer Lingus a viable commercial airline, with a cost base that would allow it to compete profitably on European short-haul routes with low-cost carriers like Ryanair and with the flexibility to exploit opportunities on its long-haul operations. Further airline liberalization between the United States and Europe – known as Open Skies, because it would literally open the skies to competition by removing restrictions on routes between the two continents – would be necessary for Aer Lingus to mount an aggressive push into the US market, but there were ample opportunities to expand long-haul operations into Africa and the Far East, if only he could get the trade unions to agree more flexible working conditions.
‘We do not consider that we have a public service commitment,’ Walsh said, just over a month before he resigned.
We believe we have a commercial mandate. While I do not wish to give the impression that the company is driven solely by profitability, profitability is critical. It is more important to highlight that we are driven by viability, and that for us to be viable, we must be profitable. Aer Lingus has a commercial mandate and operates commercially. Clearly, our view is that the company must generate a profit on all of its activities, for which I make no apologies. This perspective became very clear to us in 2001 when we were faced with closure. I have stated this before, but it must be said again.
Walsh’s profitability and Ahern’s socialism, however, were not happy bedfellows, and the escalating tension could not stay hidden for long.
Walsh knew that future growth had to be positioned away from Ryanair until Aer Lingus’s costs were substantially lower. O’Leary’s constant battles with the airport authority and the Irish government meant that Ryanair growth out of Dublin was not part of its immediate agenda. That gave Walsh the opportunity to establish Aer Lingus as a low-cost carrier direct from Dublin to Europe, and he launched routes into France, Germany, Italy and Spain, offering relatively cheap fares, an increasing Internet presence and, by 2004, a service which no longer included a business class cabin. Travel agents’ commissions were also cut from 9 to 5 per cent, new plane orders postponed and poorly performing routes replaced with new ones. Growth was not just out of Dublin; Walsh’s plan envisaged more continental destinations available from Cork airport by 2005 than there had been from Dublin in 2001.
On short-haul operations Aer Lingus was becoming a new kind of hybrid. Where other flag carriers, both in Europe and the United States, had tried to combat the rise of low-cost airlines by launching their own low-fare subsidiaries, Aer Lingus would transform itself. It was a bold decision, one that risked public hostility and political resistance. Walsh was aware of the dangers. ‘Much has been said about the positioning of Aer Lingus,’ he said. The old Aer Lingus had been a ‘traditional full-frills model. The type of words associated with this type of carrier is impressive, sophisticated, flexible but expensive. In other words, pricey but smart.’
The modern low-cost alternative, he said, could be ‘cranky, basic, unapologetic, tolerable, cheap and nasty’ – in other words Ryanair. His ideal was to position the new Aer Lingus ‘as a friendly, practical, fair and relevant airline to its customers that is cheap and cheerful’. The new Aer Lingus would by necessity be a leaner and harsher airline, but Walsh wanted to do it with a smile, not a sneer, and wanted to combine Aer Lingus’s self-styled tradition of friendliness and good service with low fares.
His survival plan was clearly time sensitive. He knew that before long O’Leary would launch new routes out of Dublin, regardless of his public hostility to the airport’s development plans. He knew too that while the Open Skies negotiations between Europe and the United States might take many years before they came to fruition, Aer Lingus had to be in a position to take advantage of any arrangements as soon as they were agreed. That would require forward planning: new planes to service the potential routes between Ireland and a host of new American locations would have to be ordered quickly because delivery could take at least three years.
Plane orders required access to capital, and that necessitated a decision from the Irish government to either invest in the airline itself or allow the company to raise outside capital by selling shares to investors. Direct investment by government was the route favoured by Aer Lingus’s trade unions and Ireland’s opposition Labour Party, but was resisted by Ahern and his coalition partners.
Under European Union rules this would have been legitimate by the summer of 2004. Aer Lingus had been returned to profit, was on a stable footing and was a candidate for private investment. While governments were precluded from shoring up failed companies with taxpayers’ money, because such investment distorted competition, there was nothing to prevent the state investing in a profitable company on the same basis, and using the same rationale, as a private
investor.
Although the sums required were relatively small – an injection of €500 million would have given Walsh the ability to fund aircraft purchases through a mix of cash and debt – political objections were intense. Ahern and his cabinet believed it would be difficult to justify spending taxpayers’ money on aircraft when there were more pressing priorities like hospitals, schools and roads. It was even less politically palatable given the willingness of private institutions to provide Aer Lingus with money in return for a shareholding in the company. Privatization, though, was as politically unpalatable for some as direct investment.
For the first two years of Walsh’s tenure the government’s reluctance to deal with the airline’s future funding was an irritant, but it paled beside the urgent need to repair its finances and implement a new business plan. By the early summer of 2004, however, Walsh’s frustrations had started to mount. In two years he had transformed the airline, turning losses into substantial profits as his cost-cutting and route expansion combined to increase passenger numbers, revenues and profits.
In 2003 Aer Lingus had made profits of €90 million and in 2004 it would make more than €100 million. As Walsh had explained to the parliamentary committee,
Despite all of this and the fact that we reduced our cost base at the end of 2003 by more than 30 per cent or €344 million, it is clear that our cost base is still too high and our efficiencies are too low. Significant further unit cost reduction is required. Our average fare in Europe at €83 in 2003 was significantly higher than that of our competitors. Competition particularly in Europe and from new European low-cost operators is intensifying. It is important to point out that there are now more than ninety airlines serving Ireland. Ireland is not served by Aer Lingus and Ryanair alone. Urgent action is needed to address this situation.
Time was running out. Walsh needed a commitment from Ahern and he needed it quickly.
In his days as a pilot and union negotiator Walsh had written in a staff publication, ‘a reasonable man gets nowhere in negotiations’. Now his frustration with Ahern’s inactivity prompted Walsh into unreasonableness. It was a course of action which might have been tempered if Aer Lingus had not lost another chairman. Tom Mulcahy, a seasoned businessman and former chief executive of AIB, had tendered his resignation earlier that year after details of an offshore remuneration scheme for senior bank executives had been published. It was a serious blow for Walsh, who had come to rely on Mulcahy for his sound and clear-headed advice.
‘If Mulcahy had remained as chairman, none of what followed would have happened,’ says one of Walsh’s former colleagues. ‘Without that, Walsh would still be chief executive and Aer Lingus would be recognized as one of Europe’s stellar performers. It would have been the only state-owned airline that had managed to create a new hybrid: a dynamic low-cost European operator combined with a more traditional long-haul presence. And it would have been privatized far more quickly.’
Frustrated by the government’s lack of urgency, Walsh decided to press for action. In June 2004 he and his senior managers requested permission to develop an investment proposal for Aer Lingus that could resolve its requirement for fresh capital. Walsh did not call it a management buyout and was careful to avoid the term. His plans were neither concrete nor well advanced; he just wanted to create some momentum towards a government decision that would allow Aer Lingus to continue on its recovery path.
While the government’s public stance was neutral, privately Ahern was furious. He believed that the privatization of the airline was purely a political decision and that the company’s management had no place in pointing a gun at his government’s head. Maintaining good relations with the trade union movement was a political priority for Ahern and the pace of privatization would be dictated by political, not commercial, priorities. Privatization, if it happened, would have to be endorsed by the unions, and Ahern needed time to persuade them to come on board.
Within days of Walsh’s request Irish newspapers were reporting conflict between government and management. Instead of urgent action, the government’s public response was to create a cabinet subcommittee to consider the airline’s future. It was an exercise in procrastination and delay, a tactic later confirmed by Ahern when he told the Dáil, ‘the day Willie Walsh and his colleagues proposed the management buyout, I shot it down’.
Ahern’s anger at being pushed towards a decision he did not want to make prompted a concerted public relations campaign against Walsh. His request to develop a proposal was swiftly transformed by government spin doctors into a request to lead a buyout that would personally enrich senior management. Walsh’s plan may indeed have developed into a management buyout, but it may also have led to the sale of Aer Lingus to another airline. It was unformed. ‘Willie just wanted to get things moving,’ says one former colleague.
The government formally requested Walsh not to advance his plans until the cabinet had made a decision on the ownership of the airline and Brennan said, ‘They [Aer Lingus management] would have to get in the queue and make their bids like anybody else. You could not do a deal or make an arrangement with management on their own. One of the things the cabinet subcommittee will have to consider is the appropriateness of senior management remaining inside were they to be involved in such a process.’
Walsh had succeeded in placing Aer Lingus’s future firmly on the government’s agenda, but his approach had alienated him from Ahern and had seriously undermined his standing with the rest of the government. Ahern was still smarting from Fianna Fáil’s poor showing in local and European elections that summer and he was in no mood for further trouble. In September he announced a reshuffle of his cabinet. Out went Charles McCreevy, the controversial finance minister, who was sent to Europe, and Seamus Brennan was shifted from transport to social welfare. The electoral setbacks had prompted Ahern to try and reposition his party as caring and left of centre. McCreevy was perceived as right wing, and had to go.
In such a climate management buyouts of prized state assets were beyond the pale. Walsh’s timing may have been dictated by frustration and commercial necessity, but it was inopportune. His head buried in the task of transforming Aer Lingus, he had missed the political nuances and lacked the guidance that Mulcahy could have provided. His call for action was, to Ahern, a slap in the face. Bad enough that Michael O’Leary should rail against his dithering and lampoon his indecisiveness, but it was unacceptable for a state employee to join the fray. Though Ahern’s style favours consensus and negotiation, when angered he can be a vicious opponent. Walsh would discover just how vicious Ahern could be.
For two months Walsh’s proposal faded from view, but in October it returned to the front pages with a vengeance. When Ahern was questioned about it in the Dáil his reply was emphatic. He did not believe that a management buyout would be ‘appropriate in the situation of Aer Lingus. I do not believe it is compatible with the mandate of Aer Lingus to have a management buyout.’
Ahern’s timing and choice of words were remarkably inflammatory because, two days earlier, Walsh had formally withdrawn his request to prepare an investment proposal for the company. As Walsh explained, ‘We did not seek permission to develop an MBO. We sought the consent of the government to prepare an investment proposal for Aer Lingus. Nothing was done with regard to that…I repeat that there was never a question of a management buyout.’ But the issue would not go away. Ahern’s hostility to Walsh meant that relations between government and Aer Lingus management had reached a nadir.
The row should have been defused by a report commissioned for the government by Goldman Sachs, the US investment bank, which recommended partial privatization as the best route forward for Aer Lingus, but it was timing, not the already conceded principle, that concerned Walsh. ‘Any number of reports could say that Aer Lingus needed to be privatized,’ says one former government adviser. ‘That was blindingly obvious, given that government was not prepared to invest. What mattered to Walsh was when. His business p
lan required funding and flexibility, not indecision. That was the nub of the problem, and Ahern was not prepared to give a commitment on timing while he was going through his public conversion to socialism.’
Ahern did not understand Walsh’s sense of urgency, or if he did, he could not accommodate it. Walsh’s views were straightforward. ‘The short-haul model of European flag carriers is broken and the companies concerned are inherently loss-making. A price war is anticipated which my good colleague in Ryanair, Michael O’Leary, expects to be a bloodbath. Ryanair and Aer Lingus are among only a handful of airlines which make a profit on short-haul operations in Europe.’
Walsh needed planes, he needed money and he needed operational independence from the government. There was an inherent conflict between what Walsh saw as his commercial mandate and what the unions and many politicians saw as Aer Lingus’s social mandate. Where Walsh wanted a stand-alone airline that could compete with the rest of the market, they wanted an airline that could continue to meet different needs – whether by subsidizing services into airports within their constituencies or maintaining staffing levels and wage rates more appropriate to an old-style airline. Where Walsh wanted permanent change, a new culture and a new airline, they wanted to believe that compromise was possible: that Aer Lingus could achieve a comfortable level of profitability, but not too much; that change could be agreed, but not too much; that there was a halfway house between success and failure.
Above all, though, Walsh wanted clarity. That clarity was not forthcoming and by 16 November Walsh believed that it would not come soon enough to allow him to build on his early successes and secure Aer Lingus’s future. And so Walsh, Brian Dunne and Seamus Kearney considered their options. If they stayed, they believed, they would be stymied. Ahern’s dismissal of their request to prepare an investment proposal was disappointing in itself, but it had also tilted the balance of power in the airline away from management and back towards the unions. Further progress on costs, staffing and flexibility was now dubious despite the success of Walsh’s autumn redundancy programme, which had elicited 1,500 volunteers.