"Irish airports can fly higher through competition"

Wednesday, July 23, 2003

Opinion And Analysis
Airports can fly higher through competition - Notwithstanding the success of
Aer Rianta, things can be improved
By John Dunne
The Irish Times


On July 10th, 2003, the Minister for Transport, Mr Brennan, announced the
Government's intention to establish Shannon, Cork and Dublin airports as
fully autonomous authorities under State ownership 12 months from now.

The Chambers of Commerce of Ireland believe that this development will
unleash untapped potential in our three major airports, and thereby enhance
balanced regional development.

The proposal has received a barrage of criticism, virtually all of which
came from the unions.

In an article in The Irish Times last week, Paul Sweeney, an economic
adviser to SIPTU, sought to argue an economic case against the proposed
reforms.

We do not find the arguments to be particularly compelling.

The starting point of virtually every critique of the Government's proposal
to unbundle the airports is that Aer Rianta is a highly-successful company
in its present form. This is true, but it is also somewhat disingenuous.

Faced with a booming economy, an explosion in air passenger numbers and a
rocketing property market it would have been hard for an airport monopoly to
do less.

This is not to suggest that Aer Rianta is anything other than a well-run
company that deserves credit for its success, but it must surely justify
consideration of the possibility that, notwithstanding this apparent
success, the current arrangement is capable of improvement.

The second cornerstone of union critiques of the Government proposal sits a
little uneasily alongside the claims of Aer Rianta's commercial prowess.

It is the contention that Shannon and Cork airports are both inherently
loss-making, only surviving on cross-subsidisation by Dublin and the
non-airport subsidiaries - an arrangement that would be irretrievably
damaged by the Government's plans. This begs a number of observations.

Firstly, international studies suggest that airports with passenger volumes
of 1 million are viable, and those with 2 million passengers (both Cork and
Shannon) have critical mass to make the provision of ancillary services
(such as retail and franchising) attractive.

If this is the case, we must ask whether Aer Rianta is as efficient as it
might be if it cannot make either airport profitable with the passenger
levels they are now achieving.

And even if we chose to accept the argument that Irish airports can justify
cost structures out of line with international norms we can certainly
question why more has not been done to increase passenger numbers, and
therefore income, to solve the alleged problems of Cork and Shannon.

Mr Sweeney refers to the 'natural spatial monopoly' of an airport. He
suggests that this imposes a natural limit on the size of each airport, as
well as limiting the potential for competition between airports.

While the concept has some validity, I would suggest that in Ireland's case
we should be talking about overlapping catchment areas rather than natural
monopolies.

Indeed, the Aer Rianta argument against allowing Ryanair to 'transfer' its
subsidised Frankfurt routes from Shannon to Cork because it was essentially
the same route is a clear repudiation of the 'natural spatial monopoly'
thesis.

Overlapping catchment areas, with significant numbers of mobile passengers,
will not only enable competition between our three main airports but will
also offer the potential to increase the commercial strength of each
airport.

Given the distinct character of each airport, this competition has the
potential to be built upon differentiation rather than crude and destructive
price competition.

Mr Sweeney lays a good deal of emphasis on the economies of scale that will
be lost by breaking up Aer Rianta. This is a moot point at best. It may be
that the net effect of applying a centralised and standardised management
template based on an airport handling 15 million passengers to one handling
2 million is negative rather than positive overall.

Even if there was to be some (unquantifiable) loss of economy, we believe
that it would be offset by the energy and enthusiasm that each board would
bring to the development of its local airport.

And if each of the boards contains a suitable panel of senior business
figures, the alleged financial weakness of the new airport bodies (each of
which would, of course, continue to have State backing by virtue of State
ownership) would likewise be offset.

For an article that sets out to defend the status quo, some of Mr Sweeney's
arguments seem capable of a contrary interpretation.

He refers to five major reports that show that airport charges are too low
and will have to rise for projected investment (regardless of whether the
Government's plans proceed). Interestingly, he fails to factor this into his
analysis of the viability of the three companies elsewhere in his article.

More fundamentally, the prospect of increased charges, if unavoidable,
presents a very reasonable basis for introducing competition in order to
ensure that any such increases are minimised and applied in the most
economically efficient manner.

Figures cited by Mr Sweeney to indicate the value of Aer Rianta suggest that
it turned capital investments totalling E706 million into assets and
dividends worth E603 million against a background of significant asset
appreciation.

While we would not judge the company in such crude terms, this is the bottom
line analysis of the figures in last week's article.

Chambers of Commerce regard publicly-owned airports primarily as strategic
infrastructure serving local economic development rather than as creators of
asset value for the State. As such, we are neither convinced nor concerned
by suggestions that unbundling the airports will reduce the book value of
Aer Rianta once the process leads to individually stronger and more vibrant
airports.

Aer Rianta is a successful company but not the paragon of perfection some
would suggest. The economic challenges facing it justify consideration of a
new competitive regime to maximise efficiency.

All three airports have the potential to be commercially viable with their
current passenger levels, as well as having the potential to increase those
levels.

While there are risks associated with the new policy there are also
benefits, and we believe that the overall result will be good for consumers,
employees, the country.

John Dunne is chief executive of the Chambers of Commerce of Ireland.


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