Aer Rianta flying solo on charges

We are an island economy. It is vital to our national interest that we have low-cost transport links with Britain and continental Europe.

We each have a personal interest in low-cost air transport through the combination of low-cost airport facilities and airlines. Think of a person who earns £5 an hour. The difference between a £500 return ticket to Paris and a £120 ticket represents 76 hours' work - two weeks' labour, before taxes. That sort of money should never go to padding an airline or an airport management company.

Ryanair prides itself on being "the low-cost airline", a justifiable claim.

Aer Rianta's mission statement is "to provide safe and efficient facilities and services at the lowest possible cost" to its customers.

Aer Rianta is planning to wind down its discounts on airport and passenger charges to airlines. It is irrelevant that this does not represent an increase in the published charges. The effective charges are what matter.

Until recently, it has stated that from 1999, there will be no new passenger discount scheme. This would mean that Aer Rianta would charge £3.80 per passenger one way (£7.60 return), rather than the 38p it charged this year.

It now has consultants examining its entire pricing structure, and any stay of execution on duty-free could change things. It would be breathing space only.

Aer Rianta is hugely dependent on shopping revenues: its 1997 accounts show that £88 million of its total airport revenues of £203 million came from shopping. Of the £88 million, £68 million was generated in Dublin airport. By contrast, £39 million arose from airport and passenger charges in all airports. Half of Aer Rianta's £41 million profit was derived from duty-free sales, of which we can assume most were in Dublin.

Aer Rianta chief executive John Burke, knows he must reduce the dependency on duty-free and shopping in general. He wants to rebalance Aer Rianta's revenue sources.

If Aer Rianta were privately-owned, it would be impossible for it to compete for investors' capital with this enormous dependency on tax-based income. It is simply not good business to invest in something so dependent on political manoeuvrings, a risk not amendable to management and an income source with a short remaining life.

Aer Rianta won't confirm the likely effect of ending discounts on new business at Dublin, but it is thought that the income from landing and passenger charges could be up £8£10 million next year. Passenger growth of approximately 1 million over 13 million, or 8 per cent, would deliver a lot of this additional revenue.

Aer Rianta says that increases in passenger numbers with present discounts would generate no new profits. It says its own aircraft landing and passenger charges are currently priced at unprofitable levels.

To justify the rate increase, Aer Rianta would have to demonstrate that it has no possible means left to cut costs. This is not yet proven, to say the least.

The company has ended up in 1998 with unsustainable cross-subsidies. It also has a horrendously complex charging structure, something it should never have allowed to develop.

These are being addressed. But they cannot be addressed fully without a hard look at costs and at the what level of return the State should expect from a State business seeking to deliver services at the "lowest possible" cost.

A return on capital of 20 per cent last year is very high, given estimates of a 9 per cent cost of capital to private airport operators.

A long-term, stable, low-cost pricing structure is what Ryanair wants. This should not prove impossible to deliver.

The more important question is the effect that pricing change will have on the economy as a whole. Will fewer tourists come to Ireland if a new Ryanair fare has to be £57 next year rather than £49? If no discount scheme is in place, the higher airport costs on a new passengers will be felt most at the low price end of the market, the tourist end. Can this be good for the economy?

The public interest demands a comprehensive economic impact assessment of proposed Aer Rianta pricing changes on the State as a whole, and not just on Aer Rianta. Only then should ministerial approval for changes be given. The State would also do well to review its opportunistic £5 ticket tax, which raised £15 million last year, putting the Aer Rianta charges in context.

Next on the agenda will be the strategic future of Aer Rianta. It can only really become a great company by competing directly for customers and by competing for capital.

Oliver O'Connor is an investment funds specialist.