Aer Lingus Group plc

ISE: EIL1        LSE: AERL

FIRST HALF RESULTS 2008

Dublin, London, 28 August 2008: Aer Lingus Group plc ("Aer Lingus"), an Irish low-cost, low-fares airline, providing both short and long haul services, today announced its first half results for the 6 months ended 30 June 2008.

Financial and Operating Highlights

• Operating loss of €22.3m, down from operating profit of €2.6m in 2007. Loss driven by fuel costs which increased by €56.5m (48.7%).  

• Overall revenue growth of 10.2% to €632.9m

• Total passenger revenue of €606.2m up 10.4%

  • Passenger growth of 10.5% - an increase of 460,000 in passengers flown

  • Strong ancillary performance with revenue of €69.7m up 38.2%

  • Strong per passenger ancillary revenue €14.35 up from €11.47 

  • Revenue per passenger maintained year on year

• Increased capacity (ASKs) of 24.1% (18.8% on short haul and 31.2% on long haul)

• Ongoing improvement in aircraft utilisation, up 5.0% on short haul and 4.5% on long haul

• Continued to drive value from shape and size of network through focus and growth of base operations and central airports  

• Cashflow of €120.5m generated from operations

• Strong balance sheet with net cash of €802.6m

• Return on capital over the 12 months to 30 June 2008 of 17.4% (2007: 17.3%) compared with target of 15%.

Strategic Highlights

• Continued progress on cost reduction and efficiencies including completion of new maintenance contracts and agreements on flexibility and mobility with staff.

• Active management of network and fleet asset portfolio to drive maximum returns.

• Agreed new codeshare deal with United Airlines, due to commence 1 November 2008.

• Investment in long haul product through refurbishment of three of current fleet over winter season.

  Performance Review & Outlook

Dermot Mannion, Aer Lingus Chief Executive, commented: "The seasonally weaker first half has been marked by extremely difficult market conditions in the form of unprecedented fuel costs, slowing economic growth in our main markets and a weakness in dollar and sterling. Fuel is the most significant cost within the business and the €56.5 million increase in our first half fuel costs contributed significantly to a loss of €22.3 million. The Company has 70% of its estimated fuel requirement for the remaining four months of 2008 hedged at a rate of $1,137 per tonne and 20% of its 2009 requirement hedged at a rate of $1,165 per tonne.

Despite the difficult environment, Aer Lingus is making progress on the delivery of its business objectives and in particular continues to demonstrate strong growth in ancillary revenue. Our continued focus on reducing operating costs was evidenced by progress on both maintenance and staff costs. During the period the company secured agreement on the Programme for Continuous Improvement which will result in annualised savings of €20 million going forward. We continue to drive value through actively managing our network portfolio and have taken prudent decisions with regard to phasing of fleet deliveries and deployment. Long haul capacity for Winter 2008/09 will decline by 11% year on year, compared to previous plans to grow by 1%, and short haul capacity in the same period will decline by 1% compared to a previous expectation of 2% growth. As previously indicated, we have agreed with Airbus the deferred delivery of an A330 aircraft from September 2009 to June 2010.  

It is clear that the unprecedented cost of fuel and the difficult operating environment will continue to have a significant effect on the financial performance of the business and that there will be sustained fare pressure over the medium and longer term. Even with the reduction in fuel prices over the last few weeks, competitive pressure on fares and volumes will continue and we are at best expected to break even in the second half, delivering a loss for the full year. Looking further ahead, we will continue to develop new revenue partnerships and initiatives such as those with United Airlines and jetBlue. However, it is now clear that we will require further fundamental changes in our operating cost base in order to minimise losses in 2009 and to help ensure the long term viability of the business."  

  Financial Performance

(i)    The employee profit share charge is based on 0 % (2007: 7.5%) of the total of operating profit and net finance income.

(ii)    Compensation under PCI

(iii)    Earnings before interest, tax, depreciation, amortisation and aircraft rentals.

Contacts

  Operating and Financial Overview

Aer Lingus' business has always been seasonal in nature with most of the profits generated in the second half of the year. The market conditions experienced year to date, with uncertainty in key economies and unprecedented fuel prices have greatly magnified this seasonality, resulting in an operating loss (before employee profit share) of €22.3m (2007: profit of €2.6m). EBITDAR has reduced by 36.2% to €36.0m and the Company recorded a net loss for the six months of €20.6m (2007: profit of €6.8m).

Passenger Revenue

Passenger revenue grew by 7.5% to 536.5m. An additional 460,000 passengers were carried in the 6 months to 30 June 2008 over the same period in 2007. Revenue per passenger (fare yield plus ancillary revenue) remained flat year on year. Total passenger load factor reduced by 5.1 points to 70.2%, mainly as a result of the 31.2% capacity increase on long haul.  

- Short haul

Short haul capacity, measured by available seat kilometres (ASKs) grew by 18.8%. ASKs increased due to the full year effect of the delivery of four A320s in 2007, most of which were not operational in the first half of the year and also to a 5.0% increase in the average daily block hour utilisation over 2007 levels. The ASK growth was not matched by utilisation, measured by revenue passenger kilometres (RPKs), which increased by 16.5%. This resulted in a drop of 1.4 points in passenger load factor to 72.2%, however, total short haul passengers increased by 10.6% to 4,261,000. One further A320 was delivered in June 2008, bringing the total short haul fleet to 33 (27 A320, 6 A321). 

The reduction in short haul fares was mostly offset by the growth in ancillary revenue per passenger, leading to comparable revenue per passenger year on year. It is anticipated that there will be continued pressure on fares for the remainder of the year and into 2009. The contribution of ancillary products to revenue per passenger will continue to be actively managed to counteract fare yield pressures.  

- Long haul

There was a significant increase in long haul capacity in the period, where ASKs grew by 31.2% due to the full year effect of the introduction of two new long haul aircraft in 2007. An increase of 4.5% in the average daily block hour utilisation over 2007 levels also contributed to higher ASKs. The ASK growth was largely deployed on three new routes opened in late 2007 under Open Skies. This resulted in a 10.2 point decrease in load factor to 67.7%, as RPKs only increased by 14.5%. The impact on load factor is expected to be minimised in the second half of the year as the capacity increase year on year moderates, and this moderation was evidenced in July traffic statistics. Total long haul passengers increased by 9.5% to 597,000, and there was a slight uplift in average long haul fares at €294.38 (2007: €286.82). These fare yield trends are expected to continue for the rest of the year. 

- Ancillary

Ancillary revenue shows another strong performance in the first half, with total ancillary revenues reaching €69.7m, up 38.2% on 2007. This increase was achieved as a result of additional passengers carried, and, significantly, through continued increase in per passenger spend, which increased by 25.1% to €14.35. The most significant ancillary revenue products are inflight sales revenue, baggage fees, online booking fees, seat selection and passenger travel insurance.  

Cargo

Aer Lingus cargo strategy is to carry cargo on long haul routes, and on short haul routes where aircraft turnaround times permit. A solid performance was delivered given difficult market conditions as a result of the economic downturn in the US. Total cargo revenue increased by 7.1% to €24.1m (2007: €22.5m). Tonnage increased by 14.9% on 2007, while yields, excluding the industry fuel surcharge decreased by 15.6%. Revenue from the fuel surcharge increased by 47% and this was the primary driver of the overall increase in cargo revenue. 

Operating costs

Total operating costs (before the employee profit share) increased by 14.6% to €655.2, mainly as a result of increased volumes and higher oil prices. The most significant cost areas were fuel costs, staff costs, airport charges and maintenance.

The largest increase was in fuel costs, which increased by €56.5m (48.7%) to €172.4m in spite of fuel hedging savings and US Dollar weakness. Fuel represented 26.3% of total costs in the period, up from 20.3% in 2007. The average cost of fuel in the period was $925 per tonne compared to $662 per tonne in 2007. 

Staff costs increased by 11.7% to €167.3m. Average numbers employed grew by 7.4% to 4,050 (2007: 3,770). Staff cost per passenger is in line with 2007. During the period the company secured agreement on the Programme for Continuous Improvement which will result in annualised savings of €20 million going forward.

Airport charges increased by 8.3% to €113.5m (2007: €104.8m). The increase in absolute terms was expected due to the growth in operations year on year. Airport charges unit cost decreased by 12.8% on 2007 due to savings from currency weakness of US Dollar and Sterling and reduced load factors.

During the period, the Company concluded new contracts with a number of world class suppliers on the provision of maintenance services. Maintenance costs for the six months to 30 June 2008, at €32.4m, reduced by €9.3m on the same period in 2007. This saving was mainly driven by the release of cost provisions which were no longer required once the new contracts were agreed.  

Employee profit share

There is no provision for an employee profit share for the first six months of 2008 as a result of the losses incurred in the period.

Financing income and costs

Net finance income has increased by 7.7% on 2007 to €19.7m (2007: €18.3m). Finance income decreased slightly on 2007 due to the timing of cash outflows for aircraft purchases, but this was more than offset by a reduction in finance costs driven by reduced borrowing rates and currency gains. 

Exceptional items

In June 2008, Aer Lingus reached agreement with the majority of staff to change their contracted terms and conditions as part of the Programme for Continuous Improvement. Provision of €17.6m was made at 30 June 2008 for the compensation due to these staff for loss of earnings resulting from the contract amendments.  

Balance sheet

The Company has a strong balance sheet. Net cash (cash, deposits and available for sale financial assets, less debt) has increased by 5% since the year end, to €802.6m (31 December 2007: €757.0m). Significant cash flows in the six months to 30 June 2008 were driven by capital expenditure on fleet. A cash inflow of €186.7m was recorded due to financing of aircraft purchased in late 2007, and €75.2m was paid out for deposits on aircraft to be delivered from 2009 onwards.  

  Fuel and currency hedging

To achieve greater certainty on costs we manage our exposure to fluctuations in the price of fuel and foreign currency through hedging. At 30 June 2008, our estimated fuel requirements for 2008 were hedged as follows:

Since 30 June 2008, we have increased our fuel hedging for 2008. At 26 August 2008, our estimated fuel requirements for the remainder of 2008 were hedged as follows:

The blended rate for 90% of out total fuel requirements in 2008 is $1,024 based on the combination of above hedges and fuel already bought in the spot market. Assuming the balance of 2008 fuel is purchased at current forward rates the total fuel bill for 2008 will be €390m (2007; €253m).

Our major foreign currency exposure is to the US dollar. At 30 June 2008, we had purchased 72% of our estimated US dollar trading requirements for 2008 at an average rate of €1=$1.49. In addition, we had purchased 59% and 17% of our estimated US dollar trading requirements for 2009 and 2010 at €1=$1.48 and €1=$1.52 respectively. 

At 26 August 2008, our forward purchases of US dollars comprised 93% of the estimated trading requirements for the four months to 31 December 2008 at €1=$1.49, 70% of the estimated trading requirements for 2009 at a rate of €1=$1.48, and 38% of the estimated trading requirement for 2010 at €1 = $1.50.

Fleet

Aer Lingus fleet increased with the addition of one A320 during the 6 months to 30 June 2008. The Company has orders with Airbus for four A320 aircraft to be delivered between late 2010 and early 2011, with a further leased A320 to join the fleet in 2009. This will bring the short haul fleet to 38 aircraft. 

On 10 April 2008, the Company's shareholders approved the purchase of 12 long haul aircraft for delivery between 2009 and 2016. These aircraft will allow Aer Lingus to upgrade the long haul fleet and will also underpin the Company's medium-term growth strategy. 

Aer Lingus is committed to its medium-term long haul growth strategy. However, given the current economic conditions and high fuel prices, the Company continues to actively manage capacity. At the Company's AGM on 6 June 2008, it was announced that our long haul fleet will not increase in 2009 beyond the current nine units. This will be achieved by using new deliveries to replace existing units, giving increased levels of passenger amenities as well as improved economics and fuel burn. In addition, the company will continue to invest in the long haul product through its fleet refurbishment program on three of the current fleet over the Winter 08/09 period. Following this refurbishment and new deliveries in 2009, seven out of the total of nine aircraft will be new/upgraded aircraft. 

  Future developments

Network

Aer Lingus continues to actively manage our network and fleet portfolios to ensure maximum shareholder return is achieved. As part of this ongoing review, the Company announced at the AGM on 6 June 2008 that services on the Dublin Los Angeles route would be suspended from 2 November 2008. This decision was taken as a direct result of the unprecedented increases in fuel costs, the weak US dollar and deteriorating economic conditions in the Company's main markets. Long haul capacity for Winter 2008/09 will decline by 11% year on year, compared to previous plans to grow by 1%, and short haul capacity in the same period will decline by 1% compared to a previous expectation of 2% growth. As previously indicated, we have agreed with Airbus the deferred delivery of an A330 aircraft from September 2009 to June 2010.

Current Trading and Outlook

It is clear that the unprecedented cost of fuel and the difficult operating environment will continue to have a significant effect on the financial performance of the business and that there will be sustained fare pressure over the medium and longer term. Even with the reduction in fuel prices over the last few weeks, competitive pressure on fares and volumes will continue and we are at best expected to break even in the second half, delivering a loss for the full year. Looking further ahead, we will continue to develop new revenue partnerships and initiatives such as those with United Airlines and jetBlue. However, it is now clear that we will require further fundamental changes in our operating cost base in order to minimise losses in 2009 and to help ensure the long term viability of the business.