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BUSINESS & CAREERS
TRINITY NEWS February 8, 2010
Aer Lingus: setting a course for a new destination Airline Analyst Joe Gill explores Aer Lingus’ future prospects and how new CEO Christopher Mueller made his mark on the national carrier
Joe Gill Director of Research, Bloxham AER LINGUS’ equity investors could be forgiven for pressing the buttons marked “cynicism” and “scepticism” when hearing of another strategy presentation. Their investment has been whittled away since 2006, both by external and internal factors. However, last week the airline’s recently appointed CEO, Christoph Mueller, set out his vision for the company in a detailed briefing that provided clarity and direction. Executing this plan will be the key to ensuring Aer Lingus’ future viability and success. The strategy is threefold. Step 1: batten down the hatches. Having extensively reviewed the business, Mr. Mueller is now focussed on stabilising the group’s finances and protecting the net cash balances that remain in the business. To this end, deferred deliveries and the winding down of expansion plans together with a cost cutting programme are the central focus. We now know Aer Lingus’ year-end net cash was over €330m. The owned fleet is worth €684m and lease debt is €493m. Despite shelling out almost €500m in the past year through capital expenditure, redundancy payments
alance sheet and operating losses, this balance remains, by any definition,, strong. To estructuring protect this position a restructuring ertaken that programme has been undertaken will yield savings of €58m in 2010 and reach €97m by 2012. This will help Aer Lingus compete on its chosen battlefield – Ireland. Step 2: fortress Ireland. Ambitions to develop an international long-haul or short-haul footprint have been effectively shelved. Rather, Aer Lingus is set to make Ireland its core operating environment. Belfast, Cork, Dublin and Shannon are now the key bases from which short-haul services will work, with a particular focus on Heathrow where additional slots have been secured as well as more being sought. Long-haul services have been scaled back aggressively to support its three key US gateways (Boston, New York and Chicago) where partners, jetBlue and United, can feed traffic across the US. From Ireland, Aer Lingus will leverage its brand and the additional services it offers to passengers such as allocated seating, frequent flyer programmes and central airports. This marks one of the most radical deviations from the previous business model. Instead of trying to compete with true low cost carriers on fares, Aer
Lingus will attempt to extract unit revenues above stt ccarriers arrier ers like ke those of true low cost Ryanair. The company will use its yield management and ancillary revenue resources to support revenue formation while its capacity is rattled back. Shorthaul volume increased 1% last year, while its long-haul business fell a staggering 20%. To augment its focus on Ireland the group has agreed a revenue sharing deal with the regional carrier Aer Arann that provides services on thin UK provincial routes into Cork and Dublin. Aer Arann, along with the Aer Lingus short-haul network, will be used to create two-way feed for long haul services into Dublin. Step 3: flirtation. Assuming steps 1 and 2 work, Aer Lingus will have a cleaned-up cost base, a solid balance sheet, a defined Irish footprint, and cash flows stabilised by a return to operating profit in 2011. Step 3 is to effect an unalloyed seduction of one of the three global alliances. Aer Lingus already plays with Skyteam (via Amsterdam with KLM), Oneworld (via Heathrow with British Airways) and STAR (via United and indirectly jetBlue). Each offers Aer Lingus global connectivity. All three
eir ow wn internal dynamics at have their own ow ward integration in nt work toward and it is likely er Lingus er Lin ingu gu us will be forced to choose that Aer on ne over over the ov hee next year. It is hard to one believe OneWorld is not in pole position given that Aer Lingus’ short haul spine swivels around Heathrow. Giving Aer Lingus passengers access to OneWorld frequent flyer programmes would surely embellish yields. Furthermore, if the Conservatives win the next UK election and bin plans for a third Heathrow runway, that will make the Aer Lingus slot portfolio of increased attraction to OneWorld players such as British Airways and Iberia. It is likely that both trade union and political shareholders will enthusiastically endorse Aer Lingus’ efforts as it could provide a very real alternative to Ryanair which both – not to put too fine a point on it – despise. The success of the plan depends very much on Mr. Mueller’s resolve. He has already replaced investment advisors, shuffled the management team and carried an extensive change programme without taking a strike. If he executes this plan, credit should be allocated where due. But what are the risks? Some investors may struggle with the notion of positive yield generation. Yields are likely to have risen last year
as capacity extraction by Aer Lingus and other airlines combined with a bottoming economy to provide a much needed boost for revenues. However, building a strategy around growing yields in a structural way is more challenging. At a minimum it implies capacity growth is sharply curtailed for the foreseeable future. It also assumes a sustained attack by a lower cost airline can be avoided. The company promises more detailed data disclosure with its final year results for 2009. The roll-out of this plan will therefore be highly transparent, meaning that its success or failure should be instantly visible. Mr. Mueller is willingly opening the books, which itself is a measure of his confidence in the future. If we assume a return to profits in 2011, and believe cash balances can be protected over the next year, then the outlook for the airline looks promising. Any further weakness in spot oil could also spice up the numbers as just 16% of the company’s fuel requirements for 2010 are hedged at $762 per ton. While prospects are certainly improving at Aer Lingus, to say anything more requires confirmation that the numbers are unfolding according to plan.
Cadbury melts into Kraft While British media focus on the cultural importance of Cadbury following its sale to Kraft Foods, the history of brokering a deal for the troubled choclatier is primarily an issue of business and finance. Grace Walsh gives us the overview Grace Walsh World Review Editor THE MIDNIGHT deal that sealed the fate of Cadbury formally ended five months of hostile takeover negotiations. Kraft’s £11.6 billion bid is comprised of an 840 pence per share offer plus a 10 pence dividend on the unaffected share price as of 4 September 2009. Cadbury shareholders officially have until February 2 this year to approve the deal. As Kraft’s offer is largely comprised of cash it does not require its own shareholders to vote on the acquisition and only requires the agreement of fifty percent of Cadbury shareholders to move forward with the takeover. Kraft increased its borrowing to $9.5 billion to finance the cash part of the offer, following shareholder Warren Buffet’s criticism of using too much stock to finance the deal. Mr. Buffet argued t h a t Kraft’s use of stock
ury deal was an “expensive expensive in the Cadbury currency”, prompting speculation that res were undervalued at Kraft’s shares ces. CEO of Kraft, current prices. feld’s final offer Irene Rosenfeld’s rcent cash, of sixty percent ad hoped which she had would satee Mr. ars of Buffet’s fears using too much stock, also sm drew criticism he from the r. shareholder. He said hee r” felt “poor” following ry the Cadbury se deal because ith it came with $1.3 billion of ation reorganisation costs and $390 al fees. He million of deal was also unhappy with the sale of Kraft’s “very fine pizza business” this month to Nestlé. Mr. Buffet stated publicly that he and Ms. Rosenfeld had a strong relationship, calling her a “good operator”, but he openly admitted his concerns regarding the success of the acquisition. Kraft’s level of debt will rise to over $30 billion including the $3 billion of Cadbury debt it will assume.
Kraft Kraft’ss reaso reasons for acquiring the booming UK co confectioner include its exploi positive synergies to desire to exploit the tune o of at least $675 million and to boost its growth, which had been stagnant, with Cadbury’s girth and opti optimism. 2009 was a profitable year for Ca Cadbury with 5% organic gr growth and EBITDA of £1 £1.02 billion. Kraft’s initial offer of 72 pence per share only 720 ga an enterprise value gave of twelve times EBITDA, rel relatively low for an ind industry where takeover valu values usually fluctuate betwe fourteen and fifteen between times EBITDA. Their final offer of 84 840 pence per share plus a ten pence dividend came closer Ca to satisfying Cadbury’s initial demand of 850 pence per share, amounting to approximately fifteen times EBITDA. Although some shareholders have expressed disappointment that the company’s board did not get a higher price, most are expected to approve the deal. In September of last year, Cadbury dismissed Kraft’s initial offer of £10.2 billion as derisory and rapidly mounted
rd a stiff defence to Kraft’s offer. Lazard Ltd., Citigroup and Deutsche Bank tanley, advised Kraft whilst Morgan Stanley, presented UBS and Goldman Sachs represented keover bid Cadbury’s interests. The takeover drew speculation that rivall bids wiss would appear from Swiss nt, confectionery giant, an Nestlé, American ey favourite Hershey an and Italian family-run business Ferrero. H o w e v e r, stlé failed Nestlé gage in to engage ding the bidding process duee to regulatory concerns that merging the two companies would havee ion. negative effects on competition. roducts Hershey markets Cadbury products ence in the US under an exclusive licence g and was rumoured to be considering mounting a rival bid for the UK-based confectioner. Hershey, who is controlled by a trust and would represent a stronger cultural fit and fewer job losses than Kraft, was understood to be the preferred option for Cadbury. The American chief executive of Cadbury is
believ to have sought a merger twice believed between the tw two companies. Attempts failed both times as the controlling trust ref behind Hershey refused to support deal the deal. Following thei eiir fail their failure to top Kraft’s offer and pay a £118 million brea break Hersh fee, Hershey disqualified itself from the race to rescu rescue the UK’ UK’s “national tre treasure”. E a r l y re reports from sources cl close to the Ferrero fa family stated that they we were “absolutley united” on their decision to jointly explore acq an acquisition of Cadbury with Hers Hershey. However, late last we week they formally withdraw as a counter-bidder to Kraft before a UK Takeover Panel. Cadbury’s white knight failed to appear and the deal was approved on the 2 February. Following the announcement of the proceeding acquisition of Cadbury, the Confederation of
British Industry, a powerful lobby group, issued a stark warning to British and US business: beware of embarking on a wave of value-destroying acquisitions as the country emerges from recession. Mergers and acquisitions are often seen as a quick and sure-fire way to achieve growth following recessionary costcutting and saving. In the aftermath of the financial crisis the cost of borrowing has increased dramatically, hovering two hundred basis points above the LIBOR, as opposed to fifty in 2007. Combined with the fall in the value of the sterling, many firms including Kraft are looking towards the UK for expansion. Kraft’s rationale for acquiring Cadbury, driven by these factors and the lure of synergies, in a recessionary time may well be considered profitable, but fears of arbitrage and concerns over Kraft’s financial standing pose significant threats to the long-term viability of this deal.
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THE AMOUNT by which the global economy is expected to grow, according to new IMF forecasts, an increase on its October predictions of 0.8 percentage points.
THE COMBINED losses which are expected to occur in the Irish banking sector this year.
THE EXPECTED total cost to the taxpayer of recapitalising the banks, with €11bn of this capital already injected.
THE INCREASE in new car sales in December, when compared with December 2008. However, 2009 as a whole saw a fall of 62.1% on the annual 2008 figure.
+3,300 THE INCREASE in the number of people signing on the Live Register in December 2009, the biggest monthly rise since August, bringing the unemployment rate to 12.5%.