I am honoured to have been asked by the Minister, Deputy Varadkar, to become Chairman of the Dublin Airport Authority and I thank the Chairman and the members of the committee for the invitation to come before it today. It is a privilege for me to be here.
I want to take this opportunity to introduce myself personally to the committee, to provide it with an overview of my professional background and to give it my initial impressions of the Dublin Airport Authority. I will also outline the key challenges I see for the company over the next few years as well as the role of the chairman in addressing them. Following this, I would welcome any questions the members may have.
I grew up in Cork, the middle child of two teachers. I have three brothers and one sister. I went to school in Coláiste an Spioraid Naoimh in Bishopstown, in Cork, after which I studied law in University College Cork. It was the late 1980s and career opportunities were quite scarce in the country. I stayed on in UCC for a period to do postgraduate degree work, which I combined with teaching law and qualifying as a barrister in King's Inns here in Dublin. When I finished that, I went to the United States where I studied at Harvard Law School where I completed a Master of Laws degree.
After Harvard, I moved to New York City where I trained with Hughes Hubbard & Reed, which is a well-known Wall Street law firm. I learned an enormous amount in that job, but in many ways my epicentre was always in Ireland and after a number of years with that firm, I left and joined Arthur Cox, where I ran its New York office for three years, dealing mainly with the firm's US-based multinational clients with operations in Ireland. I returned to Ireland with the firm in 1996 having spent approximately seven years in total in the United States.
I was elected managing partner of Arthur Cox, a role equivalent to chief executive in a company, in 2003. I was re-elected in 2007 for a second term and I have just completed that second and final term in that role. Arthur Cox is among the largest law firms in Ireland with approximately 100 partners and 500 staff.
From a legal practice perspective, my background is in corporate finance and regulated industries. Over the past three years, I have led and continue to lead the Arthur Cox team which has advised the State on the legal aspects of the banking crisis and in legally implementing Government policy. In doing so, I have worked closely with the Department of Finance, the National Treasury Management Agency, the National Asset Management Agency and the Office of the Attorney General.
In addition, I head the Arthur Cox team which last year won the tender to become the lead legal provider to the Health Service Executive. Our role under this contract is to provide the HSE's corporate legal advice, while also directly managing the work of the other 30 law firms across the country which provide services to the HSE, rationalising expenditure on legal work nationally, reducing costs and improving results.
In terms of my experience most immediately relevant to the chairmanship of the Dublin Airport Authority, I am a non-executive director of two public companies: Paddy Power plc and TVC Holdings plc, which is an investment company, both of which are listed on the Dublin and London stock exchanges. As managing partner of Arthur Cox, I have also chaired the Arthur Cox Management Committee for eight years. One of the great advantages of being a corporate legal adviser is that I have had extensive experience and exposure to the corporate governance and business issues a very wide range of boards face in both the public and private sectors. I would be happy to expand on any aspect of my background and I have separately provided a detailed résumé to assist the committee in this regard.
I would now like to speak about the Dublin Airport Authority itself. Although my firm advises it legally, I was not overly familiar with the details of the company or its business prior to the beginning of this process. I never worked with it or met its board and executives. My primary understanding of the company and its business is almost entirely from travelling through its airports and from the press. The several weeks since the Minister, Deputy Varadkar, approached me about this role have, therefore, been particularly interesting. I have met the company executives and read as much about the business of the company as time has allowed.
Although my impressions are at this stage no more than initial, I would nonetheless like to share them with the committee. My first impression is that Dublin Airport Authority is a competent, well-run and effective business. It receives no funding from the State and operates on a fully commercial basis. The executive is sophisticated and dedicated and what it has achieved, particularly over the last four or five years, is very impressive. I do not make this statement lightly and do so only by reference to my experience of other Irish and international companies of which we, as a country, should be proud. I have not yet had the opportunity to engage with staff but my personal experience of people at the airport, its safety and operational record, as well as the level of successful change which has happened at the three airports over the past few years, indicate that they are of equally high quality.
The DAA had an annual turnover of just under €560 million in 2010, the most recent period for which financial results are available, and generated a pre-tax profit of €52 million during that year. Profit after tax was €33 million. The company derives its income from passenger charges and commercial activities such as retailing, both in Ireland and overseas, the provision of car parking, property rentals and investments. It is a major employer with almost 2,500 staff in Ireland and a further 3,500 employed by Aer Rianta International in 14 countries overseas.
It is not an overstatement to say that Dublin, Cork and Shannon airports are the gateways to Ireland. Approximately 96% of all air traffic into this country comes through these three airports. Broadly speaking, that is 96% of people coming to do business here, 96% of tourists flying into the country and, indeed, 96% of people living here travelling abroad for work or vacation. A total of 68 airlines fly into Dublin Airport alone, connecting Ireland to 171 destinations. As an island nation, these airports are some of the most important infrastructure which we possess and they have never been more important than now, when the only likely path to our economic regeneration is through optimising our international trade and accessibility. Our airports are not static but are living, breathing resources which need to constantly evolve, improve and upgrade if they are to meet the international standards expected by international travellers and meet Ireland's requirements for the future.
Between 2005 and 2010, DAA invested more than €1.6 billion at Dublin, Cork and Shannon airports. This total investment programme was achieved with only a net €400 million increase in the company's debt levels, with cash generated from operations and strategic asset disposals minimising additional borrowing. This investment programme included new passenger terminals in Cork and Dublin, two new boarding gate facilities in Dublin, new US pre-clearance facilities at Dublin and Shannon for passengers travelling to the United States and a wide range of other upgrades that have improved the passenger experience at all three airports and helped the efficiency of the airlines that operate from them. These key new facilities now form a permanent part of the country's modern infrastructure without requiring any support from the Exchequer.
Terminal 2 in Dublin Airport is a particularly good example of this. When terminal 1 was opened in 1972 it was designed to cater for 5 million passengers, less than a quarter of today's volume. It received criticism because it did not operate to these volumes for many years. I ask members to imagine the situation today if terminal 1 had been built even smaller, cheaper, and less capable and think back to the days before terminal 2 was opened and the unbelievably congested conditions in terminal 1 by that time, despite major extensions. Terminal 2 is a 50 year investment and an extremely rare opportunity to build infrastructure of such lasting importance to our country. For our children and grandchildren and just about every international person doing business in our country over that period it will be a central element of their primary port. It would have been short-sighted to have built it to the standards of past. It had to be built to the most modern specification and to future capacity requirements if it was to stand a chance of providing the required value to this country throughout its lifecycle. To put the importance of this in context, Eurocontrol, which is the European organisation that monitors air traffic control, estimates that air travel in Europe will nearly double by 2030.
We have just finished year one of that 50-year cycle and already we have international airlines such as Etihad, United Continental, Emirates and American Airlines, none of which would expand its Irish operations or fly to Ireland at all except for terminal 2. The terminal has delivered a substantially better travel experience for all users of Dublin Airport. It has capacity for growth, it facilitates business travellers and it was the right thing to do. Even more important at present, the Exchequer did not have to fund it.
Over the past several weeks, I have also become much more familiar with DAA's other business, Aer Rianta International, ARI, which is one of the leading airport retailers globally and contributes significantly to the profitability of the DAA. Its revenue supports the DAA in developing the infrastructure at our airports, helps it to borrow efficiently and reinforces its resolve never to rely on the taxpayer for funding. ARI recently won new contracts to run the retail operations of airports in China and India, which is precisely the kind of business Irish companies need to win. The benefits of this are not only financial but also keep DAA at the core of evolving international standards in airports and showcase the effectiveness of Irish business in these key emerging markets.
I was struck at how successful ARI has been in generating value through the investments it has made in other international airports over the years, thereby leveraging for the benefit of the taxpayer DAA's expertise in running airports. ARI currently holds successful equity stakes in Dusseldorf Airport as well as in Larnaca and Paphos airports in Cyprus. To illustrate how important these investments are, in 2007 ARI sold its stake in Birmingham Airport at a profit of some €240 million in order to fund investments in infrastructure at home, such as terminal 2.
This is not to deny that the DAA faces real challenges in the immediate period ahead. I see challenges arising under a number of different headings. The first of these is the appointment of a new chief executive. I have come to know Declan Collier over the past few weeks while I did my due diligence on the company. I have seen his work and the team he has built around him and it is quite clear to me that he has been an excellent chief executive who will be particularly hard to replace. The identification and appointment of a new chief executive is a particularly important job for the new chairman and I intend to devote significant energy to it over the next several months.
The second challenge is rebuilding a strong and effective board. The board of DAA is currently in transition, with the terms of a number of directors expiring recently, in addition to the departure of former chairman David Dilger and Declan Collier. It is, of course, a matter for the Minister as to who is appointed to the board but I intend to work with him to identify the optimal blend of skills and people to move the work of the DAA forward. It will also be a central part of the chairman's role to continue to ensure strong communication and transparency between the company and the Department of Transport, Tourism and Sport, as well as to engender a purposeful and cohesive dynamic in the DAA board itself.
The third challenge is reducing the DAA's debt burden. As I noted previously, the development of terminal 2 is a 50 year investment for the country. As terminal 2 and other infrastructure set out in the five year plan have just been completed, we are at the beginning of that investment cycle and it is therefore no surprise that DAA is currently operating with elevated levels of debt. DAA's funding profile is strong and prudent but there is no doubt that reducing the level of net debt and consequently the cost of that debt must be a business priority for the company. This will allow DAA to continue the development of its airports to meet Ireland's needs while also returning to a position where it can again pay cash dividends to the State.
According to its most recent annual report, DAA had net debt of €765 million at the end of 2010. It is planned to reduce this debt position over the next five years and the group's current funding facilities are designed to secure its medium-term position. Prudent management of the company's balance sheet will therefore be a central area of focus for the board over the coming years.
The fourth challenge is increasing passenger numbers. Since economic growth is the primary driver of airline traffic, passenger numbers coming through our State airports have declined significantly since the start of the economic crisis, just as they rose to record highs during the many years of economic growth. In 2010, the most recent year for which figures are available, 22.6 million passengers used the Dublin Airport Authority's three Irish airports down from a high of 30 million passengers in 2007. While the final data for 2011 is still being collated, my understanding is that overall passenger numbers at DAA airports have increased slightly in the past year. While the increase is modest the detail of how it is occurring is significant and encouraging.
In recent years there has been almost a total collapse in domestic air traffic between Irish airports due in large part to the improvements in the Irish road and rail network as well as to economic conditions. However, it is interesting that this has resulted in a decrease of more than 1.3 million domestic passengers using the DAA's three airports for domestic flights since 2007. The good news is that in the past year the decline in domestic travel has been more than offset by an increase in international passengers coming to Ireland which, from a business and tourist perspective, represents a materially greater benefit to the Irish economy. Developments such as the opening of the daily Emirates service from Dubai to Dublin earlier this week gives further cause for at least some optimism.
However, the DAA must continue to strive to increase passenger numbers coming through its airports not only to grow its own business but, more important, for the benefit of the economy in general. As chairman, it will be a central objective of mine to ensure that the company remains focused on this task by continually improving the service provided to travellers, reducing costs and working with other stakeholders to optimise the attractiveness of Ireland as a destination despite the constrained circumstances of the Irish economy. I believe the DAA should continue to develop and implement strategies that incentivise its airline customers to deliver increased passenger numbers at its three Irish airports. Its current policy of offering competitive airport charges linked with attractive incentive schemes appears commercially robust and I note that the company has recently indicated that charges at Dublin Airport will be flat for 2012 with no increases planned.
In the context of increasing passenger numbers, however, it is of central importance to recognise that charges at our airports are only one of many factors that influence whether people travel to Ireland as business people or tourists. Air fares, additional baggage charges and other airline fees, hotel and food costs, the effectiveness of the tourism industry and business robustness as well as overall economic conditions are among the influences over which the DAA has no control. Nevertheless, what the DAA can prudently do it must continue to do and, as chairman, I intend to ensure that the company retains that focus.
The fifth challenge I see is the need to continue to reduce costs. I have been impressed at how effectively the DAA and Dublin Airport in particular has moderated its costs in recent years despite the opening of a new terminal. When the Commission for Aviation Regulation last set its charges for Dublin Airport in 2009 it did a comparative study on the efficiency levels of the airport versus a number of comparable European airports. The study found that Dublin Airport had the second lowest operating cost per passenger of the airports it reviewed. Since then Dublin Airport has improved its efficiency by a further 21% while effectively doubling the capacity of the airport and radically improved its service and infrastructure. To put this in context, in 2012 the DAA is operating at 2008 cost levels, prior to terminal 2 being opened. For example, the company's cost recovery programme in recent years included voluntary pay reductions ranging from 5% to 12% for all staff earning more than €30,000 per year, changes in work practices, a voluntary severance scheme and reductions in all non-pay costs. These actions contributed to reducing the DAA's payroll costs by 10% during 2010. All of this was achieved within a positive and constructive industrial relations environment. However, in the ongoing economic climate the drive for cost reduction must be strongly maintained to safeguard the business and ongoing development of our airports, to reduce debt, to which I referred earlier, to reduce costs and to return to an ability to pay cash dividends to the State.
The final challenge I see is the resolution of the structure of Cork and Shannon airports. The question of the optimal structure for Cork and Shannon airports is a matter of national policy for the Minister, Deputy Varadkar, and the Government. I am aware that the Minister is currently reviewing the Booz report on the topic and I am mindful of the considerable amount of work that has been done over many years on the question. As chairman of the DAA, I envisage my role as working closely with the Minister, the Department and the board to ensure that whatever policy is adopted is delivered efficiently and in a manner that is optimal for the ongoing viability of the assets and operations which remain within the DAA.
It will be a privilege for me to become chairman of the DAA and to work with the board, the executive and the staff in the company. My goal as DAA chairman will be to manage and lead the company's board in an effective and efficient manner. Working closely with the board of the company and with a focus on the policy objectives communicated by the Minister, I intend to challenge and to encourage the chief executive and the management team to continue to develop our airports in accordance with the country's needs, to provide a quality airport travel experience for passengers and to continue to manage the business commercially. Finally, I thank the chairman and the members of the committee for the invitation to appear before the committee today and I would be pleased to take any questions.
