T2 is ready, but it must pay its way
Built at a cost of €600m, Dublin's Terminal 2 could become a major European hub and gateway to the US , writes John Mulligan
Published 14/10/2010 | 05:00
Just recently, Dublin Airport Authority (DAA) boss Declan Collier was the guest speaker at the British Aviation Group's annual shindig in London.
Held at One Whitehall Place (it's normally held in the House of Commons), the swanky conference venue that once was home to the National Liberal Club provided the backdrop for what was an upbeat speech on our capital's airport.
Only passing reference was made by Mr Collier to the sharp decline in passenger numbers the airport has suffered amid the economic downturn.
Coincidentally, when the National Liberal Club originally opened its doors in the 1880s, it dedicated a library on the premises to the then Liberal prime minister, William Gladstone, whose mission was to "pacify Ireland".
Unfortunately it is economic pacification that the country has most recently suffered, and amid the greatest fiscal crisis Ireland has ever endured, one of the largest single construction projects ever undertaken in the state is almost ready to open its doors.
Built at a cost of €600m, Dublin Airport's new Terminal 2 is designed to handle 15 million passengers a year. The existing terminal, including recent extensions, arguably has the capacity to cope with about 25 million, but the airport's passenger throughput is likely to fall to between 18 million and 19 million this year. It slumped from 23.5 million in 2008 to 20.5 million last year. It makes the logic of opening a new terminal -- admittedly an impressive facility inside -- at a time when the DAA posted a €13m loss after exceptional items last year, a controversial tactic. Admittedly, passenger numbers remain higher than they were in 2004, but the difference now is the trend is down, not up.
Mr Collier has previously said that mothballing Terminal 2 until traffic recovers would send the wrong signal about the state of the Irish economy -- hardly reason enough to consider delaying its operational date. However, at this late stage it's a moot point. Last year, trade union SIPTU also called for the planned opening to be postponed.
"There is an acceptance that for multifarious and potentially litigious reasons the construction of Terminal 2 should be completed," said the union's aviation sector organiser Dermot O'Loughlin in a report.
"However it is the opinion of this report that it is economic, operational and social folly to open Terminal 2 anytime before 2015 as both the [passenger number] predictions of the DAA and within this narrative clearly prove there is no sound case to open this second facility," he added.
UK-based aviation expert Richard Chapman, who has undertaken consultancy work on airport development projects around the world, including a bid by international engineering group Jacobs in its unsuccessful attempt to win the tender to construct the facility, thinks that it could still be feasible to mothball elements of T2 in an effort to save money.
"You could, for instance, use T2 for departures but divert all arrivals to the existing terminal," he explains, conceding that the DAA was unfortunate in its timing in relation to its construction.
"It might end up being a bit of a piecemeal approach, but it would save money and that's the name of the game at the moment," he claims.
Had a public-private partnership (PPP) approach been adopted for the terminal construction and operation, Mr Chapman thinks there would have been a better chance that the overall construction cost could have been lower.
"I dare say if it was a PPP there would have been a very stringent review of the whole process," he claims, pointing out that there are numerous examples of very successful PPP airport construction projects all over the world.
A spokesman for the DAA said the question of constructing and operating T2 as a PPP never arose and maintained that the question of whether costs could be further lowered at the terminal by restricting its use, to for example, departures only was "irrelevant", as it's about to open. He stressed the project is built with a 30-year timeframe in mind.
Peter Morris, chief economist with influential UK aviation consultancy group Ascend, said that modular design of new airport infrastructure is increasingly common, where parts of new terminals can easily be left idle until they are needed, thereby reducing costs, and that such an approach would probably have benefited Dublin. He also said that PPPs, while sometimes akin to a "deal with the devil", are usually highly effective at airports, even where the facility might have to be operated under the auspices of a regulator.
"It's been a very effective model in the Middle East and the benefit is that you get a best-in-class operator. It's very difficult for the operator or owner of one airport to do everything the best way without having exposure to other airports," according to Mr Morris.
"Airport operators with other facilities can bring a number of benefits such as access to cheaper capital simply because of their size, while they have also learned from other airports and can undertake some operations centrally rather than locally, helping to reduce costs."
As it is, the DAA was faced with having to cut operational costs at the new terminal through lower wages than staff have traditionally been paid at the existing terminal, while its debt levels rise towards €1bn as a result of the overall €1.2bn capital spend at the airport to upgrade facilities. The airport will operate with 1,800 DAA staff -- the same number employed in 2008 with just one terminal.
A hike in passenger charges at the airport granted by the aviation regulator and obliquely ordered by Transport Minister Noel Dempsey is intended to assist with the DAA's fiscal requirements, but has been understandably slated by airlines at a time when passenger numbers have collapsed. The DAA continually insists that passenger charges at Dublin are among the cheapest in Europe and Mr Morris agrees that Dublin's charges do compare very favourably with other European airports, but still it's hardly an excuse to boost them by 40pc in the middle of a recession.
The DAA is also nervous about its credit rating, which can impact on its ability to raise funds and impacts on the cost of borrowings, and as such it needs the price increase to bolster its bottom line. Earlier this year ratings agency Standard & Poor's lowered its ratings on some of the DAA's bonds to BBB+, just two notches above junk with further downgrades possible as passenger numbers continue to decline.
Meanwhile, Ryanair chief executive Michael O'Leary, the most vociferous detractor of T2, has previously described the terminal as a "gold-plated white elephant", lambasting the DAA for what he says is a complete waste of money. But although Ryanair won't be using it, it could end up being one of the bigger beneficiaries of the new facility, as passenger numbers at the existing terminal are slashed when Aer Lingus and all long-haul traffic transfers to T2, creating what is certain to be a better overall passenger experience. Groups such as the IDA and the Irish Exporters' Association have, unsurprisingly, been supportive of T2.
Peter Morris also thinks that there's a "genuine opportunity" for Dublin to become a hub of sorts for trans-Atlantic traffic as Heathrow becomes increasingly congested. The DAA is already in talks with Air India in attempts to lure the airline into using T2 as a stop-off point for its US-bound flights, enabling passengers to clear US immigration and customs at Dublin.
"Stansted is a good example of an airport that was built with a very specific target market in mind that singularly failed to materialise," adds Mr Morris, pointing out that it rapidly adopted a focus on low-cost carriers.
"Out of misfortune came benefit and the airport actually enabled the rapid growth of a new business model within the UK," he says.
Whether Dublin Airport has the ability to become an attractive alternative for carriers to Heathrow or indeed other major European airports, is an unknown at this stage. In the meantime, the DAA is one of the state-owned assets that could conceivably be sold by the Government in its efforts to reduce the spiralling national debt. If that happens, it will be extremely interesting to see what type of valuation it achieves following the significant investment at Dublin. One thing is certain, T2 is going to have to make itself pay.