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Judging by new data in a financial filing that came out Tuesday,

Ryanair

(RYAAY) - Get Report

profits could take a big hit if the top European competition regulator shoots down the airline's low-cost airport deals.

The European Commission is probing an agreement struck by Ryanair with a government-owned airport outside of Brussels. When the commission rules on this case, likely later this month, it is expected to demand that deals with nonprivate airports become more open, more transparent and shorter in duration. Such changes, designed to prevent airlines from receiving effective public subsidies, could mean less generous airport arrangements for Ryanair, pushing up costs for the Dublin-based carrier.

It has been hard to quantify the impact of the airport deals on Ryanair's bottom line. Detox recently

had a go, but it was a necessarily rough attempt. Ryanair shares, which have held steady this year after a late-2002 surge, added $2.19 Wednesday to $42.64.

It's a Good One

The whole exercise got a

little

easier Tuesday, when Ryanair filed its annual report for its 2003 fiscal year, ended June 30. In this so-called 20-F document, Ryanair quantifies how much it benefits from the perks in the all-important deal with Brussels-Charleroi airport, which serves as a hub for the airline.

Ryanair says reduced baggage and handling charges save it 2.6 million euros annually, while marketing support payments net the airline around 2.2 million euros. Ryanair stresses in its filing that it would be "unlikely" that all the savings would be disallowed. However, it concedes that an unfavorable ruling by the commission on the Charleroi deal could mean further investigations by the body into deals in France, Italy and Scandinavia.

Ryanair then cautions in its filing: "Adverse rulings in any resultant investigations would be likely to require the repayment of monies received and increased charges at the relevant airports, and therefore have a material adverse effect on the company's airport charges and its profitability."

So what can we deduce from this disclosure? European press reports suggest that the commission doesn't want to quash low-cost airlines like Ryanair, but the reports do indicate the body is keen for airport deals to be more transparent and shorter. Ryanair's deal with Charleroi, struck in 2001, runs for 15 years, a very long time for this sort of arrangement.

Ryanair says in its filing that the terms of the Charleroi agreement "were offered to other carriers such as Sabena, easyJet and Virgin Express plc at the same time they were offered to Ryanair." Maybe so. But an early commission survey of the case said that the agreement between Ryanair and the airport owners "was not given any publicity." To be sure, the offers could've been given to the other airlines without publicizing them, but the commission probably wants to set up bidding procedures that are clear to all.

In its early comments, the commission also noted that, once Ryanair had forged its deal, there was no spare capacity at Charleroi for another airline to operate with a frequency that would've allowed it to gain similarly advantageous terms. That is another reason it may demand shorter deal times and more accessible bidding processes.

Company Time

What do the numbers look like? Again, it is a guessing game. But for argument's sake, let's assume that Ryanair only manages to retain 1 million euros of perks at Charleroi. Assuming Ryanair doesn't pull out of the airport, that would mean added expenses of 3.8 million euros per year. If this happened at three other hubs in continental Europe, we're talking added costs of 15 million euros.

But Ryanair also stands to lose savings at the many nonhub airports it flies to in Europe. It has roughly 40 such destinations on the continent. If we assume that it stands to lose 20 million euros of savings per year from amendments to deals with these 40 airports, we are up to 45 million euros of added costs per year.

That's 15% of Ryanair's operating income in fiscal 2003. The hit could be even bigger if the rule changes tempt other airlines into these airports, driving up charges. Moreover, there may be limited customer demand for many of these secondary airports over time. Sales could drop off as fliers get sick of taking long bus journeys to these airports. Costs could be rising at the same time, pinching Ryanair's margins from both sides.

Perhaps there's a simpler way of looking at this question. Out-of-the-way airports were always going to have to pay airlines to fly to them. Ryanair accepted the airports' offer of cash payments and knock-down charges because it thought it had the cost base and marketing prowess to make the routes work. Without the breaks, the whole model could start unraveling faster than anyone expected.

It is perhaps no coincidence that Charleroi is so close to Waterloo.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to

peter.eavis@thestreet.com.