Aer Lingus 2011 Annual Report Download - page 9

Annual Report 2011
OPERATING AND FINANCIAL REVIEW Aer Lingus Group Plc
OPERATING AND FINANCIAL REVIEW
Market review
Following a relatively benign 2010, the European airline industry
experienced a more difficult year in 2011. Air passenger demand
during 2011 remained unsettled reflecting unease caused by several
European governments implementing fiscal austerity measures as well
as continuing concerns about eurozone sovereign debt. On the cost
side, fuel price inflation was a notable feature of 2011 with the
average jet fuel spot price increasing by 40.2% on a year-on-year basis
linked to political changes in the Middle East. As a result of these
factors, in June 2011, the International Air Transport Association
(“IATA”), sharply reduced their forecast for global airline profits for
2011 from US$8.6bn to US$4bn.
Demand drivers in Aer Lingus’ primary Irish market remained subdued
in 2011. Full year Irish GDP growth is expected to remain low at 0.8%
(source: Irish Central Bank) and Irish unemployment remains high at
14.2% (source: CSO). While passenger volumes passing through the 3
primary airports in the Irish Republic increased by less than 1%, the
current level of air passenger numbers using Irish airports is
significantly lower than the peak traffic volumes observed in 2008. The
Irish market continues to be dominated by non-business, leisure travel
(including travel to visit friends and relatives) and as a result, is
particularly exposed to adverse trends in personal expenditure levels.
The outlook for the Irish economy in 2012 remains uncertain and Irish
GDP growth is expected to stay below 1.0% (source: Irish Central
Bank). Most commentators agree that prospects for a full Irish
economic recovery are still fragile and will be dependent on external
demand, which could be difficult to achieve given the unsteady nature
of international capital and consumer markets.
Aer Lingus actions to address market conditions
Aer Lingus initiated fundamental actions in 2009 and early 2010 to
address the difficult market conditions which then faced the Group.
Following an in-depth review of our business model and addressable
markets in 2009, Aer Lingus concluded that it needed to revise its
strategic direction. Aer Lingus positioned itself as a “value carrier” on
the basis that the pure low cost and low fares model is not sustainable
while a full service model would not be viable in our key short haul
markets. The fundamental elements of this revised strategic approach
included better matching of capacity to demand (involving reduction of
long-haul capacity and reductions in capacity on over-served short-
haul routes), a renewed focus on generating revenue per seat rather
than simple maximisation of load factor as well as more emphasis on
partnerships and connectivity to deliver on our primary mission of
connecting Ireland with the world. In addition, the Group launched a
¤97.0 million cost saving programme (known as the “Greenfield”
programme).
We continued to pursue this same strategic direction during 2011. In
particular, Aer Lingus continued to apply a disciplined approach to our
capacity management and we did not copy airlines who added
significant extra capacity in the first part of 2011, e.g. European airline
ASKs for the first half of 2011 increased by 12.3% compared to the
same period in 2010.
Our approach was successful. The modest increase in capacity in
addition to the focus on yield and network management enabled us to
grow revenue despite a contraction in Irish consumer spending. This
growth, coupled with a focus on costs, resulted in a 2011 profit margin
well ahead of industry averages (although behind our 2010 margin).
Business review
As noted above, in 2011, Aer Lingus continued to pursue the same
fundamental actions as in 2010 and the Group’s strategic approach has
remained unchanged. In particular, Aer Lingus focused on the
achievement of a core set of commercial, operational and financial
priorities. The successful pursuit of these priorities has consolidated Aer
Lingus’ return to profitability as well as creating a platform for the
future development of the airline. An overview of progress achieved on
the key priorities targeted during the year is set out below.
Customer focus
2011 priority: To continue to provide an unrivalled commitment to
customer care and to use this as a key differentiating factor for Aer
Lingus against its close competitors.
2011 vs. 2010 Capacity (ASKs)
Aer Lingus capacity growth 1.8%
European air carriers capacity growth
1
10.2%
1
Source: IATA air transport market analysis
2011 vs. 2010 Revenue
Aer Lingus revenue per passenger growth 4.8%
Irish personal consumer expenditure growth
2
(2.9%)
2
Source: Irish Central Bank
2011 vs. 2010 Profitability
Aer Lingus 2011 EBIT margin % 3.8%
European air carriers forecast 2011 EBIT margin %
3
1.2%
3
Source: IATA air transport market analysis forecast for 2011
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