State can’t keep ‘squeezing the living daylights’ out of DAA, departing chief says

In the second week of January, Dalton Philips, the chief executive of the Dublin and Cork airport operator DAA, sat down for a jaunty interview with an executive from Airports Council International (ACI), the sector’s international lobby group. In retrospect, his positivity in the video seems surreal.

It is apparent from the urbane Wicklow man’s bright demeanour throughout that he had no inkling of the operational disaster that would unfold over the following weeks and months at Dublin Airport, leading to public and political fury.

“I’m a ‘glass half full’ guy,” Philips told ACI, when asked how 2022 would turn out.

He chatted freely about climate change and Covid measures; the crucial issue of airport congestion wasn’t covered. Barely six weeks later, reams of footage on social media of the huge, snaking queues for Dublin Airport security were already beginning to scare the wits out of the travel-starved Irish public. Worse was to come.

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Airport tender documents from the beginning of the year show the DAA’s firm belief at the time that in 2022 it might hit 70 per cent of pre-pandemic traffic, which peaked near 33 million passengers in 2019. It only had enough staff for about 70 per cent after it let almost 1,000 people go in the pandemic.

Philips beamed as he told ACI in that January interview that numbers might even hit 75 per cent of pre-Covid levels: “I’m optimistic. The pent-up demand that we all know is there will really come through.”

It came through all right. January’s traffic was just 47 per cent of pre-Covid levels but by the end of the month, DAA was already at risk of financial penalties from the Commission for Aviation Regulation (CAR) for missed targets on queue times. In February, passenger numbers hit 65 per cent and the queues worsened.

By March, the numbers had climbed to 76 per cent and it was clear something was seriously wrong at Dublin Airport. The numbers kept rising: 85 per cent of pre-Covid traffic in April and 87 per cent by May. On May 29th, 1,400 people who were stuck in queues missed their flights at Dublin Airport, sparking a frenzy of recrimination. The organisation entered full-blown crisis mode as it rushed to recruit and train new security officers.

‘Flat on our face’

This week, 10 weeks after the worst of the crisis and with the queuing problems now largely solved, Philips was less breezy than in his ACI interview, as he reflected on it and a range of other issues as he prepares to leave the organisation next month to take over as CEO of listed sandwich maker Greencore. The former Brown Thomas and Morrisons supermarket chief is leaving DAA less than five years into his mandated maximum term of seven years.

“We fell over, flat on our face, on May 29th. We knew we let the country down,” he said on Tuesday as he surveyed the airport, bathed in the yellow glow of another summer heatwave, through the windows of his office in DAA’s headquarters. “We were able to get things back in place very quickly. But the stain of what happened lasts.”

Philips accepts full responsibility for the operational carnage earlier this summer at the airport, the nation’s front porch and welcome mat. He acknowledges that he let too many staff go in the pandemic to cut costs.

But he also drew a direct line between what happened and the State’s system for setting passenger charges through the regulator, CAR. In recent weeks, it has refused DAA’s request for an increase of about 70 per cent up to 2026, plumping instead to keep charges virtually flat in an interim decision.

Philips claims the “downwards only” passenger charges system of recent years has helped to hollow out DAA’s finances, which are reeling from €337 million of Covid losses. He pointedly dismissed CAR’s caps on passenger fees as a “transfer of wealth” from the State to airlines. Carriers such as Ryanair and Aer Lingus are, he suggested, the true beneficiaries.

As he prepares for his departure from the aviation industry, Philips believes Ireland needs to have a “mature debate” about the long-term future of its airport funding model, including whether private investment in Dublin Airport might be required if passenger fees are not allowed to rise.

“On the one side, people felt really let down by what happened [with the queues] on May 29th,” he said. But on the other, he says, the State can’t keep “squeezing the living daylights” out of DAA and Dublin Airport.

“The two are linked.”

Effusive O’Leary

Ryanair’s group chief executive, Michael O’Leary, is rarely chummy with DAA chief executives. He remorselessly criticised one of Philips’s predecessors, Declan Collier, who ran DAA until 2012. Collier was succeeded by Kevin Toland, who, after a difficult start, made a breakthrough with Ryanair that led to a new routes announcement in 2013. But the relationship with O’Leary never seemed particularly close. Toland left in 2017, replaced by Philips.

Given the disruption at Dublin Airport this summer after the DAA and Philips acutely underestimated the pace of the rebound in passenger numbers, one might have expected O’Leary to fire a few trademark barbs at the incumbent. Yet, surprisingly, O’Leary was almost effusive in his praise of Philips this week.

At exactly the same time as the DAA chief executive was having his photograph taken by The Irish Times on Tuesday, O’Leary returned a call to this newspaper seeking his views on the outgoing airport boss. “Tell him to stop posing,” joked O’Leary, when informed of the delicate timing of his call.

“But actually, I think Dalton Philips has done a fantastic job.”

He cited Philips’s delivery of Dublin Airport’s new €320 million north runway on time and on budget. It is due to open later this month. He also praised Philips’s overseeing of the operational turnaround on the security queues crisis this summer.

“Okay, he made mistakes at the start,” said O’Leary. “He says the DAA couldn’t have known how busy it was going to get but we sent him our schedules six months in advance. But still, he turned it around.”

O’Leary appeared to suggest that he believes Philips is a capable manager operating within a dysfunctional State system for aviation, with the most of the real “problems” emanating from policymakers of the Department of Transport and some of the old guard in DAA.

Philips, for his part, believes that O’Leary, who is also his biggest customer, is the “finest CEO in the country”. But despite their apparent mutual regard, there remains an obvious chasm between them on the defining issue that has dogged relations between Ryanair and DAA for more than 20 years.

‘Bulls**t plan’

“I don’t like the bullsh**t plan he [Philips] has come up with to raise airport charges,” said O’Leary, who argues that passenger fees must be kept low if airlines such as Ryanair are to maintain routes in an era of growing international competition to attract the airline’s business.

CAR’s interim decision on passenger fees will go out to industry consultation again before a final call is made on it later this year. Undoubtedly, O’Leary and other airlines bosses will have their say, as will Philips’s interim successor, if he leaves next month without a permanent replacement yet being appointed. It is believed that DAA’s board is not yet at an advanced stage in the hiring process.

The incumbent says he “struggles to understand” the current system of financing for DAA. Before the pandemic, it generated about one-third of its annual turnover, then €935 million, from passenger fees. The rest came from commercial activities, home and away – its Aer Rianta International subsidiary runs duty-free operations around the world while DAA International runs several airports abroad.

CAR calculates that its most recent charges determination will see DAA generate close to €1.2 billion in charges over the next four years, and a further €1.15 billion in directly associated commercial revenues. It suggests DAA could get a higher charges cap if it delivers on its capital investment programme at its Irish airports. But Philips says the quantum of fees the State regulator is proposing is not enough, especially compared to what similar airports around Europe are charging.

Philips complains that CAR cut its airport passenger fees by about 23 per cent in 2019, which left it weakened when the pandemic hit. It was then forced to cut costs, including €100 million spent on a generous redundancy scheme in 2020, while remaining staff took temporary pay cuts of 20-40 per cent. He argues that the Government’s Covid wage subsidies covered only 25 per cent of DAA’s wage bill.

“We’re not saying ramp the passenger charges up. We know we need to be the Aldi and Lidl of airports – good quality, good value. But there is a tipping point. If charges keep getting pushed down, the proposition and service gets compromised. It’s just maths.”

He says that in 2019 before the cut it announced that year, Dublin Airport’s passenger charges (then around €9.50 per passenger) were “40 per cent cheaper than any other comparable airport... That is benchmarked fact. After the cut, it went up to 50 per cent cheaper.”

Ireland is an expensive country, he says: “I can’t think of a single item in Ireland, product or service, that is cheaper in Ireland than in the rest of Europe.”

So why should airport charges be cheaper here than in comparable cities, he argues?

No direct subsidy

The chief executive of the Ryanair airline, Eddie Wilson, has argued that CAR’s most recent interim determination could still allow steep rises in DAA’s passenger fees over current rates. Theoretically, Philips says, any moderation in its passenger fees over the years should flow straight to consumers in the form of lower fares. He says he doesn’t see “any evidence” that this happens as a direct result.

DAA is 100 per cent owned by the State and its passenger fees are set by a State regulator to simulate the effects of competition, but the organisation itself doesn’t get any direct State subsidy. “We’re on our own. We don’t get a penny.”

He says it is a good model for the Government to “own DAA but to leave it alone”. He also says he personally believes the organisation should remain fully in State ownership. But if the “downwards only” passenger fees model cannot be reformed, he says, the State should have a debate about whether DAA ought to be allowed to raise equity from external private sources. In essence, he believes the State, if it won’t reform fees, should examine a part privatisation of the airports group, even if “as a citizen” he doesn’t want it ever to happen.

“We need to have this debate. If we are not going to allow private investment, then we [still] want it to be competitive and we don’t want it to be an unfit utility. But if there is a continual transfer of wealth from the State to the airlines in reduced airport charges. [Adding private capital] is a debate that the country or the political system needs to have,” he said.

“There are arguments for and against private investment. My view is, keep it in State ownership. Strategically, the asset is way too important. But we can’t keep squeezing the thing, either.”

‘Market dictates’

Philips says that where DAA can push traffic down to Cork Airport, it will do it, “but the market dictates where airlines want to travel to, and the airlines want to travel to Dublin”.

He suggests the airport operator’s financial travails have accelerated its expansion into other commercial revenue streams, including the possibility of charging for dropping off of passengers at Dublin in private cars, DAA’s forays into property development on its campus (Kellogg’s is among its tenants) and its drive to run more airports abroad for big fees.

“Ultimately, these other revenue streams give us ballast,” he said.

Earlier this year, just as its Dublin passenger queues problem was metastasising, DAA International won the contract to run its third airport facility for the repressive regime in Saudi Arabia. The new contract to run the King Abdulaziz Airport in Jeddah, which has a capacity of 46 million passengers per year, is a “significant deal” for DAA. But it is also a potentially risky one for its reputation.

“Anyone doing business in Saudi Arabia lives in the shadow of growing concern about human rights abuses,” says the CAPA Centre for Aviation, a global market intelligence firm and analyst.

Jeddah airport also retains some separate areas for men and women. Philips acknowledges that it could be debated whether an Irish State owned entity should be involved in running such a facility. But he insists DAA will be a “force for good” in Saudi, citing the women who have been appointed to the Jeddah Airport’s management team. He also says the Irish Government encourages trade with the Middle Eastern state, so it is in line with State policy.

The brouhaha over queues at Dublin Airport may have generated most of the headlines around DAA this year. But Philips’s legacy over the longer term may revolve more around issues such as ramifications of the new runway at Dublin and how such expansion fits in with the State’s climate-change strategy, as well as DAA’s push to run more airports abroad.

He says he is “sad to be leaving the best job I have ever had”. He suggests that while he is happy to be going to a corporate titan such as Greencore, he “took the call” mainly because he knew he wasn’t going to be able to secure an extension at DAA due to the seven-year semi-State limit.

“There are not so many great CEO jobs in this country. DAA is one of them. Greencore is undoubtedly another. But when there is no mechanism to extend your contract, you take calls. Once you take those calls, you start to talk.”

In the meantime, Philips, O’Leary and possibly others in Ireland’s aviation sector may have plenty more to say about the financial structure underpinning the State’s airport monopoly.