State to lose €250m from airport price cut, warns DAA chief
Dalton Philips writes to Government with warning over proposed reduction
The State faces a €250m hit from lost dividend payments if the aviation regulator pushes through a cut in airport passenger charges, the CEO of DAA has warned.
Dublin and Cork airport boss Dalton Philips told the Sunday Independent that the cut proposed by the Commission for Aviation Regulation (CAR) would lead to "hundreds" of job losses at Dublin Airport and potential industrial relations problems.
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He said it would also mean a poorer service for passengers and slower growth, as infrastructure required for expansion would not get built.
The DAA boss also predicted a "nightmare scenario" for Cork and other regional airports, should the price cut proposed by the regulator go through.
Philips confirmed to the Sunday Independent that he had written to the Department of Transport, Tourism and Sport to alert it that, should the proposed 22pc cut in passenger charges pass, the State company will no longer be in a position to pay its annual dividend of between €40m and €50m each year over the next five years.
The CAR's proposed cut is supported by DAA's two main customers - Ryanair and Aer Lingus - but slashing the dividend would be "philosophically" wrong, said the DAA chief executive.
"Over the life of the next determination, that will be about €250m gone out of the State. That is money that could be used and invested in other State enterprises," he said.
Philips said that a 22pc cut in passenger charges will require a €32m drop in DAA operating costs by January 1, and that this will require "a couple of hundred" redundancies and seriously impact Dublin's growth as a hub airport for transferring passengers.
"What you would do is 'yellow-pack' the airport. The flawed logic of this means that we would have to get rid of people and instead rely on having more signs in areas such as our new transfer facility. We could do that but what sort of product would we have?" he asked.
"This is a good airport. Now, if the Irish State wants us to have a yellow-packed airport, we can do that. I come from retail; I know how to run yellow-pack organisations. But I didn't come here to run a yellow-pack organisation. I came here to help Dublin be at the epicentre of Ireland's economic recovery, and national aviation policy is to grow this airport," said Philips, who joined DAA after a career in retail.
He argued that Dublin Airport's passenger charges were already competitive compared with other similarly sized airports, and that a more than 20pc reduction in the maximum price it can charge airlines per passenger was unwarranted.
"We are the Lidl in terms of pricing out there. If you compare us to any of the other airports of equivalent size, we're 30pc to 40pc cheaper. And there aren't many organisations in Ireland that can say at a European level they are that much cheaper on any service," he said.
Philips said the cut was based on "flawed logic", which would leave the airport unable to borrow the money it needed to fund its development.
"You can't physically borrow the money. The State doesn't want to privatise the airport and therefore when we borrow money, we can't securitise our debt against the asset. Otherwise, you could end up with a situation where you have privatisation through the backdoor, some Chinese investors owning us, because in a downturn we couldn't repay and the assets (would be) taken off us."
A consultant report submitted by Ryanair to the regulator in support of the price cut said operating costs at DAA are too high and that there was "a track record of Dublin Airport failing in the past to behave as if it were in a competitive situation and it is still failing to do so".
But, according to Philips, operating cost per passenger at Dublin in 2018 was less than at similarly sized airports such as Gatwick, Vienna and Manchester. Operating costs have fallen 12pc per passenger since 2012, he said.
He added that the regulator's draft determination was based on "flawed logic" when it came to a suggestion that DAA's operating costs could be slashed to allow for the fall in prices.
"It has to be evidence-based if you're going to take a couple of hundred people out of your business," he said. "If you're going to say our operating costs are too high then where is the evidence when you compare us to other airports? And yet CAR has not done that. And if you are not going to talk about comparatives to other airports, fine. Bring in the industrial engineers, bring in the stopwatches; let's get the clipboards out, and let's measure how long it takes to clean a metre-squared of flooring, how long it takes to clean a toilet, how quickly it takes to process somebody in security, etc. They haven't done that either. So either benchmark us or get the stopwatches in. But you can't just choose an arbitrary number and say you are not efficient."
Airlines have argued that lowering the passenger charges at the airport will allow them to grow their businesses, but Philips said that the proposed €2 reduction would not be passed on by the carriers to their customers.
"The airlines are a stakeholder group that are on a quarterly reporting cycle, and we are not. So when the prices drop for airport charges, they [the airlines] get the benefit of it immediately. So Aer Lingus or Ryanair or Lufthansa, or whoever, gets €2 immediately.
"Based on our passenger numbers of 32 million, you're talking about a more than €70m direct wealth transfer each year to largely foreign-owned airlines who are making enormous returns."
DAA is planning to invest about €2bn in infrastructure over the five-year period covered by the regulator's passenger charge determination.
But the proposed cut would mean that somewhere between €500m and €1bn of that investment plan would have to be scrapped, he said. Without this investment, Philips is adamant that the airport will not be able to fulfil its goal of expansion to 40 million passengers - from its current level of 32 million - and that growth could stagnate.
"The great irony of all of this is that we sat down with the airlines and said we wanted to do all of this, costing €2bn. They were broadly supportive. We need the capacity, and everybody recognises we need the capacity," he said.
A cut at Dublin would also put regional airports, including DAA-owned Cork Airport, in "a really difficult situation" as they struggle to compete with Dublin.
"A €7.50 charge per passenger in the world I come from, which is retail, is like selling milk below cost. What happens is the regional airports will have to price under us or they will be out of kilter. At that point, I think they're in real trouble."
Asked if DAA would look to sell Cork Airport in that scenario, Philips said: "I think the whole regional airport model, not just Cork, is under huge pressure at that price. Cork would lose €8m to €10m a year. For Cork, that's a disaster."
He continued: "As CEO of the group, my challenge at the moment is to alert people to the pending danger of turning a virtuous circle of investing in infrastructure, bringing in new airlines, continuing to generate growth here in Dublin and in Cork, which is the fastest growing airport in the State, to a vicious cycle. What we do with Cork losing €8m to €10m... it's a nightmare scenario."
Sunday Indo Business