The dismantling of Aer Rianta simply does not make economic sense, writes Paul Sweeney
The decision by the Minister for Transport, Mr Brennan, to abolish Aer Rianta will not boost competition, but will lead to increased airport charges and to a devaluation of taxpayers' investment in the company. The proposed business model is bizarre and it is a risky strategy, which threatens jobs, wages and conditions. His plans to break the company into five parts, three airport companies and two subsidiaries, may be a genuine attempt to generate competition, but it will not succeed because his model of competition is flawed.
Three "competing airports" may sound like competition, but it is not effective competition because airports are natural spatial monopolies in their areas. There will be some competition for those who are between airports and for others who can get a low fare which makes the longer commute worthwhile, but studies show that the hinterland of an international airport is within a 90-minute drive from home/work.
Dublin Airport has a particularly large spatial monopoly in Ireland, accentuated by the high concentration of business and residents in and around the city. Furthermore, airport charges are already low at all airports and at €5.20 per departing passenger (in Dublin) they are also low as a proportion of the fare.
Thus, even if they could be reduced by so-called competition between airports, it would hardly influence passengers. Further, five major reports show that airport charges are too low and it is clear that they will have to rise to pay for projected investment. The abolition of Aer Rianta will not reverse this.
Further, the abolition of the company and its break-up into three airport companies and two subsidiaries, Great Southern Hotels (GSH) and Aer Rianta International (ARI), will eliminate the economies of scale and scope which exist in this Irish-based, integrated, multinational airport management company. It derives many benefits from the scale, not alone from the three Irish airports, but its management and part-ownership of Dusseldorf, Munich and Birmingham airports, and its retailing operations all over the world contribute to scale, scope and world-class management expertise.
Aer Rianta is the 30th largest indigenously-based multinational. It is one of the leading airport management companies in the world and makes substantial net profits, unlike some of its competitors. To break it up for some experiment in "competition" is risky. It makes as much sense to break up other Irish-based multinationals like CRH or IAWS. The consequent duplication of services in the three airports will cost around €2 million to €3 million, each year (and more for Dublin) in board, governance, legal, accounting, audit, regulatory, aeronautical costs and so on.
The airports at Cork and Shannon both lose money, with a loss of €9 million at Shannon and a loss of €3 million at Cork in 2002, but even when debts and interest payments are shifted to Dublin, Shannon would still have made a loss of €5 million and Cork of €0.9 million. While stand-alone costs are included in these regulatory accounts, they are presumably given at cost by the existing group.
When these charges are bought-in by small independent companies, they will cost a lot more, with the loss of economies of scale and scope. This will boost the losses further. Dublin made a good profit of €23 million in 2002, but with huge interest to be paid on net debts of between €250 million and €360 million, at say 6 per cent, the profit of €23 million would be reduced to somewhere between €1 million and €8 million. Thus all three airport companies will be reduced to penury by Mr Brennan's plan.
When the proposed €140 million Cork investment is finalised in a few years, Dublin will have a further €140 million debt on its books. It will not be making any profit. Thus it will be unable to fund its own urgent investment needs. This will put it at a severe competitive disadvantage to any privatised terminal in Dublin. Further, it will no longer be a first-class, profitable State company, but will have become a poor performer. Thus it will require private investment and private management to "turn it around".
Aer Rianta has been condemned for poor performance in the media, but compared to the road, rail, bus and waste infrastructure in Ireland and to the Luas project, it appears pretty good. It was forced by the Department not to invest in Dublin in the 1990s against its board's wishes. The chairman, Mr O'Hanlon, refers to this "chaos" which "was clearly the result of Aer Rianta not being allowed to proceed with the building programme in accordance with the Board's wishes". Such straight talking is unusual in annual reports.
The taxpayer has done extremely well from the investment in Aer Rianta. A total of €186 million invested is worth €403 million today. On top of this, at least €200 million has been paid out in cash in dividends to the taxpayer, plus taxes. It has also invested an average of €104 million each year over the past five years in assets. It has growth potential in Ireland and greater growth potential internationally. This valuable asset will be broken up and devalued by the Minister's plan.
There are other risk elements in this experiment, such as the State aid issues which would have to be overcome. Will the EU or the regulator allow the Dublin Airport Company to gift the proposed €140 million investment to the "competing" Cork Airport Company? How will Dublin manage cost and time overruns on the investment on which it is not a beneficiary?
Dublin looked as if it would be a clear winner as it already subsidises the other two airports and would be cut free from them. But Mr Brennan plans to saddle it with huge debts, which will eat into profits. It will immediately be forced to sell off the GSH to reduce its debts. Similarly Shannon, which is loss-making, even with Dublin paying its interest, will be forced to sell ARI. ARI would lose the skills, economies and expertise of the group when it is hived off to Shannon and, vice versa, the group will lose the international perspective of ARI.
Finally, Standard and Poors has already downgraded the company because of the Minister's actions and this will push up interest costs. A further downgrade is likely. None of the three airport companies on their own will even get into the banking hall of the big banks, never mind issue their own bonds, as Aer Rianta does today. These bonds are also under threat of downgrade.
Thus it is clear that Mr Brennan's "competition model" is not based on any serious examination of the reality of the aviation industry in Ireland and this may be why he is unwilling to have it examined by an independent, transparent expert group. The travelling public and taxpayer should beware of powerful aviation interests bearing gifts.