Committee Reports > List of Committees > Joint > 1979 > Committee on Commercial State-Sponsored Bodies > Report No. 06 - Aer Rianta Teoranta

SIXTH REPORT

AER RIANTA, TEORANTA

I INTRODUCTION

1.1 Background

1. Aer Rianta, Teoranta has existed as a company since 1937. Originally it was set up as the holding company in Aer Lingus and later Aerlínte, and in 1941 it was given responsibility for the management of Dublin Airport on an agency basis on behalf of the Minister for Industry and Commerce. In practice, however, the functions of Aer Rianta and those of the national airline were intertwined to a considerable extent. Under the Air Companies Act, 1966 the total shares of Aer Lingus and Aerlínte were transferred to the Minister for Finance and Aer Rianta relinquished its function as a holding company but continued to act as an agent in managing Dublin airport. Under this Act a new Board of Directors was appointed and arrangements were made for the separation of the functions to be performed by Aer Rianta from those performed by Aer Lingus.

2. By 1 April 1969, the separation of these functions had taken place and Aer Rianta assumed the additional responsibility of managing Shannon and Cork airports on an agency basis for the Minister for Transport and Power. The Shannon Sales and Catering Organisation which operated under a separate arrangement was integrated with Aer Rianta on 1 April 1973.

3. At present Aer Rianta is a State Company responsible for the management and development of Cork, Dublin and Shannon Airports on an agency basis for the Minister for Tourism and Transport. Airport services operated directly by Aer Rianta are airport management, airport design and planning, construction and maintenance, security, fire fighting and rescue, car parking facilities, shops and general catering facilities. Aer Rianta also directly operates a number of ancillary activities including mail order and tourism services. Ground handling of aircraft and passenger and cargo handling services are provided by Aer Lingus on behalf of Aer Rianta. In addition, a number of concessions are operated at the airports under contract with Aer Rianta. A number of air traffic control and communications services are provided by the Department of Tourism and Transport, while customs and immigration services are provided by the Revenue Commissioners and the Department of Justice respectively.

1.2 Legal Character

4. Aer Rianta is a public limited liability company incorporated under the Companies Acts. The Company is obliged to submit audited annual accounts and other reports directly to the Minister for Tourism and Transport.

5. Pursuant to the Air Companies Act, 1966, the authorised share capital of Aer Rianta is £60,000 divided into 60,000 shares valued at £1 each. At the end of 1978 the issued share capital was £51,269. The Minister for Finance holds 51,262 of these shares and the remainder is held by the Board members and the Secretaries of the Department of Finance and Department of Tourism and Transport.

6. All fixed assets are vested in the Minister for Tourism and Transport under the Air Navigation and Transport Acts—capital expenditure under these Acts to 31 December 1978 was £38.5 million. Consequently, fixed assets are not included in the Company’s balance sheet. The balance sheet discloses only current assets and liabilities with a resultant surplus which accrues to the Minister for Tourism and Transport.

7. The Board of Aer Rianta, which consists of five members, is appointed by the Minister for Tourism and Transport with the agreement of the Minister for Finance. Since Aer Rianta is not a designated company under the Worker Participation (State Enterprises) Act, 1977 there are no worker directors on the board.

8. A General Management Council, consisting of six senior company executives including the Chief Executive, executes Board policy and assists the Chief Executive in formulating policy submissions for consideration by the Board. Direct responsibility for the execution of Company policy and day-to-day performance rests with the Chief Executive.

II COMPANY OBJECTIVES AND ACTIVITIES

2.1 Company Objectives

9. In its submission of March 1979 to the Joint Committee,¹ Aer Rianta stated its corporate objectives as follows, to:

—Generate sufficient revenue to cover costs and provide sufficient investment funds,

—Manage the three major airports,

—Maximise revenue earning potential of commercial activities,

—Develop a properly skilled and satisfied workforce, and

—Promote good relations with local communities.

The Joint Committee believes that for objectives to be useful to management in decision making they must be spelt out in operational terms. Vague objectives mean that too often resulting performance is not assessed against sensitive evaluative criteria. Objectives stated in operational terms carry with them the implication that somebody will do something or that certain behaviour will be evaluated in a pre-specified manner. In this regard the Joint Committee requested Aer Rianta to specify in operational terms the objectives it had set itself.

10. In response to the aforementioned request from the Joint Committee, ² the Company described its operating objectives as:

—Providing airport facilities, both in terms of the range of services and of physical accommodation, up to the highest standards attainable within the financial resources available,

—Operating these facilities as economically, efficiently and profitably as possible, having regard to:

—the need to keep charges to public and airlines at an acceptable level, and

—the need to maintain staff numbers, conditions of service and rates of pay at levels mutually acceptable to the company and the unions, and

—Developing profitable ancillary activities to the maximum extent possible.

Under present circumstances Aer Rianta does not foresee any fundamental change in these operational objectives within the next five to ten years.

11. The Joint Committee accepts that within the existing framework of its agency agreement with the Department of Tourism and Transport, Aer Rianta is not in a position to set operational objectives in precise terms.³ The scope and nature of the facilities which the Company operates are determined to a large extent by capital availability and by international aviation standards, both of which are outside the immediate control of Aer Rianta. In this context the Joint Committee fully accepts that the Company’s principal objective is to operate at a level which will provide a surplus to the Minister for Tourism and Transport.

12. In addition to the economic objectives, Aer Rianta attempts to achieve a number of social objectives particularly through the development of tourism in the Shannon region and the promotion of Irish goods and materials.⁴

13. The Joint Committee accepts that from time to time Aer Rianta may face a conflict in attempting to achieve its stated objectives. The difficulty arises due to the dual role the Company is expected to play in the aviation industry. On the one hand Aer Rianta acts on behalf of the Department of Tourism and Transport as the regulation agent [e.g. international safety standards and international requirements for runways] and on the other hand it plays the role of manager of the three national airports. The Joint Committee believes that the decision making role and the regulatory role should be separated in organisational terms.

14. Although Aer Rianta is consulted and makes recommendations on capital investments, the final decisions are not taken within the company because the Minister for Tourism and Transport holds the Company’s fixed assets. In this regard the Joint Committee accepts that it is difficult for a company to maximise its revenue earning potential if it does not control its investment decisions; investment decisions based on the year to year budget system are not suited to airport planning and management.

2.2 Company Activities

15. In achieving company objectives Aer Rianta’s activities consist of traffic operations (landing and accommodation of aircraft and passenger loading) and commercial activities (airport shops, catering, tours and mail order) both of which are related to the movement of aircraft passengers and freight. With regard to traffic operations the Company is responsible for the management and development of Cork, Dublin and Shannon Airports as agent for the Minister for Tourism and Transport which means that, among other things, the Company must make projections of passenger and cargo traffic for considerable periods into the future if it is to achieve its stated overall objective. The Joint Committee accepts that since the life of many airport fixed assets exceeds 20 years it is difficult to make accurate forecasts to cover such a long period. Nevertheless, for its traffic operations the Company does plan on the basis of periodic forecasts provided by specialist agencies.⁵ However, these forecasts refer only to terminal traffic and to date have not been very accurate and are therefore of limited use for planning purposes. In Aer Rianta’s experience it has not been possible to forecast transit traffic with any degree of accuracy and this particularly affects the Company’s planning for Shannon which depends to a large extent on transit traffic. To overcome these forecasting problems the Company keeps in constant touch with the market and liaises closely with other related agencies.⁶

16. In regard to traffic operations Aer Rianta has responsibility for the general co-ordination of all airport activities including general aircraft traffic management, apron control, flight information displays, telephones, public address and baggage trolleys. The Company is also responsible for airport security, fire fighting services, airport design, planning, construction and maintenance and airport traffic development at each of its airports. Airport traffic development is carried out in conjunction with the airline companies of which there are in excess of 75 registered operators using the airports. Most of Aer Rianta’s traffic operations revenue comes from aircraft landing fees, passenger load fees, rents, concessions and car parks. While most airport services are provided directly by Aer Rianta there are a number of ground services provided by Aer Lingus on behalf of Aer Rianta which are normally the responsibility of an airport authority. In most situations this arrangement works well in practice, but two airlines queried the widespread use of the approach, particularly at Shannon.⁷ In addition, another airline suggested that improved landing facilities similar to those available in other European airports be installed at Irish airports.⁸ The Company’s most important items of expenditure are those for building maintenance, security and fire fighting services, salaries and wages.

17. Commercial activities in Aer Rianta refer to the provision of shopping, catering, mail order and tour services. In 1978 a total of 691 Aer Rianta staff were employed in these activities. The more lucrative duty free and VAT free shops are owned and managed by Aer Rianta. The Company also controls a number of additional commercial outlets such as banking, car hire, and some shops but these are operated on a concession basis. Traditionally, most of the shopping activity by passengers was concentrated at Shannon but now with duty free sales to passengers travelling to U.K., the commercial activity at Cork and Dublin has increased substantially. In addition to the shops, Aer Rianta controls or manages a number of other commercial activities. Catering services are provided at airports and are divided into flight victualling and ground catering (restaurants and snack bars). Flight victualling is provided by Aer Lingus at Dublin, by a concessionary at Cork and by Aer Rianta itself at Shannon. Ground catering services are provided by Aer Rianta at Dublin and Shannon. Ground catering at Cork is operated on a concession basis. Aer Rianta, in conjunction with S.F.A.D.C.O., operates a comprehensive tourism service covering tours of the Shannon region, banqueting and a holiday reservation service linked very much with Shannon Airport. The Mail Order Division of the Company at Shannon concentrates on the selling from catalogues of many goods to overseas buyers particularly those resident in the United States. The mail order business is not dependent on passenger traffic; over three million catalogues are mailed each year to the United States.⁹

In a typical year sales from mail order approximate £3 million. This compares with about £7 million sales through the shops at Shannon.

The Joint Committee notes that mail order represented a diversification in Aer Rianta’s activities and that because it is independent of traffic operations it provides a useful source of revenue, particularly to an airport such as Shannon which experiences the vagaries of transit traffic.

III CAPITAL STRUCTURE AND PRICING POLICIES

3.1 Capital Structure

18. The accumulated capital of Aer Rianta is approximately £40 million which at replacement cost would be valued at about £250 million. ¹⁰ Present and future capital needs of the company are confined to the need for additional buildings and plant as over the years sufficient lands have been acquired at the three airports. Capital expenditure for the acquisition of lands and buildings at airports is controlled by the Department of Finance and capital expenditure for constructional work at airports including the furnishing of buildings is controlled by the same Department acting through the Airports Construction Committee. The demand for capital is cyclical: in the late sixties and early seventies the company built new terminals at Dublin and Shannon and since then capital requirements for these airports have been limited. However, by the middle of the next decade it is expected that about four million passengers will be passing through Dublin Airport and this will give rise to the need for the planning in 1981/82 of further capital investment at that airport.¹¹ Aer Rianta anticipates that it will require an additional £30 million during the next five years to cover planned capital expenditures. ¹² While a reliance on the public capital programme for investment funds did not produce undue restraints for Aer Rianta in the past, the Company argues that because airport investments are such a long term proposition it should be free to raise its own capital as the need arises.

19. A company may finance its capital expenditure from internal sources (surpluses) or it may attempt to do so through borrowing. For major capital investments it is more equitable to borrow capital since financing from internal sources means that a company is penalising current customers and users of its services through higher prices, rents, and fees. In an autonomous situation Aer Rianta believes it could continue to maintain its service to the public and to the airlines by maintaining an adequate capital programme financed from retained earnings.¹³ While the Joint Committee recognises the constraints at present facing the Company it also acknowledges the difficulties the Company could face in an autonomous situation in regard to its proposed method of financing capital investments.¹⁴ When a company is contemplating making capital investments it must compare the expected benefits to the project with its costs. The benefits of an investment at an airport occur over time since buildings, runways, aprons, have life spans of up to 20 years in some instances. Therefore, in planning investments it is necessary to discount the cash flows by an interest rate which would reflect the productivity of capital. The Joint Committee expresses its concern that under the present method of financing capital investments and under the method proposed, should Aer Rianta become autonomous, it will not be possible to derive an accurate evaluation of the expected return from different investments. Consequently, the Joint Committee suggests that Aer Rianta adopt a suitable investment appraisal technique such as discounted cash flow in planning investments irrespective of the source of the funds.

20. In recent years inflation has become a problem in investment appraisals. In investment appraisal there are at least two ways of taking inflation into account (a) the rate of inflation is estimated and added to estimated annual costings—a simple percentage figure is added to the required rate of return, and (b) the profits of a particular project can be deflated by using an index based on the expected rate of inflation and the resulting series is discounted by the normal rate of return. In Aer Rianta the first policy is followed in that cost projections contain an element of inflation and the Company expects its surpluses to rise with inflation.¹⁵

21. In regard to depreciation policy, a company may decide to use historic cost or replacement costs. Generally, depreciation on the basis of historic cost will not provide sufficient funds to finance the replacement of assets when required. Nevertheless, Aer Rianta believes that a depreciation policy based on historic cost is the more appropriate for the Company since it expects its income to be sufficient to cover investment needs.¹⁶

22. Aer Rianta’s balance sheet does not contain an entry for fixed assets. The fixed assets are vested in the Minister for Tourism and Transport. All the balance sheet discloses are current assets and current liabilities. Consequently, it is not possible to determine a return on capital employed by the Company and difficult to apply conventional investment criteria to new investment projects. In this regard it was stated in evidence that the accumulated capital debt was in the region of £40 million which if written down on an historical cost basis would result in a figure between £20 million and £23 million which means that Aer Rianta is obtaining a gross return on investment of between 16 and 19 percent.¹⁷ The Company believes that this level of return would allow it to operate independently in a future autonomous situation provided the Company was not lumbered with the accumulated capital invested in airport assets.¹⁸ However, the Joint Committee believes that the question of Aer Rianta becoming a fully fledged state sponsored company cannot be divorced from the question of the capital burden it would have to bear in such circumstances. In the event of Aer Rianta becoming autonomous the Joint Committee considers that it would be unrealistic for the Company not to carry the full burden of its accumulated capital debt.

23. The Joint Committee notes the arguments put forward by Aer Rianta as to the advantages that would accrue if the Company were to become a fully fledged state sponsored company autonomous of the Department of Tourism and Transport.¹⁹ Such autonomy might give the Company greater control over its investment decisions and their timing and it might also relieve government of the need to find significant sums of money for investment purposes. However, the close links with the Department of Tourism and Transport, have not, in the past, caused undue difficulties in relation to investment decisions that would not have occurred were Aer Rianta an independent state sponsored company.

Under an autonomous regime, which would require an amendment to the Air Companies Act, 1966, the Company would have to raise its own investment monies on the capital market or from retained earnings. Aer Rianta’s indifferent financial performance since its inception would make it difficult for it to service its accumulated debt and to provide sufficient funds for investment purposes. Furthermore, since management enjoys wide latitude and discretion in the running of Aer Rianta, the link with the Department of Tourism and Transport should not interfere with Company initiative. The major task facing the Company is that of managing significant national resources and developing an essential national service. The close association with the Department of Tourism and Transport should not unduly burden a dynamic management team or impede company growth. Consequently, the Joint Committee believes that Aer Rianta should continue to work closely with the Department of Tourism and Transport and that the question of autonomy should be deferred.

24. The Aer Rianta submission to the Joint Committee states that landing fees and passenger load fees “are submitted by Aer Rianta to the Minister for Tourism and Transport for his approval and then to the National Prices Commission”.²⁰ This procedure of sanctioning traffic operations charges does not pose any problems for the Company since it operates under the same reporting rules as other State Sponsored enterprises.²¹ Aer Rianta’s pricing policy for commercial activities is to “…make money from optional things the traveller does not have to do and may choose to do or choose not to do like buying in a duty free shop, or having a drink or a meal, so that we can keep down the actual cost to him of the essential thing which is travelling …” ²² The Joint Committee expresses its concern at the extent of cross subsidisation of services which may arise in pursuing such a policy. Cross subsidisation occurs when the profits of one activity in a company are used to keep prices down in another activity. Cross subsidisation can involve financing a nonprofitable service from a profitable service while maintaining overall profitability. Companies which are run on a sound commercial basis will have prices calculated to cover running costs, to service the capital employed at market rates and to give a commercially acceptable profit. While the Joint Committee recognises that travellers may not be as sensitive to the charges for commercial activities at airports as they are to the basic cost of travel, nevertheless it believes that where cross subsidisation of one activity by another does occur, the facts should clearly be stated in the Company’s annual report and the reason for doing so indicated.

25. Aer Rianta follows a uniform pricing policy irrespective of airport. The Company does not distinguish between Shannon Airport which relies mainly on transit traffic and Dublin Airport which caters mainly for terminal traffic. There are a number of products sold in Shannon, however, the prices of which reflect competition from outlets located in the United States.²³ The Joint Committee agrees with Aer Rianta in regard to the need to maintain the charges for commercial activities at a level competitive with other airports.

3.2 Pricing Policies

26. Aer Rianta is in a monopoly position in regard to aircraft movements and its pricing policies affect airlines, passengers, tourism, and the various concessionaries using the airports. In fixing its charges for traffic operations, Aer Rianta states that it takes a number of factors into account including the effect on growth of passenger movements and the competitiveness of Irish airports vis-a-vis other European airports. On the question of airport charges at airports in the main capitals of Europe, Aer Rianta stated in evidence that charges at “Dublin, Shannon and Cork airports have constantly in the last number of years come into the latter end of that league table at about tenth or eleventh”.²⁴ Appendix 4 sets out a recent league table submitted by Aer Rianta of airport charges at the main European Airports. A conflicting view has been presented in written evidence to the Committee by Aer Lingus — it stated that “landing fees at Irish airports are very high”.²⁵ Other recent public statements regarding landing charges lend support to the latter view. Aer Rianta believes that airlines are very sensitive to landing charges at all airports and particularly at airports such as Shannon where the proportion of transit traffic is very high in relation to terminal traffic. Landing charges vary between six and thirteen percent of the cost of running airlines depending on the length of haul operated by the airlines. ²⁶ A related issue and one of greater importance to the airlines and to national policy is the energy cost of the regulation landings at Shannon for aircraft on trans-Atlantic scheduled routes. In the circumstances the Joint Committee recommends that the question of competitiveness of airport charges and the issue of the importance of these charges relative to the energy costs of landings be referred by the Minister for Tourism and Transport to the National Prices Commission for urgent examination.

IV COMPANY PERFORMANCE

4.1 Financial Performance

27. In the Aer Rianta submission traffic statistics are very detailed but there is very much less detail on the financial side. Commercial activities represent 64 percent of total Aer Rianta revenues yet much less is known about this part of the Company’s activity. For example, it is not possible, from the data available, to compute many of the conventional financial ratios for the Company’s commercial activities. The Joint Committee accepts, however, that the criteria applied by the Company in gauging the success of its commercial activities, such as payroll ratio to turnover for catering activities, sales per passenger in the shops and payroll ratio to net profits for all commercial activities, adequately measure performance in these activities.²⁷ In respect of concessions controlled by Aer Rianta such as the banking facility and the car rental counters the Joint Committee believes that by attempting to maximise profits through a tendering process or attempting to obtain rents approximately 10 per cent of the concessionaires’ annual turnover may be in conflict with the Company’s social objectives and its objectives in regard to the promotion of tourism. However, the Company points out that due to seasonality factors the 10 per cent commission is rarely achieved at Shannon and Cork. The Company states that these charges are in line with the practice at other European airports.²⁸

28. Alternatively, the performance of a company may be measured using various measures of output. Output may be measured on a current output basis in which case value added at factor cost (employee remuneration, operating surplus and consumption of fixed assets (depreciation)), or gross output (selling value or full cost of output) are acceptable measures. When performance is being measured on a real output basis the figures are deflated by an appropriate index to derive a measure of output at constant prices. The latter approach was adopted by the Joint Committee in an earlier report.²⁹ Because value added cannot be deflated directly, gross output is usually taken when a measure of real output is desired. Measures of value added are difficult to derive from the submissions made by Aer Rianta because depreciation policies fall under the ambit of the Department of Tourism and Transport. Gross output measures are, however, readily available. One of the more important measures of gross output employed by the Company is that of an operating surplus.

29. Aer Rianta reports trading surpluses on its traffic operations and profits on its commercial activities. Operating surplus is defined as the excess of income over expenditure before charging depreciation on fixed assets, interest on capital expenditure and the cost of State services (air traffic control, meteorological and communications services, and facilities provided by the Department of Tourism and Transport at the three airports). Recent company wide operating surpluses are shown below:

TABLE 1

Operating Surpluses

Source: Aer Rianta Annual Reports and Accounts, Various Issues.

While a decline of four percent was originally forecast for 1979 the Company is now confident that the operating surplus this year will be slightly greater than that achieved in 1978.³⁰ When the notional interest and depreciation charges used by the Department of Tourism and Transport are applied and the charges for the State services mentioned above are taken into account a small net surplus remains for 1977 and 1978; for the two previous years losses were incurred. However, it is also necessary to examine other measures of company performance. By relating profits to sales revenues for a period of years a company can judge its comparative performance over time. The ratio thus obtained will vary from industry to industry but within an industry this ratio serves as a good indicator of performance. For Aer Rianta the following data are relevant:

TABLE 2

Revenue and Surpluses

Source: Aer Rianta Annual Reports and Accounts, Various Issues. However, because the depreciation and interest figures are provisional at the date of publication of the annual report, the net surplus/revenue percentage is computed on the basis of information published for the subsequent year except in the case of 1978.

Using the surplus to revenue percentage it is clear that there has been a decline in Company performance in recent years. However, for 1977 and 1978 a computed net surplus to revenue percentage of between 0.3 and 1.2 percent was achieved. This represents a turnround from the two previous years. It is this net surplus which the Company believes that, taking one year with another, will be sufficient to finance investment needs in the next five to ten years. It is not altogether clear in the Joint Committee’s view that even if the present trend in net surpluses continues that they would be adequate to meet the Company’s investment needs if the Company were granted the full independent status of a State sponsored enterprise.³²

30. Aer Rianta produced an average annual trading surplus of £2.87 million during the period 1975-78. The surplus for 1978 was £3.71 million and a larger surplus is forecast for 1979.³³ The Company pays a substantial proportion of this surplus to the Minister for Tourism and Transport. The amount retained varies from year to year and depends on working capital requirements and other exigencies. When account is taken of the notional interest and depreciation allowances applied by the Department of Tourism and Transport, Aer Rianta’s trading position before any provision for the cost of State services shows a net loss of £0.9 million over the period 1975-1978.

31. Like other airport managers, Aer Rianta has found that a major share of its revenue now comes from commercial activities associated with the movement of people and freight. Only 36 per cent of Aer Rianta’s revenue comes from its primary function, traffic operations. Revenue from the Company’s commercial activities amounts to 64 percent of total revenue. Aircraft landing and passenger handling and loading fees amount to 26 percent of total revenue. Rents and concessions produce eight percent of revenue. Catering services generate 11 percent of total revenue and tour services, which are operated on a break-even basis at Shannon, produce a further eight percent of Company revenue. A very different picture emerges when the question of surpluses or profitability is considered. Traffic operations produce 53 percent of Aer Rianta surpluses while commercial activities produce the remaining 47 percent. In 1978 the surplus on traffic operations at Dublin Airport represented 56 percent of total Aer Rianta surplus while the corresponding figure for Shannon Airport was 10 percent. Cork Airport loses money on its traffic operations but produces a small surplus on its commercial activities. The surplus on commercial activities at Dublin Airport amounts to approximately 41 percent of total Company surplus which makes Dublin Airport the most profitable of the three Airports in terms of traffic operations and commercial activities.

4.2 Productivity

32. The difficulty of measuring productivity in Aer Rianta varies enormously from one activity to another. Because of the unusual diversity of Company activities and the nature of the employment given, a global measure of productivity would not be appropriate according to a Company submission.³⁴ In regard to commercial activities Aer Rianta takes account of payroll ratio to turnover or gross profits, sales per passenger and net profitability. Some of these issues have already been discussed in previous paragraphs of this report. In activities such as maintenance the Company takes account of the square footage to be covered plus the complexity of the areas involved. With regard to security and fire-fighting, Aer Rianta states that it is a question of meeting international and national standards laid down by the International Civil Aviation Organisation and the National Civil Aviation Security Council and productivity is, therefore, difficult to measure. Nevertheless, while the Joint Committee accepts’ that it is difficult to derive an accurate measure of productivity it is still necessary to search for suitable ways in which productivity might be measured. Improvements in productivity are of critical importance to the national economy and to Aer Rianta in particular. Increased productivity is one of the principal ways in which the Company can improve its overall performance . Hence, it is imperative that adequate measures of productivity be developed which are applicable to the Company. One such measure can be derived by examining trends in productivity using the concept of a work load unit.³⁵ Using work load units (WLU’s) as a measure of the quantity of work performed, productivity in Aer Rianta increased by 9.3 per cent during the period 1975-78. Passenger WLU’s increased by 13.8 per cent but freight WLU’s carried declined by 12.3 per cent. While total WLU’s increased by 9.3 per cent between 1975 and 1978, productivity per employee declined by over three per cent. During the same period Company revenue and surpluses related to WLU’s carried increased significantly as the figures below show:

TABLE 3

Work Load Units—Dublin, Cork and Shannon Airports

An alternative way of looking at productivity and one more in line with practices within Aer Rianta, is to examine trends in employment in relation to sales and profitability. Aer Rianta is now a major employer; at the end of 1978 the Company had a total of 1,932 staff including a number of temporary staff on its payroll. Between 1975 and 1978 employment in Aer Rianta increased by 224 people. In terms of productivity as measured by sales per employee, Aer Rianta returned an average revenue per employee of £17,484 in 1978 compared with £10,328 per employee in 1975, an increase in current terms of 69 percent per employee. In terms of profits or surpluses the corresponding figures are £1,920 per employee in 1978 and £978 per employee in 1975; an increase in surplus per employee in current terms of 96 percent in the four year period. However, when inflation is taken into account these increases are modified considerably. In real terms the increase in revenue per employee between 1975 and 1978 was 17 per cent while the increase in surplus per employee was 36 percent³⁶. During the period 1975-78 real value added in the Company increased by an average of over four percent per year. The growth in real value added was greatest during 1977-78. Real productivity in Aer Rianta increased by less than one percent during the four years under review while employment increased by 13.1 per cent. Real increases in value added and productivity and changes in employment are shown below:

TABLE 4

Percentage Growth Rates of Value Added, Productivity and Employment

While recognising the difficulties in computing productivity measures, the Joint Committee is, nevertheless, impressed by the levels of productivity achieved by Aer Rianta and recommends that adequate rules of productivity be developed so that Company performances can be monitored over time.

33. Since 1969 Aer Rianta has had responsibility for the management of Cork and Shannon airports in addition to the airport at Dublin. Good management would imply that each airport should be run at a profit. Dublin Airport is a profitable operation having produced a surplus of £8.60 million in the period 1975-78. The Joint Committee believes that for a new airport, such as Cork, a 10 year period would seem quite adequate to show profitability. During the four year period 1975-78 losses at Cork Airport amounted to £1.18 million. However, the Joint Committee also accepts that the nature of the circumstances pertaining to the operation of the airport make it virtually impossible to generate profits at current levels of passenger throughput. The cost of maintaining Cork Airport at a level to match international standards is high and the corresponding breakeven point is also high. Unless there is a substantial increase in the number of passengers and the amount of freight passing through. Cork Airport will continue to operate at a loss. The Joint Committee accepts that Aer Rianta is following the right approach in attempting to improve the performance of Cork Airport³⁹. In regard to Shannon Airport, the Company faces a particular difficulty. In recent years Shannon Airport has relied mainly on transit traffic which is extremely unpredictable. Nevertheless, Shannon Airport consistently shows a surplus on its total operations. During the period 1975-78 Shannon Airport produced a surplus on all its activities which amounted to £4.07 million. Again, the Joint Committee recognises the difficulties facing Aer Rianta in the operation of an airport dependent on transit traffic and it welcomes the initiatives taken by the Company to redress the situation⁴⁰. The Joint Committee’s view on cross subsidisation has already been stated in paragraph 24.

4.3 Traffic Operations

34. Approximately 36 percent of Aer Rianta’s revenue is generated from its primary function—that of accommodating the landing and take off of aircraft and the ground handling of passengers and freight. Because of traditional links, Aer Lingus continues to provide a number of basic airport services such as the ground handling of aircraft. The Department of Tourism and Transport provides a number of services at the airports. A total of 531 Departmental staff are engaged in providing these services. Table 5 sets out the numbers of such staff engaged on each of the services at each of the airports.

TABLE 5

Department of Tourism and Transport Number of Staff Employed at Aer Rianta Airports

Source: Department of Tourism and Transport.

Like other airports the Company has witnessed a decline in the relative importance of its primary function in terms of revenue generated. Surpluses on traffic operations at Dublin Airport have been very buoyant in recent years but have declined in absolute terms at Cork and Shannon. Losses at Cork have been increasing since 1975 and a loss is forecast for traffic operations at Shannon for 1979:

TABLE 6

Surpluses on Traffic Operations

In view of the continuing losses at Cork and the possibility of further losses at Shannon the Joint Committee expresses its concern at the likely effect such trends will have on total traffic operations surpluses and the future investment needs of the Company. Given that traffic operations are the Company’s primary function, the Joint Committee welcomes the efforts being made by Aer Rianta to overcome the difficulties at Cork and Shannon but suggests that in the light of the comments made earlier in regard to cross-subsidisation it may be necessary to re-examine Company pricing policies.

35. In paragraph 32 we examined the trends in the quantity of work performed on commercial activities and traffic operations for all Aer Rianta employees. Here we wish to examine productivity related to traffic operations staff only. For this purpose, traffic operations staff include airport management staff, police and fire service staff, cleaning staff and engineering and maintenance staff. Head office staff and staff associated with commercial activities are excluded. During the period 1975-78 work load units (WLU’s) per traffic operations employee declined from 4,845 to 4,787 or by 58 units. The quantity of work performed at Dublin as measured by WLU’s per employee directly employed in the airport’s primary function is 1.18 times the Aer Rianta average. The corresponding ratios for Cork and Shannon are 0.72 and 0.80 respectively.

TABLE 7

Work Load Units—Traffic Operations, 1978

In regard to the need to redress the productivity trends in its traffic operations the Joint Committee noted the continuing efforts of Aer Rianta to attract additional airlines into the country.⁴² An aggressive marketing posture aimed at attracting new airlines to Cork and additional transit traffic to Shannon would be likely to overcome many of the capacity problems facing these airports, if an overall programme acceptable to both the airlines and Aer Rianta could be developed. At the same time it is recognised that the additional use of airports by charters and transit traffic may cause temporary bottlenecks particularly in the area of ground handling of aircraft and passengers.⁴³ The introduction of “cheapfare” airlines may benefit travellers, but because these operators prefer to fly to capital cities such an innovation would be unlikely to benefit Cork or Shannon Airports.⁴⁴

4.4 Commercial Activities

36. In 1978 Aer Rianta generated 64 percent of its total revenue from commercial activities and this proportion is likely to continue growing.⁴⁵ At present Aer Rianta is engaged in a number of commercial activities such as catering, shops, tours and mail order while it indirectly manages other shopping and ancillary services through concessions. There are very few commercial enterprises which gain a major proportion of their income from activities other than those which are their primary function and where this is the case it would be normal for the primary function to be reviewed or changed altogether. For airports it is not possible for the primary function to change but commercial activities are an essential part of modern air transportation so they must be designed into an airport’s activities with the same care as air jetties, moving walkways, flight information systems and specialised landing aids and they must be as functional as each of these systems. It is the view of the Joint Committee that special attention should be paid to commercial activities since they are so important in terms of revenue and, because a number of them represent discretionary expenditure activities for the traveller, the quality of the products and services on offer must be of a very high standard. In this regard good management attempts to ensure that all activities under its control are profitable. Because of the captive market it is expected that commercial activities at airports should be profitable. In this respect Aer Rianta airports have demonstrated a very varied performance. Only Dublin Airport shows a consistently good performance. Shannon Airport performance declined throughout the period and a loss is expected in 1979 and commercial surpluses at Cork have improved:

TABLE 8

Surpluses on Commercial Activities

.37 Catering is an essential facility of any airport of reasonable size. An airport must provide good reasonably priced catering facilities to suit the different needs of travellers. International airports have become focal points for business meetings and catering facilities of different standards are required e.g. snack bars, self service restaurants and waiter service restaurants. Catering revenue should cover operating costs and capital replacement costs but thereafter the emphasis should be on service. However, because there is no competition for catering services at airports there is no check on its quality. In contrast, if gift shops at an airport gain a reputation for exorbitant prices people will buy in the High Street before coming to the airport but in regard to meals, snacks and drinks, a viable alternative very often does not exist and the traveller is trapped. Aer Rianta catering activities at Dublin and Shannon, which are directly under the Company’s control, have been losing money in recent years. The Company is at present attempting to redress this situation and the Joint Committee welcomes the new developments, planned for the catering services at the airports.⁴⁷

38. The nature of the passenger traffic and not just its size dictates the commercial success of international airports. Duty free and tax free shops account for the bulk of the income at airports while duty free sales represent the most profitable side of commercial activities. It is sometimes argued that the duty free facility at airports reduces the sales of dutiable goods in shops in the High Street and therefore adversely affects Government receipts. Aer Rianta does not hold this view but rather believes that such purchases are generally of a discretionary nature and would not therefore affect sales in the High Street. In this regard Aer Rianta is no different from other operators in that it makes a lot of profit from duty free sales.⁴⁸ An alternative way of looking at duty free sales is to view such sales as a bonus and a benefit allowed by countries to which the traveller is destined: it is a bizzare fact that a substantial part of the revenue of the world’s international airports comes from customs concessions of other countries.

V FUTURE DEVELOPMENTS

39. Many of the likely future developments affecting Aer Rianta have already been discussed in previous paragraphs of this report. The Company believes that future developments are likely to take place under four headings: continued airport traffic development, improvement of corporate services, the strengthening of the Company’s commercial activities, and the development of the Company into a fully fledged State sponsored body with independent financial status.

40. In respect of airport traffic development, improvement of corporate services and the strengthening of its commercial activities, Aer Rianta sees much of its future development in further investment in physical resources at Dublin and a more extensive marketing plan to promote Shannon and Cork. The Company expects to see a significant increase in its traffic operations through the growth of transit traffic through Shannon. Plans are already underway to establish Shannon as a major airport, handling transit passengers, which will boost aircraft service fees and sales from Company shops.

41. In regard to commercial activities, the Company expects much of its future growth to come from duty free shops in Dublin and Cork and from mail order activities at Shannon. Like most airports, Aer Rianta sees most of its future high revenue earning developments taking place in the commercial activities area and to achieve this growth the Company has developed an aggressive marketing approach. Much of these developments will take place within the framework of a corporate plan which is currently being prepared by the recently established corporate planning unit within Aer Rianta. A parallel activity is the preparation of master development plans for the three airports. Such planning documents are an essential ingredient to the proper running of the Company and are welcomed by the Joint Committee.

42. The Joint Committee also welcomes the positive marketing approach adopted by the Company to achieve its objectives in regard to traffic development and the expansion of its commercial activities. It is evident, however, that Aer Rianta may have to institute a staff development programme, modify its organisational structure and strengthen its human resource base generally if it is to achieve the objectives set. Many of Aer Rianta’s commercial activities might better be placed under individual management rather than under the separate responsibility of the different airport managers.⁴⁹ Furthermore it is the joint Committee’s view that in the light of the heavy emphasis given to marketing in company submissions, this function should be given direct responsibility for the marketing of all Aer Rianta’s services and a stronger line position than that indicated in the Company organisation chart. New management and technical skills will be necessary to keep abreast of developments overseas. Consequently, it is necessary that the Company constantly reviews its personnel policy with a view to seeking ways in which its staff can develop their full potential. In this regard the Joint Committee welcomes the training programmes established by the Company for various staff categories. However, the Joint Committee believes that staff development and renewal is also required for senior managers to enable them to develop new management skills, innovate and adapt the Company to market needs.

43. The question of Aer Rianta becoming an autonomous state sponsored company has already been examined in detail and the Joint Committee’s views on the issue have already been expressd — see paragraphs 22.23 and 29. The Joint Committee believes that Aer Rianta should continue to work closely with the Department of Tourism and Transport and that the question of autonomy should be deferred.

44. Various written submissions received from Aer Rianta are reproduced in Appendices 1 to 4. Written submissions on the role and operations of Aer Rianta received from 5 airline companies—Aer Lingus, Air Canada, British Airways, Swiss Air and Trans World Airlines—are reproduced in Appendices 5 to 9.

45. The Joint Committee wishes to express its thanks to Dr. M.F. Bradley, Lecturer in Marketing in the Department of Business Administration, University College Dublin, for his help at the different stages of the inquiry.

Chairman of the Joint Committee.

14 November 1979.

¹ See Appendix 1.

² See Appendix 2.

³ see Evidence (Question 28 and 29).

⁴ See Evidence (Question 64).

⁵ See Evidence (Question 1).

⁶ See Evidence (Question 2).

⁷ See Appendices 6 and 9.

⁸ See Appendix 5.

⁹ See Evidence (Question 52 and 53).

¹⁰ See Evidence (Question 63).

¹¹ See Evidence (Question 2and 4).

¹² See Evidence (Question 10).

¹³ See Evidence (Question 31 and 90).

¹⁴ See Evidence (Question 27).

¹⁵ See Evidence (Questions 15 and 16).

¹⁶ See Evidence (Questions 24 and 25).

¹⁷ See Evidence (Questions 17 and 24).

¹⁸ See Evidence (Question 15).

¹⁹ See Appendix 1 and Evidence (page 56).

²⁰ See Appendix 1.

²¹ See Evidence (Qusetions 39 and 40)

²² See Evidence (Question 46).

²³ See Evidence(Question 51).

²⁴ See Evidence(Question 35).

²⁵ See Appendix 5.

²⁶ See Evidence(Questions 36 and 42).

²⁷ See Evidence (Question 47).

²⁸ See Evidence (Question 99).

²⁹ See Second Report: British and Irish Steam Packet Company Limited, para 19, page 21.

³⁰ See Evidence (Question 54)

³¹ Net Surplus—surplus minus notional interest and depreciation (computed by Department of Tourism and Transport). Note negative rates of return for 1975 and 1976.

³² Paragraph 23.

³³ Evidence (Question 54).

³⁴ See Appendix 2.

³⁵ Simply stated, a work load unit purports to measure the amount of work performed by an airport and is computed as follows—each passenger and accompanying baggage is taken as a passenger work load unit; each 200 lbs. of freight (cargo and mail) is taken as a freight work load unit. By adding the two the total work load units handled by the airport can be derived.

³⁶ The Consumer Price Index was used to deflate the revenue and surplus data.

³⁷ Value added data were deflated by the Consumer Price Index.

³⁸ Productivity was obtained by dividing the real value added by the number of people employed.

³⁹ See Evidence (Questions 65-69).

⁴⁰ See Evidence (Questions 53 and 95)

⁴¹ Cork is loss making throughout.

⁴² See Evidence(Questions 67 and 68).

⁴³ See Evidence(Questions 82 and 83).

⁴⁴ See Evidence(Questions 69 and 70).

⁴⁵ Although not strictly comparable, it is worth noting that in 1977/78 the British Airports Authority derived more than half of its revenue (51 percent) and all its profits from commercial activities (Computed from 1977/78 BAA financial results reported in an article “Present Profits, Future Uncertainties”, Airports International, August/September, 1978, p.24.

⁴⁶ Loss.

⁴⁷ See Evidence (Questions 78 and 79).

⁴⁸ See Evidence (Question 48).

⁴⁹ See Organisation Chart in Appendix I.