Ireland’s aviation industry takes-off

Posted on August 4, 2015 · Posted in Accounting & Business

The island of Ireland has an impressively strong aviation sector.  Ryanair, Aer Lingus, Bombardier, Avolon, Magellan, Thales, B/E Aerospace and Omega Air are all substantial companies – though not all are household names.  Each is either Irish, or has a substantial operation in the island of Ireland.  The sector employs at least 26,000 people in the Republic, plus another 8,000 in the North – and generates billions of euros to both economies.


“The important point to make is that Ireland has a number of significant success stories in aviation and aerospace,” explains Mark McAuley, director of the Federation of Aerospace Enterprises in Ireland (FAEI), which is part of IBEC and a member of the AeroSpace and Defence Industries Association of Europe.


“Not only do we have in Ryanair Europe’s largest airline, but also Ireland and Dublin is a major centre for the leasing and financing of aircraft,” continues McAuley.  “We would have to consider Ireland as very well served by a modern network of airports, which have the capacity to serve the country into the foreseeable future.  We have very good connectivity, particularly in short haul, but also with long haul in comparison with other European capital cities.  We have a large number of airlines using Irish airports.”


Part of the credit for the success of the aviation service sector – which includes leading maintenance repair and overhaul (MRO) businesses – should go to the Irish Aviation Authority, says McAuley.  “It has a very good reputation as a regulator,” he says.  That has been central to the development and expansion of Ireland’s aircraft financing and leasing sector, he argues.


But Ryanair has become a global industry giant.  In the year ending March 2014, it generated revenues of €5bn, up 3% on 2013, while reporting lower – but still very healthy – profit figures at €523m.  It remains a growth airline, with orders placed for 280 new aircraft, with options for a further 100, and the continued opening of new routes and operating bases.


Domestically, Ryanair has benefited from the abolition of air travel tax from 1 April last year.  Ryanair is confident this will produce an additional 1.7 million passengers flying into or out of Ireland in the year ending this coming March – 1.4 million at Dublin and another 350,000 between Shannon and Knock.  Half the additional passengers will be inbound, representing substantial tourism revenues – estimated at €400m by Ryanair.  There will also be, says Ryanair, 1,700 jobs created at Irish airports, plus 700 jobs within Ryanair.


Ryanair’s chief marketing officer, Kenny Jacobs commented: “While this remarkable growth and success in Irish tourism will be claimed by many of the usual suspects, Ryanair, as the airline that has delivered more than 67% of this traffic growth, wishes to put on record that this tourism boom is entirely down to Minister Noonan’s courageous decision to abolish the air travel tax, a decision which was opposed by many at the time.


“We hope that Ireland, as a peripheral island nation, will never again impose an air travel tax on visitors, which during the five years following its introduction caused traffic at the three main Irish airports to decline by one third.”


Aer Lingus is also doing well and expects profits for last year to exceed the  €61.1m reported for 2013.  Aer Lingus is benefiting from the reduced air travel tax, the improving state of the  Irish economy and the positive impact on its transatlantic business of pre boarding clearance with US authorities for passengers.  With Aer Lingus’s financial position strengthening, a bid has been submitted for it by IAG, the parent of BA.  This follows three unsuccessful attempts by Ryanair to buy the airline.  Currently Ryanair holds a 29.9% stake in Aer Lingus, while the Irish government holds 25%.


Declan Kearney, Aer Lingus director of communications, says there are three main advantages of the Irish operating environment.  “The Irish population are the most frequent flyers in Europe. The propensity to fly in Ireland is four times the European average. It’s a crude measurement, but the number of airline passengers in and out of the country annually, divided by the population, equals 6. This compares to an EU average of 1.5.


“Ireland is home to two of the top three most profitable airlines in Europe and over half of the world’s aircraft leasing companies are headquartered here. Ireland is also the home to many successful aircraft maintenance, repair and overhaul organisations. As a result aviation expertise abounds here. The Irish aviation sector comprises a talent pool that is unrivalled internationally relative to the size of the country.


“Geographic location: being Europe’s most westerly point makes us an ideal transfer point for connecting traffic crossing the North Atlantic. Hence, while Dublin is nowhere near the seventh largest city in Europe, Dublin Airport has the seventh largest volume of transatlantic traffic in Europe.”


These factors are insufficient to explain the turnaround of Aer Lingus from a struggling airline, to a thriving one.  That has been achieved, explains Kearney, by the establishment of a hub and spoke network based at Dublin, connecting with partner airlines to offer global connectivity; a very competitive cost base following comprehensive restructuring, with operating costs now  lower than all the other European flag carriers and big four US carriers; and, consequently, low priced tickets that have driven demand.


Aircraft leasing is also important for Ireland.  Omega Air is one of the world’s biggest suppliers of Boeing 707s and providers of support services for these and other planes.  And Irish aircraft leasing group Avolon listed on the New York Stock Exchange in December, with a market valuation of $1.55bn.  Avolon has been backed by major private equity firms Cinven, CVC and Oak Hill.  Customers of the business include Air France-KLM, American Airlines and Aeroflot.


Aviation is also a key industry for Northern Ireland, says Esmond Birnie, chief economist with PwC in Northern Ireland.  “It is a major part of the manufacturing sector,” he says.  “It ticks all the right boxes in terms of [the Northern Ireland Executive’s] economic priorities – high productivity, research and development.”


The sector offers high wages in Northern Ireland’s generally low waged economy and generates substantial employment in a sub-supply sector – some 9,600 people are employed in supplying the aviation industry, in addition to the 8,000 who are directly employed.  “There are at least 50 sub-supply companies [in Northern Ireland],” says Birnie.  Aviation is one of Northern Ireland’s most important industrial clusters, he adds.


Yet there are serious challenges facing Northern Ireland’s aviation industry, argues Birnie.  There are skilled labour shortages, at graduate, doctoral and technical levels.  “Energy costs are an issue for this sector, as they are for all of Northern Ireland manufacturing,” he says.  According to Manufacturing NI, electricity costs for heavy commercial users are the highest in Europe.


The UK’s high Air Passenger Duty is also a bigger problem for Northern Ireland than the rest of the UK, damaging its competitive position against the Republic.  APD effectively encourages airlines to use the Republic’s airports in place of those in Northern Ireland, which not only damages the North’s tourism sector and airports, but also holds back the aviation maintenance and service sector, points out Birnie.


Yet Northern Ireland is host to some of the world’s most important aviation and defence companies, including Thales, B/E Aerospace and Magellan.  Bombardier is particularly important, as the 16th largest aerospace company in the world and one of Northern Ireland’s largest employers.  Since, 1989 Bombardier has invested around £2.5bn in its Northern Ireland operations, which is now one of the Canadian corporation’s centres of excellence in key aerospace technologies, including advanced composites.  Recent investments have included a new wing manufacturing and assembly facility in Belfast.

A spokeswoman for Bombardier says that an operating and manufacturing base in Northern Ireland has both benefits and disadvantages.  “The geographical location of Northern Ireland throws up a number of challenges for Bombardier,” she admits.  “Utility costs are higher in Northern Ireland than the rest of the UK, so we pay more here for energy procurement and waste disposal.


“However, we have a comprehensive energy strategy in place to enable us to have a much more competitive and sustainable energy supply to support our business. This includes plans for an energy from waste plant, which will be owned and operated by an energy consortium and will supply electricity and heating to our factories and offices within the Belfast Harbour Industrial Estate.  Given that we export a very large percentage of our products – around 10% of Northern Ireland’s total manufacturing exports – transportation costs, particularly shipping, are also considerable.


“However, it is the wealth of ingenuity of local people and the long-standing engineering expertise that Northern Ireland has which is of great advantage.  Although Northern Ireland is small, it regularly punches above its weight on the global stage.  We have a good local supply base, both in Northern Ireland and the Republic and we are actively working with our supply chain to develop it further, to make it more competitive, and to enable companies to take on higher value work.”


In addition, Bombardier benefits from support from the Northern Ireland Executive and the cluster of related technology businesses and research and development – including through its close relationship with Queen’s University.


For both parts of Ireland, the aviation and aerospace industry is massively important.


Box

High flying Willie Walsh


Willie Walsh is one of Ireland’s most successful business leaders – but has taken an unconventional route to the top.  At 17 he trained to become a pilot with Aer Lingus.  While a qualified pilot, he used his spare time to gain an MBA from Trinity.  Walsh rose through the Aer Lingus ranks, becoming a Boeing 737 captain; chief executive of subsidiary company Futura, chief operating officer of Aer Lingus and, in 2001, its CEO.


In 2005, Walsh resigned his Aer Lingus position when the Irish government rejected his proposal for a management buy-out of the recovering airline.  He was immediately snapped-up by BA to replace Rod Eddington as CEO.  Having turned around Aer Lingus, Walsh then did the same to the giant BA.


Under Walsh’s leadership, BA formed the International Airlines Group and took over another struggling airline – Iberia.  Once more, a failing airline is now turning in much improved financial results.  Aer Lingus is the latest target for Walsh and IAG.


Away from his airline roles, Walsh was President of the London Chamber of Commerce and Industry for three terms, until 2013.  Last year Walsh was appointed chair of Ireland’s National Treasury Management Agency, where he is tasked with overseeing the strategic management of government assets and liabilities and related state borrowing.