Airport must cut costs to take flight

A topic of debate in this column and in other circles over the past year has been the performance of Cork Airport. 

Emotive could be one way of putting the views flying around about this important asset. A more analytical perspective could be of greater value.

Starting with the facts, passenger numbers at Cork have struggled to recover from the economic crisis. Debt lies at the heart of any discussion about how Cork can move forward.

It is saddled with hefty borrowings that relate to the construction of a terminal that has been in operation for years, during which time passenger throughput has not grown.

That can be attributed to the state of the economy after 2008 but, whatever way you cut it, added overhead and static or declining throughput add up to a disappointing financial performance.

In 2005, I wrote a couple of articles heavily criticising the scale of debt being assumed in building a new terminal for an airport of Cork’s size. That view won little support locally as focus rested on the construction jobs in the project and the terminal’s status as a symbol of Cork’s prowess.

Nine years later, the airport, and its contiguous economy, are smothered by debt-related costs that limit its ability to offer cut-price deals to airlines in exchange for added services.

That challenge is compounded by Shannon Airport, which has a helpful financial structure, post separation, which allows it to compete hard. Kerry Airport, too, adds competitive pressures on Cork as does a motorway that connects Cork and Dublin Airport in less than three hours.

What should be done? The narrative currently seems to centre on just removing the debt from Cork to sort its difficulties. That, effectively, is asking taxpayers to incur a debt write-off because we, through the State, own 100% of the DAA. That type of “burn the bondholders” stance is nonsensical in my opinion.

If we assume Cork can only grow if its costs can be reduced, then there are three options: (1) Cut non-debt-related costs. This has already occurred since the crisis and minimum standards of service and safety cover are needed for a functioning commercial airport; (2) Sell the facility to someone who has a growth vision for the site. The concept of selling State assets seems politically unlikely in the current climate; (3) Restructure the airport’s debt to ease short-term costs and create headroom for more competitive airline deals.

This option needs an imaginative, open-minded approach by all parties. While it is true the terminal leaves the airport with significant debts, the asset itself is a long life facility linked to a stream of income. That provides the ingredients for a deal that either allows longer-terming of the debt (which lowers short-term annual costs), selling the terminal and leasing it back (which amplifies the annual costs savings further), or a mixture of both.

Finding a formula that works won’t be easy. Local economic interests have to consider how much they would shell out (in cash or through guaranteed business) to help Cork Airport lower annual costs and entice new routes. The airport itself has to move forward with a plan that is credible financially. Recovering GDP could be a route, albeit over an extended period, that delivers growth.

Any blame game around why Cork is having a tough time driving traffic up cannot avoid a simple truth: Debt increases cost and hurts competitiveness. To fix this, vested interests have to look hard in the mirror instead of endlessly pointing fingers at Dublin.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.

Joe

Gill


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