Booz favours Shannon-DAA split

THE long-awaited Booz Report on the future of the State airports has recommended that Shannon be separated from the Dublin Airport Authority (DAA).
It has also identified a concession model as the “preferred option” for Shannon, which could see Clare County Council take a leading role in its operation.
While Transport Minister Leo Varadkar is not bound by it, he will draw on the options outlined in the document, released this week in a redacted form, and said he will make a decision on Shannon’s future by Easter.
The report goes through five options for Shannon’s future: no change or full centralisation within the DAA; DAA restructure toward greater separation; a concession model; public-private partnership and full privatisation.
With regard to the concession option, the report states it is the one favoured. “The introduction of a holding entity at Shannon Airport with the objective of appointing an appropriate airport board and facilitating a long-term operating concession would bring a number of benefits over the current situation and is considered the preferred option for Shannon, based on the evaluation criteria.
“The composition of the local authority holding company could include both the Clare and Limerick County Councils, with the former recently approving such an approach. The holding company could also include Shannon Development as part of a move to integrate the airport and nearby industrial land, as well as relevant commercial interests and other national bodies.”
The concession model, it finds, would give full autonomy for the development of traffic and allow specialist airport operators and passenger and cargo business developers to be recruited to the management team. The report also states it would “have positive impacts on regional economic development”.
Despite the advantages, the option is not without downsides. “However, our analysis shows that, under a number of scenarios and even with a significantly reduced debt allocation, any airport operator would find it challenging to operate the airport on a viable basis that generates sufficient cash flow to meet its operational costs, maintenance and investment requirements. This highlights a need for additional support to the airport to accommodate the withdrawal of DAA support. For example, this could include establishing local funding sources, or more closely integrating the airport with adjoining industrial developments (the Shannon Free Zone, supported by the inclusion of Shannon Development in the new holding company).”

“In fact, the latter approach could prove to be the most sustainable, creating opportunities to exploit market synergies and increase investment in cargo business, as well as to enhance development in nearby industrial zones.
“Overall, the combination of benefits associated with the concession model would enhance financial viability of the airport and provide a framework to allow greater focus on development of a long-term strategy for generating sustainable revenue streams across both aeronautical and non-aeronautical businesses.”
Having no change to the current structure, something that Mr Varadkar had already publicly dismissed, is deemed a poor option. “Current demand levels are too low for the airport to make an operating profit and historic capital investment levels have resulted in high debt levels and interest payments, which add additional constraints to the airport’s cash flow. The DAA’s projected demand levels appear overly optimistic, particularly in the context of increasing airport charges and a marketing approach that many stakeholders feel is inadequate. There is also a concern that, under the existing DAA ownership structure, the airport is not well placed to be able to take advantage of niche business opportunities.
“With traffic levels showing further reductions this year, there is a growing sense that if no change is made, then Shannon Airport will continue to decline.”
While a DAA restructure towards greater separation would have some benefits, the report also highlights some weaknesses and it concludes that “These considerations suggest that this option may offer limited material change from current situation, although it could increase the perception of airport autonomy among airport stakeholders. This option would require convincing lenders that there is no material change to the ability of the group to meet its financial commitments. There would also be some additional costs associated with creating extra governance at the national level, and through duplicating management roles at the airport that are currently performed by the DAA.”
It is also against privatisation of Shannon. “Over the longer term, the new airport company may compete more closely with DAA’s remaining airports (with Cork in particular) affecting future sales values.
“Further weaknesses of the full privatisation option include risks to regional economic development since the airport owner would have no incentive to meet regional objectives and would be primarily motivated by profit incentives. In addition, local government would be left with no influence over the airport and in the most extreme scenario, the airport would be closed down if the owner chose to do so. This was found to be a major concern of stakeholders, who consider the airport to be a strategic asset for the region and a key driver of economic growth.”
It also says that current market conditions indicate that the time is wrong to sell Shannon. In its initial stages the report outlines the drastic decline at Shannon. “Traffic at Shannon Airport has reduced over the last five years from 3.6 million in 2006 to 1.8m in 2010, which represents a 50% reduction from its peak level of services. This decline has been driven by various factors including the economic downturn and a reduction in capacity by Ryanair from 2009 and a decline in Irish domestic traffic.”
It finds that the status quo puts Shannon at more risk than Cork. “Of the two airports, Shannon Airport is faced with the greatest threat to its future viability under current ownership arrangements. This reflects the significant deterioration in market conditions affecting the airport and the challenges for the DAA in developing an alternative growth strategy to take advantage of the airport’s unique characteristics and connection with nearby industrial development. Reflecting the urgency of the situation at the airport, local stakeholders are more vocal in their support from the DAA and advanced in terms of readiness for new ownership models involving local authorities and business groups.”
After considering several international examples, it states, “evidence suggests that separation from the existing DAA structure and organising Cork and Shannon airports into functioning local airport authorities with an independent management will improve the airport’s growth prospects, operating performance and overall accountability”.
Engaging other bodies in running an airport, which remains in State hands, may be effective where there is opposition to privatisation, going by international examples it states.
“Where strong public sentiments exist against any private ownership, as is the case for Shannon and Cork airports, the use of airport concessions are an attractive option for private sector involvement and structuring a high upfront fee with lower recurrent annual payments could be advantageous for debt alleviation,” the report states.