Committee Reports > List of Committees > Joint > 1992 > Committee on Commercial State-Sponsored Bodies (6th Committee) > Report No. 07 - Aer Rianta CPT

TITHE AN OIREACHTAIS

SIXTH JOINT COMMITTEE ON COMMERCIAL STATE-SPONSORED BODIES

SEVENTH REPORT

AER RIANTA CPT

INTRODUCTION

Aer Rianta has developed over the past ten years from a fledgling company managing three local airports to a business today with annual revenues of IR£147m and net assets of IR£66m. Its business interests include not only the management of airports but also overseas joint ventures and the ownership of seven hotels.

The operations of Aer Rianta were reported on by the First Joint Committee on State-Sponsored Bodies in November 1979 [Prl. 8582]. Since then, there has been considerable expansion and diversification in Aer Rianta’s operations in particular in its overseas activities. Consequently, the Joint Committee decided to carry out a wide ranging review of all aspects of Aer Rianta’s activities. As part of this review, the Joint Committee was pleased to accept the invitation extended by the then Chairman of Aer Rianta, Mr Dermot Desmond, to visit the Commonwealth of Independent States in July 1991 and to see at first hand the overseas business which the company has created and nurtured there.

The Joint Committee took oral evidence on a number of occasions from company representatives and also visited Shannon Airport in July 1991 to hear the views of the local interest groups on the Shannon Airport compulsory stop over. In the course of its visit to Shannon Airport, the Joint Committee met representatives of Status [an umbrella organisation representing the main business interests in the Shannon Region], SIGNAL [Shannon Ireland’s Gateway New Action Lobby] and Ennis Urban District Council. In addition, Deputies Donal Carey, Sile de Valera and Madeline Taylor-Quinn and Senators Michael Howard, Mary Jackman and Tony McKenna (in his capacity as Chairman, North Tipperary County Council) met the Joint Committee. Also oral evidence was taken from representatives of Aer Lingus, Dublin Chamber of Commerce, Irish Airline Pilots Association and Fly Dublin Direct Committee. The Joint Committee are deeply indebted to all who gave so generously of their time and the Report incorporates at Section E a synopsis of the views expressed by the bodies referred to above. The formal evidence taken by the Joint Committee is published separately.

The Joint Committee wish to acknowledge its sincere thanks to the former Chairman of Aer Rianta, Mr Dermot Desmond, the Chief Executive and other senior company representatives for their extensive cooperation during the course of this examination. The Joint Committee also wish to thank the interested parties who submitted memoranda or gave evidence.

The present Joint Committee’s immediate predecessor appointed Brennan Governey & Co, Chartered Accountants, as its specialist advisors for the purpose of this enquiry. However, the examination was interrupted by the dissolution of Dail Eireann in May, 1989. The Joint Committee have now brought the examination to a conclusion and wish to record its deep appreciation of the invaluable assistance given by Mr Darach Brennan and Mr Michael Sargent, Brennan Governey & Co, throughout the enquiry.

SUMMARY OF RECOMMENDATIONS/VIEWS

(a)The Joint Committee fully supports and endorses the company in its diversification programmes both at home and overseas.

(b)Aer Rianta acts as agent in managing, developing and operating airports at Cork, Dublin and Shannon but the full cost of airport land, buildings and facilities is not included in the Company’s Balance Sheet (all assets acquired subsequent to 1 January 1988 are included). The transfer of such assets (i.e. assets financed directly from Exchequer Funds at 31 December 1987) to Aer Rianta is being considered by the Department of Tourism, Transport and Communications at present and recommendations in this regard are anticipated before the end of the year. The incorporation of these assets into the accounts of Aer Rianta together with related depreciation will remove the anomaly whereby some assets are included in the accounts while others are excluded. The Joint Committee believe that a more realistic view of the accounts of the group will be available with the inclusion of all assets and charging depreciation to the Profit and Loss Account and in this regard believe that the assets should be transferred to Aer Rianta as a matter of urgency.

(c)Legislation is required to formalise the status of Aer Rianta. Such legislation must address a number of significant issues such as payments to the Minister, liability for rates, application of planning laws, exposure to Landlord and Tenant legislation and liability to corporation and other state taxes.

(d)The position in regard to the Air Navigation and Services Office (ANSO) should also be regularised. At present, it is understood that a certain amount of the payment each year to the Minister represents payment from Aer Rianta for terminal air navigation services. Charges should be levied on a regular basis by ANSO for the services provided with payment being made by Aer Rianta on foot of accounts received. This would allow such charges to be included in the accounts of Aer Rianta as a normal expenditure charge before arriving at profit for each year. The charge is currently included in the payment to the Minister and is not deducted in arriving at the company’s annual profit.

(e)The pension entitlement of employees is funded externally through the Irish Airline (General Employees) Superannuation Scheme. The Pensions Act, 1990 [No.25 of 1990] now regulates pensions and the Trustees should ensure that actuarial valuations are current and monitored in order to protect fully the interests of contributors.

(f)The company has financed its capital investment programme from its own resources and from borrowings and at 31 December 1991 borrowings amounted to IR£47.4m. In the years up to 31 December 1991 the company has maintained a high level of payments to the Minister by way of surrender of its surplus. However, the net effect in a situation where the company has been investing heavily in tangible assets is a deteriorating liquidity ratio and higher gearing. Arrangements must therefore be made with the Minister to redress this obviously unsatisfactory arrangement.

(g)The Joint Committee note that the threat to duty free facilities has been removed for the present with the decision of the EC Commission to retain the status quo at least until the middle of 1999. The surplus on commercial activities, principally from tax free and duty free revenue, represents 40% of the company’s total surplus and is vital to the operations of the company. The Joint Committee recommend that the company now use this opportunity and over a period of years begin to reduce its reliance on a source of revenue, the nature of which will again be under threat in the relatively near future. The Joint Committee are aware of the discussions for inward duty free facilities and see no argument in principle against having such facilities. The Joint Committee note that the European Customs Union does not at present allow duty free on arrivals.

(h)The Joint Committee received many submissions and took extensive evidence in relation to the Shannon compulsory stop over. However, as the Joint Committee was on the point of adopting this Report, the Minister for Tourism, Transport and Communications announced the continuation of the Shannon stop over. Nevertheless, the Joint Committee deemed it appropriate to summarise in Section E of the Report the arguments adduced for and against the stop over by the various interest groups consulted by the Joint Committee.

(i)The Joint Committee note that Shannon Airport reported losses on commercial activities in 1991 and note the company’s determination to reverse this situation. The Joint Committee note that the losses were incurred consequent on losses in the company’s mail order division which, while based at Shannon, is in fact a company operation.

(j)The Joint Committee are pleased to note that Aer Rianta’s passenger traffic growth is well in line with international trends.

(k)The Joint Committee are pleased to acknowledge the diversification of the company’s operations overseas, in particular the wide ranging business interests developed in the Commonwealth of Independent States (CIS) and compliment the company on its considerable efforts and achievements. The Joint Committee envisage that further opportunities await Aer Rianta and indeed any other Irish enterprise interested in the evolving market in the CIS. In this connection the Joint Committee would be pleased to see the signing of an investment protection treaty with the CIS. It is understood, however, that in the evolving political situation in the CIS there is a degree of concern irrespective of what agreements on investment protection are signed. In the longer term the Joint Committee would welcome also a double taxation agreement with the CIS.

(l)The Group has an extensive capital expenditure programme. Because of the scale of investment the Joint Committee advise that the programme be reviewed fully in the light of trends and projections for the aviation industry. The Joint Committee would also point out that programmes must be set in line with projected borrowing and repayment capabilities and in agreement with the Minister as to the levels of surplus surrender required by the Exchequer.

(m)The Joint Committee are pleased that efforts to create a hub for traffic from the CIS to North America has been successful.

A. CORPORATE STRUCTURE

Brief History

1Aer Rianta was incorporated in 1937 and is a public limited company. The company has an authorised share capital of 60,000 ordinary shares of IR£1 each, of which 51,000 shares have been issued and fully paid. The sole shareholder is the Minister for Finance, apart from eleven qualifying shares held by Board members and the secretaries of the Departments of Finance and Tourism, Transport and Communications.

2The Board of Aer Rianta, which consists of nine members, is appointed by the Minister for Tourism, Transport and Communications with the agreement of the Minister for Finance.

3A senior management team consisting of fifteen senior company executives, including the chief executive, is responsible for formulating corporate policy submissions for consideration by the Board. The team is responsible for implementing Board policy and for day-to-day operations and performance.

4Aer Rianta was originally set up as a holding company for Aer Lingus and later Aer Linte and in 1941 was given responsibility for the management of Dublin Airport. In 1950, the present agency arrangement between the company and the Minister for Industry and Commerce was put in place.

5Under the Air Companies Act, 1966 [No. 4 of 1966], Aer Rianta ceased to act as a holding company for Aer Lingus. A new Board of Directors was appointed and the functions performed by Aer Rianta and Aer Lingus were separated.

6In 1968 Aer Rianta assumed responsibility for the management of Shannon and Cork airports on the same basis as Aer Rianta then managed Dublin airport. In 1973 Aer Rianta assumed responsibility for the Shannon sales and catering organisation. During 1990 Aer Rianta acquired the Great Southern Hotels group.

7An unusual feature of the existing company structure is that ownership of the three airports (Dublin, Shannon and Cork) is vested in the Minister for Tourism, Transport and Communications. Aer Rianta acts as agent in managing, developing and operating the airports but the full cost of the airport land, buildings and facilities is not included in the company’s Balance Sheet. For the longer term planning of the company, it would be best if all the assets that Aer Rianta utilise domestically were recognised in its Balance Sheet and through its Profit and Loss Statement. This matter is dealt with more fully at Section I.

8Legislation was expected in 1968 which would have set up Aer Rianta on a basis similar to other semi-state companies but to date the position remains unchanged.

The Case for a Change in Status

9The case for a change in the status of Aer Rianta was considered by the first Joint Committee on State-Sponsored Bodies in 1979 which recommended that any change should be deferred on the basis of the capital burden which it felt the company would have to bear. It also considered that the financial performance of the company at that time was inadequate and that the close relationship with the then Department of Transport should not impede company growth.

10The case was also considered by the Inter-Departmental Committee in 1980 which took a similar line to the Joint Committee. A key issue also for the Inter-Departmental Committee was the valuation of the assets which it felt should also be valued at replacement cost rather than nil or historic cost. It recommended that the matter should be looked at again in 1984.

11In 1985 a Review Committee comprising representatives of the Departments of Transport and Finance and Aer Rianta was set up to consider the status of Aer Rianta. The outcome of the work of this group was as follows:

i)The Airports’ Construction Committee was abolished. This Committee used to vet all capital expenditure at the airports.

ii)Delegated authority arrangements for capital projects was increased from IR£22,500 to IR£250,000 and subsequently to IR£500,000.

iii)The then Minister for Transport confirmed in writing that it was his intention to transfer ownership of the assets to Aer Rianta at a future date.

iv)The funding system was changed from one where grants were paid by the Exchequer to one where Aer Rianta funded all capital expenditure from its own resources or borrowings. Assets funded on this basis are included in the company’s accounts. Related depreciation and interest charges are also included.

v)A capital reserve fund was created for surpluses which were not paid over to the Minister. Previously these amounts were shown as being due to the Minister in the accounts.

12The net effect of these changes was to give Aer Rianta more autonomy and to improve greatly the presentation of its accounts. It also had other beneficial effects in capital budgeting and management.

13The target date for the full change of status was 1991. This would have involved the introduction of legislation to transfer ownership of the assets from the Minister to Aer Rianta and the discontinuation of the agency relationship. As most of the changes had already been implemented no formal report was ever issued by the Review Committee.

Implications of a Change in Status

14The key outstanding issue is the valuation of the assets and the method of transfer. A Review Committee comprising representatives of Aer Rianta and of the Departments of Finance and Tourism, Transport and Communications was again set up in April 1991 to consider this key issue and is expected to report to the Minister before 31 December, 1992. The historic value of the assets not included in Aer Rianta accounts is IR£57m. A very high valuation on the assets could have implications for depreciation or interest and therefore reduce profitability. An important issue is the effect any change would have on the surplus surrender to the Department of Tourism, Transport and Communications.

15A change in the agency relationship could make Aer Rianta liable for local authority rates and corporation profits tax and remove the present exemption for airport properties under Landlord and Tenant legislation. Other implications could be the question of the company’s exposure to planning laws. However, the final position would, of course, depend on the particular legislative proposals.

16Aer Rianta’s role changed fundamentally in 1968 but no legislation was introduced to give formal effect to these changes. The company has evolved since then to be a major commercial State-sponsored body without any statutory changes. One major anomaly is that the agency status which is unique within the State sector makes the company’s limited liability status of little value as the Minister is fully liable for all the actions of Aer Rianta. Further complications arise in respect of overseas expansion. The Joint Committee is satisfied that the present ad-hoc arrangement is unsatisfactory and should be regularised.

B. OBJECTIVES AND ACTIVITIES

Objectives

17According to Aer Rianta’s 1991 Annual Report its mission statement is as follows:

“Aer Rianta wants to establish itself as the best organisation in the world in the field of managing airports and associated commercial activities.”

18Aer Rianta summarises its corporate objectives as follows:

“ i)To be a profitable organisation capable of funding its own development plans while at the same time providing a high quality of service to the airlines, the air travelling public, the travel trade, the freight industry and all our customers.

ii)To make adequate returns to the Exchequer.

iii)To develop and operate modern, first class airports which comply with full international safety standards and recommended practices and which take account of environmental needs.

iv)To have high performing employees who value customers and the quality-of-service ideal.

v)To market the company’s expertise at home and abroad.

vi)To have good relations with local communities, organisations operating in Ireland in related fields and our business partners both in Ireland and overseas.”

Activities

19The company’s activities fall into six main categories:

a) Operational, b) Commercial, c) Overseas, d) Technical, e) Hotels, f) Ancillary.

a) Operational

20Operational activities relate to the provision of aviation related services directly to airlines and their passengers. Revenue and associated expenses arise under the following broad headings:

21The company’s operational revenue and expenditure in the five years from 1987 through to 1991 is summarised as follows:

22Although an overall surplus on operational activities is recorded in each of the years above it should be noted that it is with the benefit of income from rents and concessions. The company’s principal sources of rental and concession income are:

23In regard to traffic operations, Aer Rianta has responsibility for the management of all airport aviation related activities including general aircraft traffic, apron control, flight information displays and the provision of essential ancillary services such as security and firefighting services. A number of ground handling services are provided by Aer Lingus and other companies on behalf of Aer Rianta.

24Airlines are the main source of operational revenue which consist of airport landing and parking fees and passenger load fees. Aircraft landing fees are calculated by reference to the weight of the aircraft, while passenger load fees are calculated by reference to embarking passengers on departing flights. The Joint Committee note that there have been no increases in such charges since April 1987. The latest league table of airport charges [see Appendices (i) and (ii)] at European airports shows Aer Rianta in thirty fourth place out of fifty for B737 aircraft.

25The Joint Committee note that operational expenditure does not include the cost of airport services provided directly by the Air Navigation and Services Office (ANSO) at the three airports. These services include air traffic control and meteorological and communications services. The 1985 Green Paper on Transport Policy indicated that terminal air navigation services cost approximately IR£3m to provide in 1984 and the Department of Tourism, Transport and Communications consider that IR£3m of the annual surrender to the Minister goes to fund air traffic services provided on behalf of Aer Rianta. The Joint Committee believe that a provision for these services should be included so that the true surplus is disclosed.

b) Commercial Activities

26Commercial activities of Aer Rianta include tax free and duty free shops at the three airports. The significance of this source of revenue may be gauged from the table below.

27The company acknowledges that duty free sales of liquor and tobacco are the most profitable segment of commercial activities (representing approximately 60% of tax free/duty free sales) and the proposed abolition of duty free selling at airports in 1992 by the EC would have had major implications for the company. The company’s total surplus in 1991 was IR£22m, of which IR£12.4m was generated from commercial activities. The abolition of duty free would significantly reduce the commercial surplus as the profits returned by other commercial activities are not as high. However, the threat to duty free has been removed for the present with the decision of the EC Commission to retain the status quo at least until the middle of 1999.

28While the company would agree that the abolition of intra-EC duty free allowances would significantly reduce profits from retail activities, it sees airport retailing as a distinct segment of the retail business and would attempt to re-position its retail business to passengers to minimise this impact and to grow new sources of retail revenue. By reformulating its basis of differentiation it would see itself maintaining and perhaps enhancing its competitive advantage over downtown stores and while profits from the revised product range, post duty free abolition, would not be as great as those heretofore, it would see itself as maintaining up to 40% of the current surplus from duty free sales.

29Commercial activities of the company at Shannon Airport include mail order, ground catering services (restaurants and snack bars) and flight victualling. Catering services at Dublin and Cork airports are operated on a concession basis. The mail order business at Shannon is not dependent on passenger traffic as direct marketing is undertaken to potential customers in the United States. The mail order business is a company operation based at Shannon Airport and not just a Shannon activity reflecting on Shannon Airport.

30The previously operated tours and banquet service in the Shannon Region have now been transferred to SFADCo for their sole operation.

c) Overseas Activities

31These are reviewed separately in Section G of the Report.

d) Technical

32During 1990, Aer Rianta set up a separate technical division (comprising principally engineering and architecture disciplines) - Aer Rianta Technical Consultancy (ARTC).

33This division employs an average of fifty people and provides internal technical advice on planning, design and construction projects at the three airports and also sells its services externally.

34Examples of such external services include advising the Maltese in relation to airport work being undertaken there and a feasibility study undertaken for the Chinese on an airport facility at Shenzhen on the China mainland opposite Hong Kong.

e) Hotels

35These are also reviewed separately in Section H of the Report.

f) Ancillary Activities

36Aer Rianta provides aircraft painting and refurbishment services to Aeroflot at Shannon Airport in addition to the operational services provided to Aeroflot. The paint work is sub-contracted to an independent third party firm.

Personnel

37Aer Rianta is conscious of the effort and commitment made by staff in achieving the satisfactory results of recent years. A joint working party of management and an Industrial Democracy Council representing staff was established in 1987 to examine opportunities for greater staff participation in the company. The group meets regularly to consider and discuss areas of mutual concern including the appointment of worker directors and sub-board structures. The company has for a number of years published an Annual Employee Report which provides a detailed analysis of Aer Rianta’s performance in the previous year.

38Aer Rianta’s stated commitment to customer service is reflected in the range of courses which the company runs at its Training Centre in Castlemoate House. The courses address three priorities - customer service, personal development and management development. All staff are encouraged to participate.

39The average number of persons employed by the group in Ireland in 1991 was 2,627. Because of the seasonal nature of the company’s business, it is necessary to recruit temporary staff for the peak summer months.

40The main staff groupings during 1991 were as follows.

Catering services at Dublin and Cork Airports are operated on a concession basis. Schedules setting out a history of employment numbers and revenue/contribution per employee are included at Appendices (iv) and (v).

41The pension entitlement of employees is funded externally through the Irish Airlines (General Employees) Superannuation Scheme. The rules of the scheme require the financial position of the fund to be examined by an actuary at least every five years and the last actuarial valuation was carried out at 31 March 1988.

42The company has introduced a limited profit sharing/bonus scheme. This scheme provides for a bonus payment subject to the company meeting its budgeted performance and a second tier which is productivity linked.

C. FINANCIAL PERFORMANCE

43In assessing the financial performance of Aer Rianta the Joint Committee wish to draw attention to the basis of preparation of the Financial Statements.

a) Depreciation and Interest Charges

Prior to 1986, all fixed assets used by the company were financed directly from Exchequer funds. No charge has been made in the Financial Statements for depreciation or interest on such capital expenditure.

b) Department of Tourism, Transport and Communications

No charge is made by the Department of Tourism, Transport and Communications for services provided directly or indirectly to the airports e.g. air traffic control and meteorological services.

c) Group Profit and Loss Account

The Financial Statements of the Group include a Group Profit and Loss Account which records the surplus of turnover over operating costs for the year. An amount representing 50% of the surplus from core activities is payable to the Minister for Tourism, Transport and Communications. The term “Profit” in this sense is not necessarily proper because of the absence of the charges described in the two preceding paragraphs and this accounting treatment can distort perceived results.

44Each Annual Report of the Group up to 1984 included a ten year summary of Financial Statistics which included a notional charge for depreciation and interest.

Trading Results

45In each of the four years up to 31 December 1990 Aer Rianta recorded an increase in its trading surplus over the immediately preceding year, the trend reversing, however, in the past year.

46The company derived considerable financial benefit from the significant increase in traffic between Ireland and Great Britain and it is clear that sustained growth in the British Economy in the 1980s boosted the growth in traffic.

47During the same period, airlines had the benefit of falling fuel prices which with greater competition resulted in reduced fares thereby encouraging travel.

48However, the vulnerability of the company to general economic conditions is reflected in the net results for 1990 and 1991. The net surplus for 1990 was more or less in line with 1989 with, however, a fall of 22% in 1991 compared to 1990. Both the international recession and the Gulf War contributed to the decline in results with the recessions particularly in the US and UK having a detrimental impact on passenger traffic numbers. Oil prices also accelerated during the Gulf crisis period but stabilised thereafter.

Group Balance Sheet

49Over the past five years net assets have risen from IR£5m in 1987 to IR£66m in 1991. The group has purchased and invested in land and buildings, runways and plant and equipment. The investment at 31 December 1987 was IR£10.4m compared to IR£117.2m at 31 December 1991.

50The capital investment programme has been financed from the group’s own resources and from borrowings and at 31 December 1991 borrowings amounted to IR£47.4m.

Group Balance Sheets at 31 December

51In the five years up to 31 December 1991 the company has paid IR£72m to the Minister for Tourism, Transport and Communications. The Joint Committee note with dismay that the net effect of maintaining payments to the Minister and investing heavily at the same time in tangible assets has resulted in deteriorating liquidity ratios and higher gearing.

52The following ratios taken from the Annual Accounts illustrate the position.

The Debt/Equity ratio is less meaningful in earlier years as Aer Rianta only started funding its own fixed assets in 1986. In 1988 borrowing increased from IR£1.16m to IR£15.2m mainly to finance fixed assets and investment in associates.

N/A denotes not applicable.

Volume of Business

53Passenger numbers for the past five years have been as follows:

The success of the company in increasing profit in the years up to 1990 has been due to increased passenger throughput. In planning its services the company must take account of likely trends in the growth of passenger traffic and cargo traffic. Although the volume of traffic is of course influenced by a number of socio and economic factors which are outside the control of Aer Rianta, the Joint Committee note with satisfaction that passenger traffic increased by 75% from 4.1 million in 1985 to 7.8 million in 1990.

D. INDIVIDUAL AIRPORTS

54In the following paragraphs the financial performance of the three airports is examined in more detail.

Five Year Summary

Dublin Airport

55Dublin Airport accounted for 71% of the company’s passenger throughput in 1991 and contributed IR£23.875m towards the company’s overall surplus before interest and central costs.

56In 1991 5.3 million passengers travelled through Dublin Airport. The Dublin Airport passenger numbers for 1990 were 5.5 million compared to 2.9m in 1986. Passenger numbers have shown an increase each year up to 1990. However, the 1991 passenger numbers were 4% down on 1990 due principally to the international recession and the Gulf War.

DUBLIN PASSENGER

Transatlantic passengers are passengers embarking and disembarking on transatlantic routes. A transit passenger is a person who comes on a flight and leaves either on the same flight or on a connecting flight without leaving the airport.

58Numbers were down on the UK route in 1991 reflecting the UK recession and the withdrawal of British Airways in March 1991.

59However, of the three airports, Dublin Airport has derived the most benefit from the increase over the past number of years in traffic between the Republic and Great Britain. Passenger departures from Dublin to Great Britain in 1991 were 3.1m, 82% above the 1983 level. The departures to Britain of 3.1m represented 58% of all departures in 1991 with European departures being 26%. The European traffic continues to show growth increasing in 1991 against the trends in other markets.

60While the pull out of British Airways in March 1991 from Ireland was a worrying development for Aer Rianta, the Joint Committee has been reassured by Aer Rianta that it envisages no long term direct loss of business as a result. The type of passenger carried by British Airways was predominantly the business passenger who will travel in any event. Also it is expected that the other airlines on the route will increase capacity to cater for the additional demand as the Dublin/London route is still very competitive with Aer Lingus, British Midland and RyanAir.

61Commercial activities at Dublin Airport are confined to tax free and duty free shops and increased revenue from this source reflects increased passenger throughput.

63The Airport management has extended the range and quality of goods available to the travelling public and the average spend has held in real terms since 1987. Aer Rianta is satisfied from its own market research that prices in the airport shops are competitive when compared to equivalent shops in U.K. airports. The company’s pricing policy is to maintain where possible a price advantage over similar product in Heathrow and Manchester. The abolition of duty free shopping would have a very severe impact on Dublin Airport results. There is no doubt that abolition would significantly reduce the 1991 commercial surplus of IR£11.5 million.

64The Joint Committee are pleased to note that Aer Rianta have won quite a number of Awards over the last few years. The following are some of the major awards:

In addition to the above, Aer Rianta have been a finalist in the Published Accounts (Annual Report Award for a number of years, the Quality Hygiene Award has been won by Shannon Airport Catering for the third year in a row and in October 1992, Dublin Airport was awarded the Quality Mark by the Irish Quality Association.

65Despite the additional car parking facilities made available by Aer Rianta in recent years the Joint Committee is not satisfied that the additional facilities have resolved matters satisfactorily, particularly in the area of access by passengers to the facilities which are quite a distance from the main terminal building. However, the Joint Committee has been assured by Aer Rianta that ongoing progress is being made in these areas.

Shannon Airport

66In 1991, Shannon had a throughput of 1.5 million passengers, the first fall in traffic since 1986, although down only 5.3% on 1990. While Transatlantic and Great Britain traffic shows a fall-off compared to 1990, traffic to Europe was up 27% and transit traffic was up 3.2%.

67SHANNON PASSENGER

Transatlantic passengers are passengers embarking and disembarking on transatlantic routes. A transit passenger is a person who comes on a flight and leaves either on the same flight or on a connecting flight without leaving the airport. Transit at Shannon includes Aeroflot but does not include New York/Dublin passengers or vice versa.

68It is, of course, a condition of all transatlantic scheduled services that flights into and out of Ireland must stop at Shannon Airport in both directions. The company in its submission to Government on the 1985 Green Paper stated

“Shannon’s importance to the tourist industry is illustrated by the fact that the Airport continues to be the major stopping point for North American visitors accounting for 70% of all such traffic in 1984 - despite the fact that both Aer Lingus and Northwest Orient can serve Dublin on their transatlantic flights”.

Aer Rianta is still of this view in 1992.

69The Aeroflot presence at Shannon has been a considerable benefit in terms of refuelling aircraft, painting and refurbishment, handling fees, catering, rents and duty free shop sales. Efforts with Aeroflot to create a hub at Shannon for traffic between the Commonwealth of Independent States and North and South America continue. New services include Kiev to New York and Minsk to Shannon, with other services being negotiated.

70The financial fortunes of Shannon are dependent also to a large extent on the strength of the US economy. Indeed, experience shows that a weak US dollar discourages US tourists from travelling.

71Shannon airport was the pioneer of duty free shopping in 1947. Any EC changes will have less impact on Shannon than Dublin or Cork because transatlantic passengers may avail themselves of duty free shopping during their Shannon stopover. However, the fact that traffic to Europe and Great Britain has increased in the past five years compared to growth in transatlantic traffic, does mean that the elimination of duty free will have a greater effect than it might have had at Shannon some years ago. Revenue for the past five years is noted hereunder.

72Other commercial activities at Shannon include catering and the Shannon College of Hotel Management. The mail order business operated by the company is an operation based at Shannon and not solely a Shannon activity reflecting on Shannon Airport.

73Revenue from these activities over the past five years is summarised below:

Catering Revenue

74Catering services provided at Shannon airport are divided between flight victualling for airlines who use Shannon and ground catering in the airport (restaurants and snack bars). Approximately 70% of catering sales revenue arises from flight victualling and 30% from airport restaurant and snack bars. In overall terms there is a direct correlation between total catering revenue and passenger throughput.

Mail Order Revenue

75The Mail Order division of the company sells a broad range of merchandise to overseas buyers and concentrates its marketing on the United States. Approximately 50% of the goods are of Irish manufacture. The division utilises the services of a New York based firm of mail order consultants to help identify potential customers in the US. The mail order business is not dependent on passenger traffic and in its 1979 Report on Aer Rianta, the then Joint Committee noted that

“Mail Order represented a diversification in Aer Rianta’s activities and because it is independent of traffic operating it provides a useful source of revenue, particularly to an airport such as Shannon which experiences the vagaries of transit traffic”.

76Mail order revenue in 1986 and 1987 declined below the record levels achieved in 1985 and this unwelcome trend continued in 1991. In 1987 the company engaged the services of an International Mail Order Consultant to review the marketing approach and steps have been taken to reverse the downward trend including the introduction of a new catalogue and measures to penetrate the Japanese market. A cost cutting exercise reducing staff by one third has been implemented.

Relationship with SFADCo

77Until November 1990 the company managed the catering and entertainment operations of Bunratty, Knappogue and Dunguaire Castles in conjunction with the Shannon Free Airport Development Company (SFADCo) who are responsible for the promotion of these activities. The profits from the banquets and tours handled by Shannon Castle Tours were split equally between Aer Rianta and SFADCo (SFADCo retaining all profits from day visits to the castles and other facilities).

78From November 1990 the Minister for Tourism, Transport and Communications transferred sole responsibility for management of these activities to SFADCo.

79It is relevant to note here that a 1986 Report of the Dail Committee on Public Expenditure reviewed the operations of SFADCo [PL4034] and commented as follows regarding the relationship between Aer Rianta and SFADCo.

“SFADCo also has close inter-relationships with Aer Rianta. Aer Rianta is responsible for the management of the country’s airports including traffic promotion. In the case of Shannon a different arrangement exists. SFADCo has statutory responsibility for terminal traffic and so Aer Rianta is concerned with transit traffic promotion only. But it does have a key role in the servicing of tourist amenities in the area through a Management Agreement with SFADCo with respect to Shannon Castle Tours. Since Aer Rianta has management responsibility for Shannon, Cork and Dublin Airports and responsibility for promoting and developing that half of Shannon’s traffic which is transit, it no longer makes sense to assign separate responsibility for the terminal traffic to SFADCo.”

80The Joint Committee note that in recent years Aer Rianta has also promoted terminal traffic without any specific funding. The Joint Committee believe that marketing of traffic at Shannon should be the responsibility of Aer Rianta.

Hotel and Catering College

81The company owns and operates the 120 bedroom Shannon International Hotel at Shannon Airport which has now become part of the Great Southern Hotels Group. The hotel also houses the Shannon College of Hotel Management which has expanded its activities to include overseas consultancy on hotel standards.

Transport Facilities to Limerick City

82The Joint Committee are not satisfied as to the adequacy of public transport facilities out of Shannon Airport to the surrounding areas and suggest that consideration be given by Aer Rianta to initiating improvements.

Cork Airport

83Cork Airport’s results over the past five years are summarised below:

84In 1991 Cork had a throughput of 644,896 passengers, the second highest year to date. In common with Dublin and Shannon, Great Britain traffic fell in 1991, with European traffic showing a slight increase. Marketing initiatives in France resulted in a substantial increase in the charter market.

85CORK PASSENGER

The reason for the increase in transit figures for Cork Airport in 1990 is mainly attributable to a Ryanair service which was operated from Farranfore through Cork and onwards to Luton. This service was discontinued in 1991 and the number of transit passengers on this service for 1990 was approximately 14,000. A second contributing factor was Corona airline flights to the Canaries from Dublin transitting through Cork in the period October to December 1990.

86In common with Dublin, duty free shopping makes a considerable contribution to the Cork results and without its duty free shopping Cork airport would have made only a small operational profit in 1991. Revenue for the past five years is noted hereunder.

87An extension to the main runway has been completed and a new landing system installed at a cost of approximately IR£4 million. As a result there is better reliability in bad weather and the diversion rate has been reduced to 1%.

88The budgeted cost of extending the terminal building is IR£6 million and the work will be completed by the end of this year.

E. SHANNON STOP OVER

89As mentioned in the introduction to this Report, the Joint Committee on a number of occasions took oral evidence on the Shannon stop over. Notwithstanding the recent decision of the Minister for Tourism, Transport and Communications to retain the stop over the Joint Committee deemed it appropriate to summarise hereunder the arguments adduced for and against its retention:

For Retaining the Stop Over

a) Aer Rianta

90Aer Rianta believed that direct access to Dublin would add to overall terminal traffic into Ireland only if this resulted in an increase in the number of airlines operating and/or destinations served. They did not see any evidence that the size and potential of the Irish market would support additional carriers and routes to the required extent in the long run; Aer Rianta management further believed that the long term effect of a change in access policy would be to strengthen Aer Lingus’s competitive position by enabling it to consolidate at its Dublin base and therefore increase its dominance of this market.

91Aer Rianta did not believe that the Shannon stop is a deterrent to tourism from the USA and pointed out that three quarters of US visitors now embark and disembark at Shannon by choice. The company was not aware of any American complaints about the Shannon stop.

92Aer Rianta believed that the present pattern of backtracking through the UK has nothing to do with the Shannon stop but everything to do with price and service options. They believed that direct access to Dublin would be unlikely to change the backtracking pattern dramatically unless it resulted in more US access points and lower fares. They also pointed out that the backtrackers are a loss only to direct transatlantic operators, such backtrackers still arrive in Ireland and are not in any other way “lost” to the country or to the airports.

93Aer Rianta stated that the effects on Shannon of any change in policy must be considered in both short term and long term contexts. Aer Rianta estimated, for example, that a one-in-three transfer of flights to Dublin could cost 230 jobs and IR£3.5m revenue and would also bring Shannon below the minimum traffic requirements to justify US immigration facilities. They also believed that if airlines follow their normal economic and logistical concerns, an “open skies” policy could in the long run reduce Shannon to the size of Cork airport.

94Aer Rianta stated that scheduled long haul services to Dublin would require investment in landside and airside facilities including an extension to the main runway. The cost of these developments would be of the order of IR£25m to IR£60m depending on the routes and aircraft types involved.

b) SIGNAL [Shannon Ireland’s Gateway New Action Lobby]

95SIGNAL maintained that there are 1,800 people employed at Shannon; that employment at the Shannon free zone is about 5,000 for the first time in over a decade; that the population of the mid-West has shown employment gains between 1971 and 1981; that this has occured after over a century of consistent decline up to the 1970s; and that the Clare/Shannon area has not had a reversal since.

96SIGNAL pointed out that overseas industry has come to rely on Shannon and Shannon spin-off has helped the establishment of Irish firms. They stated that just over 30% of manufacturing and service jobs at the Shannon free zone are aviation related and estimated that 75% of raw materials for US industries located in Ireland are shipped through Shannon.

97SIGNAL noted that it is the number of direct flights to London from 26 different US cities that sends travellers to London.

c) Irish Hotels Federation

98The Irish Hotels Federation maintained that a change in status will mean a shift to the east of the country in the distribution of tourism expenditure with no national gain. The Federation pointed out that only 6% of US visitors to London travel out of the greater London area.

99The Federation stated that it would be inexcusably bad management to provide additional facilities at Dublin with a resulting under-utilisation of existing facilities at Shannon. The Federation believed that there is a general indifference in regard to point of entry into this country from the US, 71% of US tourists on direct flights currently choose to embark/disembark at Shannon and hotels in the western seaboard have a very high dependency on the North Atlantic traffic.

100The Federation further added that the capacity to attract new business to the region would be severely impaired and that US tour operators did not consider the Shannon gateway to be an impediment to future US business. The Federation maintained that the London “leakage” factor due to Shannon status is a myth and that the decision to fly via London is due to destination access, 26 US cities being served from Heathrow, compared with only 3 from Dublin.

d) Shannon Status Committee

101Shannon Status Committee noted that Shannon airport has made a very significant contribution to the social and economic development of the area which it serves and has provided a national counterbalance to the increasing centralisation in the east of the country. The Committee maintained that the majority of North American visitors to Ireland either expressed a preference to fly to Shannon or expressed no preference at all and that the Shannon issue was not the factor in the withdrawal of any North American airline from the Irish market.

102The Committee believed that hotels in the Limerick/Clare region display a very high dependency on Shannon Airport’s North Atlantic traffic (up to 90% in some cases). They maintained that there is a high employment dependency on the Shannon status and that a survey of Dublin business travellers to the US indicated that Shannon’s status had no significant impact on travellers. The Committee pointed out that any delays east bound are counterbalanced by time savings from the immigration pre-inspection services provided at Shannon.

103The Committee argued that the British experience in changing the Scotland gateway policy in Prestwick would not support any of the Dublin arguments.

e) Ennis Urban District Council

104The District Council maintained that airports are often the conduit to tourism and industrial development in the regions and that Shannon airport has been a critical factor in the successful development of the mid-West and surrounding regions. The District Council stated that the provision of private and public sector funds to develop the infrastructure and facilities was evidence of the success of Shannon in attracting substantial business. Shannon airport is an Irish example of successful airport and regional development.

Against the Stop Over

f) Aer Lingus

105Aer Lingus stated that the Boeing 747 fleet must be retired within a few years but that until there has been a substantial improvement in its profitability it cannot enter into any commitments to replace the Atlantic Fleet.

106Aer Lingus pointed out that over the past months the massive competitive challenge posed by indirect routings via UK hubs has become very evident and that in many cases these services are given a more prominent display than direct services in the computer reservations systems used by US travel agents. To counter this threat direct service into Ireland must be restructured [see Paragraph 112].

107In the absence of any change, Aer Lingus stated that there is a real danger that they will be forced because of traffic erosion to abandon transatlantic services to Ireland. In such a scenario, Ireland would be served through UK hubs and Shannon and Aer Lingus would be the real losers. Aer Lingus emphasised that a hub is driven by passengers and not by the availability of an airport. In the course of evidence Aer Lingus maintained that Shannon should concentrate on activities that are commercially worthwhile and that Dublin should do likewise, ensuring, however, that Shannon activities are not harmed but strengthened.

108Aer Lingus argued that the concern that a change in the rule would over a period lead to a significant reduction in transatlantic services at Shannon is seriously misplaced as there is a year round market for transatlantic travel to and from Shannon which Aer Lingus believes can be served on a commercially viable basis with a B767 aircraft. They maintained that a strong preference of the tourism market for Shannon as a gateway will also mean that Shannon will continue as the main Atlantic gateway for Ireland.

g) Dublin Chamber of Commerce

109Dublin Chamber of Commerce noted that there is clear evidence over the past three years that the number of people flying direct from North America to Ireland has been declining. At the same time passenger numbers to UK provincial airports direct from North America have been increasing. Dublin Chamber maintained that the Shannon stop over is inhibiting tourism to Ireland and that growth would be achieved through new airline services with direct connections to Dublin. The Chamber believed that Shannon because of its location in Ireland’s prime holiday region has a secure tourism market share and that this factor will sustain daily direct flights.

110The Chamber also maintained that a Shannon hub with feeder services by small aircraft to provincial UK cities is not viable because of the alternative choices available in the UK through transatlantic gateways such as Manchester, Glasgow, Heathrow, Gatwick and Stansted.

111The Chamber believed that more routes will only be opened from North America by existing or new airlines when there is direct access to Dublin. Dublin is the nearest EC capital to North America and has a year round tourism “product” which can make for successful US marketing. The Chamber believed that Aer Lingus can give the Shannon assurances if necessary.

112The Chamber explained that travel agents today use a computerised package which enables them, on receiving an enquiry from a potential customer, to advise the shortest travel time and route between destinations and that such computerised reservation systems frequently show that the fastest way to travel to Dublin is via various other European centres rather than via Shannon. They point out that when access to Scotland was relaxed, 36% more capacity was provided into Scotland in 1991.

h) Irish Air Line Pilots Association (IALPA)

113IALPA maintained that the requirement to land at Shannon is a constraint of trade. The Association would like to see the introduction of a trial period of say three years for direct flights to Dublin. They maintained that the level of business travel on Aer Lingus services is low, principally because of the Shannon stop which causes much business traffic (estimated at between 50% and 70%) between Ireland and the United States to route via London. The operation of direct services from Dublin to Boston, Chicago, Los Angeles, New York and Toronto would offer Aer Lingus the opportunity to link those cities with eleven cities in the UK which have daily services to Dublin.

i) Fly Dublin Direct Committee

114The Fly Dublin Direct Committee believed their position is constantly misrepresented as a policy to eliminate the Shannon stop. The Committee stated that its aim is to remove the compulsory stop and allow carriers to provide service in accordance with market demands. They believed that as two thirds of traffic disembark at Shannon, the Shannon market is healthy enough in itself to support year round services and is an attractive and viable destination not needing protection.

115The Committee’s principal aim was to increase tourism to Ireland as a whole and believed that this could be achieved by allowing direct flights to Dublin. The Committee maintained that since September 1990 services to Ireland have been deteriorating as Aer Lingus is not expanding and its existing US destinations are under serious threat.

116The Committee also pointed out that apart from generating extra tourists, the Shannon stop is a serious inconvenience for Dublin and particularly for US business travellers. The Committee further added that the extra journey time has a major impact in computer selling, which shows on the screens of travel agents the routings in order of journey time. The Committee believed that the problems will not get better and that the real risk of losing Atlantic services will remain and grow.

F. OTHER INTERNATIONAL AIRPORT COMPARISONS

Airport Charges

117A current league table of European and UK airport charge comparisons is included at Appendices (i) (Boeing 737) and (ii) (Boeing 747). Appendix (iii) reproduces a copy of the letter of 18 October 1988 from Aer Rianta to the Air Transport Users Committee which explains the company’s position on airport charges.

Comparison of Passenger Numbers/Cargo

118It is difficult for the Joint Committee to make valid comparisons between the financial results of airport companies as many international airports are run by municipal authorities or city councils and the accounting policies adopted for income and expenditure differ considerably from country to country.

119In Great Britain, BAA plc owns and operates seven airports: Heathrow, Gatwick and Stansted in the South East of England and Glasgow, Edinburgh, Prestwick and Aberdeen in Scotland.

120Manchester airport is operated by a public limited company which is controlled by the ten Greater Manchester district councils.

121Amsterdam’s Schiphol airport is operated by an airport authority which is controlled by the Dutch Government.

122Sweden’s airports are run by the State through the Swedish Civil Aviation Administration.

123However, one salient feature which airport annual reports have in common is passenger and freight statistics. These statistics are reproduced overleaf and provide a useful comparison with those of Aer Rianta:

125The growth in passenger traffic over the period is clearly an international trend and the Joint Committee are pleased that Aer Rianta’s growth rate in the period is well in line with this trend.

126Aer Rianta has not, however, achieved growth (measured in tonnes) in cargo and mail volumes in marked contrast to the increases achieved at the other airports. However, the volume of business has increased and the international trend to fast freight forwarding has resulted in the construction of a new cargo terminal at Dublin Airport.

Profit/Depreciation Ratio

127Aer Rianta’s Financial Statements have only included a charge for depreciation since 1986 because of the Agency arrangement referred to in Section A of the Report.

128The following table illustrates the significance of a depreciation charge in financial statements of airports generally. In each case the figures are extracted from the 1989 Annual Reports of the relevant airport company (the exception being Schiphol - 1988 report).

130The figures serve to underline the impact which a depreciation charge may have on the results of Aer Rianta in future years. Also Aer Rianta is unique among the airports compared above insofar as a substantial portion of its surplus is derived from direct retailing of tax free and duty free merchandise. The other airports appear to operate such facilities on a concession basis where the net return is believed to be significantly lower.

G. OVERSEAS ACTIVITIES

131The most publicised of these in recent years has been the joint venture with the Soviet airline, Aeroflot. Under this arrangement a joint venture company, Aerofirst, was established in February 1988 to set up duty free shops at Moscow’s international airport. Aer Rianta has a 49% interest in Aerofirst which is held through Aer Rianta International CPT.

132Further joint ventures have been established to run duty free shops at Leningrad airport with Aeroflot, with Intour Services to run downtown shops in Leningrad and with Leningrad Regional Council to run a shop on the Soviet border with Finland.

133Agreements have also been entered into with Aeroflot for the management of duty free shops in Kiev and Tashkent and with the Moscow City Soviet to run downtown shops in Moscow.

134A listing of current activities, noted by date commenced, is set out hereunder.

-On 1 May 1988, two duty free shops were opened in the departures area of Sheremetyevo II.

-In August 1988, duty free sales were commenced on board international flights operated by Aeroflot out of Moscow.

-Also in August 1988, Aer Rianta commenced the repainting and refurbishing of the Aeroflot aircraft fleet at Shannon.

-In November 1988, Aer Rianta signed its second joint venture agreement, this time with Aeroflot - Leningrad. The purpose of this joint venture was to establish duty free shop facilities at Pulkova Airport in Leningrad.

-In March 1989, two duty free shops were opened at Moscow Airport.

-In April 1989, a third joint venture agreement was signed with the Vyborg Regional Consumer Society for the establishment of a duty free shop on the USSR/Finnish border at Torfionovika.

-In June 1989, the first duty free shops and bars at Leningrad Airport were opened and in-flight duty free sales from Leningrad were commenced.

-In August 1989, a further joint venture agreement was signed with Intourservices and the Pribaltiskaya Hotel in Leningrad to establish duty free shops there and in other hotels in Leningrad.

-In October 1989, a contract was signed to construct a maintenance hangar for Aeroflot at Moscow Airport.

-In December 1989, the shop in the Pribaltiskaya Hotel opened.

-In January 1990, an agreement was signed with Aeroflot - Tashkent for the construction and operation of duty free shops at that airport.

-In February 1990, a similar agreement was signed with Aeroflot - Kiev and these shops will also commence trading in 1992.

-In April 1990, a new joint venture with Aeroflot and other business partners in Moscow was registered to cover various other commercial undertakings in the Moscow region.

-In May 1990, a new perfume shop was opened in Moscow airport.

-Also in May 1990, a second downtown shop was opened in the Moskva Hotel in Leningrad and the shop on the Finnish border at Torfionovika commenced trading.

-In September 1990, the Moscow departures shops were greatly extended.

-In December 1990, a third shop was opened in downtown Leningrad in the prestigious Astoria Hotel.

-In August 1991, a supermarket was opened in the Arbat district in central Moscow. The development is on two floors of a large city block.

-In October 1991, a duty free shop was opened at Bahrain international airport.

135The company recently obtained the prestigious contract to manage Warsaw airport.

136The overseas CIS activities are operated through a Statutory Fund of hard currency and roubles which pays for shop fittings, stock and staff. Aer Rianta receive credit for its provision of expertise while the CIS parties provide land, buildings and business opportunity.

137Total revenue for the first full year of operations in the CIS exceeded IR£20m and in 1991 amounted to IR£44m.

138Passenger traffic through the airports in the CIS was hit more than Irish airports in 1991, with total passenger throughput down 21% over 1990, although the shops increased overall sales by 25% as a result of increased customer spending. Since commencing operations on 1 May 1988 in Moscow, overseas activities have grown to the point where sales in 1991 reached IR£44m and 1,200 were employed in joint ventures.

139At 31 December 1990 Aer Rianta had an investment of IR£5m in fixtures and fittings. While remits home of profit share will reduce the exposure level of the investment, the Joint Committee believe that an added and necessary safeguard would be the signing of an Investment Protection Treaty with the CIS. Such treaties are common today and in place with many countries and the continuing development of activity in the CIS requires such a safeguard.

140Also, while Aer Rianta is covered by an existing agreement on double taxation relating to air transport undertakings, in the longer term a double taxation agreement is required with the CIS.

H. HOTELS

141Great Southern Hotels Limited (GSH) was acquired by Aer Rianta in 1990. There are seven hotels in the group:-

142The Shannon Airport Hotel operated heretofore by Aer Rianta became a part of Great Southern Hotels Limited from May 1991.

143Profits increased over each of the past six years to 1990. Results for 1991, however, were down due to a fall in US business from about 25% of the total in 1990 to 16% in 1991.

144Results over the past five years have been -

145Great Southern Hotels Limited have carried out extensive home marketing and the domestic market is a major contributor to hotel business. It is anticipated that by 1993 the following split of business will have been achieved:

146The company has carried out considerable upgrading in recent years at all hotels with a major investment of IR£1.75m expended on a new convention and leisure facility at Killarney Great Southern which opened in 1990. Work has been completed on a 16,000 sq.ft. conference and exhibition centre at the Galway Corrib, together with an additional sixty two bedrooms. This extension opened in March 1992 and cost IR£6.6m.

147The work carried out at the Galway Corrib has completed the current phase of major expansion within the existing hotels. The emphasis now has switched to expansion into Dublin and possibly Cork.

148Aer Rianta operate Great Southern Hotels Limited as a wholly owned subsidiary company. The Chairman of GSH is a member of the Aer Rianta board, while the Chief Executive of Great Southern Hotels Limited has joined the Aer Rianta senior management team.

149The hotels have achieved a remarkable turnaround in the past number of years. Until 1984 the company had accumulated losses but following the appointment of a new Board in 1984, the clearing of liabilities by the Government and with an injection of funds, the company with management and marketing has enhanced standards, adopted a competitive pricing structure and implemented strong financial reporting systems.

150Each hotel prepares weekly results which are collated at the central corporate office in Galway and monthly and annual accounts are prepared there.

151Great Southern Hotels Limited achieved a profit of IR£1.5m in 1991 and expect to better that in 1992 and subsequent years. In a situation where Aer Rianta may suffer reduced profits in time due to abolition of duty free, the Joint Committee are pleased to note that Great Southern Hotels Limited will assist Aer Rianta in expanding its core activities at home.

152Moreover, the transfer of the hotels to Aer Rianta enables the group to expand Great Southern Hotels Limited by expanding into Dublin or Cork where there is no group presence at present.

I. MAJOR ISSUES

153Aer Rianta has a five year rolling strategic plan which outlines the company corporate objectives and strategies. It also identifies key issues facing the company in the years ahead.

i) Continued passenger and freight traffic development and promotion of the three airports

154Dublin airport in 1991 accounted for 70% of passengers (5.3 million of a total of 7.5 million) and Aer Rianta indicated to the Joint Committee that the facilities available are near capacity. Aer Lingus advised the Joint Committee that it does not support this view. Aer Rianta is accordingly concentrating its efforts in establishing Shannon as a “hub”. The Joint Committee received different views as to the type of hub which could be created at Shannon. The Joint Committee believe that the question is linked with the Shannon stop over matter.

As regards passenger aircraft, Shannon has bilateral arrangements with all US airlines and very little documentation would be necessary to allow for additional carriers in or out of Shannon. Indeed, opportunities are being pursued which would see US/Canadian Airlines terminate at Shannon and passengers from Shannon then shuttle to the relevant UK destinations.

155Partnerships have been arranged by Aer Rianta with UK regional airports and the communities they serve and specific orders have been received from a number of UK based airlines to participate in the feeder service.

156However, successful implementation depends on a commitment from one US carrier to become involved in the project. Aer Rianta believe that a contributory factor in delaying the bringing of the concept to a successful conclusion has been the uncertainty generated by the Shannon status debate.

157Efforts to create a hub for traffic from the Commonwealth of Independent States to North America have been successful. Flights have already commenced from Kiev to Shannon and are operated by Air Byelorus and the services due to commence from Tashkent airport will be operated by Uzbek Airlines.

ii) Advancing of physical development plans (funding of capital projects)

158The major capital expenditure development is a new multi-storey car park at Dublin Airport. Work commenced in November 1990 with the second of the two phases of the development due to commence this year. The Joint Committee have already adverted in paragraph 65 to the car parking situation at Dublin Airport.

159The new car park will give one thousand additional short term parking spaces under cover. The budget is IR£13m with phase one costed at IR£5m.

160It is also planned before 1995 to extend the terminal building and increase the aprons at Dublin airport. The expected cost is IR£40m with part assistance being provided through EC structural funding.

161Of their nature, airports have a high capital cost structure (i.e. buildings, runways, equipment) as illustrated by fixed assets to total revenue ratios shown below for certain airports.

162Because of the high element of construction involved in the provision of airport facilities the lead time from approval of plans to completion of the project can be three years or even longer. Sales forecasts (passenger traffic) therefore have to be longer term than for many other service industries. It is only since 1986 that Aer Rianta has begun to include capital expenditure in its balance sheet and it will be a number of years before the company’s ratios begin to equate with those of other airport companies.

163Prior to 31 December 1985 all fixed assets in use by the company were owned directly by the Minister and were not included in the balance sheet of Aer Rianta CPT.

164In 1986 the Minister, as part of a review of this agency arrangement, decided that expenditure on certain long term fixed assets should be financed directly by the company. Consequently there are now two categories of fixed assets:

a)Fixed assets financed directly from Exchequer Funds and owned by the Minister at 31 December 1991.

These assets and their related depreciation charge are not included in the company’s financial statements.

b)Fixed assets financed directly by the Company since 1 January 1986 are included in the financial statements at their gross cost as shown below and are depreciated over their estimated useful lives.

165The company’s balance sheet shows major change as regards the carrying value of fixed assets even if the pre-1986 assets owned by the Minister are not transferred to the company i.e.

166Capital expenditure between 1992 and 1996 will be incurred on major extensions to terminal facilities at Dublin and Cork airports. The company projects average annual capital expenditure in the four years from 1992 to 1996 at IR£30m per annum. In the light of the ongoing recessions in the UK and the US, the aftermath of the Gulf war and trends in the aviation industry, capital expenditure programmes will be subject to review.

167The company’s strategic plan makes a number of significant assumptions regarding funding of the IR£120m capital expenditure:

168The Joint Committee understand that the company and the Department of Tourism, Transport and Communications are examining the question of EC structural funding grant support for these development plans.

iii) Adaptation of commercial retailing areas to cater for new type of demand

169The company is acutely aware of the need to keep commercial retailing areas under scrutiny and continually reviews its methods of catering for new types of demand.

iv) Expansion of international activities

170The Joint Committee are pleased to acknowledge the diversification of the company’s operations overseas, in particular the wide ranging business interests developed in the Commonwealth of Independent States (CIS) and compliment the company on its considerable efforts and achievements. The Joint Committee envisage that further opportunities await Aer Rianta and indeed any other Irish enterprise interested in the evolving market in the CIS. Aer Rianta see the development of the international division as a key element in ensuring the achieving of profitability, investment returns and future capital funding provisions and the company has given a high priority to the further development of opportunities overseas. The success of the company in establishing a presence in Moscow airport has presented further similar opportunities at other Soviet airports and with Aeroflot. The company has had a long and cordial business relationship with Aeroflot and the Joint Committee recognise the tremendous contribution that Aer Rianta management and staff have made in this area. Indeed, in the course of its visit to Leningrad and Moscow the Joint Committee were at all times impressed by the outstanding dedication and enthusiasm of all involved in the operations there.

171The company considers that its experience in a broad range of activities in Ireland was a significant factor in winning the original Joint Venture contract for the duty free shop at Moscow airport in the face of stiff international competition.

172The CIS venture operations are governed by agreements between Aer Rianta International and CIS Partners. The agreements are governed by CIS Law and the financial results of the Joint Venture Companies will be determined in accordance with CIS Accounting Practice. The Joint Venture Company’s Board of Management consists of four representatives of Aeroflot and three from Aer Rianta.

v) Completion of the internal market in 1992 and other EC related developments

173Aer Rianta expresses considerable concern in regard to the proposed completion of the internal market by 1992 and in particular the proposed abolition of vat free and duty free shopping for travellers to the United Kingdom and Europe as abolition would obviously have a fundamental bearing on the airports’ commercial activities. As already mentioned in Section B, duty free and tax free sales accounted for 28% of total revenues in 1991. The breakdown at individual airports is even more significant in terms of operational and commercial turnover and surplus based on 1991 results.

176Tax free and duty free sales are acknowledged as high margin earners and therefore in order to generate a corresponding surplus without this source, it will be necessary to increase substantially turnover from alternative sources. The Joint Committee advise therefore that the company consider the following:-

a)The desirability of competing with High Street outlets without the benefits of a major price advantage.

b)The additional resources (management, staffing and financial) to handle significant turnover of merchandise which is new to the company.

c)The physical space and cost of fitting out extensive shopping areas.

d)The range of goods to be carried.

e)Whether it makes more commercial sense to operate shopping areas on a concession basis.

177The tax free and duty free shopping facilities provide a range of consumables and gifts which appeal to the traveller and which can be selected quickly. Accordingly, any significant deviation from “tried and tested” product ranges will require detailed consideration bearing in mind the significant investment required.

178The Joint Committee do not see the concessioning of duty free shops as an option as it would not be feasible to have the Aer Rianta home shops operated by an international duty free specialist while Aer Rianta competed with such specialists for the operation of duty free shops abroad.

179The Joint Committee have noted previously that the loss of the duty free facility would have a major effect on profits. In a scenario where Aer Rianta were to do nothing to adapt its retailing, the loss at current rates is estimated at IR£12m. However, the undertaking of alternative retail repositioning strategies would lessen this loss. But even in the most ideally changed scenario, the maximum level of profits which Aer Rianta could hope to maintain would be IR£5m per annum. The annual loss therefore to Aer Rianta would appear to be a minimum of IR£7m.

3rd November, 1992

* The interest charges in 1990 and 1991 reflect additions to fixed assets which were financed by borrowings.