Aer Lingus 2012 Annual Report Download - page 10

CHIEF EXECUTIVE OFFICER’S REVIEW Aer Lingus Group Plc
ANNUAL REPORT 2012
8
As previously mentioned we now generate approximately 60% of our total
long haul bookings from the US. This has the added advantage of reducing
our annual requirement to purchase US dollars to meet our fuel costs. In
addition, we will continue to actively manage our network and address
under-performing routes as well as tactically managing capacity where
demand conditions prevail so as to maximise revenue and yield-per-seat
performance.
From a cost perspective, non-controllable cost inflation will continue to
be a challenge. Forward fuel prices are currently higher than for 2012 but,
we have good protection for the first half of 2013 in particular as a result
of our fuel hedging programme. Airport charges are likely to significantly
increase in 2013. On a steady state basis (i.e. assuming the same passenger/
movement volumes as 2012) airport price increases, notably at Dublin,
London Heathrow, Spanish and Italian airports, are expected to add
approximately €15 million to our costs in 2013. While some of this inflation
may be offset by positive yield growth, we nonetheless expect that it will
be difficult to fully pass through fuel cost and airport charge inflation to
passengers, particularly with the implementation of austerity policies by
several European governments and the subsequent expected knock-on
impact on customers’ discretionary income in 2013.
We have now reached the third anniversary of our Greenfield cost savings
agreement with our unions. In the absence of a deal to resolve the pension
issue (which would have to incorporate continued pay restraint), we are
likely to face pressure for wage increases in 2013. As I previously noted, we
will be implementing a range of targeted and co-ordinated cost reduction
measures across our business to preserve, and most importantly progress,
the savings generated through our Greenfield programme to ensure our
operating margin remains amongst the highest of our European peers.
Balance sheet strength
Aer Lingus continues to benefit from significant balance sheet strength. As
set out in Note 23, gross cash balances as at 31 December 2012 were
€908.5 million, an increase of €13.7 million over the prior year. All Group
borrowings are associated with aircraft asset financing. The Aer Lingus debt
maturity profile is spread over the years to 2023.
In addition to this substantial financial strength, Aer Lingus owns significant
assets which are not recognised on its balance sheet, including an attractive
slot portfolio at London Heathrow, JFK and Dublin airports, as well as a
globally recognised brand.
Conclusion
Aer Lingus has changed significantly since the loss making years of 2008
and 2009 but there are still many opportunities to be seized and some
challenges to be addressed. We are faced with some headwinds moving
into 2013, not least from inflation in non-controllable costs, particularly
airport charges, but also from continuing weakness in our primary markets
(i.e. Ireland and the UK). However, we leave 2012 with good momentum
in our long haul business. In 2013, management will remain focused on
creating demonstrable value for our shareholders. We will continue to
explore commercial opportunities to grow our business profitability and
build on recent accomplishments such as the Virgin “wet lease” agreement
and the extension of the successful Aer Lingus Regional franchise
agreement. In addition, we cannot afford to let up in our pursuit of cost
reduction measures to ensure the continuing competiveness and flexibility
of the Group in 2013 and subsequent years.
We remain focused on delivering value to our shareholders. Over the last
three years we have turned Aer Lingus around, instituted a new annual
dividend policy and generated total shareholder return in the upper quartile
of the European industry. With a view to the future, and with shareholder
consent, we have embarked on a process to reduce the Group’s capital
which, if court approval can be obtained, will give us the ability to maintain
or, if appropriate, enhance our distributions to shareholders. Refer to the
“Principal risks and uncertainties” section and note 3.2 to the Financial
Statements for further details.
I would like to thank our staff and management team for their hard work
in 2012 and their continued focus in 2013. In addition, I would like to
thank our shareholders for their support of our efforts since 2009 and in
future years.
Christoph Mueller
Chief Executive Officer
7 March 2013