Turbulent times ahead as airports look to build a sustainable future
Published 12/01/2012 | 05:00
With passenger numbers falling and many airlines struggling, management at Cork and Shannon are looking for major reforms
To fanfare more reminiscent of a boom-time corporate party, the first flight to Dublin of Dubai-based airline Emirates touched down this week.
It's safe to say that the United Arab Emirates carrier has spent millions of euro to promote the route, the first out of Ireland to offer a three-class service.
But despite that massive outlay -- which included a shindig at Dublin's National Convention Centre last month with headline act Lionel Richie -- Emirates expects to make the money back within six months.
The airline's president, Tim Clark, said this week that advance bookings on the service have been exceptionally strong, and that Emirates will probably have to introduce a larger aircraft on the route sooner than anticipated.
It's no doubt music to the ears of the outgoing Dublin Airport Authority (DAA) chief Declan Collier, who sat alongside Transport Minister Leo Varadkar at Monday's Emirates gig.
The new service (which benefits from no or very low airport charges for the first five years) also comes as Mr Varadkar ponders a recently completed report by consultants Booz & Co that examined the future of the three state airports at Dublin, Cork and Shannon.
All have experienced passenger traffic slumps since the downturn, and the future of Shannon and Cork -- both of which are losing fairly significant amounts of money -- has been the core focus.
The Booz report has recommended that Shannon be hived off from the DAA and granted full autonomy with a new board structure. It's suggested that the airport could come under the joint control of bodies such as Clare County Council and Shannon Development.
For Cork, it recommends that the facility remain within the DAA's ambit, but that it be permitted greater autonomy than it currently has.
While Cork is losing money, Booz points out that it is profitable on an operational basis. Its €220m debt pile is weighing it down and pushes it into the red. In 2010 it lost over €10m.
The cost base at Shannon, which lost €5m in 2010 and has debts of about €100m, is too high, according to Booz, whose report comes nearly a decade after the separation of the three airports was first mooted by then transport minister Seamus Brennan.
But the long-term issue facing Shannon runs much deeper than its cost base. Just 1.6 million passengers used the airport last year -- substantially less than half the 3.6 million that passed through at its peak, in 2007. Luring new sustainable passenger traffic back isn't going to be easy, and in itself is not the answer to the airport's long-term viability.
Shannon Airport Authority marketing director Declan Power, who declined to comment for this article, was quoted last week as saying that before Shannon had a Ryanair base there were five or six foreign carriers serving the airport but that they were "driven out".
"Now we have to get back to the start again and go back to what we were good at and get other airlines to fly in," he told a newspaper last week.
For a number of years, Ryanair threatened to severely curtail its operations out of Shannon unless charges there were lowered. It later culled many services.
Earlier this year the DAA rejected what it described as an unreasonable proposal from Ryanair, where the airline sought €4.70 for every new passenger it delivered to the airport.
On top of that, it wanted landing charges waived for those new passengers and free office space and communications services. Ryanair insisted it would bring one million new passengers to Shannon by 2016 if its offer was accepted.
This week, Ryanair spokes-man Stephen McNamara said that Mr Power was wrong to lay the blame for a collapse in passenger traffic at Shannon on the airline.
But whatever the root cause of Shannon's traffic decline, it's clear that something very drastic needs to be done to afford it any kind of meaningful future.
The airport recently put in place a €1m route incentive scheme, but that's a plaster when surgery is the likely requirement.
"One of the benefits Shannon has is that it's a 24-hour operation, and it does have a strategic location," says Patrick Edmond, a former Cityjet executive who now acts as a consultant to the aviation industry.
But he wonders that if Shannon Airport didn't exist now, would it be built? The answer, he ventures, is probably no. He adds that there's demand for an airport somewhere between Galway and Limerick, but Shannon probably isn't the ideal location now for a facility of its type.
Mr Edmond maintains that executives at Shannon Airport have been doing their best, but happenstance has dealt them a tough blow.
President of the Limerick Chamber of Commerce, Kieran MacSweeney, claims that many of the current difficulties at Shannon arise from "inefficiencies and inadequacies" of government policy and the operational structure that's been in place. He insists that structure is "fraught with corporate governance conflicts".
He acknowledges, however, that the current economic climate has played a big part in dampening business at the airport and that the issue of its future needs to be urgently tackled.
"We would view Shannon Airport as one of the biggest priority issues to be addressed for the entire western region," he says. "It's quite evident that maintaining the status quo is the worst way to go."
Mr Varadkar is meeting with executives from Limerick Chamber of Commerce this month to discuss their views on the airport.
Mr MacSweeney is also adamant that Aer Rianta International (ARI) -- the DAA unit that operates its global duty free operations -- should revert to being a part of Shannon Airport in any organisational change. He says that's because the division was "spawned and nurtured" in Shannon.
But the DAA is highly unlikely to agree to such a move, even if it is Mr Varadkar's decision to ultimately make.
With a gross net debt burden approaching over €1.2bn, and net debt of €765m at the end of 2010, the DAA needs the cashflow generated by ARI to help fund its repayments and other costs.
A €600m bond issued by DAA Finance that matures in 2018 doesn't have any covenants attached, such as those that might be related to earning levels, however.
Shannon could also argue that it should have received proceeds from the sale of other DAA assets, including the authority's 24pc stake in Birmingham Airport. It was offloaded in 2007 for £210m (€330m at the time).
The new chairman designate of the Dublin Airport Authority, Arthur Cox partner Padraig O'Riordain, underscored the importance of the ARI business to the DAA at an Oireachtas joint committee hearing yesterday. He described it as a "very significant contributor" to the airports. In 2010, ARI generated a profit of €18.8m for the DAA.
"All that money gets ploughed back into the airports again," he said.
Born and raised in Cork, Mr O'Riordain also said that any separation of Shannon or Cork from the DAA is a matter for Mr Varadkar.
"The job of the board of the DAA is to implement Government strategy," he said. "My role . . . is to make sure that the DAA effects that in a way that works in a lasting way."
For both Cork and Dublin airports, their ability to withstand the current downturn is stronger than that of Shannon. Still, both face longer-term challenges.
Cork Chamber of Commerce president John Mullins -- the outgoing chief executive of Bord Gais -- has slammed the Booz proposal that Cork Airport be granted only some additional autonomy and not be removed from Dublin's fold.
He said that an independent local airport company with a strong balance sheet and a sustainable debt level and free from the control of the DAA is the "preferred outcome".
The chamber's chief executive, Conor Healy, says Cork Airport was originally promised by the Government that much of its debt wouldn't be left on its books, but that hasn't happened. He adds that Cork Airport has "a lot of potential", but claims it needs a genuinely autonomous board so it can fulfil that.
The airport's passenger traffic declined 12pc to 2.42 million in 2010, while for 2011 the DAA has reckoned the figure is over 2.5 million.
"We work closely with the airport, there's big business demand, and there's significant scope for expansion," Mr Healy argues. He also adds that the improved road network means Cork Airport's catchment area has grown.
Meanwhile, Mr Edmond believes that plans to develop Shannon as a freight hub could bear some fruit.
Last year, Texas-based Lynxs and the DAA signed a heads of agreement that saw them enter a due diligence phase on whether a major international cargo base could be a success at Shannon.
A decision on whether or not to advance to construction of the project is likely to be made towards the end of this year.
Mr Edmond believes that Shannon could conceivably attract business from North America, where freight firms could transport goods to Shannon which are then shipped onwards to destinations in Africa for instance.
Whichever way Mr Varadkar and the Cabinet ultimately act on the Booz recommendations, there's certainly likely to be unhappy parties in all the airport camps.
What's certain, though, is that the issues surrounding the future of those airports need at last to be addressed. And in that sense, whatever decision is made will at least let the state-owned airports know where they stand.