The Brancatelli File
WHAT A CONCEPT:
A PROFITABLE AIRLINE
BY JOE BRANCATELLI
April 3, 2003 -- Stop me if you've heard this one: A chronically unprofitable traditional airline is engaged in a guerilla war in the overcrowded North Atlantic skies and strafed at home by a relentless low-fare carrier. The planes empty after the 9/11 terrorist attacks, capacity is slashed, losses hit $2 million a day and the carrier estimates it will be out of cash in a matter of months.
Still with me? Good, 'cause you'll never guess the punch line of this particular airline joke.
The carrier, Aer Lingus of Ireland, has not only survived the shark-infested North Atlantic, the challenge of über-discounter Ryanair and the perilous months after 9/11, it also rang up a net profit of about $38 million in 2002. Against nearly impossible odds, Aer Lingus has done what America's Big, Stupid Six hasn't had the guts or the smarts to do: Look at air travel realistically, transform its assumptions about how to function in the 21st Century and lay the groundwork for what chief executive Willie Walsh has called "sustainable profits."
Aer Lingus' top man in the United States, executive vice president Jack Foley, bought me lunch six months ago and predicted just such a fairy-tale outcome. I didn't believe him. But after Aer Lingus' profit was announced late last month, I felt compelled to buy Foley lunch and get the specifics of the remarkable renaissance.
An affable New Yorker who joined Aer Lingus in 1996 after 19 years with British Airways, Foley is hardly smug about the Irish carrier's success. In fact, he's quick to admit dire necessity was the mother of the airline's survival strategy.
"Willie Walsh called a meeting in Dublin in mid-September of 2001 and he made it simple," Foley recalls. "He said that neither the Irish government nor the European Community would help, that there was no U.S.-style bailout in the works. Nothing was coming in [from reservations] and we were losing $2 million a day. He told us how much cash we had on hand and calculated that we'd be out of business in mid-March if nothing changed. Then, he said, 'OK, we're going to have to figure this out ourselves.' "
What Aer Lingus came up with were long-overdue changes: It ended flights to Newark and Baltimore/Washington and returned its leased planes. It slashed staff, salaries and costs everywhere. And it shifted its strategy. It began encouraging passengers to book directly on the Aer Lingus Web site. It simplified its Premier Class service and focused on what business-class passengers wanted most. And Aer Lingus decided "we would become a low-cost carrier that passed the savings on to the customer in the form of lower fares," Foley explains.
Aer Lingus also made what, in airline terms, was a nearly heretical conclusion about its pricing policies. "We thought it made no sense for our fares to range from here to here," Foley says, his arms dramatically spread wide. "The whole world thinks that the old fare structure was unsupportable and we decided that the world was right."
As a result, Aer Lingus created the Aerfares strategy. Last year, the airline began announcing each season's lowest fares months in advance rather than playing chicken with customers and running an endless series of bait-and-switch fare sales whenever bookings lagged.
The first Aerfares announcement last fall was stunning because Aer Lingus offered seats to Ireland during the winter months for as little as $99 one-way--a price that usually only appeared for a few days in January and February and only in quick-hit fare sales. It was unprecedented for an airline to announce months in advance that it was selling $99 seats without first seeing if passengers would buy seats at higher fares.
"You asked me then if I could make money at $99," Foley recalls. "And I said that I could if I filled up my planes. My point was that we switched from obsessing over the yield per passenger to concentrating on the yield per route. I can't make money if I sell all my seats for $99. But I can if I sell 75 percent of my seats in the winter at that price and my planes are full. Discretionary travelers know that they get my best prices if they book early and I fill my planes quickly and efficiently."
It's hard to argue with the logic of Aerfares now. Traffic on the crucial transatlantic routes--Aer Lingus makes most of its profit flying between the United States and Ireland--skyrocketed. Profit margins, an infinitesimally puny 1.8 percent in the days before 9/11, jumped to 6 percent in 2002. Aer Lingus revived its Baltimore-Washington route on Monday--it also flies from New York, Boston, Chicago and Los Angeles--and Foley says first-quarter traffic "was great."
Next month, Foley says, Aer Lingus will address the price gap between the lowest-price coach seats and walk-up coach prices. Foley wouldn't say what the airline will announce, but I'm expecting a permanent price cut and lots more perks, privileges and upgrades for business travelers who must buy a full-fare coach ticket.
"Full-fare coach travelers get the least value and I needed to change that," Foley says bluntly. "So we went to our last-minute customers and asked them what they wanted. And what you'll see next month is the full-fare coach product that full-fare business travelers designed."
A fairy-tale happy ending? Hardly. Aer Lingus remains hamstrung by the weird U.S.-Irish aviation agreement. (It bars Irish carriers from flying to other U.S. destinations and mandates that Aer Lingus split its capacity between Shannon and Dublin regardless of where passengers want to fly.) Its main domestic and European competitor, fast-growing Ryanair, makes Southwest seem rapacious. (On Monday, I actually booked a $1 fare on a Ryanair flight between Dublin and London.)
And Foley admits that the phones stopped ringing late in February when the United States government first moved the country to a Code Orange security alert. Passengers didn't cancel many reservations to Ireland, Foley says, but advance bookings for the extremely profitable summer travel season have slowed dramatically.
So once again dire necessity has become the catalyst for creativity. As I've been writing this, Aer Lingus announced an inventive new summer-travel program called A Thousand Welcomes. For two weeks beginning tomorrow (April 4), travelers will be able to buy tickets to Ireland for as little as $149 one-way for travel in April and May, $179 in June and $199 in July and August. (That's about 33 percent below last summer's lowest fares.) Better yet, restrictions are minimal: no minimum stays, no Saturday stays and no annoying change fees. If you cancel your flights, the entire value of the tickets can be applied to a future Aer Lingus itinerary. The airline has also created a new discount program valid throughout Ireland. Aer Lingus flyers will receive discounts at more than 400 hotels, restaurants, pubs, museums and sports and tourist attractions around the island.
"We figured cutting seats and capacity would give us nothing," Foley explains about his reaction to the current travel slump. "We decided to do a promotion instead. I realize right now that people are not making a travel decision. So I want to put something in front of the American people and say, 'Hey, you should travel.' "
Will skittish Americans, cowed by war and SARS and a shaky economy, bite? "I hope so," Foley says, "Americans rightly perceive Ireland as a warm, welcoming and friendly place. And I think my fares are simple and welcoming and friendly. I'm trying to make it impossible for them to stay home."
Gee, what a concept. An airline that actually wants your business and goes out of its way to get it.
This column originally appeared at JoeSentMe.com
Copyright © 1993-2004 by Joe Brancatelli. All rights reserved.