RYANAIR CHIEF executive Michael O’Leary has warned the Minister for Transport Noel Dempsey that he may sue the Government if the Kerry-Dublin PSO air contract is awarded to another operator at a higher subsidy.

In a letter to Mr Dempsey, dated October 9th and seen by The Irish Times, Mr O’Leary notes the Minister’s unwillingness to enter binding arbitration to resolve the dispute surrounding the threatened withdrawal of the Kerry PSO route by Ryanair.

Ryanair is seeking compensation of €660,000 from the Government for cost increases it claims have been imposed by the State, including a travel tax and increases in charges by the Dublin Airport Authority and the Irish Aviation Authority.

“For the avoidance of doubt, Ryanair confirms that we are willing to continue to provide the three return daily flights for the remaining eight months of the contract if you agree to reimburse us these increased costs . . . amounting to additional compensation of just €440,000,” Mr O’Leary stated in his letter.

In relation to legal action, Mr O’Leary said: “We will reserve all of our rights up to and including initiating court proceedings against you and your department for any loss and/or damage suffered by Ryanair as a result of your breach of the PSO contract.”

On Friday last, Mr Dempsey’s office told The Irish Times that it had “no plans to enter into an arbitration on this issue”.

The arbitration offer was made following a meeting between Mr O’Leary and Kerry councillors in Tralee last Thursday.

The airline which has operated the Kerry-Dublin PSO since July 2008 is to withdraw from the subsidised route later this month. It will then operate just one commercial flight a day.

Ryanair says the annual subsidy of €1.7 million is no longer enough to cover its costs because of the various cost increases.