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Aer Arann: subsidies now a bonus, not a crutch
John Mulligan



Garry Cullen, Aer Arann managing director
THERE'S a business book sitting on top of an uneven pile of documents on the floor of Garry Cullen's pokey office in Dublin Airport. It's called Good and Great, by an author named Jim Collins. It probably neatly sums up the new managing director's challenge at Aer Arann: To turn it from a good business to a great one.

Genial and chatty, Cullen turned 62 recently. He admits that he's likely to stay in the job three years or so. It's a relatively short time to initiate major and lasting change, but Cullen . . . an experienced airline veteran who once headed Aer Lingus . . . is confident of being able to steer the niche carrier into a new era.

Since former chief executive and now chairman Padraig O Ceidigh acquired Aer Arann with Eugene O'Kelly in 1994 after ditching his law practice and remortgaging his house, the airline has beaten the odds to survive. In 2004 it posted profits of 7.6m on turnover of 70m. Last year turnover is estimated to have touched 94m. Earlier this year the airline signed a $180m order for 10 new turboprop aircraft to replace some of its existing fleet, increase frequencies on existing routes and open new ones. It's up to Cullen to find the opportunities.

"A critical part of my job is preparing the plan for the next couple of years in terms of fleet development, training management and, at the right time, identifying a successor, " says Cullen, who until April had been running an Antiguabased regional airline, Liat.

It's possible that his successor will come from within the Aer Arann ranks, explains Cullen, who spent a large part of his career with Aer Lingus, working on economic planning, business development and as operations director, before taking over the helm at the state airline. The grooming process in Aer Arann has clearly just begun, but Cullen says he will be evaluating existing managers over his tenure to see if any of them fit the chief executive mould.

"You can see that at the moment the organisation is straining to cope in some areas as a result of growth, " he says. "There's a certain amount of fire-fighting going on. I want to put more structure on some things, but I don't want to have layers of management. It's about getting a balance."

In the meantime he has to grow Aer Arann, which now carries about a million passengers a year. It's easy to sniff at the airline, and plenty of detractors do. Its bread and butter was traditionally generated from the controversial but lucrative public service obligation (PSO) routes, by which the government provides vast subsidies to operate services that would otherwise be commercial suicide. It has often been speculated as to whether Aer Arann could have survived without them. While those routes provided a crutch for Aer Arann, Cullen points out that today, their importance has lessened.

"We now generate about 25% of revenue and passenger traffic from those PSO routes, " he says. "Two of our most profitable routes aren't PSO routes."

Cullen says he can foresee a time when PSO routes may even not form part of Aer Arann's business at all.

"They do have a finite life.

Some PSO routes, here and in the UK, are beginning to approach commercial viability now anyway, " he explains.

That said, he does think there may be opportunities in countries such as France to capitalise on PSO offerings there.

Expansion will be key to growth, but Aer Arann has to "box clever", according to Cullen. The airline uses turboprop aircraft that allows it to fly into airports with shorter runways that can't accommodate jet aircraft such as Ryanair's. The trick is to keep finding destinations that can't be served by jet carriers. Aer Arann does fly into Dublin and Cork, for instance, but on such routes Cullen believes the airline differentiates itself from Ryanair through service.

"On shorter routes there's not much difference between flying a prop aircraft or a jet, " he says. The real issue, he thinks, is frequencies.

Attracting British travellers, for instance, will be a lot easier if there are greater frequencies and people aren't concerned about missing the one flight a day, or seeing it cancelled and leaving them stranded.

Cullen is thinking further ahead too. Even as Dublin Airport embarks on a 400m new terminal, Cullen can envisage a time when Aer Arann wouldn't even need to fly into it. Should airfields such as Jim Mansfield's Weston in Leixlip open to commercial traffic, he sees merit in shifting operations to such a location rather than staying at Dublin Airport. On the other hand, if Dublin Airport can develop into a reasonably-sized hub, Cullen believes Aer Arann could benefit greatly from providing connecting flights. It's called hedging your bets.

Building Dublin into a hub would be a process partly accelerated by a successful flotation of Aer Lingus, which wants to boost its number of international routes. Cullen believes that if Aer Lingus had a strategic investor, this could be more easily achieved.

"If I was to wave a magic wand, that's what I'd like to see happen, " he says, without the slightest impression of Paul Daniels. But with lucrative concessions given to unions, investors could shy away from Aer Lingus. Even Siptu has said it "hopes" that will be the case.

"Aer Lingus is a unionised environment. You have to be pragmatic about it, " he says.

"Aer Lingus had to cut the best possible deal. Management had to negotiate their way out of that. But what has been agreed is probably on the outer rim alright in terms of the airline's attractiveness to investors. In an ideal world [management] would probably prefer it was otherwise."

He's unsure as to what type of industry or corporate investor Aer Lingus will now attract. Retail investors will have to stump up a minimum of 10,000 for a piece of the action. So will Cullen buy in?

"I don't know what the price is yet, " he laughs. "If the limit wasn't there the answer would be a straight yes, just for the enjoyment of a punt. But for 10,000 you have to reflect on it."

Cullen has plenty to focus his attention without thinking about Aer Lingus. But he doesn't find stepping into O Ceidigh's shoes daunting. O Ceidigh was a front and centre CEO, with a relatively high public profile, but Cullen is not necessarily seeking the limelight.

With O Ceidigh staying on as chairman, it's also easy to wonder whether he will find it easy to let go of what has been a massive part of his life.

"When we met we had a very frank discussion, " explains Cullen. "I got a good sense from him. I wouldn't have taken the job if I thought there were going to be any issues. That wouldn't have been good for Padraig and it wouldn't have been good for me. It's working very well."

Another three years or so will prove just how effective a partnership it is.

THE CV
GARRY CULLEN
Age: 62
Position: Managing director, Aer Arann Status: Married with four children
Education: Presentation College, Bray; UCD; TCD
Work history: Worked his way through the ranks of Aer Lingus before going on to head the company from 1998 to 2000. He was then hired as chief executive of Antiguabased regional carrier Liat. He left the company earlier this year to take up the new position with Aer Arann.

AER ARANN
Aircraft: 14
Turnover: 94m (2005), 70m (2004) Pro"ts: 7.6m (2004)
Background: Aer Arann recently hired Cullen to take over from Padraig O Ceidigh, who is now chairman. The airline has placed a $180m order for 10 new aircraft and is examining strategic expansion opportunities.




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