Aer Rianta should be making pre-tax profits of around £40 million (€50 million) per annum within two years, despite the loss of duty free, the State airports operator's chairman Mr Noel Hanlon has said. He also said the appointment of an airports' regulator is a vital prerequisite to a flotation.

Duty free, which was abolished last month, contributed about £30 million to Aer Rianta's post-tax profits, which last year were £42 million. The company has opted to absorb the tax on items such as electrical goods and perfumes, but not the duty on alcohol and tobacco.

Mr Hanlon said that sales at Dublin Airport's outlets were back at pre-duty free abolition levels, for the first time last week. The company hopes to increase sales of non-duty free items and install more shopping areas, to offset the revenue losses.

"It involves a whole cultural change," he said. "Until now people bought duty free goods anyway, but now Aer Rianta staff have to go out and sell the goods."

He is confident that airports will survive the abolition of duty free. Dublin Airport still retains 25 per cent of its duty free sales while Shannon (the home of duty free) still retains 80 per cent of its duty free business, he said.

However, the chairman warned that airport charges - the subject of much confrontation with airline operators, most notably Ryanair - will rise from January 1st next. "For years duty free was an artificial form of revenue which kept airport charges artificially low," he said. "That will have to change."

Mr Hanlon said the net effect of the new charges will be to add £1-£2 per passenger ticket. "I don't think that will make a lot of difference to passengers," he said.

Mr Hanlon acknowledged that Ryanair had brought many passengers to Irish airports. But, he said, Ryanair is a low-cost operator which flies into secondary airports in Europe. Irish airports did not equate to such airports, he said.

"At present, landing charges only account for 16 per cent of our revenues, whereas, the European norm is 40 per cent. We have to move towards that level," he said.

The appointment of an airports regulator should resolve problems over landing charges, he said. The regulator's remit, announced by Public Enterprise Minister, Ms O'Rourke, last week will include setting landing charges and resolving ground handling issues.

"I believe it is an absolute necessity, we couldn't even dream of going to the market without a regulator," he said.

Mr Hanlon said the current Government recognised that landing charges needed to be increased but he questioned what future governments might do. "A regulator will take charges out of the political arena and ensure the shareholder/investor in Aer Rianta is protected."

A report commissioned by Aer Rianta on its future has proposed that the regulator's office be funded by the airline industry and that the Consumer Price Index (CPI) be used as a guide for charges. Aer Rianta would be allowed to vary its charges plus or minus the CPI but would have to demonstrate why it was doing so.

The report also recommended a flotation to raise money for the company's £500 million investment plan to develop its airports at Dublin, Cork and Shannon. Mr Hanlon said the amount which may be floated is up to the Government which is the shareholder. However, he personally favours floating 49 per cent of the company so that the Government retains a controlling stake.

He said this approach has been used by many other European governments and the Irish Government could float more of the company at a later stage, if it wished.

Mr Hanlon estimated Aer Rianta's value at about £1 billion. He maintained it would be attractive to investors, saying Aer Rianta was recognised as one of the world's top three airport operators. As part of its investment strategy Aer Rianta will be putting in more shops at its airports and is talking to several high street names.

The company is to sell its chain of Great Southern Hotels, a move which could net up to £100 million. He said he favoured retaining the Great Southern hotels at Dublin Airport and Shannon. "Those hotels are part of the airports' infrastructure," he said.

However, he said the remaining hotels should be sold. "They are not our core business and they need substantial investment which we cannot give them," he said, adding that the disposals would be done in consultation with staff.

Mr Hanlon defended Aer Rianta's decision to increase car-park charges at Dublin Airport, saying they were comparable with city centre rates. He said car-parking charges would generate £8 million revenue per annum.

He added that there had been major complaints about shortage of carparking spaces and this problem had been overcome. The airport has 20,000 car-park spaces, he said. "Last weekend, the busiest weekend of the year, saw only four vacant car-park spaces."

The company is also installing more shops, restaurants and bars at the airports. Mr Hanlon said it would receive around 8-10 per cent of the revenue of these companies through franchise agreements. This figure would increase to around 40 per cent if Aer Rianta ran the shops themselves.

It has been forecast, he added, that within five years Dublin Airport would be handling up to 20 million passengers. The current runway can accommodate up to 18 million passengers. He said a second runway will have to be built, in about three years, at a cost of £100 million.

He pointed out that 17 new routes had been launched from Dublin this summer - some are summer schedule flights, some are all-year round. But what of Ryanair's proposal to launch up to 10 new routes if Aer Rianta lowers its charges?

Mr Hanlon smiled, appearing unfazed by the Ryanair demand: "There is no point in bringing in passengers if you are losing money on them. Duty free accounted for £14 per passenger. We have to make up that revenue."

He also rejected criticism that Aer Rianta should have seen the passenger numbers explosion coming. Various governments deferring decisions and engaging consultants to examine proposals, delayed Aer Rianta's investment proposals by more than two years, he said.

Aer Rianta has management contracts to run duty free operations in a number of countries, including Russia, the Ukraine, Canada and Bahrain, which are not affected by the abolition of duty free. It also has a 40 per cent stake in Birmingham Airport and a share of a 50 per cent shareholding in Dusseldorf Airport for which it paid £35 million.

Mr Hanlon said all Aer Rianta's overseas investments are making good returns. He said a recent independent valuation of its Dusseldorf investment valued it at eight times what Aer Rianta paid for it. In the case of Birmingham Airport, it has been offered a 4.5 per cent share of the facility which is owned by National Car Parks (NCP), a UK-based group which was recently bought over. The stake is valued at £6 million, demonstrating that the value of Aer Rianta's 20 per cent share has appreciated considerably in the two years since it bought it for £10 million.

Aer Rianta's partner in Birmingham is NatWest Ventures. Mr Hanlon said there was a mechanism by which Aer Rianta could buy out the venture capital company after five years, at a set price. The company intends to do so, he said.