The joint committee meets to discuss the regulation of Dublin Airport Authority. I welcome Mr. Jim Callaghan, head of regulatory affairs, Ryanair. I draw attention to the fact that members of the committee have absolute privilege but that the same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I propose that we hear a short presentation from Mr. Callaghan which will be followed by questions and answers.
Regulation of Dublin Airport: Discussion with Ryanair.
Mr. Jim Callaghan
Thank you very much, Mr. Chairman. I thank the committee for the opportunity to present on the issue of the failure of aviation regulation policy in Ireland and the urgent need for competition in airport services. I will take a brief look at the situation in the UK because, as the committee is aware, the aviation regulation regime in Ireland is a carbon copy of that in the UK. There has been considerable criticism of the UK regulatory regime in recent days, most particularly by the Office of Fair Trading, OFT, and the Competition Commission in the UK. Furthermore, the UK Civil Aviation Authority has recently been quoted in the press as calling for a break-up of the British Airports Authority, BAA, monopoly on the London airports and in Scotland.
The Competition Commission's preliminary findings make very strong statements against the joint ownership by the British Airports Authority of the Scottish and London airports. More particularly, the commission refers to the fact that the way in which the BAA monopoly has conducted its business has adversely affected competition and says the inadequate regulatory regime, as operated by the Civil Aviation Authority, has also adversely affected competition. These last two points apply equally to the situation in Ireland. I will expand on these points.
The Competition Commission is investigating the market power of the BAA monopoly. It is looking at a possible break-up of this monopoly and at the possible introduction of competing terminals at the airports. Ireland needs similar pro-consumer competition in Dublin Airport. The second slide in our presentation shows that Dublin Airport is, currently, the second most expensive base in the Ryanair network. That is before the doubling of charges predicted by the Commission for Aviation Regulation, CAR. The Dublin Airport Authority, DAA, constantly claims that its airport charges are among the least expensive in Europe. Members can see from the graph that they are already Ryanair's second most expensive and will soon be the most expensive, once the doubling of airport charges occurs.
Dublin Airport's monopoly of airport services does not work. Airport monopolies lead to high prices and poor services. This is the case in every sector of the industry. There are several examples of highly expensive and inefficient facilities that have been provided by the DAA, both in Dublin Airport and in Cork and Shannon. For example, Pier C was constructed seven years ago at a cost of €150 million. This pier is now being made redundant by the ridiculous location and excessive size of Terminal 2, T2. Similarly, Pier D, which was supposed to be a low-cost pier, has cost almost €130 million. Its original cost, six years ago, was to have been approximately €16 million. T2 is, perhaps, the most blatant example of the kind of abuse identified by the UK authorities. It makes perfect sense for a regulated monopoly to spend more than €800 million on a terminal whose cost was originally estimated at less than €200 million. This is because the regulatory systems in Ireland and the UK incentivise this kind of waste. There is a guaranteed rate of return of 7.5% on everything spent on capital expenditure, CAPEX. What company would not overspend on capital facilities if it has a guaranteed rate of return on that basis? The new terminal in Cork was built for €180 million. Terminals of the same size and quality are being built throughout Europe for a tenth of that price. Cork Airport has more than €100 million of debt, which has rendered the airport completely uncompetitive. The same thing is happening in Dublin Airport on a much larger scale. This is clear evidence that regulation has not worked in Ireland.
We have identified numerous inflation busting price increases. The CAR has confirmed that charges at Dublin Airport are set to double, based on the amount of money being spent by the DAA monopoly. In addition, we have poor services, including unacceptable security and immigration queues. There is no consultation with users on what their reasonable requirements are. This is an obligation under the Aviation Regulation Act 2001 but the DAA ignores constant calls by all airlines for low-cost and efficient facilities at Dublin Airport.
The next slide shows that Dublin Airport costs are exploding. Volumes at Dublin Airport increased by 47% in the past five years and yet we have massive price increases. Passenger charges are up 31%. If one adds this to the increase in passenger volumes at the airport, the revenue from airport charges has increased by 93%. The car hire levy has increased by 58% and the resulting revenue is up by 132%. Car parking charges are up by 100% and resulting revenue by 200%. Check-in desk charges are up by 200% and revenue by 341%. This is all at a time when general inflation is 4%. It is clear that the DAA is being rewarded for its inefficiency and waste. These costs will double again, according to the CAR. In any competitive market, as volumes increase, prices should come down. Yet, in regulated airports such as the London and Dublin airports, volumes and prices are both going up. This is clear evidence that regulation has failed.
The CAR is supposed to replicate the benefits of competition. These are that prices should fall and services should improve. Neither of these has occurred under the CAR. Under the terms of the Aviation Regulation Act 2001, the CAR is required to facilitate the efficient and economic development and operation of Dublin Airport to meet the requirements of users. That is not happening. The commissioner is supposed to protect the reasonable interests of users of Dublin Airport. He has not done that. He is supposed to have regard to the level and quality of services offered and the reasonable interest of users. He is also supposed to have regard to the cost competitiveness of the airport services at Dublin Airport. As I showed in the earlier chart, Dublin Airport is already our second most expensive airport and prices are expected to double again.
These failures by the CAR to fulfil its statutory obligations are clear from the last revised determination. I know the commissioner hates this term. However, he has rubber-stamped a €1.2 billion addition to the regulated asset base, RAB, which is the basis on which airport charges are calculated. The more money the monopoly can cram into the RAB the higher the airport charges will be. The commissioner's consultants confirmed that T2 was 50% too large. However, he allowed the vast majority of that expense into the RAB. T2 costs have quadrupled from the original estimate of between €170 million and €200 million to more than €800 million. This makes perfect rational sense for a regulated monopoly.
The commissioner has failed to attend any user consultation meetings, despite repeated requests by users. He has engaged in private meetings with the DAA. Users, and not only Ryanair, have confirmed that CAPEX does not meet their reasonable requirements. Ryanair, Aer Lingus, Aer Arann and CityJet, which are the four main users of Dublin Airport, recently formed the Dublin Airport CAPEX consultation committee. This is a grouping of airlines that have very different interests in the market and compete very heavily with each other but that recognise that their needs are not being met by the DAA and are being ignored by the CAR. This is not a Ryanair issue. It is one for all the airlines at Dublin Airport. The CAR confirms that costs will have to double to pay for this wasted expenditure.
Another blatant example of regulatory failure is the CAR rubber-stamping of a 200% increase in check-in desk charges. The DAA also doubles charges for self-service kiosks. The commissioner simply says this has nothing to do with him. During the so called consultation period the DAA refused to provide the cost details underlying its cost increase and said they had been sent to the CAR. The CAR, in turn, refused to provide the costs because the DAA had claimed they were confidential.
This is a complete monopoly over airport services in Dublin. How can information regarding the costs of check-in desks be commercially sensitive? Users in any event have already paid for the terminal space through airport charges. One of the costs included in airport charges is the cost of providing the terminal space. Moreover in terms of self-service kiosks, SSKs, Aer Lingus, British Midland and Aer France have not been charged for kiosks in the past three years and now all of a sudden the Dublin Airport Authority is introducing a charge and Ryanair has been forced to challenge legally the CAR's decision on this issue.
If we look at the CAR's costs, these have also doubled in the past five years from €2 million to €4 million. The CAR had a 40% increase in staff numbers which is completely unjustified based on its workload. Moreover, salaries have doubled or almost doubled from €48,000 to €87,000 in the past five years, again at an inflation rate of only 4%. They also have an additional €1 million for advisers, which is unusual given the fact that there was no review in 2008 and the next review is not till next year. The inefficiency of the regulator is indicated by his failure to control the costs of the DAA. Consumers are forced to foot the bill for this inefficiency.
If we look at the costs, again we see them doubling from just under €2 million to just under €4 million and the major increase is in salaries. What is the justification for going from a salary of €48,000 to €87,000 on average per official? That is a significant increase in salaries when inflation is just 4%.
Another blatant area of inefficiency in the CAR is his handling of EU 261 complaints. If we look at the 2007 budget for EU 261 it is more than €300,000. In fact, his original budget was €500,000 and he only reduced it when Ryanair highlighted this extreme waste in the press. He has a staff of 2.5 personnel to respond to numerous complaints but, if we look at the complaints in 2005, he had 130, which averages to just 2.5 complaints per week or one per person per week. In 2006, he had 181 complaints, which is three per week. In 2007, 252 and it now emerges that 64% of those were non-Irish complaints so all he had to do was stick them in the post to another national enforcement body. He literally dealt with 91 complaints for the whole year at a cost per letter of more than €1,000. The CAR is clearly overstaffed, underworked and overpaid.
Let us look exactly at what they are doing. They claimed at this hearing to have a high level of activity when responding to one letter per week on the EU 261 front. They have had two reviews one in 2001 and one in 2005, an interim review in 2007 and the next review is not until 2009. We have 2.5 people replying to one letter per week at €1,000 per letter. What exactly are the other 18 officials doing at €87,000 per year? The CAR is even more inefficient than the DAA and again consumers are forced to foot the bill for his inefficiency.
Competition works and regulation fails. That is clear in the UK and it is very clear in Ireland. The regulated asset base, RAB based regulation actually incentivises inefficiency. Why would the DAA monopoly spend €200 million on a terminal if they can get away with spending more than €800,000. Passenger charges have doubled and are set to double again. The Government must allow for competing terminals in Dublin Airport. The Programme for Government 2002, states: “We will examine proposals for a new independent terminal at Dublin Airport and progress them if evidence suggests that such a terminal will deliver significant benefits.” It was concluded in an independent report afterwards that a competing terminal would deliver major benefits. There were 13 expressions of interest to provide that competing terminal. If we had a competing terminal at Dublin Airport instead of an out of control monopoly wasting more than €800,000 on a second terminal, I can guarantee that services would massively improve and costs would fall at Dublin Airport .
Again the UK Competition Commission are set to recommend the break-up of the BAA monopoly and introduce competing terminals at the airports. The DAA should be forced to fund T2 through its own funds. Members will be aware that it sold the Great Southern Hotels and its interests in Dusseldorf and Birmingham airports, netting approximately €800 million in the process, roughly equal to the cost of T2 and those investments were made using revenues from airport charges at Dublin Airport. Therefore that revenue should be used to fund the development of T2. Members will not be surprised to learn that the last proposal is that we propose to sack the regulator and save consumers approximately €4 million per annum because regulation would not be needed if we had competition at Dublin Airport.
The CAR came before the joint committee on two different occasions and I think Mr. Callaghan was at one such committee meeting. Many of the questions raised by Mr. Callaghan today were put to CAR and we got answers. I suggest that we go back to CAR and ask it to explain the scenario. I too have a problem with a fixed return on investment in the capital projects, as I see there is no real incentive to deliver a terminal at a low cost. The Commission argues that we were wrong and that there was an incentive, but I cannot see it because it is open to the Commission to implement it and I have seen no evidence of that to date. As a committee we should look at this in more detail and I welcome Mr. Callaghan's comments.
I welcome Mr. Callaghan's presentation on behalf of Ryanair. I am trying to get a read on the issue from the point of view of how it impacts on the end user, the customer at the airport. We are hearing numerous costings for Terminal 2. The question is whether the charges being imposed by the regulator are being imposed in a manner that seeks to meet the cost of the new terminal. If that is the case, what is the true cost of T2? When Mr. Guiomard appeared before the committee he mentioned a figure of €1.2 billion. The Dublin Airport Authority states the cost will be in the region of €395 million at current prices and Ryanair has its own figures on this. What is the true picture as regards the pricing mechanism of the cost of the terminal? With regard to RAB, the regulated asset base, what is the alternative model of costing in that sense? I am a layman and I am seeking to broaden my understanding of the issues. If we had a different model would it be more efficient? What does Ryanair think is the more efficient model? What are the powers of this committee to question until we get to the bottom of what is quite a confusing issue? I am not completely convinced the regulator is acting in the best interests of the consumer. I am not convinced that it is an openly competitive model, but I cannot explain the reason for not being convinced. I need further information. Perhaps it was naivety and lack of understanding on my part, but when the Commission for Aviation Regulation was here it give us a rose-tinted view of matters. I called specifically for Ryanair to attend today to obtain another point of view and then we could recall the Regulator so that we can see the true picture. I am not convinced the cost model that pertains to Terminal 2 is necessarily the correct one. As a Corkman who finds it necessary to use Dublin Airport every time I go to Dublin, I do so reluctantly because of the sheer hassle one must go through and the charging structures that apply to everything one does from the time one parks one's car to when one boards the plane. Perhaps the aviation regulator should be brought to book in regard to some of these charges that are applied to consumers, to whom we have ultimate responsibility.
I do not know whether it is appropriate to ask, but would it be possible for Mr. Callaghan to expand on his views in regard to the servicing of debt vis-à-vis Cork Airport and the future of that airport. Is Ryanair’s potential involvement in Cork Airport hindered by virtue of the debt the airport is saddled with and the cost structures that arise as a result of that debt?
I thank Mr. Callaghan for attending and outlining the Ryanair case in regard to the costs in Dublin Airport. Like Deputy Sherlock, I am a consumer and a regular user of both Ryanair and Aer Lingus. In the past five years charges by DAA have increased. The levy has been increased. Parking charges have increased. In respect of Ryanair the fees for credit card payment are up, the baggage charge is up and the charge for priority boarding is up. There appears to be a certain amount of airport price inflation that appears similar to medical inflation in that inflation is higher in some areas than it is in others. What Mr. Callaghan has pointed out is very serious and we should certainly revisit the issue with the regulator. There are apparently gross inefficiencies that this committee is tasked with finding out to see what can be done about it. I thank Mr. Callaghan for his presentation.
I welcome Mr. Callaghan. His presentation was an interesting riposte that counterbalances what we heard in earlier submissions. I tend to like Ryanair because it broke the monopoly in air travel and opened it up to people in Ireland who could not previously afford it. Ryanair is an aggressively competitive business firm. It is not always right, but that is true of everybody. We will have to sift through this submission and, with the other one in our hands, revisit the whole issue later.
One or two things bother me. Mr. Callaghan expressed the opinion that Cork Airport is far too big. I do not know what the Chairman's view is but I used to fly from the old Cork terminal and it was a nightmare. I do not find the new terminal too big. It is very comfortable and civilised. I have flown once or twice with Ryanair out of Paris Beauvais Airport and would never fly there again. The queues for the various Ryanair services intersected and crisscrossed each other. It was virtually impossible to walk from one point to another, and it was quite unsafe. It was certainly uncomfortable and stressful. Is Mr. Callaghan saying that is the ideal? I prefer Cork as it is.
I congratulate Ryanair on being recently awarded the contract for services from Kerry to Dublin. However, its first action was to announce a cut in the number of flights. Business people have contacted me in the past 24 hours to express their concern about this. Does Ryanair intend to make its profit by cutting a service on which the community depends? Kerry is a peripheral county and the people there have come to depend on daily flights to Dublin. Now Ryanair has moved in, Aer Arann is moving out and the number of flights has been cut by one a day.
I do not wish to sound completely negative. I prefaced my remarks by saying I fly with Ryanair. Apart from Paris Beauvais, Ryanair is my airline of choice. However, there are some aspects of its corporate presentation about which I have serious reservations, not least the unfair and unprofessional manner in which it pilloried and caricatured the former Taoiseach. That was offensive to me as a customer and as a patriot.
Mr. Callaghan mentioned the failure to attend any of the consultation meetings. The point was made that there must be consultation. I am aware of the difference between consultation and listening to what one is told. Is Mr. Callaghan saying the CAR did not even attend the consultation meetings? If that is true, we were misled, because we were told the CAR engaged in consultation.
Mr. Jim Callaghan
The CAR has never attended a consultation meeting on the €1.2 billion worth of CAPEX. Since the four main airlines established the consultation committee CAR has started to attend the meetings. However, before signing off on the €1.2 billion worth of CAPEX, despite repeated requests for it to attend and repeated warnings that the DAA was not listening to users, CAR never attended. It attended seven separate meetings with the DAA and none with the users.
Perhaps Mr. Callaghan might respond to some of the questions.
Mr. Jim Callaghan
Let me deal with Deputy English's question. I realise this is a very complicated area. It is made complicated by the regulator and the regulated monopoly. However, it boils down to the very simple fact that if one offers a monopoly the incentive of getting a fixed guaranteed rate of return on the amount of money spent, it invests a huge amount of money in convincing the regulator that it must spend this money. Let me give an example. Ireland is approximately two years behind the UK. Hence the Competition Commission is examining the issue. For the past two years we have been fighting a very similar situation at Stansted Airport where BAA informed users it intended to spend £4 billion on a second terminal and runway at Stansted, a low-cost airport. We put forward an alternative proposal that a second runway and a second very high quality, efficient, low-cost terminal could be built for less than £1 billion. That is exactly the situation we are dealing with in Ireland in regard to Terminal 2. Originally it was proposed to spend €170 million to €200 million but now the figure is €800 million. That brings me to Deputy Sherlock's question.
Does Deputy Sherlock wish to come in?
I will come in on the second round.
Mr. Jim Callaghan
There is significant obfuscation and confusion being created by the DAA which claims the terminal will cost €395 million. However, there are additional factors. When one adds the cost of a huge pier leading off the terminal and all the associated works and takes account of the fact that Pier C which cost €150 million seven years ago is being written off and incorporated into the terminal, the estimated cost is approximately €850 million. It makes sense for the DAA to claim the lower figure, but it is spending €1.2 billion. That includes the cost of other projects but the vast bulk relates to Terminal 2. This is what is commonly referred to in the industry as regulatory gaming, an accepted term in the industry for such behaviour. That is what the DAA is engaged in in terms of its claim that the terminal will cost only €395 million. However, one cannot have a terminal without a pier and one cannot build Terminal 2 at the proposed location without destroying an existing pier which cost a lot of money.
The Deputy asked what was the alternative to regulated asset based costing. It is a very good question and something with which we have been grappling for the past 18 months to two years in the context of what is happening in the United Kingdom. It is a very difficult issue to address. One wants to replicate the benefits of competition, but there is no competition. Dublin is different from other major European cities in that it does not have a secondary airport such as Hahn, Charleroi or Ciampino. Most cities have two or three airports. Dublin has one. It is, therefore, doubly important that the regulator get matters right, but the real solution — it is something the Government included in its programme for Government — is to inject competition into the airport. If we had a competing terminal at Dublin Airport, whether it was used by Ryanair or Aer Lingus, competition would force the DAA to reduce its prices and improve its services overnight or risk losing its share of traffic. That is an issue the Government must re-examine. The only sure way of ensuring a competitive airport is to have competition within the airport.
On the servicing of debt in the context of Cork Airport and Ryanair's future involvement, again, this is a crucial question. We have very limited services at Cork Airport because of this. The airport has been strapped with more than €100 million of a debt of €180 million. We will fight tooth and nail to make sure we do not end up paying for any of the rest of that debt. Cork Airport is completely uncompetitive with the huge number of other airports around Europe to which we operate. Unfortunately, until a solution is found, that debt will mean a limitation to our operations at Cork Airport. I am not a commercial expert within Ryanair, but that is an obvious result of the mess created in Cork by Aer Rianta, now the DAA.
In response to Senator O'Sullivan, I am not saying Cork Airport is too large. There are several examples around Europe of comparable airports with new terminals with similar capacity. I accept that Beauvais is not a good example and it is not one of our bases. It is in the process of building a new terminal. Marseille Airport is a little smaller than Dublin Airport but has developed a low cost terminal with the same capacity as Cork Airport for €16 million. I recommend that the committee take a trip to Marseille to see what airports such as these are doing. Bremen Airport is another example of where a cargo terminal was converted into a low cost terminal with the same capacity as Cork Airport for €6 million. Something is wrong with a company which spends €180 million on a terminal at a small regional airport. I apologise to Cork Airport. It is having a dramatically negative effect on traffic growth at the airport.
Deputy Ardagh commented on Ryanair's fees. I expected a question. Unfortunately, I am not on the commercial side. However, I make the point that throughout its history Ryanair has revolutionised air travel. It is no longer a mode of transport for the privileged few. It used to be like a cruise ship experience. One had a wonderful meal and was catered to on board. Now air travel is what it was meant to be, a transport mode to get people from one place to another. That is crucial for an economy like ours, an island economy, where the only way of getting off the island is on a ferry or an aeroplane.
On the issue of fees, all of the fees to which the Deputy referred in relation to Ryanair are discretionary. If one does not check in a bag, one does not pay for it. A bag carries an associated cost. There is a handling cost. There is also the huge cost of fuel which now accounts for more than 45% of our costs. What we are doing is identifying cost areas and asking passengers who choose to use those services to pay for them. That is not the case at Dublin Airport. One is forced to pay these charges. If one uses the airport, one has no way of getting out of them. That is the nature of a monopoly. If one does not like Ryanair's fees, one can fly with another airline. There is no other airport in Dublin. One must, therefore, pay the charges.
I addressed Deputy O'Sullivan's point in regard to Beauvais.
I would welcome the promotion but I am still only a Senator.
Mr. Jim Callaghan
I apologise. I cannot comment in regard to County Kerry.
There is breaking news. I read it only this morning.
Mr. Jim Callaghan
We have massively increased capacity at Kerry Airport. We have 189 seats as opposed to fewer than 100 for Aer Arann. Unfortunately, I cannot comment on the number of flights.
Perhaps Mr. Callaghan might check the matter and respond later.
Mr. Jim Callaghan
Yes. That is fine. As to the offence of advertising against the Taoiseach——
The airline has its genesis in Ireland.
Mr. Jim Callaghan
I understand that. Ours is an equal opportunities organisation in terms of lack of respect. Other Prime Ministers, finance Ministers, politicians and celebrities have featured in our advertising. I do not know whether that gives much consolation. Ryanair is an aggressive company. It is highly competitive and its advertising often reflects this.
I thank Mr. Callaghan for those answers. We need to distinguish between discretionary and airport charges. I have flown to far flung places with Ryanair. I slept on the floor of Frankfurt-Hahn Airport, not a very comfortable place to sleep, while awaiting a transfer to Ciampino to watch Ireland play Italy in the Six Nations Championship. However, had I travelled with Alitalia or Aer Lingus, I would have paid through the nose for the privilege.
There are many customers who will take whatever steps are necessary to reach their final destination, including, if they must, sleeping on an uncomfortable airport floor. The argument is not about the extra charges Ryanair imposes. The bottom line is to pack a smaller bag. Most people I know travel at weekends and can simply put their bags in the overhead locker. We must distinguish between that charge and those levied by airports on consumers. That is the point.
I do not wish to harp on about the cost of Terminal 2 but who will its end users be? Who will pay for it? If Ryanair or any other airline will not use it, will they have to pay for it? Will it be the taxpayer who will ultimately pay for it? Who will be the net beneficiaries when it is completed? This issue must be hammered out. If I have learned anything today, it is that more questions must be asked of the regulator who must be brought back to address the points outlined in the submission.
Mr. Jim Callaghan
I will respond to the Deputy's question because it is very interesting. The bottom line is that everybody will end up paying for Terminal 2. Aer Lingus's position has always been that while it wants the terminal, it will not pay any more for it than any other user of the airport. Interestingly, this has led to the DAA discussing the spending of an additional €450 million on Terminal 1 because the only way to justify everyone paying the same amount is to spend more on that terminal. On top of this, because the DAA has massively overbuilt Terminal 2 it is talking about reducing the capacity of Terminal 1 by 40%, from 25 million to 15 million passengers. It will spend an extra €450 million on Terminal 1 and at the same time reduce its capacity by 40%. This nonsense is caused by this form of regulation. Therefore, to answer the Deputy's question, we are all going to pay through the nose.
I thank Mr. Callaghan for his presentation which probably raises more questions than it answers. The committee may revisit the issue and perhaps look at other companies and talk to the head of regulatory affairs before it comes back to the regulator. I also thank members for attending.
The joint committee adjourned at 4.55 p.m. until 4 p.m. on Tuesday, 10 June 2008.