In an industry where airlines have all too often been run by aviators instead of businessmen, Aer Arann chief executive Padraig O’Ceidigh (pronounced ‘O’Kaygee’) has brought a cautious–if not typically Irish–approach to the airline. “The most important word in business is ‘no’,” he asserts. As an entrepreneur turned airline boss, he has learned quickly that (in the words of William Stout, designer of the Ford Tri-Motor) an airliner has to be “a vehicle capable of supporting itself aerodynamically and economically at the same time.” Accordingly, O’Ceidigh will not easily accept an airliner salesman’s pitch unchallenged.
Is his non-aviation background a disadvantage? Not according to Aer Arann commercial manager Jennifer Mooney: “We believe the fact that Padraig is an entrepreneur is a huge advantage, and he uses his experience as an accountant, solicitor and teacher to benefit the company. It also enables him to think outside the box, as he is not constrained by the airline background of many CEOs.”
Almost 10 years into his ownership, O’Ceidigh has taken a tiny, financially bleak operation that linked offshore islands to the Irish mainland and built a profitable regional airline that is contemplating buying jets to fly into Europe. When he bought Aer Arann in 1994, 20,000 passengers per year generated an annual turnover of I£250,000 (about $355,000). By the time scheduled services began in 1997, the airline was headquartered in Dublin and flying with an Express suffix. The original service continues as a sister company operating three nine-seat Britten-Norman Islanders from Connemara on up to 25 flights a day under an Islands suffix.
O’Ceidigh began scheduled service between Dublin and Donegal in Ireland’s extreme northwest with a Shorts 360. Service to the Isle of Man followed, with a night freight run to Coventry in England’s Midlands. Aer Arann also flew a British Aerospace Jetstream 31, added a second Shorts 360 and struck a deal to fly to and from Sligo, Ireland, on behalf of flag carrier Aer Lingus.
The past four years have seen rapid expansion, the acquisition of ATR 42s and larger ATR 72s and the establishment of operations to Ireland’s principal regions. Today, with 16 routes, annual turnover totals e68 million (almost $76 million), passenger numbers exceed 600,000 per year and weekly flights across Ireland and to UK regional points exceed 400, with Aer Arann serving more British cities from Ireland than either Aer Lingus or Ryanair.
A turning point came in 1998, when O’Ceidigh realized Aer Lingus could not continue domestic service while flying to the UK, Europe and the U.S. He decided Aer Arann should become international, and set off a major expansion that saw traffic increase 1,100 percent from 5,000 per month in January 2001 to 56,000 per month by the middle of this year. Having initially acquired the airline with a “sleeping partner,” O’Ceidigh is now sole proprietor, declining to discuss the private company’s finances beyond saying that he has made “significant” investment and it is profitable.
Aer Arann competes domestically against road and rail transport, one factor that contributed to the recent discontinuation of Dublin-Belfast services. Other flights compete against Isle of Man-based Beech 1900D operator Euromanx and British Airways on Dublin-Isle of Man services. Aer Arann also competes directly with British European Airlines on flights between Cork and Birmingham, England.
The airline has seen a slight reduction in business travel, but Aer Arann has been relatively unaffected by the recession, said Mooney. “To increase load factor, we are reducing yield to compete with low-fare offerings; however, passengers are prepared to pay more to fly direct,” she added.
The airline manages yield to stimulate demand while ensuring highest income from late bookers. While numbers of seats at each fare vary across routes, Mooney said the network averages about 2 percent at the least expensive, and 24 percent and 41 percent at the next two levels, respectively. The remaining third sell at higher rates. Aer Arann currently does not overbook flights.
Low Fares, Not No-frills
Price flexibility does not constitute a low-cost operation: “We are not a ‘no-frills’ airline, but we do offer low fares and very competitive lead-in fares–particularly on UK services,” said Mooney. “We are changing to the Openskies [reservation] system, which will [provide] more flexible pricing. Our objective is to ‘grow’ traffic through pricing incentives.” The airline plans a major fare promotion this coming winter, having proved last year that such initiatives increase load factors.
“Openskies is a leading solution for successful low-cost airlines, providing an integrated suite of products and real-time information. It provides opportunities for aggressive distribution-cost reduction,” said Mooney. But the system has drawbacks, compared with Aer Arann’s current use of Aer Lingus’ Astral: “It does not provide the same level of interline connectivity, but this functionality is currently being developed.”
Aer Arann’s prime selling points in Ireland center on speed and frequency, while UK operations focus on price and convenience. “Passengers no longer want to drive to Dublin to fly to the UK. They want to travel direct, and they are willing to pay more for [such] service from the regions,” said Mooney. The airline maintains no code-share arrangements with other carriers, although some 30 percent of passengers connect with other flights.
The airline recently established a passenger-handling service in Dublin, due in part to passengers’ feedback regarding its previous agent. The Internet plays a huge role in sales, accounting for around 30 percent of bookings. A large e-mail database advises customers about special offers.
Aer Arann operates to Irish Aviation Authority (IAA) regulations, which do not differ significantly from European Joint Aviation Authorities (JAA) requirements, according to head of operations John Halpin. Average utilization for the ATR 42/72 twin-turboprop fleet is 1,900 hours per year and aircraft fly on average 1.6 cycles per hour–equivalent to less than 38 minutes per sector, making ground time at airports crucial.
Schedule reliability figures appear on Aer Arann’s Web site, which assures travelers that the operator endeavors to operate 90 percent of flights within 15 minutes of scheduled times. For one recent week, involving more than 400 flights, Aer Arann concedes that reliability fell short at 86.1 percent, with fewer than 7 percent of services more than 30 minutes adrift.
But Halpin draws no link between turnaround time and failure to meet targets: “Short turns do not really inhibit punctuality. Every other aspect of difficulty you could expect (such as technical problems, ATC, reactionary delays or airport congestion) does affect this.” With 50 percent of Aer Arann routes serving Dublin, delays might seem more likely. O’Ceidigh disagreed, although he acknowledged the potential at peak times, especially since the carrier’s many public-obligation services do not have reserved slots at Dublin.
Most of Aer Arann’s expansion has occurred in the past five years on its 16 routes, including 10 to the UK. Five of its six Irish operations are public-service obligation (PSO) services, while Scottish regional Loganair flies a sixth Irish PSO route.
In fact, Aer Arann’s metamorphosis from coastal island-hopper to Dublin-based regional began with PSO routes to Donegal and Sligo (see route map). PSO contracts last for three years, and Aer Arann lost the Donegal and Sligo services to EuroCeltic Airways in the summer of last year. When EuroCeltic ceased operations, however, Aer Arann resumed services to the destinations. While Aer Arann recognized huge potential for UK services from Irish regional airports, initially it concentrated on domestic services. Key considerations for new destinations include projected traffic, population/ catchment-area size, passenger profile and demand under previous carriers.
Vigorous expansion in 2000 added Cork, Galway, Londonderry, Isle of Man and Sheffield, England–the last-mentioned replacing abandoned British Regional Airlines service. In 2001 Kerry and Knock routes opened, while Dublin service to Shannon, Cork routes to Birmingham, Bristol, Edinburgh and Southampton and Galway flights to London Luton followed last year. This year has seen new services linking Isle of Man with Glasgow Prestwick, Waterford with London Luton, Galway with Manchester and Dublin with Belfast.
Aer Arann has had to be ruthlessly flexible in matching capacity to profitable demand: it dropped Dublin-Isle of Man service in March 2001 but resurrected it this year; Sheffield service ceased in October 2001, while Shannon was abandoned at the end of last year. Cork-Southampton has become a nonstop flight, the intermediate Bristol stop now receiving dedicated Cork services. Increased traffic has seen capacity added on Cork-Birmingham, -Dublin and-Edinburgh flights.
One potential route that received the chief executive’s “most important word” treatment was Dublin to Norwich in eastern England: “It wasn’t right at the time ,” said O’Ceidigh. “That’s not to say there’s too little traffic, but it did not enhance our business model. We could consider it again.”
O’Ceidigh acknowledged the part played by local airports in stimulating new services.
For example, for Galway-London Luton and -Manchester and Waterford-London Luton flights “all the initial drive came from [them].” Aer Arann–and any competitors–also benefits from proposed government investment in airport infrastructure under Ireland’s 2002 to 2006 national development plan.
Daily-return business traffic is strong on Dublin-Cork, -Galway and -Kerry and Cork-Birmingham, according to Mooney. Strong leisure routes include Cork-Edinburgh and -Southampton, Galway-London Luton and -Manchester and Waterford-London Luton.
PSO subsidies for Galway and Kerry remain vital, said Mooney, despite those communities’ relative dense populations. “We pay considerable airport charges, which otherwise would be punitive,” she said. “Assistance allows both frequency and attractive fares. The main PSO considerations are timing and frequency. We operate four and five daily flights, respectively, on Kerry and Galway.” She conceded that subsidies permit “attractive” fares, but acknowledged that unsubsidized Cork-Dublin services see “very high” use. “Business passengers are prepared to pay for convenience,” she stressed. Conversely, Dublin-Belfast services inaugurated three months ago have suffered from seasonal low traffic.
Apart from the original Britten-Norman Islanders, Aer Arann also flew Piper twins before Jetstream and Shorts 360 twin turboprops began serving in night mail and cargo roles. But it needed bigger aircraft once O’Ceidigh decided to establish scheduled regional services as Aer Lingus withdrew in the late 1990s.
“Fokker F27s and 50s, de Havilland Dash 8s, BAe ATPs and Saab 340s were considered,” said COO Peter McKenna. “ATRs were selected due to available support, the security of the manufacturer and the operating and lease costs. Performance and reliability were also well proven, and the [48-seat] ATR 42 could lead into the [66-passenger] ATR 72 very easily for training, spares commonality, tooling and engineering.”
Aer Arann considered ATR and Bombardier, but settled on the Franco-Italian supplier due to its European proximity. The airline also spoke with operators and the used market, finding little difference in rival route economics, according to O’Ceidigh. “But we were comfortable with potential ATR support, spares and maintenance from [French regional] TAT.”
Aer Arann’s five ATR 42-300s and three ATR 72-200s were delivered between January 2001 and July this year, and no orders are outstanding (although it monitors available ATR aircraft and current market rates). Both regional types have proved “ideal” for short-hop services, said McKenna, citing routes such as Cork-Edinburgh, Dublin-Cork and Galway-London Luton as occasionally requiring higher capacity. Accordingly, the airline expects to add a few ATR 72s in the short term. Some could replace ATR 42s, but the smaller aircraft will always form the fleet core, according to O’Ceidigh, who said he is considering two additional ATR 72s for summer service next year. The airline could use the additional capacity on Dublin routes to Galway, Kerry and Waterford.
An Option to Buy
O’Ceidigh has the option to buy most of Aer Arann’s aircraft, all of whose leases extend three to five years. He said he will consider several factors, including current markets for leased aircraft, or for purchase of previously leased or replacement aircraft. Of course, buying a known quantity already on lease also avoids additional administrative and regulatory requirements of taking an aircraft from a foreign register and operator, said McKenna.
Aer Arann must also take into account cash flow and available funding (whether passenger revenue or incoming investment) and decide whether it wants owned aircraft to strengthen the balance sheet, said O’Ceidigh. His past philosophy has led him to lease aircraft as rates were continually falling, as were aircraft market values, according to McKenna. “We are evaluating the benefits of purchasing some of our aircraft [for which] lease-expiry dates are staggered to coincide with termination of some of our public-service obligation (PSO) contracts.” For example, two ATR 42 leases expire in January (coincident with Donegal and Sligo PSO contracts), two more run out in early 2005 and the remainder lapse at different times through mid-2007.
Looking forward, O’Ceidigh said the airline is profitable: “We wouldn’t survive if not. But credit has become much tighter, our growth needs continual investment and banks wouldn’t support us [otherwise].” Current information-technology investments, including the Openskies reservations system, will permit more aggressive pricing. According to head of finance Fergal Barry, margins “run on 5 percent of turnover. Emphasis will be on growing this to double digits within two years.”
To that end, the airline is already looking at costs. “The markets have changed dramatically since September 11 . New efficiencies are being introduced across the operation,” said McKenna. For example, “the downturn left opportunities for renegotiation of [all] costs,” although, again, Aer Arann officials declined to provide details.
The airline carried its one-millionth scheduled passenger in June and expects the two-millionth by early 2005, said McKenna, who predicts continuing “steady growth of approximately 15 to 20 percent per annum.” By late 2005 traffic will be running at a million passengers per year on about 22 routes flown by at least 10 aircraft, said Mooney: “Growth will depend on opportunities. Development will focus on the UK and then mainland Europe.”
As load factors grow, initial efforts will involve increased frequency and new services, primarily focused on the 90-minute turboprop range, said O’Ceidigh. Early route moves could include a return to the Dublin-Londonderry PSO service, for which the airline will bid when the contract comes up for renewal in January. Aer Arann also hopes to continue Donegal and Sligo, for which bidding has been “extremely competitive,” according to O’Ceidigh. “Normally the lowest bid wins, but in recent years two operators have gone bust,” he said. “Aer Arann is the only airline in eight years to succeed.”
O’Ceidigh sees opportunities to develop Cork and Galway as hubs, the two points already serving eight routes. Airport officials in northern France have already approached Aer Arann about operating routes there because French airlines have shown no interest, despite possible PSO support. “This shows the risk factor involved–PSO [status] is far from guaranteed,” he warned.
Finally, future fleet requirements could include jets–not to replace turboprops but rather to exploit new opportunities in longer-range markets. O’Ceidigh expects to look “very seriously” in 12 to 18 months before entering the market about six months later. Just so long as the jetliner salesmen have an answer should O’Ceidigh respond to the best and final offer with the “most important word in business.”