Dublin Airport a reflection of recovering Irish economy set to gain altitude

Returning to Dublin this week from Minneapolis you could not miss the fact that it is Christmas time. While many suburban gardens in Minneapolis were festooned with decorations marking the approach of the Christmas (or the holiday) season, Dublin suburbs are more restrained. However, Dublin Airport does not know such restraint. The very extensive decorations are supplemented every day between now and Christmas by choirs singing carols.

The approach of Christmas was also unmistakable on my inbound flight from Chicago to Dublin, with a substantial number of families with young children returning to visit their parents and grandparents.

There were even a few bemused US parents coming to visit their children who had emigrated to Ireland. (Last year 3,400 US citizens applied for PPS numbers in Ireland having moved here.)

As the bags from the Chicago flight came off the carousel it was clear that an unusually high proportion were marked “Heavy” reflecting, presumably, the arrival of a sleigh run from the US, replete with presents. This flow of passengers generated by the diaspora will reach a peak on Christmas Eve.

While a substantial number of emigrants is continuing to leave, the advertising in the airport today invites visiting emigrants to look for employment in Ireland in 2016 – something you would not have seen two or three years ago. It is more reminiscent on the middle and late years of the 1990s.

Changing demographics

The airport not only provides an interesting reflection on changing demographics in Ireland but it is also now a very important feature of the modern Irish economy. Many of the passengers flying into Dublin throughout the year are flying on to other destinations in Britain or in western Europe. They have chosen to fly through Dublin because it is the cheapest option and because it also has direct connections now to many North American and European cities. This has further boosted traffic through the airport so that Dublin is now one of the top 10 European hubs serving North America.

The takeover of Aer Lingus by British Airways looks set to further add to this business with flights to new destinations in the summer.

The growing air transport business is obviously good for the local economy, generating jobs directly in the transport sector. However, the availability of good air connections to Europe and, increasingly, to North America has significant additional benefits for the wider economy.

Because of extensive competition between Ryanair and Aer Lingus on European routes, and between Aer Lingus and US airlines to the US, fares are low by European and US standards, benefiting business and private travellers alike.

These direct air links are very important to many businesses in Ireland. The return of the direct flight to San Francisco provides a much faster (and cheaper) link to Silicon Valley than was available through the crisis years. IDA Ireland considered this important in further developing the information technology sector in Ireland. Also, a key requirement for at least one Italian financial institution setting up in Dublin was that there should be a flight a day to Milan (there are three).

The wide range of destinations served from Dublin has been greatly facilitated by competition. Beginning with the advent of Ryanair in the mid-1980s, air fares were steadily driven down over the following 15 years. Previously airlines made money by charging very high air fares and serving a small number of business or well-to-do passengers.

The advent of competition resulted in a switch to a new equilibrium where airlines make money from carrying a high volume of passengers at a low cost. In turn, the high volume of passengers makes it possible for the airlines to serve a much wider range of destinations by direct flights.

It is interesting that the European model of air services has evolved differently from that of the US, partly as a result of competition. In most cases the cheapest way of getting from one European destination to another is by a direct flight. While there are regional hubs, such as Heathrow, Amsterdam, Frankfurt and Paris, which are useful for travel outside Europe, they are best avoided if a direct flight is an option, both for convenience and for economy.

Hub-and-spoke model

In the US, by contrast, the traditional carriers operate a hub-and-spoke model where many journeys within the US involve two flights, to and from a major hub. The result is a reduction in competition if you are not living at a major hub served by a number of carriers.

For example, while Minneapolis is a hub for Delta airlines, that airline has limited competition from other carriers at that city. Hence, many relatively short journeys from Minneapolis involve two very expensive flights to cover a distance that would be served by a direct flight in Europe at much lower cost. Because of the level of competition on the transatlantic routes, it can be cheaper to fly from Minneapolis to Dublin than to fly from Minneapolis to many other significant US cities not served by direct flights.

While the expansion of Dublin Airport was very badly timed, with Terminal 2 coming on stream just as the recession hit, it is now looking like a more sensible decision. If the traffic through the airport continues to grow, because Dublin is seen as a cheap and easy connecting point between Europe and the US, there may be a need to build an additional runway. Because of the cyclicality of air transport any decision on such a major investment should await clear evidence of a sustained future need for such an expansion.