Impact of State Aid on Aer Lingus Essay

Aer Lingus is an airline in the republic of Ireland with a rich history that spans for a period exceeding 66 years. It’s an airline that is thought to hold a very special place in the hearts of most Irish people. In recent times, the airline has experienced difficulties. For example, there were agricultural problems both in England and in Ireland due to the emergence of BSE and Foot and Mouth disease. These are problems that caused the numbers of passengers traveling to various countries to go down. In 2001, workers were in strike due to salary issues and this adversely affected the operations of the Aer Lingus. Global economic crisis emanating from the most powerful economy in the world, the United States together with the September 11 terrorist attacks made many holidaymakers and seasoned passengers to panic and they thus feared traveling. Moreover, lack of funds has been another major problem and this is something that made Sabena and Swissair to close down because of insufficient funds. In fact, this is a problem that was so dangerous to many organizations that even Sabena had gone bankrupt. Due to such events, the major debate has been whether to provide state aid to Aer Lingus or not. The EU has been in the frontline to state that there is no need for the airline to be provided with state aid. On the other hand, some believe that since the government is a shareholder in Aer Lingus it should then use some of the tax payers’ money to inject more cash into the company to save it (Mulcahy, 2002). Since this is a state owned airline, its dependence on aid to raise capital has creates several problems for it. The financial performance of the airline has been undermined for quite a long period of time due to this dependence. However, in comparison to the private sector, state aid in most cases involves writing off the debts to financial institutions like banks. If it were the private sector on this issue, they would not have taken the consideration that such debts may be written off. The idea to use state aid for Aer Lingus may be seen as a bad option. This is so because if it was a private investor at Aer Lingus and they encountered huge debts, such an investor would have considered liquidating the airline and starting all over again using the available assets. But this has not been possible for Aer Lingus since its dependence is on the state to provide it with aid (Doganis, 2001). In 1994, the European Commission sought to approve the guidelines on evaluation proposals relating to state aid for airlines. Approving of the aforementioned proposals would see several conditions being imposed. For example, by relying on state aid, Aer Lingus is going to face the condition that it mustn’t expect additional aid in the coming future. Moreover, state aid according to the commission is not supposed to be used in any way to increase Aer Lingus capacity that may be to the detriment of EU competitors. Moreover, if Aer Lingus obtains this aid, the offer it has in the EU market is not supposed to increase faster compared to overall traffic growth. Aer Lingus is also not supposed to use the state aid to increase its direct competition against other airlines (Doganis, 2006). The impacts of state aid on Aer Lingus did not come with negative effects alone as aforementioned. There has been a success story to tell after state aid that was approved by the EU in mid 1990s. Even though reconstruction success at Aer Lingus took longer compared to Iberia and Air France, cost-cutting was achieved in years 2002 and 2004. State aid that Aer Lingus had received a decade ago had enabled it to survive most crises of that time. Up to early 2005, Aer Lingus still had not been privatized despite the crisis. Early 90s posed problems for Aer Lingus that are still similar to the current problems. The company lost profits amounting to 7% and talks embarked to seek a merger with Ryainar but this did not bear fruits. The management team came up with a recovery plan but the profits realized were still down. This is a problem that continued in 1992 but the appointment of Bernie Cahill as the board chairman saw the government provide more investment in the airline. After the proposal was accepted by the EU, some assets like the computer company and hotels were sold. By 1995, the company realized some profits. These shows the impacts of the state aid on Aer Lingus have been both positive and negative. But for Aer Lingus to survive in the market state aid is required since today, it estimated that the company is losing $2m in a single day. Moreover, the bookings have gone down by a staggering 80% (Barrington and Sweeny, 2001).