Regulator's Aer Rianta plans raise serious concerns

The aviation regulator's proposal to allow Aer Rianta increase the charges it levies airlines for using Dublin, Shannon and Cork…

The aviation regulator's proposal to allow Aer Rianta increase the charges it levies airlines for using Dublin, Shannon and Cork airports raises a number of serious issues.

As the implications sink in of regulator Dr Bill Prasifka's document, which was published last week, the difficulties confronting Aer Rianta will also sink in. It will be impossible for the Government to sell or float Aer Rianta until the impact of the regulator's charge structure has been absorbed by the company and a convincing plan put in place.

This will involve a wide policy change. It may require a new company board to make the change plausible to lenders and any new shareholders.

The draft "determination" concerns charges Aer Riant a should be allowed to impose on users for five years, starting at the end of September. The regulator's draft report allows a rise of approximately 9 per cent at Dublin Airport, averaged across a range of controlled services. It leaves Aer Rianta free to decide how to price different services within the overall price cap, but it warns that Aer Rianta is subject to competition law in how it prices services to different airport users.

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At Shannon, the regulator would allow a rise of approximately 30 per cent and at Cork about 94 per cent. All three price caps would be increased in line with inflation.

The rise of only 9 per cent in total over five years at Dublin will be particularly grievous to Aer Rianta. While it did not apply to the regulator for any particular increase, chief executive Mr John Bourke said recently that current landing charges of £4.22 (€5.36) per customer are too low and "will have to be doubled".

In effect, the regulator's tight price cap will compel Aer Rianta to "go for growth" in traffic at its largest airport if it is to get sizeable revenue increases and be able to afford heavy investment in infrastructure and facilities. Going for growth might force it to offer Ryanair (and all other airlines) sweet enough deals to open new routes, plus "basic" landing fees for using only basic facilities.

At Cork and Shannon, the much higher rises in airport charges offered by Dr Prasifka are a double-edged sword. They seem favourable but, if actually applied, they might stultify traffic or even reduce it.

Aer Rianta will also need to squeeze costs. The regulator has included in his calculations an improvement in the international cost competitiveness and operational efficiency of Dublin and Shannon airports.

He estimated the scope for operational improvement at Dublin at 29 per cent, measured by the best of its peer group (Brussels, Copenhagen, Glasgow, Oslo and London Stansted), but requires only a 15 per cent improvement over five years. Cork, he found, was operating efficiently. Shannon had costs "considerably out of line" with its peer group, so he requires it to make a 25 per cent operational efficiency improvement over five years.

By making these improvements, Aer Rianta can improve its results and thus its ability to pay interest on borrowings.

The regulator has slashed the amount that he proposes to allow Aer Rianta to claim in its "regulated asset base" by £21 million to take account of the spending that would have been justified to erect "a hypothetically efficient equivalent to pier C" at Dublin Airport.

According to Aer Rianta, Pier C was opened in 1998 and cost £31 million. Dr Prasifka has disallowed two-thirds of what Aer Rianta spent.

Of course, if it cost Aer Rianta more than it publicly announced, then the regulator's devaluation would be correspondingly reduced in percentage terms.

Dr Prasifka should clear up this mystery. His £21million cut seems to be an example of a regulator stripping out the notorious "gold plating" that features in regulatory literature. The term covers the way monopolists boost their capital base unnecessarily by "gold plating" infrastructure. They do this so their permitted earnings (calculated as a percentage of the capital base) can be boosted. This happens at the expense of users - in this case, air travellers and airlines.

Dr Prasifka has also slashed the allowable value of the new terminal building at Shannon by £7 million, which Aer Rianta said cost £28 million.

Of Aer Rianta's future capital expenditure (Capex) proposals, Dr Prasifka said: "With the exception of projects justified by reasons of safety, Aer Rianta has not adequately justified its planned Capex programme." He has allowed only a cut-down version, of which he gives a financial summary. He does not reveal the size of his cut compared with Aer Rianta's original, confidential request.

Dr Prasifka's proposals are now open to public consultation with a July 26th deadline for submissions.

Andrew Whittaker is editor of Competition. This is an abridged version of an article which appeared in that publication.