Aer Rianta's financial position is likely to deteriorate over the next three years and the quality of its service to the public could also decline, the credit rating agency Standards & Poor's has concluded.

The agency said its negative outlook for the company would remain until a range of issues were resolved, including the question of an independent terminal at Dublin Airport.

The High Court recently rejected a challenge by Aer Rianta to a determination on its capital expenditure by the airport regulator Mr Bill Prasifka. The report says this means only a low level of capital expenditure will be permitted to Aer Rianta.

Therefore, Aer Rianta will have to subsidise its revenue from airport charges with increased revenue from commercial operations, it says. "As a result of this determination, Aer Rianta's financial profile is expected to continue to deteriorate in the next three years," says the report. However, it concedes that Aer Rianta's debt requirements up to 2006 will be reduced.

The ratings agency says the regulator's view on how much Aer Rianta needs to invest could "affect the quality of the services offered by Aer Rianta's airports and its future ability to cope with passenger volume growth". It notes that Aer Rianta may appeal the recent decision to the Supreme Court.

It says Mr Prasifka is entitled to conduct an interim review of airport charges in August 2003 and this is "expected to provide a potential rise in tariffs".

It says the current discussions about an independent terminal add to the uncertainty in the outlook for Aer Rianta. If the Minister for Transport, Mr Brennan, goes ahead with a terminal, substantial regulatory changes will have to take place, according to the report.

"The costs of common assets, such as runways and parking stands, would have to be separated out so Aer Rianta could charge the new terminal for the use of its infrastructure," it says.

"The implications of a change in the methodology are that material increases in airport charges would have to take place in order to reflect the true operating costs of the aviation assets."

In relation to the controversial airport charges at any new terminal, S&P says prices would have to rise to make any independent terminal "economically viable" and to compensate Aer Rianta for the commercial revenue it is going to lose.