Aer Lingus warns fuel, slowdown threaten viability

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By Andras Gergely

DUBLIN (Reuters) - Irish airline Aer Lingus expects to make losses this year and next due to high fuel costs and a slowdown in consumer spending, which it said could threaten the long-term viability of its business.

High oil prices and a global economic downturn have pressured airlines from large full-service carriers to budget operators, in what many people in the industry say is a crisis that could overshadow the fallout from the September 2001 attacks on the United States.

Aer Lingus, Ireland’s former state airline, on Thursday posted a first-half operating loss of 22.3 million euros (18 million pounds) compared with a 2.6 million euro profit a year ago and announced plans to cut capacity.

The company said it expects a loss between 22 million and 30 million euros for the full year, which could widen to a "3-figure" million loss in 2009.

Aer Lingus said it will give details of new cost-cutting measures by the end of September.

Aer Lingus’ costs per seat are up to twice that of rival Ryanair , Europe’s biggest budget carrier, which owns more than 29 percent of Aer Lingus after a failed takeover bid.

"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 .....continued below

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Aer Lingus said it would cut capacity on long and short-haul flights.

"Long haul capacity for winter 2008/09 will decline by 11 percent year on year, compared to previous plans to grow by 1 percent, and short haul capacity in the same period will decline by 1 percent compared to a previous expectation of 2 percent growth," Mannion said.

Its shares traded 2.3 percent weaker in Dublin by 1043 GMT (11:43 a.m. BST) at 1.39 euros, having lost 60 percent since a peak in April 2007. The Irish market <.ISEQ> was up 1.2 percent.

Analysts said Aer Lingus had one of the strongest balance sheets in the industry, with over 800 million euros in net cash.

"It is therefore well placed to deal with what is likely to be a very stormy winter for the airline industry," Goodbody analyst John Goode said.

Rival Ryanair has warned it could make its first loss since 1989 this year and said it would cut fares to snatch business from struggling rivals in an attempt to become one of the few European carriers to grow this winter.

PRESSURE ON FARES

Aer Lingus faced slowing economies in its main markets Ireland, the UK and the United States as well as a weakness in the dollar and sterling in its seasonally weaker first half, Mannion said.

Its fuel bill rose by 56.5 million euros in the period, which it plans to control by seeking opportunities to hedge more of its needs whenever oil prices fall, the airline said.

"Even with the reduction in fuel prices over the last few weeks, competitive pressure on fares and volumes will continue," Mannion said.

Revenue increased by 10.2 percent in the first half of the year to 632.9 million euros and it flew 10.5 percent more passengers than in the same period of 2007, the carrier said.

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