Transformation Plan | Financial Objectives
Aer Lingus has developed a two stage Transformation Plan (the "Plan") to reduce costs and remove legacy work practices enabling it to compete more effectively against a peer group with significantly lower operating costs. The changes to be implemented under the Plan are expected to reduce Aer Lingus' operating costs, excluding fuel, by €97 million per annum, comprising staff cost savings of €74 million and non-staff cost savings of €23 million. It will also significantly improve cash conservation and protect the Group's strong balance sheet. The first stage of the Plan is expected to deliver significant change across the organisation, primarily in operational areas although pay and staff numbers will reduce in support areas. The second stage of the Plan will focus on a series of initiatives to deliver revenue growth, improved customer service and further cost savings through a series of business process improvements. This will include a broadening of the Aer Lingus customer base beyond the current dependency on the Irish consumer through the use of an Airline Operating Certificate in the United Kingdom.
Stage One | Operational Change, Headcount and Pay Reductions
The objective of the first stage of the Plan is to deliver substantial operating cost reduction, in both staff and non-staff areas, to enhance productivity and to implement change in the Group's pension arrangements.
Significant operating cost savings have been identified through staff cost reductions including reduced headcount; banded reductions in basic pay for staff whose basic pay exceeds €35,000 per annum and reduced variable pay and allowances for all staff. The Group believes that these proposals are the fairest and most balanced way to reduce costs towards the level of lower cost competitors, while protecting the less well-paid employees within the Group. Total staff cost savings will amount to €74 million per annum from 2011, with approximately 80% of these savings accruing in 2010 and the full savings coming in 2011 once the second phase of the Plan has been achieved.
While the Board of Aer Lingus recognises that staff cost savings have been delivered across many areas of the business in previous years, an objective analysis shows that, operating costs and, in particular staff costs do not reflect current and expected trading conditions and are significantly out of line with peers. Therefore the proposed changes are necessary to better align operating costs with those of Aer Lingus' competitors.
Changes in staff numbers resulting from a reduced flight schedule and changes to work practices are expected to result in a surplus of approximately 489 positions in operational areas and some support areas. While it is hoped that many of these redundancies will be achieved on a voluntary basis, or through releasing fixed term staff at the end of their contract period, compulsory redundancy may be necessary and Aer Lingus reserves the right to reduce staff numbers on a compulsory basis if agreement on changes with staff cannot be reached. In addition, if it is not possible to deliver the required cost savings in line with the Plan, and within the required timeframe, it may be necessary to reduce staff numbers further in order to ensure the continued viability of Aer Lingus. These numbers are in addition to approximately 100 staff that have already been informed that they will leave the organisation before the end of the year at the end of their fixed term contracts.
In addition to the changes to remuneration outlined above, it is also necessary that Aer Lingus fundamentally change legacy work practices. Aer Lingus cannot survive in a situation where staff are paid significantly more and operate less efficiently than comparable positions at its peers. Aer Lingus must rationalise work practices - in the air, on the ground and in support staff areas - to introduce best practice processes and procedures, and at least match its competitors in terms of productivity. In addition, Aer Lingus' operational flexibility cannot continue to be held back by restrictive practices that date from the past.
Non-staff costs will be reduced by €23 million in 2010. These savings will be derived from areas such as airport charges, distribution, reduced direct operating costs, maintenance and overheads and will build upon the €26 million delivered in 2009 in these areas.
Aer Lingus' employees face significant challenges in relation to the current deficits in the Irish Airline Pilots Superannuation Scheme and the Irish Airlines (General Employees) Superannuation Scheme, into which Aer Lingus makes fixed payments on a defined contribution basis. Aer Lingus has met with the Trustees of both schemes in recent months. The Trustees are aware that any change to Aer Lingus' position would result in the Group having to adopt "defined benefit" accounting rules for the schemes, which would result in both income charges and significant balance sheet liabilities for the Group.
Aer Lingus is proposing to introduce a new defined contribution scheme for the future service of all employees, which will attempt to recognise, through higher contribution rates, past service in the business but will on average cost the company no more than the current schemes. Aer Lingus intends to engage with the Trustees of both schemes to reach a solution that delivers the best result for staff in the context of what the Group can afford.
Stage Two | Enhancing Revenue, IT and Business Processes
The second phase of the Plan will focus on delivering revenue growth and further cost savings through a series of business process improvements. This will involve changes within head office and support areas through the introduction of new IT systems and refined business processes. This transition will take place over a longer period of time - between now and the end of 2011.
The introduction of new IT systems is expected to facilitate incremental improvements in revenue and will certainly reduce cost by removing manual processes, transferring information seamlessly between departments and providing better management information which the business requires for more accurate and timely decision making. Individual business cases will be built for transformation of this area, however, at this time, it is estimated that headcount in head office and support areas will be reduced by 40% by the end of 2011 in line with a technology driven adoption of simplified and industry standard business processes. This reduction means that there will be 187 redundancies in this area in addition to 51 redundancies included in the first phase of the Plan.
The Board understands that the changes being made under the Plan will be extremely difficult for its employees. The Group will now engage in a six-week consultation period with employees, their union representatives and the Pension Scheme Trustees in respect of the transition required under the Plan. Aer Lingus expects to conclude this consultation period by 18 November 2009.
Christoph Mueller, Aer Lingus CEO, commented: "The outlook in each of our current core markets is poor and, in line with the macroeconomic outlook, we do not expect any near-term recovery. Against this backdrop, Aer Lingus cannot continue with an operating cost base, which is structurally uncompetitive when compared to that of its closest peers. A significant differential in operating cost is not sustainable. Aer Lingus has a strong brand which is valued by our customers. Our plan to reduce our operating cost base and change work practices will secure Aer Lingus' future as a viable and strong airline that can prosper in one of the most competitive travel markets in the world. We regret the impact that the proposed plan may have on our employees, however, we must transform the business now to ensure that Aer Lingus has a business model for the long-term and can deliver value for all stakeholders."
Colm Barrington, Aer Lingus Chairman, commented: "This is a very difficult time for the global airline industry and for Aer Lingus. The board and management has completed a thorough review of all elements of our business and our operating model and has unanimously agreed and proposed this plan to transform the business. As part of the Plan, the executive and management teams have agreed to a 10% reduction in salaries, which will be frozen at least through the end of 2011, and the non-executive directors have unanimously agreed to a further 10% reduction in their fees on top of the 20% reduction which they took earlier this year. It is imperative that we all now make the right - and radical - choices to ensure that our company can prosper in the future; providing an attractive and competitive product alternative for our customers, a vibrant and developing environment for our employees and a viable investment proposition for our shareholders."