Aer Arann Rises from the Ashes

 - September 1, 2012, 3:50 AM

Two years after entering bankruptcy protection, restructured Irish regional operator Aer Arann has embarked on a fleet-replacement program. Last month it neared a resolution to negotiations to acquire eight ATR 72-600s, reflecting expectations for rejuvenation of a business that has fought valiantly to escape the ravages of the Irish economic collapse.

The airline, which flies as Aer Lingus Regional (under 2010 franchise arrangements with the eponymous national carrier), authorized ATR to reveal plans at July’s Farnborough International airshow to deliver the first new turboprop next year.“We are reviewing our requirement regarding potential purchase or leasing of [several] new aircraft,” Aer Arann CFO Fiachra Kirwan told AIN in early August.

“The deal is imminent and we are looking forward to announcing the details in the near future,” said Kirwan. Aer Arann operates four ATR 42-300s, four ATR 72-200s and four ATR 72-500s; Aer Arann group owns four of the aircraft in that fleet.

The airline expects this year’s passenger numbers to grow by 10 percent from the slightly more than 1 million carried last year, the first time Aer Arann achieved a seven-figure total since 2007. Kirwan said that the airline carries 10 percent of all Aer Lingus traffic, and that the regional’s services had “driven” 88 percent of the state carrier’s 2011 short-haul passenger growth.

“Aer Arann aims to develop the franchise, focusing on increasing passenger numbers and route development,” according to Kirwan. Aer Arann load factors have increased from 55 percent in 2009 to 62 percent last year, and the airline expects to add another three points this year. That growth has occurred while the airline has struggled financially, including a brief period from August to November 2010 when it entered bankruptcy protection, called “examinership” in Ireland, and during which Aer Arann maintained normal service.

“Losses [occurred] over a three-year period as a result of [several] issues, including high fuel costs, [Ireland’s] national economic crisis, commencement of the global recession and–primarily–the volcanic-ash disruption that began in April 2010,” explained Kirwan. Following the eruption of Icelandic volcano Eyjafjallajokull, airlines canceled almost 9,700 flights, nearly 13 percent of those planned by ERA members, after authorities closed large areas of European airspace.

New investment and a new business model aimed at restoring growth and profitability proved crucial to emergence from examinership. A cost-reduction program enabled the airline to work through extremely difficult recessionary times, while minimizing the effect on customers and staff, said Kirwan.

Entering examinership, Aer Arann reported that an earlier 2008 cost-reduction program and establishment of the “profitable” Aer Lingus franchise agreement had put it “on budget” for 2010 before the airspace closures and subsequent reduced bookings and yield revenue. The airline lost about €6 million ($7.8 million) in both 2008 and 2009 and had incurred a further €6 million loss by August 2010, creating a deficit in shareholder funding of approximately €13 million ($16.9 million). It had been trading well from January to March 2010, but the previous losses left it without cash reserves to cope following the April eruption.

The original franchise arrangement saw the regional operate 12 services from Dublin and Cork, comprising established Aer Lingus and Aer Arann services and three new routes. Now, two years since seeking court protection, Aer Arann continues “to grow and thrive,” as it develops its franchise flying model with Aer Lingus and opens new routes. Aer Arann considers services provided under the Aer Lingus Regional brand “vital to the infrastructure and economic future of Ireland’s regions,” said Kirwan.

Under an expanded deal, Aer Arann assumes full operational and commercial responsibility for services covered by the franchise agreement, while Aer Lingus receives a fee for providing its brand and “product suite.” It operates 550 flights per week on 27 routes between Ireland, the UK and northern France, claiming to compete successfully by offering frequent flights for business passengers and low fares for leisure travelers. Passengers connecting with transatlantic Aer Lingus flights at Dublin can clear Immigration and Customs before takeoff for the U.S.

The restructuring has seen Stobart Group, a UK road-transport and logistics operator that also owns London Southend regional airport, acquire a 5-percent stake in Everdeal, Aer Arann’s ultimate parent company. British entrepreneur Tim Kilroe holds a 27.5-percent share, while Aer Arann chairman Padraig O’Ceidigh controls the 67.5-percent balance.

Stobart has an option to acquire Everdeal stock that would give it 32.5 percent. Kilroe would retain 7.5 percent of the shares and O’Ceidigh, who originally bought Aer Arann in 1994, would continue to own 47.5 percent.

Related Aer Arann group firms include Comhfhorbairt Gaillimh, which holds the air-operator certificate, and financial “special-purpose vehicle” Arann Aircraft Leasing, which is involved in ownership arrangements covering the four owned aircraft. Earlier this year, Aer Arann named Stobart senior manager Sean Brogan the airline’s interim chief executive.

Bookings on recently launched routes, including Knock-Birmingham, Dublin-Bournemouth, Shannon-Rennes and Dublin-London Southend, have proved “reasonably strong,” said Kirwan, and continue to grow.