Business News

Up in the air

By Business & Finance
03 April 2010
airplane stock

Terminals are half empty, redundancy and industrial unrest have replaced shopping trips to New York at Irish airports and there is no discernible government aviation policy to help stop the rot, writes Fearghal O’Connor.

The Irish aviation sector is in turmoil. Redundancies and plummeting passenger figures are the order of the day and many within the industry believe that a lack of a coherent government policy for the sector has only exacerbated a downturn that is decimating passenger traffic.

DAA’s January passenger figures for Dublin airport, obtained by Business & Finance, show serious declines in passenger numbers for January 2010 compared to January 2009. Ryanair experienced a 21.6% decline in passengers while the Aer Lingus decline was 14.6%. Total passenger numbers fell 17.8% for the month compared to January 2009, a month which itself saw a 11.5% decrease on January 2008. And Geoffrey O’Byrne White, CEO of Cityjet, believes the meltdown may only be starting and the airport could soon handle little more than half the 24 million passengers per annum it did at its peak.

“The decrease in numbers is very misleading because it is only the tip of the iceberg,” he says. “That decrease has happened against a background where every airline is offering ticket prices that are below cost. Aer Lingus is losing money, we are losing money, even Ryanair is losing money.  Sooner or later people are going to pull capacity and costs are going to go up. That will drive the numbers down by a substantial factor beyond where they have fallen to at the moment. What you are seeing at the moment is the very best situation and that is only going to get much worse. You may well be looking at a 30% to 40% reduction in traffic at Dublin.”

Representatives of foreign airlines operating in Dublin report that their load factors have not been as badly hit as Aer Lingus or even Ryanair because they are not as dependent on selling seats in Ireland. One such representative reports seeing an upturn in the leisure market that deserted all airlines so dramatically when the downturn came. But O’Byrne White is not so optimistic.

“The market has changed and it is not going to go back, especially in the short-haul market it is never going to go back to where it was. The bubble has burst. Dublin’s traffic levels will probably fall to 15 milllion and perhaps as low as 12 million passengers per annum. The DAA built a terminal that airlines didn’t want or need. They built a terminal for classic long-haul carriers who are not going to come in here in any numbers. It was a completely insane strategy. Anything they built should have been of a very temporary nature because the nature of low- cost carriers is that they are nomadic and will move their aircraft as soon as there is a downturn. You don’t want to be left with a huge structure that somebody has to pay for after they leave.”

And just who is expected to pay for the terminal became obvious when the Commission for Aviation Regulation ruled that DAA could increase its passenger charges 40% by 2011 provided the second terminal is in operation. But one observer, who believes a decision to mothball the new terminal should have been taken, says it will be very difficult and counter productive to increase passenger charges at a time when the airport is haemorrhaging traffic.

Against this backdrop, the latest reversal in government aviation policy – to scrap the tender competition for the operation of Terminal 2 (T2) – came as little surprise.

“The dropping of the tender was completely predictable but it brings the cynic out in you,” says another close observer. “I generally take everything Michael O’Leary has to say with a pinch of salt but in this case he is absolutely right. The whole process set up in 2005 by Martin Cullen – transparency, openness, etc – has just been blown away. There is no way they could have delivered on it anyway and they certainly haven’t made a huge effort to deliver on it. At the time everyone was asking how the DAA could be expected to kill themselves building a terminal without getting any of the longer term benefits of operating it. Yet the Government enshrined the fact that there would be competition.”

This mirrors the situation with the long-held policy to turn Shannon and Cork into independent entities that was long fingered until 2011, now fast approaching. Yet Shannon in particular is in such serious difficulty, according to sources, that it could never hope to stand on its own two feet. They estimate  traffic through the mid-west airport this year will fall as low as 1.8 million, down from close to 3 million at its peak.

“As a separate entity Shannon is now a basket case,” says the source. “If I was a director of DAA and I could be purely commercial about it, I would have to abandon Shannon. It only survives because it is effectively subsidised by Dublin and very soon the DAA will have to go with a begging bowl to the minister to ask him for money to  keep it open. Meanwhile, the Government is spending a fortune on Public Service Obligation (PSO) routes to smaller airports within spitting distance of Cork and Shannon.”

And one of the biggest challenges in the coming months will be just how the DAA will staff its new terminal within the operating budget parameters allowed for by the regulator. It is a challenge that could  lead to a whole new bout of serious industrial unrest at Dublin Airport, say union sources. Last October the Aviation Regulator was expected to publish a determination on airport charges for 2010 to 2014. But this was held up because the Government had not made a decision on the operating tender for the second terminal, meaning that the cost of operating the terminal were unknown. In the absence of government direction, the regulator took matters into his own hands and commissioned a consultant’s report to define the parameters of an operating budget for the new terminal. The determination was then published in December based on this budget.

When abandoning the competitive tender for the operation of T2 in recent weeks, Minister Dempsey alluded to this aspirational operating budget and said it “effectively superseded” the original plan to bring in an independent operator. But trade union sources are deeply uneasy about what they believe will be the consequences of this stringent budget, which envisages greatly reduced rates of pay in the new terminal compared to elsewhere in DAA. For example, the consultants suggest that a security supervisor in T2 should earn E37,760. Top of the scale for this position in Terminal 1 is E57,414. This huge drop in wages is envisaged across every position. Effectively, DAA will have to negotiate with 500 staff to move to T2 on these lower rates or else make them redundant and hire new staff. The minister has given the company three months to achieve this. An even more pressing deadline is the imminent testing phase of systems at T2 if Heathrow Terminal 5-style embarrassment is to be avoided on opening day in November. The prospect of either huge redundancy costs for the already indebted company to achieve this or serious industrial unrest are very real, says the union source.
And it is here that current goings-on in Aer Lingus could be of major interest to DAA management.

Firstly, any recent new staff at Aer Lingus (for example, the small number of maintenance workers who transferred from SR Technics) are not employed by the airline but instead work for a new company called Aer Lingus Ireland that has an entirely different structure for terms and conditions of employment. DAA sources say that the airport authority is planning the same model at T2 and any staff transferring across to the new terminal will have to sign up to new yet to be agreed terms and conditions with a new subsidiary company.

It is likely that such staff (as is the case in the Aer Lingus scenario) will not be part of the current troubled Aer Lingus / DAA pension scheme. If 500 DAA workers do agree to transfer, this will only increase the pressure on a pension fund with a deficit that may top E400m. Securing such agreement will be extremely challenging and this is where other recent developments at Aer Lingus may set a tempting precedent for DAA management. Aer Lingus CEO Christoph Mueller is planning to make all 1,200 cabin crew redundant and then hire back 970 on lesser terms and conditions. At time of writing both sides were meeting on this issue at the Labour Relations Commission but sources believe that, if carried out, it could be a useful model for DAA if it fails to secure agreement from staff.

One employment law expert is horrified and believes the scenario has serious national implications. He is particularly concerned that Aer Lingus is likely to get a 60% rebate from the Government on the statutory redundancy payments it expects to make as part of the plan.

“It is quite bizarre how all 1,200 can be redundant if 970 are still required and their jobs are still there and it doesn’t seem to be a correct redundancy situation,” he says.

“They probably should be denied the 60% rebate. Because to me it would seem to be little more than a form of state subsidy for improper redundancies.  All I can surmise is that because the airport and some of the companies based there are so well got with the Government for many years that there is an element of not looking too closely at what they are doing. Nobody wants to see the place close down  and I presume there must be a case of ‘let’s turn a blind eye’.”

He says that legislation was enacted in the wake of the Irish Ferries dispute to specifically deal with extraordinary collective redundancies to prevent a repeat of that scenario. But while the sanctions under this legislation are quite stringent, they apply when new people are hired to take over the role and not where the same person is hired back. He believes it will make for an interesting test case and others believe that DAA will be first to learn the lessons as it looks to staff its new terminal at greatly decreased rates.

“How can there be one law for companies at the airport and one law for the rest of the country?” says the employment expert. “If the Department of Enterprise, Trade and Employment pays out the rebate in these circumstances where there is clearly a need for jobs but jobs on reduced terms and conditions, then surely that applies to any redundancy situation? But if that is the case, when a company wants to introduce a salary cut then they just have to fire everybody. The definitions of redundancy are quite wide ranging but effectively it is about the employer trying to do the job with fewer employees or doing it in a new way for which the current employees are not qualified. But none of that applies here. They are going to cut back on employees but the bulk of them will be re-hired to do the same job.”

He believes that if Aer Lingus carries out its plan with cabin crew it will be very hard to stop the practice spreading.

“If I was an employer with 500 staff and I went to do the same thing and the Department of Enterprise, Trade and Employment sought not to pay this rebate because I was re-hiring 400 of the staff, I could very easily make an application to the court to say that there has been a precedent. I could easily argue that I was being denied equal treatment.

“This has national implications.”

But such an ad hoc approach to policy is not unusual when it comes to dealing with serious issues at the State’s airports, agree a number of sources.

“There is no aviation policy and as a result everything is decided out of the slagging matches that take place between Michael O’Leary and the State entities,” says Geoffrey O’Byrne White. “A lot of these agencies and quangos that have been set up – the regulator, the DAA, the Irish Aviation Authority – have all allowed the Department of Transport to wash its hands of aviation. Look at the mess with T2. That was supposed to be an independent terminal. Then it was going to be run through contracted services. Then they spent a million getting a stockbroker to advise them on it. Then the minister effectively nullifies the policy anyway. There is no real policy – it is all about avoiding responsibilities.”