A rough week for Aer Rianta as regulator rejects ambitious plans

When Ryanair introduced its new service between Dublin and Edinburgh this week, Aer Rianta proposed making a presentation to the pilot on the maiden flight with champagne for passengers. But relations between the two firms are tetchy - and the budget carrier declined the frills. Aer Rianta had plenty of reasons of its own not to crack open the bubbly this week.

On Monday ambitious plans to spend up to £1 billion on capital projects were bluntly rejected by the regulator who sets passenger landing fees at its airports in Dublin, Cork and Shannon. Mr Bill Prasifka's 537-page ruling on tariffs said only £272 million of a £998 million programme should be recovered from landing fees. The decision enabled him to impose cuts in all tariffs from next year.

The ruling - which differed radically from a draft ruling published in July that envisaged increases in landing fees - was a severe setback to Aer Rianta. It also brought to a head months of backroom bickering, during which Mr Prasifka took Aer Rianta to the High Court over its failure to give him the information he needed to conduct his review. Also thrust into the open for the first time was criticism of Aer Rianta from the airlines that use the airports.

The Aer Rianta chairman, Mr Noel Hanlon, was quick to attack the report, claiming the firm could be left with "Third World" airports if the determination stood. Expenditure per passenger was greater in Rwanda, he said. Only the Aer Rianta board could decide what level of investment was required, said Mr Hanlon.

The chairman said Aer Rianta would plough on regardless with its capital programme. If necessary, it might sell the Great Southern Hotel group to fund it. It was a significant statement. Such a sale had been mooted in 1999, but politicians opposed it, most notably Mr Jackie Healy-Rae, the influential Co Kerry TD whose vote is crucial to the Government's majority in the Dβil.

The Commission for Aviation Regulation, which Mr Prasifka leads, was set up last February to depoliticise the issue. Its establishment unburdened the Minister for Public Enterprise, Ms O'Rourke, of a potential conflict of interest arising from her dual role as both Aer Rianta's sole shareholder and the person responsible for setting the rates its customers pay.

Mr Hanlon said he was "flabbergasted" by the determination, which he said was "fundamentally flawed". The company would appeal to Ms O'Rourke, he promised. The Minister indicated an appeal panel would be set up once Aer Rianta initiated the process.

The determination received a predictable welcome from the airlines, which accuse Aer Rianta of gold-plating its airports and providing unwanted facilities. Submissions they sent to Mr Prasifka showed considerable dissatisfaction with Aer Rianta's proposals.

Always the most vocal in criticising the airport company, Ryanair said Aer Rianta's plans were "extraordinarily profligate". "Absurd" is another word the company has used when referring to the plan.

CityJet said "full consultation and consensus" had not taken place and BMI British Midland had "serious concerns" about the content and scale of the plan.

Aer Lingus's submission was equally telling. Because it is also owned by the State, the airline has rarely criticised Aer Rianta in public. But as the airport's largest customer the airline has long expressed its dissatisfaction in private with aspects of the service it receives. Mr Prasifka's appointment fundamentally altered Aer Lingus's relationship with Aer Rianta.

In what was one of the longer submissions to the regulator, the airline said its requirements would be best met by a "simple halt to further gold-plating". It added: "Until - consultation has taken place, we do not see how any investment can be regarded as meeting user requirements, since the main users have not been consulted in any meaningful sense."

Aer Lingus said required no further development of the roads at Dublin airport. Neither were terminal building developments required nor those on the airfield. A proposed rail project was not required either, it said. Though generally pleased with Mr Prasifka's determination, it is understood that Aer Lingus might yet lodge an appeal against some of its elements.

The airline's comments were no surprise to Aer Rianta. When asked why he thought airlines opposed the capital plan, the chief executive, Mr John Burke, said such objections were always expected. Airlines operate in a cyclical business, he said, with an eye to the short-term. Airport investments took longer. If capacity becomes constrained, Mr Burke said it was airlines complained loudest. At the same time, he said airlines were reluctant to pay for the facilities they wanted.

Mr Prasifka's report was damning. It accused Aer Rianta of producing inefficient facilities that did not meet the requirements of airport users. It also said cost-benefit-analyses or business cases presented to justify new projects were "inadequate or non-existent". The regulator also cited the strength of the airlines' submissions when supporting his determination on charges. His ruling accepted that landing fee revenues per workload unit at Dublin airport were "lower than its peers". But it added: "The commission continues to believe that there is room for efficiency to be improved."

With this in mind, the determination forces Aer Rianta to reduce landing charges in Dublin this month. Mr Hanlon said an immediate rise at Cork and Shannon would not be imposed, even though rises were sanctioned by Mr Prasifka - in anticipation of reductions from next year.

Paradoxically, passengers are unlikely to gain from the lower charges. As Mr Prasifka pointed out, airlines operate in a deregulated market and they are free to charge whatever the market dictates for tickets.

Aer Rianta's head-on clash with the regulator means that plans central to its strategy have run aground twice in the past two years. In March last year Mr Burke said that the company could be floated on the stock exchange in mid-2001. The project was championed by Ms O'Rourke but some of her Cabinet colleagues did not like it. No decision was taken and none is expected before the General Election. Senior figures at Aer Rianta, understood to be very unhappy with the Government's dithering, still stand by the flotation plan.

A similar stance has been taken by Mr Hanlon over the capital investment programme.

It is not surprising as he could not with any credibility say that the company would walk away from the plan just because Mr Prasifka did not like it.

Capital expenditure is a cornerstone of any airport company's business plan. If the programme was abandoned, Mr Hanlon argued that Aer Rianta would be left with airports of "shanty town" quality in which the safety of passengers could be compromised.

Mr Prasifka, maintains the ruling allows Aer Rianta to recover the costs of all projects necessary to secure the safety of the airports and their expansion. Mr Prasifka was aided in his ruling by analyses carried out by IMG, a consulting group based in Washington.

The projects he will not allow Aer Rianta pay for out of landing charges include a new runway at Dublin, costing £100 million, and an internal rail system, also worth up to £100 million at Dublin.

In a six-page critique of the investment programme, Mr Prasifka wrote: "Aer Rianta was unable to provide the commission with adequate demonstration of the cost-effectiveness of its capital expenditure (capex) plan. Users expressed trenchantly critical views of the capex programme."

He rejected assertions by Aer Rianta that its plans were justified. "The commission sought information regarding Aer Rianta's proposed investments for the next five to seven years. In particular, the commission asked for the financial analysis performed to justify the investment - Aer Rianta responded: 'Not in existence.'

"Subsequently, the commission again sought cost-benefit or other financial justifications for Aer Rianta's investment programme. No adequate justification was received." Aer Rianta disputed Mr Prasifka's claim that it was not "transparent" when explaining its plans to the airlines, cargo- and ground-handlers who use the airports. Yet the regulator said the documentation provided "no evidence" of Aer Rianta engaging in a meaningful consultation process with users, particularly on project costs.

"The commission also notes that, at all times, Aer Rianta has provided such information as was given to the commission concerning its capex programme on the basis of strict confidentiality. "While this is not necessarily in conflict with the claim of full consultation, the commission notes that airport operators in other jurisdictions have published extensive descriptions of their future investment plans including, for example, detailed project-by-project costings and descriptions."

Still, Mr Hanlon claimed Aer Rianta had indeed submitted a "detailed project-by-project" analysis of its 10-year plan.

He said this was analysed in categories setting out capacity, replacement/refurbishment and safety/regulatory/environment. It had submitted 17 "expert reports" and conducted "consultation with various interested parties".

In addition, Mr Hanlon charged: "Aer Rianta also requested on numerous occasions meetings with the commissioner and his consultants to explain our capital plans and process. He refused to meet us."

Mr Prasifka said these claims were "highly misleading". It is understood that Aer Rianta cancelled a meeting with IMG after Mr Prasifka moved a High Court case in March against the company because it did not release certain data to him.

Later, the commission organised a conference call between its consultants and Aer Rianta. Mr Prasifka said: "We gave an opportunity to present their 'contextualised' capex programme in the conference call and they had very little to say." One commission source said: "They (Aer Rianta) wanted to see our consultants like a hole in the head. They spent the entire first part of the process trying to avoid them."

The State company later sought meetings with Mr Prasifka after July 26th, the statutory closing date for submissions to his office. These were refused because he wanted to observe "due process". Similarly, a submission on charges from the Department of Enterprise, Trade and Employment was not considered by Mr Prasifka's team because it arrived by post one day after the deadline.

"We dispute that absolutely," said Aer Rianta's spokesman when asked about "due process". "We believe he was treating us the same as all the other parties who made submissions. We're not the same as everybody else. We're the actual entity being regulated."

Thus did Aer Rianta join Aer Lingus, CIE and the ESB in a group of semi-States that has serious difficulty implementing core strategies.

As Mr Hanlon and Mr Burke mull over the appeal, the refusal of Ryanair to accept their hospitality is unlikely to be top of the agenda. Ryanair was not apologetic. Its spokeswoman said: "We would prefer that Aer Rianta would put the money to better use."