Business Opinion/John McManus: The collapse last week of JetGreen must have sent a shiver down the spine of Pádraig O'Ceidigh, the managing director of Aer Arann who is now the last man standing when it comes to small Irish airlines.

Mr O'Ceidigh has done a fantastic job of building his Connemara-based island hopping service into a regional airline. But now he has set his sights on the next level, offering flights to the UK in direct and indirect competition with Ryanair and Aer Lingus.

It is a big step. The lesson from the JetGreen collapse - and those of JetMagic and Duo earlier this year - is that if you don't have your cost base right and enough cash you have not got a chance in the new world of European aviation.

The release of Aer Arann's first full set of accounts for 2002 last week is illuminating. At a superficial level the airline would appear to be doing pretty well. It recorded a profit for the year of €726,000 which makes it a member of a the fairly exclusive club of non-loss making European airlines.

But when you take a closer look things are not quite so rosy. The 2002 figures include "other operating income" of €16.5 million, the bulk of which are the grants it gets in respect of the regional routes it operates under the Essential Air Services programme. According to a study done for the Government by DKM Economic Consultants, the Exchequer subsidies these routes by between €200 and €560 per return journey. The services, from Dublin to Sligo, Donegal, Knock, Kerry, Galway and Derry, are subsidised because they are seen as vital for the development of the regions.

Without this subsidy it is obvious that Aer Arann would be massively loss making. But it is equally obvious that without these subsidies it would not be flying these routes. What is not possible to establish from the accounts is the extent to which the non-subsidised routes are profitable and if there is any cross-subsidising of other routes by the subsidised routes.

This issue was raised recently by Mr Eamon Rothwell, the chief executive of Irish Continental Group. He obviously sees Aer Arann's services to places like Birmingham and Manchester as competition for his Irish Sea ferry business and wants to see the airline's subsidies reviewed and regulated. Ryanair has raised similar concerns, according to Mr Rothwell.

Any such review is unlikely to be good news for Aer Arann. DKM is of the view that it does not offer value for money. "The total subvention to these air services, which carried 260,000 passengers in 2002, is now close to the total subvention of the entire Bus Éireann system, which carried approximately 46 million in the same year. Expressway, the long-distance bus network which competes with rail and air on the main inter-urban routes, carried 7.5 million passengers in 2002 without any subvention."

It also says it has been unable "to locate any studies which establish, for the EASP [Essential Air Services Programme] as a whole or for any individual route, that benefits exceed costs".

It proposes a number of reforms ranging from fewer services, using bigger aircraft, longer contract times and switching the subsidies to the regional airports themselves. None of them are likely to be positive for Aer Arann.

More interesting perhaps is what the accounts tell us about the cost base. Aer Arann's staff costs of €6.9 million represent 27 per cent of sales, roughly on a par with Aer Lingus. The comparable figure for Ryanair and easyJet - the two market leaders - is around 10 per cent.

A comparison of operating profits in terms of numbers of passengers is equally grim. Ryanair and easyJet made operating profits of around €15 and €7 per passenger in 2002.

There are no passenger figures included in the accounts, but the firm is on record as saying passenger numbers in 2002 were around 400,000. This works out at an operating profit of €2.34 per passenger after the subsidies are included. Aer Lingus made an operating profit of over €10 per passenger flown in 2002.

There is a limit to the comparisons that can be made between an airline with sales of €26 million and Aer Lingus - with a turnover of €888 million - or Ryanair and easy Jet with turnover in excess of €1 billion each.

But on the face of it Mr O'Ceidigh is taking a big risk attacking the UK market with a cost base that is closer to that of a traditional airline's than a low cost operator. Equally he is doing this while controversial Government subsidies form an essential part of his business.

It is far from certain that Aer Arann will be one of the survivors of the blood letting that has been predicted to take place in European skies over the coming years. But that is no reason not to wish him good luck.