Aer Rianta, Ryanair must do deal on charges

Seconds away, round three, in the Aer Rianta-Ryanair passenger charges battle. Aer Rianta has countered with a report it commissioned from PricewaterhouseCoopers (PwC) in London which supports the ending of its passenger charges discount schemes.

To recap, the issue is whether Aer Rianta is justified in ending discounts of as much as 90 per cent of its passenger charges and what effect this would have on tourism, jobs and the economy. Here, I must say that tourism traffic jargon is dreadful and airport charges are absurdly complex. But please bear with them.

Just before Christmas, neither Ryanair nor Aer Rianta could or would say what would be the effect on demand of each 1 per cent increase in ticket prices.

In this report, there is at least an estimate of how price-sensitive the market is. PwC says that for every 1 per cent rise in travel cost, demand drops by a factor of 1.5 per cent. This is crucial to assess the effect of the ending of discounts on tourism, tax revenues and jobs. The public interest argument hangs on this number.

The report calculates this effect on the basis of the total cost that a visitor to the Republic might budget for the trip. Average tourist spending in the Republic is £420 (#533.3). Add the cost of a two-way ticket, £82, based on the £41 average passenger (one-way) cost of a Ryanair ticket. This gives a total travel budget of £502.

The report takes an example of an increase of £4 in Aer Rianta average passenger charges per return visit. This is 0.8 per cent of the £502 total trip costs to the average visitor. Multiply 0.8 per cent by the price sensitivity factor of -1.5 and you get a decrease of 1.2 per cent in visitors to the Republic.

Ryanair claimed that it would bring an increase of 865,000 visitors to the Republic if the current Aer Rianta discount scheme remained. The report then estimates that 10,000 (1.2 per cent) of these Ryanair visitors would be lost by an average increase of £4 per return passenger charge.

Such a decrease in visitors would represent lost spending in the Republic of £4.2 million, of which £2.5 million would be lost to the Exchequer. This would also mean us foregoing 220 jobs.

Of course, potential visitors carried by other airlines would also decline. This report does not estimate the total number, since its terms of reference were confined to Aer Rianta's charges and it confined itself to rebutting Ryanair's case. For the economy, it would mean a loss of approximately 1.2 per cent of total airborne tourists, 3.3 million. That means 39,600 visitors lost, £16.6 million spending lost, £9.5 million lost to the Exchequer and 850 jobs lost.

What is the effect on Aer Rianta? An increase of £4 per return passenger would give Aer Rianta an additional £20 million from Dublin Airport, based on 1997 passenger numbers. This compares with £25 million in total Aer Rianta passenger fees in 1997, an 80 per cent increase. Big gains for Aer Rianta.

A fair argument is made, within the narrow scope of the report, for some increased charges. It is still not entirely clear why the airport passenger charges must cover all passenger costs since, as the report says, the "single till" applies. Revenue from other sources cannot be ignored. Aer Rianta's cost base and divestment of hotel businesses must also be addressed. What is the right answer? Ryanair's predictions of dire consequences to the economy and the Exchequer were based on the threat that they would not carry any of their potential 865,000 new visitors to the Republic, since they would not view the Dublin route as profitable enough. Clearly, this would be more serious than a loss of 1.2 per cent of all potential visitors to the Republic.

The PwC report assumes that the bulk of new and existing passenger business will be generated anyway, even if not by Ryanair. It does not accept that there would be a major loss of potential new visitors, beyond roughly 1.2 per cent. It would be a problem to the economy if these judgments were wrong. Since the threat of a diminished Ryanair commitment to Dublin has been made, the more acute public issue could boil down to calling the Ryanair bluff. It should not have to come to that.

Ryanair could concentrate its new business elsewhere, as it will eventually, but how does accelerating that process serve the public interest? The public interest is best served by low-cost airlines continuing to fly many millions of passengers to the Republic (not just to Dublin) and, also, by rationalising those horrendously complex Aer Rianta charges. A deal is needed, not a triumphal victory by one side or another.

Oliver O'Connor is an investment funds specialist.