Keeping tabs on costs at booming Dublin Airport

Dublin Airport passed yet another milestone recently when it handled more than 100,000 travellers in a single day. This week it released figures showing that 13 million people travelled through there in the first six months of this year, teeing the airport up to top 2015’s record-breaking 25 million passengers.

While the momentum could slow, it appears almost certain that the airport will continue to grow in the near future.

Last year's numbers meant that Dublin revived previously mothballed plans for a second runway. The project will cost €320 million, €70 million more than the €250 million that the airport's manager, State-owned DAA agreed with the Commission for Aviation Regulation (CAR) in 2014.

Under that settlement, the DAA can add 59 cent to its passenger charges, which are capped at €9.87 a head for this year, to pay for the new runway. Airline customers such as Ryanair and Aer Lingus, which pay those fees, support the new runway plan but question whether the €70 million increase is justified. They fear that they will have to cover the extra cost.

Dublin’s size means it is the only airport in the Republic whose charges are regulated. The other gateways, including the State- owned Cork and Shannon, can impose whatever fees they want on airlines for handling their passengers.

The regulator, an independent agency, sets the charges every five years after a consultation process that generally descends into a wrangle between the regulator, the DAA, the airlines and the Government. Last time around was pretty typical. In May 2014, the regulator recommended that the airport cut charges from its then maximum, €10.68 a head to €8.35 over the five years to 2019, an overall reduction of 22 per cent.

The airport authority responded by warning that such a move could force it to cut 650 jobs. It wanted charges capped at €13.50, but pledged not to raise them by more than the rate of inflation. Ryanair and Aer Lingus both backed the regulator’s plan as it would cut their costs.

However, the then minister for transport, tourism and sport, Paschal Donohoe, stepped in and directed that the regulator protect Dublin Airport's financial viability and have regard to its role as a the Republic's main international gateway.

This outraged the airlines, which accused him of interfering. However, the legislation governing the system, the Aviation Regulation Act, does allow ministers to give directions to the commission.

Ultimately, the regulator ruled that Dublin Airport should cut charges from its €10.68 cap in 2014 to €8.68 in 2019.That amounted to a cut of 18.7 per cent over five years – not as much as the 22 per cent originally proposed, but still substantial. The settlement provided for €340 million in capital spending and an allowance for the new runway.

However, the regulator did not really believe that Dublin would need it. Chairman Cathal Guiomard predicted at the time that passenger numbers would grow to 24 million by 2019 and hit the 25 million "trigger" for the new runway in 2024. The reality has left those figures far behind.

It has also disproved virtually all the worst predictions made in the course of the debate over the charges in 2014. Far from letting workers go, the airport authority noted proudly in January that, between this year and last, it would actually hire 350 extra people.

In a similar vein, airlines have been adding capacity at Dublin despite saying that the passenger charge cuts did not go far enough and warning that this could hinder growth.

Financially viable

As the airport is profitable, attracting passengers in record numbers and carving a niche as a transatlantic hub, it also appears to be meeting the Government’s aims of staying financially viable while acting as the main gateway to the Republic.

So even if its predictions were short of the mark, the regulator’s 2014 ruling ultimately delivered for everybody – consumers, the airlines, the airport manager and the State.

Nonetheless, when it published its National Aviation Strategy last year, the Government pledged to review regulation at Dublin Airport and hired economic consultants Indecon to do the work. The Department of Transport, Tourism and Sport published that report this month and the various interested parties now have until next Friday, July 29th, to submit their responses.

Indecon’s bottom line is that Dublin Airport’s market power is such that it should remain regulated. The EU requires this and others, notably London Heathrow, are subject to a similar regime. Dublin is the main – or only – choice for many consumers, which in turn limits airlines’ options for switching capacity to Shannon or Cork. The carriers themselves have some bargaining power, but not enough to counter the gateway’s dominance.

“The balance of evidence is that economic regulation of charges at Dublin Airport is currently required to ensure consumer interests are safeguarded,” Indecon says. “As a result, continued economic regulation is recommended.”

The consultants advocate sticking with the current system – that is, where the regulator sets the maximum that the airport can charge per passenger over a five-year period following consultation with all those involved. Indecon says changes should focus on incentivising efficiency and ensuring that investment proposals are warranted.

It does argue that the law should be changed to limit the minister’s power to give directions to the regulator when it is setting charges. Indecon says this undermines the perception that the process is independent, a point with which the airlines agree strongly.

Once the minister invokes the power, the regulator is obliged to follow his or her direction. Donohoe was not the first to use it. In fact, politicians almost always step in. In 2009, Noel Dempsey also intervened to ensure that the airport authority had enough money to built Terminal Two, a project that particularly incensed the airport's biggest customer, Ryanair.

The Indecon report argues that the power to intervene should be scaled back to deal only with issues of national importance, such as security or international obligations, that legislation cannot address. Indecon also states that the minister should only issue directions on capital spending at the airport where the projects have first been subject to a rigorous cost-benefit analysis.

While they are keeping their powder dry until they make their own submissions at the end of the month, it is understood the airlines want the minister’s power limited. They feel that not only have politicians always stepped in to the process, they have always taken the airport’s “side”.

The airlines also have views on the appeals mechanism through which any party can challenge the regulator’s final determination. Currently, if an appeal panel is needed, the minister appoints the members on an ad-hoc basis. Indecon says this should be replaced with a permanent panel with government appointments.

With an eye on taking the heat out of the rows that characterise the consultations, they suggest establishing an independently chaired group with representatives of DAA, the airlines and other relevant parties.

In broad terms, Indecon’s report recommends ways of making the current system of oversight more robust and independent. However, the document does make some more radical suggestions. The ones that stand out are the introduction of competition between terminals one and two – or any new ones that the airport authority might build – and the question of building a new airport to serve the capital.

Indecon’s logic for each of these is essentially that regulation is necessary where there is no real competition, therefore introducing competition would reduce the need to regulate. While none of the significant players wants to go on the record ahead of making their formal responses, nobody within the industry sees either proposal as a viable option.

Planning hurdles

Dublin Airport must negotiate a number of planning hurdles before it can get its new runway off the ground, primarily a condition limiting the number of flights between 11pm- 7am to 65. In light of that, sources believe the level of public dismay likely to greet any proposal for a new airport makes it a non-runner.

Competing terminals meet less scepticism. The only difficulty is that in some ways, the two existing terminals are serving different markets. Sources point out that, as Aer Lingus, Etihad and Emirates use Terminal Two, it has a greater concentration of long-haul business. At the same time, as Terminal One is home to a number of EU carriers and significantly Ryanair, which flies mostly within Europe, it has more of a focus on shorter-haul traffic.

To be fair, Indecon agrees that these proposals are not of immediate relevance and are unlikely to happen before the charges review in 2019. It does argue that they merit detailed consideration in the medium term. More realistically – and more immediately – it stresses that one of regulator’s statutory obligations should specifically include promoting competition.

Most observers agree that competition has generally delivered for those flying in and out of the Republic. Flying is cheaper and there is more choice. Dublin now offers almost 180 destinations at peak season.

Indecon’s logic is that more competition should be good for the airport, However, in the absence of that, the only way to ensure that passengers get the best deal is robust and independent regulation.