Aer Lingus: underlying profits rise for ‘Ireland’s civilised airline’, but beware any fall in RASK

Last week (06-Feb-2013), Aer Lingus reported 2012 operating profit before exceptional items up almost 41% to EUR69 million, 5% above the consensus forecast of EUR66 million (according to Reuters) and its third successive positive annual operating result.

Aer Lingus is positioned between the LCCs and the full service carriers, styling itself as 'Ireland's civilised airline', but is this a sustainably profitable niche or just an attempt to make a virtue out of a necessity? It lacks the brand and product strength, network and frequent flyer programme to be a major network carrier and does not have a low enough cost base to be a genuine LCC. Its creditable profit recovery since 2009 owes more to market-driven unit revenue recovery, albeit aided by some intelligent management decisions, than it does to equally forceful action on unit costs.

Any slump in unit revenues, whether resulting from weak demand or over-supply in the market place could threaten its now well-established profitability. Assuming Aer Lingus does not end up in the hands of Ryanair, it may need to reconsider its strategy of avoiding the global alliances in the longer term, although its strong balance sheet should remain a good insurance policy in the near to medium term.