Wind once more appears to be blowing in several directions for troubled airline

ANALYSIS:A share price drop may reflect Aer Lingus's flightpath through a lot of recent turbulence

IT SAYS much about Aer Lingus that, in spite of returning to the black in 2010 with better than expected results, the airline’s share price still fell by more than 4 per cent in Dublin yesterday.

Aer Lingus’s problem is that it always seems to be just one year away from being in great shape.

No matter how hard it tries, some event or other – the Icelandic volcano, weather disruptions, bids from Ryanair, industrial disputes, sharply rising fuel prices and airport charges, restructuring costs, and the crash of the Irish economy – seems to blow it off-course.

These factors, of course, affect other commercial airlines, but many rivals – mainly its biggest domestic competitor, Ryanair – seem less prone to these hits.

Since becoming a public company in 2006, Aer Lingus has booked exceptional items of almost €175 million. That’s nearly six times the pretax profit landed by chief executive Christoph Mueller last year. It’s an extraordinary figure.

In 2010, it had an unscheduled hit of €32 million relating to the controversial “leave and return” scheme cooked up in 2008.

There might well be more exceptional items to come.

In yesterday’s results, Aer Lingus flagged that there was a €400 million hole in its legacy pension scheme, which it shares with the Dublin Airport Authority.

This needs to be filled. It is also in talks with its unions about future pension provisions. These form part of its greenfield restructuring project. The view in the market is that Aer Lingus will take a financial hit of some sort this year to try and deal with the pension issue once and for all.

Institutional shareholders won’t be happy about this, particularly as Aer Lingus has always insisted its pension issues were sorted out at the time of the IPO. There’s no doubt that Aer Lingus’s German chief executive Mueller has significantly turned around the performance of the Irish flag-carrier over the past 18 months or so.

It was a back-to-the-future approach in many ways. The airline has stopped chasing market share with cut-price fares and axed loss-making routes, particularly on long-haul services to the US. It is no longer striving to be a mirror-image of Ryanair.

Mueller has focused more on its code-sharing and partnerships with other airlines to boost transfer traffic, signing a franchise deal with Aer Arann that allows it to plug gaps in its UK services without incurring the operational risk.

And it has retrenched to its core Irish market, parachuting out of its heavily loss-making London Gatwick base.

Meaningful staff cost savings have also been achieved, albeit in a somewhat tortuous manner.

Aer Lingus has warned that rising fuel costs and airport charges, and continued slack consumer demand in Ireland could put a dent in its 2011 profits.

That’s without the impact of any exceptional items. Another bumpy ride could be in store for shareholders.

Aer Lingus: 2010 results

Revenue:€1.2bn (+0.8%)

Operating profit:€57.6m (loss €81m)

Pre-tax profit:€30.4m (loss €154.8m)

Passengers carried: 9.3m (-10%)

Average yield:€107.1 (+12%)

SUMMARY

Aer Lingus returned to profitability last year in spite of a 10 per cent reduction in passenger numbers and flat revenues. This was due to the effects of the Greenfield restructuring plan; higher average fares; lower fuel costs and the elimination of loss-making routes. However, there are significant headwinds ahead.

Consumer demand remains weak in Ireland and fuel prices, which are beyond the airline’s control, are once again rising. Aer Lingus chief executive Christoph Mueller has warned that profits this year could be “significantly” lower.